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ICAI VIEWS ON COST AUDIT

Pages : 1

CMA A.K.ROY
SERVICE

[ Scorecard : 168]

Posted On 27 March 2009 at 09:58

Appendix - A

Views of Shri Vinod Jain, Chairman, Committee on Management

Accounting, ICAI and Member of the Expert Group set up by

Government of India, on the draft report of the Expert Group,

expressed during a meeting of the Expert Group held on

13.12.2008 at ICAI, New Delhi.

1. Shri Vinod Jain, while speaking on the issue of applicability of Cost

Accounting Record Rules/Cost Accounting Report Rules (CARRs), said

that such Rules should be applicable to a class of companies engaged

in production, processing, manufacturing or mining activities only when

there is involvement of public interest and the Regulators require

details of utilisation of material, labour or other items of cost to

monitor, regulate, administer the prices and for other purposes as a

matter of statutory requirements.

2. There is no need to amend and apply these rules to all classes of

companies in view of the fact that these rules were made applicable

sometimes in 1965 to administer the prices in post independence

India. However, since then sea-change can be noticed in the business

environment of the country. There is over all fierce competition in the

market and the principle of survival of fittest is now applicable. The

companies have already become cost conscious and cost effective

themselves and they have already adopted Cost Accounting principles

and practices as well as modern technology and latest tools like

ERP/SAP to survive in the competitive world. There should be a Self-

Regulatory approach rather than imposition in the provision of

applicability of CARRs. Hence, it is felt that there should not be any

change as far as the case of applicability of CARRs is concerned, from

the existing one.

3. The provisions of CARRs should be applicable to those organizations

only where there is a question of subsidy, anti-dumping, administered

prices, requirements of Regulatory bodies or in such industries where

in view of public interest the Government consider it appropriate to

prescribe compulsory maintenance of cost accounts.

4. With regard to maintenance of Cost accounting records, it is felt that,

such records may be maintained as an integral part of financial records

whereby, it should be possible to derive all kinds of relevant cost

accounting data from integrated records only which should suffice the

requirements of all statutory provisions. Usually, a separate set of cost

accounting records may not be necessary. However, the management

is free to design and adopt various kinds of forms/formats according to

their own size, scale, type and the purpose etc., as an internal

practice.

5. There should not be any legal mandate on the applicability of Cost

Accounting Record/Report Rules (CARRs) i.e., on the maintenance and

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the Cost Audit rather the Companies should be educated properly

about the importance of costing system so that they voluntarily adopt

the same for improving internal efficiency of the management. The

burden of compliance audit should not jeopardize the day-to-day

management function. The management should be left free to

concentrate more on operational aspects rather than on compliance

formalities.

6. With regard to confidentiality of cost data, we are of the opinion that

the nature of cost data is very sensitive and the confidentiality of cost

data is to be ensured. The cost auditor may submit a small report to

the Government – MCA and a detailed report to the company

Management. The cost auditor’s report may contain a report as well as

findings for the information of management. There should be detailed

guidelines/formats as to how to prepare the Cost auditor’s report in a

structured form for the use by the management of the company. No

part of Cost auditor’s report be disclosed to public at large. However, if

the Board of Directors feels appropriate, they may disclose some

indicators of Cost as part of their annual report.

7. The provisions of CARRs should be applied based on a multiple criteria

on the basis of investment in Fixed Assets and the annual turnover. All

those companies in whose cases the investment in fixed assets is upto

the limits as prescribed for small and medium enterprises should be

exempted from the purview of applicability of CARRs.

8. It is worth mentioning that ICAI would like to be closely associated

with ICWAI in the matter of formulation of Cost Accounting Standards

to make them fully convergent with IFRS and ensure smooth transition

to new Costing system in tune with future accounting scenario in India.

ICAI technical competence and resources are available for use by the

Government and society. It is very important to use ICAI resources as

financial accounting concept have undergone a comprehensive change

and its impact on cost accounting and cost Audit will be significant.

9. It is also felt necessary that instead of applicability of CARRs, the

companies should follow Cost Accounting Standards. Rather than

applicability of Rules, there should be provision and applicability of

principles of accounting as far as the case of maintenance of Cost

Accounting records is concerned. Such Cost Accounting Standards

should be formulated keeping in view:

(a) GAAP – Indian as well as International;

(b) IFRS;

(d) Indian Accounting Standards; and

(e) Best International Practices as adopted by PAIB.

