Dear Esteemed Citizen of India Earlier in 2011 Ministry of Corporate Affairs (MCA) has issued Cost Accounting Record Rules followed by Cost Audit Report Rules and ultimately followed by Cost Audit Orders. Thereby almost all manufacturing companies were covered under statutory requirement of maintenance of cost accounting records, cost accounting compliance report and cost audit to be performed by a qualified cost accountant. This had fulfilled the objective of protecting the interests of investors, consumers, tax payers and society at large. The objectives and reasons for ensuring that the companies keep proper cost accounting records is to inculcate a culture of cost consciousness among industries for better resource management, to make the efficiency audit possible, and to make cost data available to the Government. Ministry of Corporate Affairs (MCA) has recently issued draft rules on Cost Audit. These draft rules are intended to take away all the efforts made from 2011 till date. Note: - For your ready reference I have attached my published article on this issue and proposed draft rules issued by MCA yesterday. Now every one of us must respond to MCA against these draft rules and give suggestions and justifications through following the below mentioned procedure:- 1. Go to : ncbfeedback.mca.gov.in/ 2. Register for giving reply. 3. Use your personal email ids to register. 4. Select view by topic 5. Select cost accountant 6. Select Companies (Cost Records and Cost Audit) Rules 2013 7. Select Rule no. 8. Select Others & Then mention your suggestions. A sample of suggestion and justification is as under. Kindly put your words on line of similar view expressed as below:- For Rule 2: Suggestion: “Production of goods” means production, making, manufacturing, processing, mining, transformation or growing of tangible or intangible ad intermediates, semi-finished or finished products by using resources, raw materials, components, intermediates, semi-finished goods, sub-assemblies, prices, method, factors or other inputs; “Providing Services” means providing, rendering or allowing use of tangible or intangible products or services of any nature, type, kind or variety and includes all types of job work or processing operations. Justification: There is a need for defining the terms as the business process decides what production is. For Rule 3: Suggestion: I most humbly submit that the present rules in place which are implemented after considering recommendations of expert group (learned representatives from different segments) are ideally fitted to the situation at present and need not require any amendments at all, therefore the said draft rules should be scrapped. Justification: These Cost Accounting Records / Audit Draft Rules appears to be drafted neglecting serious concerns of all related stakeholder consumers, shareholders, conservation of limited national resources and largely interest of the nation in terms of protecting revenue and valuable contribution to economy of the nation through the mechanism of Cost Audit. The ultimate objectives and recommendations of the expert group committee formed by MCA in the year 2011 is also totally bypassed and just to favor a smaller segment of the society (where concerned people are not interested to give true and fair disclosures to protect their personal gains and personal interests) economy of entire nation and interest of the common Indian citizen is put to risk. Government had a wonderful opportunity to take a pro public step when it drafted the new rules under Companies act 2013. But it is sad to note that government and ministry has fallen pray to the pressure from industry and may be for some other reasons / interest, and the whole mechanism is almost scrapped. For Rule 3: Suggestion: Capital Goods is one of the sectors that is Strategic for strengthening national abilities for the long –term. The sectors that are to be included under the Application clause 3 (1) (a) are as follows:- Machine Tools Earth moving Heavy electrical Metallurgical Textile Process Plant Power Plant Other industrial machinery and engineering sector. Justification: As per the planning commission report on the infrastructure sector, the recommendation of the PMGR, the key objectives for the considering the above capital goods sector was:- Make the capital goods sector globally competitive Reduce overseas dependence in strategic sectors Increase dept in manufacturing Enhance production levels, employment, exports, exports and contribution to the national exchequer. For All Rules: Suggestions: We are shocked to see the contents of these draft rules which, if finalized in present form, shall throw the Cost Accounting framework of India around 40 years back. Based on the painful feedback received in last couple of days from our members and students, we hereby state as follows: 1. Definitions & Interpretations: Various important definitions and interpretations properly covered under the Companies (Cost Accounting Records) Rules 2011, the Companies (Cost Audit report) Rules 2011 and 6 sector specific CARR are missing under subject Draft Rules. The same needs to be incorporated in detail like existing rules. 