COST ACCOUNTING RECORDS AND COST AUDIT.

[Mr. M. GOVINDARAJAN]

                        Ministry of Corporate Affairs issued nearly 15 circulars since 1982 on Cost Accounting Records and Cost Audit.  All these circulars have been reviewed by the Ministry and in supersession of all the old circulars, the Ministry issued a Master circular on 11.11.2011.    *The features of the Master circular are as follows:

• The Cost Auditor is required to comment on the scope of the internal audit of cost records.  Hence the Cost Auditor cannot be appointed as internal auditor of a company for the period which he is conducting the cost audit, irrespective of the fact whether he is conducting cost audit for one or all the company’s products/activities;
• The specified number of companies for conducting cost audit under Section 233(B) read with Section 224 (1B) of the Companies Act, 1956 is to be computed for a financial year with reference to the number of companies in which he has been appointed as Cost Auditor, including those in which he is proposed to be appointed for which he has given consent.  The number of companies for which cost audit reports have not been submitted and have become overdue  shall also be taken into account for the purposes of the ceiling;
• A cost auditor shall be deemed to have concluded his appointment for the relevant financial year as soon as he sends a report to the Central Government in accordance with Cost Audit Report Rules with a copy to the company.  His obligations to answer the queries from the Ministry of Corporate Affairs should not debar him from accepting another appointment as cost auditor of a company provided the specified number of companies contemplated in Section 224(1B) is not exceeded;
• The cost auditor should in strict compliance with the provisions of Section 233B of the Companies Act and in compliance with Cost Audit Report Rules in force, and to ensure the full and complete details of cost accounts are furnished in their cost audit reports;
• The cost audit report shall be signed by any one of the partners of the firm responsible for the conduct of cost audit in his own hand along with his membership number for and on behalf the firm.   In any case the report should not be signed merely affixing the firm’s name;
• Cost audit for a financial year should contain the corresponding data for the previous year(s) also.   If the company is covered under cost audit for the first time, then the cost auditor shall mention the figures for the previous year(s), certifying by means of a note that the figures so stated are on the basis of information furnished by the management, for which he has obtained a certificate from them;
• The Audit Committee is to discuss the suggestions made in the cost audit report for implementation, wherever cost audit has been directed.  The presence of the cost auditor in such committees will ensure overall cost management, efficiency in resource utilization, business vertical-wise performance evaluation, proper pricing of inter-unit/inter-company transfers and valuation of inventories.   The cost auditor shall attend and participate at the meetings of the Audit Committee or the Board, as the case may be, but shall neither be a member nor have the right to vote;

*Vide General Circular No. 67/2011, dated 30.11.2011 the Ministry of Corporate Affairs issued the following clarifications:

• The Companies (Cost Accounting Records) Rules, 2011 are not applicable to-

-          Wholesale or retail trading activities;

-          Banking, Financial, leasing, investment, insurance, education, healthcare, tourism, travel, hospitality, recreation, transport services, business/professional consultancy, IT & IT enabled services, research & development, postal/courier services etc., unless any of these have been specifically covered under any other Cost Accounts Records Rules;

-          Companies engaged in job work operations or contracting/sub contracting activities, and are paid only the job work or conversion charges such as tailoring, repairing, painting, printing, constructing, services etc.,;

-          Companies engaged in the production, processing, manufacturing or mining activities till such time they commences their commercial operations;

-          Ancillary products/activities of companies incidental to their main operations and wherein the total turnover from the sale of each such ancillary products/activities do not exceed 2% of the total turnover of the company or Rs.20 crores, whichever is lower.   However, required details of all such ancillary products/activities may be maintained under a miscellaneous group  and disclosed appropriate;

• The Cost Audit Orders dated 2.5.2011 and 03.07.2011 are not applicable to the following cases:

-          Generation of electricity for captive consumption.  For this purpose the term ‘captive generating plant’ shall have the same meaning as assigned in Rule 3 of the  Electricity Rules, 2005;

-          Own manufactured products that are consumed exclusively by the company for the sole purpose of production, processing, manufacturing, or mining of its other products or activities that are subject to cost audit;

-          Hundred per cent Export Oriented Units.

• Only such items falling under the relevant chapter(s) of the Central Excise Tariff Act, 1985 as constitute intermediate or final or allied products of the industry mentioned in the Cost Audit Order, dated 30^th June 2011 shall be covered under cost audit and all other items not related to the industry shall be outside the purview of the said orders.

*Vide General Circular No. 68/2011, dated 30.11.2011 the Ministry of Corporate Affairs clarified that-

• the companies covered under Companies (Cost Accounting Records) Rules, 2011 shall only file a simple compliance report as per Form B and no other details of cost records are required to be filed with the Government.   If all the products/activities of a company, excluding the exempted categories, are covered under cost audit, then the company will not be required to separately file the compliance report; 
• for companies coming under the purview of the Companies (Cost Accounting Records) Rules, 2011 and the Companies (Cost Audit Report) Rules, 2011 for the first time, cost records and cost details, statements, schedules etc., shall be kept in good order for the next 8 financial years beginning with the first year of the application of the said rules;
• for filing the cost audit reports the following procedure may be followed:

-          If only one product of a company is subject to cost audit and the company appoints more than one cost auditor, only a consolidated cost audit report should be prepared and signed by all the cost auditors;

-          For this purpose company may designate/appoint any one of them as the principal/lead cost auditor who would  be responsible for the consolidation and filing the same with the Central Government;

-          If more than one products of a company are under cost audit for which it has appointed either same or separate cost auditors, then they may either may submit separate cost audit report for each product group or submit only one consolidated report containing details of each product group under audit separately as per the procedure provided above.

• The Audit Committee shall obtain a certificate from the cost auditor certifying his/its independence and ‘arm’s length relationship’ with the company.   In order that ‘arm’s length relationship’ is in fact ensured, it may be noted that cost auditor(s) shall not provide any other services to the company relating to-

-          Design and implementation of cost accounting system; or

-          The maintenance of cost accounting records; or

-          Act as internal auditor, whether acting individually or through the same firm or through  other group firms where he or any partner has any common interest. 

The cost auditors are allowed to certify the compliance report or provide any other services as may be assigned by the company but which shall not include any of the services mentioned above.