10. There should not be any conflict/contradiction between the Cost

Accounting and Financial Accounting Standards. Just like ICAI has

issued Accounting Standards and Auditing Assurance Standards, there

- 59 -

is urgent need to formulate not only Cost Accounting Standards but at

the same time, there should be formulation of Cost Auditing and

Assurance Standards also. This will ensure both uniformity and

standardization of principles and practices in the sphere of Cost

Accounting and the Cost Audit.

11. The CASB of ICWAI along with ICAI should issue:

(a) Guidance Notes

(b) Monographs

(d) Statements

(e) Standards

12. The Guidance Notes issued by CASB of ICWAI in association with ICAI

should be mandatory in nature.

13. At the initial stage the Cost Accounting Standards may be

recommendatory in nature and later on they should be graduated to

become mandatory.

14. There should be more emphasis on the maintenance of integrated

accounting system to facilitate easy compilation of cost information

and reduce cost of compliance.

15. The appointment of Cost auditor should be made by Board of Directors

without seeking prior approval from the Central Government. The Cost

Auditor should be rotated after 3 – 5 years. It is not necessary that the

Cost Auditor should be appointed in Annual General Body meeting of

shareholders. It is worth mentioning that the report of Cost Auditor will

be used by the internal management in strategic decision making.

(Vinod Jain)

- 60 -

Sanket
accountant

[ Scorecard : 128]

Posted On 30 March 2009 at 12:25

VIEWS ON THE EXPECTED LINES. NOTHING GOOD TO EXPECT

ACMA-ICAI
DGM-Global Voice Business

[ Scorecard : 1031]

Posted On 30 March 2009 at 16:25

Observations of the Expert Group on the aforesaid views

expressed by Shri Vinod Jain.

1. The Expert Group noted that majority of the views expressed by Shri

Vinod Jain are in complete consonance with the Observations and

Recommendations made by the Expert Group in this report.

2. All the recommendations made by the Expert Group are based on the

recommendations made by various Working Groups, views expressed

by all stakeholders as part of replies to the questionnaire and/or

expressed in the country-wide open house meetings, and detailed

deliberations held in various meetings of the Expert Group.

3. It is also important to note that eminent experts representing the

Industry Associations; Regulatory Authorities; Academicians from

leading B-School; leading Management Consultants; Presidents,

Council Members and other Professionals from ICAI, ICWAI & ICSI;

CFOs of top ranking Public & Private Sector Companies; and Senior

Government officials were participated in the deliberations of the

Expert Group / Working Groups and their views have been fully

considered while making final recommendations in this report.

4. The Expert Group received response (more than 300) from various

Regulatory Authorities and user departments/agencies (SEBI, CCI,

NPPA, FICC, CERC, C&AG, PNGRB, CAC, Tariff Commission, Tea Board,

DGAD, etc.); major private sector industrial conglomerates/ companies

(Tata, Birla, Reliance, ITC, Mahindra, Bajaj, Jindal, Mallaya, Muthiah,

TVS, Maruti Suzuki, Dabur, HUL, Ashok Leyland, Asian Paints, BPL

Mobile, Cadila, Finolex, Ford, HML, Kirloskar, Nestle, NDPL, Subros,

Sundaram, Swaraj, W.S. Industries, etc.); major industry associations

(CII, FICCI, ASSOCHAM, IBA, PHDCCI, CCFI, etc.); Navratna/Miniratna

PSUs (ONGC, IOC, BPCL, HPCL, GAIL, NTPC, NHPC, CIL, NLC, SAIL,

RINL, BHEL, BEL, CEL, BEML, MTNL, NALCO, NMDC, NFL, NTC, PGCIL,

GACL, etc.); IIMs, and ISB, Hyderabad; and leading management

consultants. All of them have broadly agreed with the revised

framework as proposed by the Expert Group.