2. Applicability: (a) Compliance Report: Considering the various recommendations of some high powered Committees and Expert Group appointed by Govt. of India, it is requested to continue with the existing practice of maintenance of Cost records and submission of Compliance Report following the various criterion prescribed in the existing CARRs. You are requested to consider the existing format of Compliance report prescribed in those rules. (b) Cost Audit: All the industries and products/services confirming to the prescribed criterion already covered under existing Cost Audit Order no. 52/26/CAB-2010 dtd. 06-11-2012 should be covered under subject draft rules also. (c) Companies engaged in Strategic Sectors: Although there are very few organizations which are working as a COMPANY, we still welcome the inclusion of this sector in the Cost Accounting framework. (d)Sectoral Companies: In-depth details related to Cost records rules for these 6 sectoral Companies are to be incorporated as in existing 6 sector specific Cost record Rules. (e) Service Sector: Various Government authorized Committees and Expert Groups since 2004 have insisted on strategic importance of bringing Service sectors such as Banking, Insurance, Health Services, Education, Hotel, etc. within the framework of Cost Records and Cost Audit. 3. Maintenance of records: Various important clauses related to records maintenance needs to be prescribed in details as in existing CARRS, like following Cost Accounting Principles & Cost Accounting Standards, reconciliation of records with the financial records, timeline for keeping the records in goods order & persons responsible for this compliance etc. Prescribed Form “I” is still not provided along with Draft Rules. It is requested to not going back to proforma based records maintenance (except for Sector regulated companies) and continue with the existing provisions of records maintenance prescribed in existing CARRs. Justifications: We hereby request you to consider our above mentioned suggestions of continuing with the existing framework of Cost Records & Cost Audit based on below premises: 1. Beneficial for proper Governance: As per International Good Practice Guidance (IGPG) of IFAC PAIB, definition of Governance is “the set of responsibilities and practices exercised by the board and executive management (“the governing body”) with the goal of (a) providing strategic direction, (b) ensuring that objectives are achieved, (c) ascertaining that risks are managed appropriately, and (d) verifying that the organization’s resources are used responsibly.” In today’s time, there is an urgent need of good governance even in case of small companies. Cost Audit Report (CAR) do not contain merely the cost details, but are full of information related to all aspects of business organization which, if harnesses properly can provide a comprehensive analysis about the company, the industry and the economy as a whole. The CAR serves as an effective tool of information in the hands of directors on the Board ensuring good corporate governance. 2. With the advent of liberalization & WTO regime, consequential globalization has further enhanced the need for authentic data and we need to build up appropriate cost database to detect or fight all anti-dumping cases. This dumping of products, often below the cost price, if not properly countered may harm the indigenous industry. The practice of selling below cost to ward off competition is also to be scrutinized. Therefore, the Cost Compliance and Cost Audit Reports are required to ensure that the comprehensive authentic data is available in the format required. Further, in the present economic scenario, maintenance of cost records in a systematic manner is essential for all the companies. It is also considered necessary to provide requisite cost inputs to various regulators and government departments/bodies to protect the interest of consumers and investors and to protect the industry from unfair trade practices under WTO agreements. 3. Similarly, cases relating to transfer pricing or arm’s length pricecannot be decided judiciously in the absence of reliable cost data. Further, proper allocation/apportionment of common costs to theenterprises operating in SEZ areas would also require adoption of well laid down costing principles. Such a reliable, standardized and industry wide database is possible only by way of statutory cost accounting and cost reporting. 4. Beneficial for Indirect Taxation: The way financial audit supports the revenue generation of Direct Taxes, in the same manner maintenance of Cost Records, Compliance report & Cost Audit are a very much beneficial tool in the hands of Indirect Tax officials. Supreme Court verdict in case of FIAT Motors is a fine example of the same. 5. Beneficial for Financial Institutions: They can go in Cost details of the company and its various products being manufactured before going for the financing decision. This will help in saving a lot of NPAs for the country. 6. Beneficial for Domestic & Foreign Investors (FDI): They can have a detailed scrutiny of the records before investing in any of the company. 7. Beneficial for Tariff Commission: The Tariff Commission relies on the authenticity of the Cost Compliance and Cost Audit reports and makes use of these reports extensively in fixation of tariffs for the products covered under Cost Accounting Records Rules. 8. The reports have great potential in government procurements especially in case of non-competitive procurements. Cost Audit reports also helps government in making informed decisions on subsidies and incentives. 