The Hindu Business Line : ICWAI doing a SWOT of cost audit

The most important consideration for corporate governance is value creation for stakeholders. The observations in the cost audit report provide direction for continuous improvement. MR DHANANJAY JOSHI, PRESIDENT, ICWAI.

MR DHANANJAY JOSHI, President, ICWAI.

A recent mail from a reader throws a bombshell. `Mandatory cost audit is going to be abolished,' he says. But this is not the first time we have been hearing such predictions. Meanwhile, the Institute of Cost and Works Accountants of India (ICWAI) has been working hard to justify the audit in question. For instance, a few weeks ago, the Institute held a national seminar, `Cost audit - A way ahead', in Delhi.

"Cost audit is a system which builds the competitiveness in the industry to face the global challenges and it is oriented towards corporate governance," averred Mr Dhananjay Joshi, president of the Institute, in an interaction with Business Line on the eve of the seminar. "We, the Institute, are in a receptive mode and are considering the seminar as an opportunity to do a SWOT (strengths, weaknesses, opportunities, and threats) analysis of cost audit as a system," he said.

Here is more, from Mr Joshi.

Do you foresee a shift in the focus of cost audit in the new economic scenario?

The cost audit mechanism is multifaceted and of perennial significance, having universal application. The foundation of the system is solid and deep-rooted, whereas the structure keeps changing with the economic situation. The utility is expanding and encompasses topical areas. The current focus and utility of cost audit is more in the following areas:

Anti-dumping and countervailing duties: In anti-dumping cases, the International Dispute Resolution Authority accepts the authenticated data on cost from the cost audit report. Thus, the unique system of cost audit in India has become a big source of support for industry to check dumping as well as to provide inputs when dumping is alleged, even in cases of legitimate export. Because of this mechanism, the country could file and fight a large number of anti-dumping cases.

Transfer pricing: With increased presence of MNCs in India, the frequent transfer of resources among units operating in different parts of globe has a big impact on their profitability. The revenue department has successfully utilised a check system, which is very much a part of the cost audit report.

Free trade agreement: The pivotal point for incorporating any item during the process of negotiations under an FTA is the domestic cost of the product. The costs of items covered under cost audit are being used by the competent authority for decision-making.

Predatory price: To increase market-share, the dominant players may opt for a price lower than cost to eliminate competition. This, in long run, is detrimental to consumers. Cost audit report will help in deciding predatory pricing cases before the Competition Commission of India.

Corporate governance: Today, India Inc. is focusing on good corporate governance practices to have a better image among shareholders and others. They have started implementing some of the codes of ethics framed under Clause 49 of the Listing Agreement of SEBI and other provisions under the Companies Act.

But these have not generated the desired level of confidence among shareholders. Prospective investors and shareholders look for better utilisation of resources and disclosure systems, which reveal the real strength of the company. The analytical information provided in the cost audit report can address these issues.

The most important consideration for corporate governance is value creation for stakeholders, which can only be achieved by efficient use of resources. The observations in the cost audit report provide direction for continuous improvement.

Is there support from the Government?

The Committee on Subordinate Legislation (Fourteenth Lok Sabha, 2004-05), under the Chairmanship of Mr N. N. Krishnadas, has submitted its report and identified major industries for which Cost Accounting Record Rules (CARR) are yet to be framed. They include coal, transportation, industrial machinery, medical and surgical appliances and defence industries. In addition, industrial/service sectors, such as banking, insurance, media/broadcasting, health services, education, hospitality, tourism and airlines, which have attained strategic importance, particularly after the opening of the economy, also need to be covered under CARR. We understand that the Ministry of Company Affairs has framed policy guidelines on CARRs and cost audit. We welcome such a move. However, it is felt that the views of the Committee on Subordinate Legislation and those of the stakeholders should also have been considered and reflected upon.

There are various positive initiatives in the policy guidelines, such as coverage of CARR for infrastructure and Defence sectors, products produced by PSUs, etc. However, there are restrictions in the guidelines. We hope that the system of cost audit will be strengthened further.

D. Murali

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