has reference to the Article in the opinion section of your daily on 12-10-2006 "Should we bid adieu to cost audit?".

by A.R.Ramanathan. In addition to what the esteemed author has stated- for the government and the industry to reorient its outlook towards the exercise, I would like to add the following which may kindly be Published. While questioning the requirement of Cost audit time and again one must analyse in totality why Cost audit is required and for that, one must know the deficiency and focus of related audit systems that have been statutorily sanctified ,specially the Financial Audit: The focus of financial audit is scrutiny of financial records(Income and expenses)to ascertain and repose faith in the profits projected, Value of assets and liability in a given period, Propriety of the transaction of income and outgo. Simply this is the essence of scrutiny of financial records. Its focus is Shareholders of the company who are supposedly wealth creators of the business.

Financial records fail miserably in speaking out about the internal strength, efficiency, and sustenance aspect of the business ,which a seasoned businessman is interested. Financial records do not also reflect the wealth creation for the society at large(no macro economic outlook).
It doesn't question price-output-cost relation as well, it doesn't also address the competitors strategy and our strength. In essence it is simply a documentation of inflow-outflow data and projection of residue as gain available for distribution. Financial audit is shortsighted in its approach and Blind towards societal interest.

The focus of Cost-audit is stake-holders at large (every citizen of India is a stakeholder in the economic activity of the country) Cost records basically reflect Cost incurred in the activity and the drivers that enable such incurrence and thus warn the business to moderate the drivers in advance. It speaks amply about utilisation of resources which is vital for managing an economy. It discloses the reasonability or otherwise of the pricing module which is important to bringing an exploitation free society.
Cost records scrutiny is vital for business sustenance as well ,when we talk of demutualisation of management and owners. Management perspective is sustenance and efficiency and these two are amply addressed by cost records, through its methods and techniques which are prescriptive(Like budgeting, standard costing ,variable costing, pricing methods like target pricing etc.) Do owner-investor benefit from this exercise, yes in the long run an investor is unconcerned with immediate gains but the vision of business to sustain and its data projecting bottomline efficiency is utmost important for a owner-investor, While a government benefit from the cost data for planning,resource monitoring,Price controls and comparative industry study with authentic cost data.The tax department benefits from the hard work of Cost accountants both inrespect of Direct tax(where the basis is to judge from allowances and disallowances and mapping with cost to business activity)and indirect taxes(where Cost of goods and services is vital). It is thus unfortunate to see cost audit often being projected in negative perspective by one and all and in a democracy the conflict of interest in sharing such data is just in the maxim"what is

good for all is many a times not good for a few who rule". which sans the basic framework of the constitution"Of the people, by the people and for the people". Improving reporting methodology, switching from becoming just a prescriptive exercise to a valueadded and dynamic tool can trigger focus on cost audit. Audit itself is an art of handling data to produce decision tools and cost auditor should now-on be proactive and prove value addition to the management. Cost audit in India is there to stay for long and i am confident about it and the world can learn from us in this regard. Thanx CMA.R.Veeraraghavan

Posted by Ubhaya Vedanthi.R.Veeraraghavachariar at 12:06 PM 1 comments: raghu said... Should we bid adieu to cost audit? > > A. R. Ramanathan > > Totally scrapping cost audit or retaining the system in the present > form are extreme positions that should be avoided > > In a rational economy any activity that adds no value has no > justification to exist. Industry associations and industrialists have > been voicing the view that cost audit provisions are burdensome, > especially in the light of liberalisation and globalisation. While > industry admits that cost accounting is an important management tool > in today's competitive milieu, what is really being objected to is the > preparation and reporting of cost data in the format prescribed by the > government. The argument put forth is loss of confidential information > and little utility to the management, as every well-run company has > its own cost and budgetary control system. The money spent on this > audit, it is argued, adds no value to the management. > > The industrial scene has changed since 1991. In a liberalised > industrial economy, it is survival of the fittest. Cost consciousness > and efficiency improvement are an essential offshoot of competition > and there is no need for a legislation in this regard. > > No one in the industry today is against a sound costing system and > efficiency audit. The objection is to the statutory imposition. The > pith of the industry's argument is that they are already pursuing

> sound costing systems and efficiency audit than the statutorily > imposed system. The statutory system implies an annual collection and > collation of data which has no utility for day-to-day management > control. Similarly, the Annual Cost Audit Report in the prescribed > format serves no purpose in the discharge of managerial functions. Its > utility is "zero", it is argued. > > Format matters > > In the era of liberalisation, the objective of the Government to make > the industry cost conscious and efficient should be to merely insist > on a sound costing and an effective reporting system. Let formats be > left to the company concerned, choosing according to its needs and > circumstances. > > Every professional management would welcome an expert to examine the > efficiency of the control system. There should be no objection if the > law also says so. The efficiency can be tested and reported in such > periodicity as may be decided by the Government and industry. > > Expert cost accountants will also be put to test, to deliver the best > in the interests of the company. In fact, some well-managed companies > have called for and made use of periodic information selectively from > the cost auditor on voluntary basis. Here again, the advantage of > competition among professionals can be exploited by the company and a > management auditor who performs will get preference. This audit will > be of efficiency which, at present, does not exist in corporate > statutory audit. Such an audit adds value to the management and will > be welcomed.. The provisions regarding prescription of formats by > bureaucrats and reporting to them must be dispensed with. Bereft of > these, the provisions relating to management audit should be welcomed > by all. > > An obvious question that the bureaucracy would pose at this point is: > How should the Government monitor the effectiveness of these > provisions? The only way is involvement of professionals and > independent reporting to the Government. > > As regards the loss of confidentiality of operational data, it is > possible to devise a simple reporting system confirming the existence > of a sound costing system and management reporting for control. This

> system can cover more details if required without operational data. > The industry and the Government, with the help of cost accountants, > can work together in devising such a format. > > The argument that such a reporting is done by financial auditors under > CARO is hogwash. There is a great deal of misreporting. Moreover, > under professional statutes, they are not authorised to do this work. > > Perhaps, this alternative will address the legitimate objections of > the industry. However, there are certain sections in government which > require data in the existing cost audit formats for discharge of their > statutory/regulatory functions. This is particularly relevant for > excise authorities and tariff-fixing bodies. It is only proper that if > they so require, such information should be called for in exercise of > their powers under the relevant provisions of the respective statutes. > If necessary, they can call for such information duly authenticated by > independent professionals. Obviously, it is not the responsibility of > Ministry of Company Affairs to facilitate these data for these > authorities. In fact, they should extend the scope of such reporting > to all sectors under their jurisdiction. For instance, why power > companies alone should do cost audit, and not State electricity boards? > > Save the practitioners > > Any move to scrap the system rather than modify it according to the > needs of the day would be like throwing the baby along with the > bathtub. The Government has to also keep in view the fate of thousands > of practitioners, especially the young men and women who have staked > their careers to the profession. As of today there are more than 2,000 > members of the professional body who have developed expertise in > costing. . Their expertise and careers should not be jeopardised. By > not being proactive enough in convincing industry that its services do > add value, the profession has stunted its own growth. > > There is need for a balanced view in this matter. Totally scrapping > cost audit or retaining the system in the present form are extreme > positions that should be avoided. The Government, having jurisdiction > over the profession, should look at how it can be made vibrant. > > (The author is a former Member, CLB and CERC.) >

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