9. Importance of Cost Accounting: has already been recognized by Govt. of India on many occasions. In moving the Cost and Works Accountants Bill for reference to the Joint Committee, the Deputy Minister of Commerce and Industry explained the nature and purpose of cost accounting as follows (Lok Sabha Debates, Vol. XXIV, dated 20th December, 1958, pp. 6608-09): “Cost accounting is a function entirely different from general or financial accounting. Cost accountancy covers a wide range of subjects, with special emphasis on cost accounting, factory organization and management, engineering techniques, and knowledge of the working of the factories. The cost accountant performs services involving pricing of goods, preparation, and verification, certification of cost accounts and related statements, or recording presentation or certification of cost facts or data. In a manufacturing concern, he works out the economical cost of production and evaluates its progress at each stage of production. In mass production enterprises, he points out wastage of manpower due to overstaffing or inefficient organization and indicates the output, the capacity of the machines and labour, the stock position, the movement of stores and weakness in the production process. The systematic determination of cost in every single and distinct process of manufacturing provides a continuous check on the margin of waste in the processing of raw and semi-finished materials, on the utilisation of machinery installed, on manpower expended and the percentage of rejection of finished products. This pinpoints also the particular process in which defects and deficiencies exist, thereby enabling immediate remedial measure being taken. Costing, in short, aims at making the organization efficient and economical, by providing the minimum of labour and material and getting the full capacity of the machine output. The cost accountant, therefore, is concerned solely and mainly with the internal economy of the industry, and renders services essential to the day-to-day management of the undertaking.” 10. Importance of sec 209 (1)(d): The Expert Group noted that in the Object & Reasons of the Bill seeking insertion of clause (d) under sub-section (1) of section 209 of the Companies Act, 1956, in the Report of the Joint Select Committee, and in the statements of the then Hon’ble Finance Minister made in reply to the debate in Rajya Sabha, it was stated that (a) maintenance of proper cost accounting records by the companies is essential which would make the efficiency audit possible; (b) all companies belonging to class of companies engaged in the production, processing, manufacturing or mining activities to include in their books of account particulars relating to the utilisation of materials, labour or other items of cost; and (c) every producing/manufacturing company to employ a cost accountant and to have a cost accountant’s report in regard to the product(s) that it produces. 11. Curtailing the ever increasing Current Account Deficit (CAD):Even today, our lots of industries are dependent on imported inputs for their products and incurring a lot of Foreign Exchange. To control the haunting Current Account Deficit, there is a dire need to make sure that proper utilization of imported resources is being done. We could not deal with these issues even since 1965 but we started a new journey in 2011 in the right direction with the existing framework of CARRs but above said draft rules are again trying to take us back to 1960s. During the Rajya Sabha Debate in 1965 on introduction of sec 209(1)(d), Smt. Tara Ramchandra Sathe (Hon’ble MP for Maharashtra) stated as under: “What is Cost Audit? The Cost Audit is quite different from the Financial Audit. It is to see whether the labour is sufficient or not, whether the industry has provided efficient labour or the labour which is required by that industry is less than what is required, whether every material and every part of the machinery is used to the optimum, whether any material is wasted, etc. As we all know, we are short of material, there is so much material is imported, when we are short of foreign exchange. In these circumstances, it is very essential that there should be cost audit. In fact, it should be introduced in almost all the industries, but the Government is trying this in certain cases only. So by this we will know whether there is a proper utilization of the material or not. It is very essential, no doubt, and in factories and industries, everywhere, this cost audit should be emphasized.” (Proceedings of Rajya Sabha, 14thSeptember, 1965 Columns 3944 and 3945) 12. In this regards, please note the Statements of the then Hon’ble Finance Minister of India, Shri T.T. Krishnamachari, made in 1965 in reply to the Debate in Rajya Sabha on introduction of sections 209(1)(d) and 233B in the Companies Act, 1956 that very clearly supported the view that when we would have sufficient number of cost accountants in the country (presently there are nearly 45,000 cost accountants in India), every producing/manufacturing company shall be covered by the mechanism of cost accounting records and cost audit. ` “while we have made it obligatory or rather semi-obligatory to employ Cost Accountant, it is our intention to ask certain industries to have a cost accountant’s report.” “when we can have sufficient number of Cost Accountants so as to make it obligatory for every company, every producing concern and every manufacturing concern, to have a cost accountant’s report.” “we are really making it possible for the institution of Cost Accountants to grow so as to enable the Government some time later to make every manufacturing company employ a Cost Accountant, and have a cost accountant’s report in regard to the cost of product that it produces.” 13. Opinion of Deptt. Of Company Affairs: As per Committee on Subordinate Legislation (Fourteenth Lok Sabha) in its First Report (Chapter-III) submitted on 2nd December 2004, The Department of Company Affairs had opined in front of them that the main objective of cost audit when introduced was mainly to meet Government requirements for regulating the price mechanism in certain industries and that in the present scenario authentic cost data base is not only essential for the industries to improve upon their performance and face competitive environment but is useful to various Government agencies, revenue authorities, regulatory bodies, banks and financial institutions for meeting their respective objectives. The Committee note that one of the objects of the Companies (Second Amendment) Bill, 1964, [which on enactment became Companies (Amendment) Act, 1965] as stated in the Statement of Objects and Reasons appended to the Bill, was “to strengthen the provisions relating to investigation into the affairs of Companies and to provide for more effective audit in dealing with cases of dishonesty and fraud in the corporate sector”. This is the need of the hour when our country is facing huge inflation due to Supply side issues which can be tackled with strict control over costs only. 14. Inclusion of Service Sectors: Observations/recommendations made by the Committee on Subordinate Legislation (Fourteenth Lok Sabha) in its First Report submitted on 2nd December, 2004. The Committee said that Service sectors such as Banking, Insurance, Health Services, Education, Hotel, etc. have admittedly “attained strategic importance to the economy and the public at large, particularly after opening up of the economy for private/foreign companies”. It has been stated that an authentic cost data base is of paramount importance to various existing and new regulatory bodies, Competition Commission and Government Departments for fixation of user charges in respect of services provided by them and would go a long way in fulfilling their respective objectives. 15. The existing provisions under section 209(1)(d) and 233B of the Companies Act, 1956 were reviewed by the “Expert Committee on New Company Law” (chaired by Dr.J.J.Irani) set up by the Ministry of Company Affairs, which made its recommendations to the Ministry in May, 2005, which are reproduced below: “At present, the Companies Act contains provision relating to maintenance of Cost Records u/s 209(1)(d) and Cost Audit u/s 233B of the Companies Act in respect of specified industries. The Committee felt that Cost Records and Cost Audit were important instruments that would enable companies make their operations efficient and exist in a competitive environment. 16. Additional Justifications:- It is universally required to be maintained in France and South Korea. (Source Expert Committee Report) Small countries like Pakistan and Bangla Desh have prescribed it. Following universal melt down of 2008, even the Group of 20 where our Prime Minister is important leader has emphasised for close monitoring and control of costs and expenses for social good. Countries like Greece, Italy etc. have suffered due to uncontrolled expenses. Similar fate happens in a number of Indian Corporates which is evident from the Reports of MCA itself and latest instance of National Spot Exchange Ltd. Present Rules were notified after transparent discussions with all stakeholders by the Expert Group. It is very essential to control manipulations by businesses which pre-empt capacities and natural resources promising large capacities but do not implement projects. 17. There are thousands of Practicing Cost Accountants and hundred thousands of students undergoing the course of CMA. Please note that a lot of them have entered the practice or joined the course after the recent changes in Cost Accounting framework in 2011. If the said draft rules are finalized in the present form, then future of all these existing and future professionals will be at stake. Some of them have already threatened to take legal action against the Institute or Chapter if their career is destroyed like this. So, considering the detailed justification give above which also includes the recommendations of various Government representatives and Govt. authorized bodies, you are requested to not only incorporate our above mentioned suggestions in the said Draft Rules but you are also requested to recommend the same framework to Ministry of Finance also so that similar Cost Accounting framework can be established for the non-companies also and we can achieve the Original goal behind prescribing Sec. 209(1)(d) in 1965, Looking forward to your positive response. Thanking you with Warm Regards, Yours Truly, CMA Dr. Niranjan Mahendranath Shastri Treasurer & Ex Chairman The Institute of Cost Accountatns of India Indore-Dewas Chapter
Posted on: Mon, 25 Nov 2013 12:16:40 +0000
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