5. The Expert Group noted that the views expressed by Shri Vinod Jain

are in complete contradiction to the directions of the Government in

constituting this Expert Group whereby the entire focus is on

enhancing the competitiveness of Indian industry. The present

mechanism, which Shri Jain has strongly favoured to be continued, is

not suited to achieve this objective. The present economic upheavals

across the globe also suggest strengthening of regulatory mechanism

and shifting the focus from corporate governance to enterprise

governance where the later includes both performance and

conformance.

6. The modified framework of Cost Accounting Records and Cost Audit in

the Corporate Sector as recommended by the Expert Group is based

on the suggestions made by various stakeholders under the presently

changed economic and regulatory environment on key issues such as,

the need to shift from Corporate Governance to Enterprise

Governance; the need to focus on enhancing competitiveness of India

Inc; the need to shift from the existing Rule based to Principle based

mechanism; rules/formats to be replaced with the Cost Accounting

Standards; Companies to be granted flexibility in maintaining the Cost

Accounting Records and left free to choose appropriate Cost

Management framework; enhance the existing exemption limits

applicable to SSI units; reporting mechanism to be simplified and

replaced with the compliance; maintain complete confidentiality of

sensitive cost data by retaining the details with the Company; reducing

the cost of compliance of the Companies; need to empower the

Companies in appointment of Cost Auditors; and to suggest path for

voluntary compliance of statutory framework for all companies

reaching the highest level of Total Cost Management maturity.

7. The Expert Group has also recommended applicability of the modified

framework not only for large size companies representing all sectors of

economies, but has also suggested extending this framework to all the

Government projects/schemes, departmental undertakings, contracts

& procurements, infrastructure activities, public service organisations,

etc. This would significantly improve the efficiency levels of all the

bodies resulting in proper utilisation of National Resources. This would

also enable the government to justifiably determine the fees, tariffs,

duties, levies, charges, subsidies, etc.

8. The Expert Group does not agree with the views of Shri Jain either for

continuation of the existing mechanism of CARRs or to their limited

applicability. This suggestion is in contradiction to his own views

expressed therein agreeing with the Expert Group for shifting from

Rule based to Principle based mechanism and prescripttion of Cost

Accounting Standards for compliance by all companies.

9. The Expert Group also does not agree with his views that on the one

hand he is suggesting that in the present stage of maturity levels

achieved by the Indian companies, companies should be fully

exempted from the mechanism of Cost Audit, on the other hand, he

has also given his views on the structure and distribution of Cost Audit

Reports, mode of appointment of Cost Auditors, sharing of information

with the shareholders, etc, which tantamount to self contradictions.

The Expert Group does not support to such disjointed views of Shri

Jain.

10. Shri Jain has expressed a view that the cost accounting standards

should be framed by ICWAI in consultation with ICAI. The Expert

Group opines that perhaps Shri Jain intends to say that the ICAI should

be associated with this exercise. It may be noted here that the CASB of

ICWAI has a member from the ICAI besides members drawn from

various other professional bodies, academic institutions, industry

associations and regulatory authorities. Therefore, no such separate

consultation with ICAI would be necessary as the composition of the

Board takes care of such consultation process. The Expert Group in its

recommendations has very clearly reiterated this view.

11. With regard to his views on synergy between the cost accounting

standards and accounting standards, Indian GAAP, International Best

Practices and IFRS, the Expert Group agrees with this view and has

made a specific recommendation in this regard. In fact CASB of ICWAI

has already approved a revised framework which requires CAS to be

aligned with the aforesaid aspects.

12. Shri Vinod Jain’s views that guidance Notes issued CASB of ICWAI

should be mandatory in nature is impracticable. This goes against the

very principle of providing Guidance Note to the stakeholders and not

the Standards only which are mandatory in nature.

13. The Expert Group reiterates that all other views and suggestions made

by Shri Vinod Jain have been fully incorporated in various observations

& recommendations made in this report.

Total thanks : 1 times

CMA A.K.ROY
SERVICE

[ Scorecard : 168]

Posted On 01 April 2009 at 11:02

Dissent Views of Mr. Amarjit Chopra and Dr. Ashok Haldia – Members of the Expert Group constituted by DCA for Suggesting Transfer Pricing Guidelines.

(MR AMARJEET CHOPRA NOW VICE PRESIDENT OF ICAI)

There is no denying to the fact that the transfer pricing practices adopted by the companies could be a possible tool for corporate abuse. A probe into transfer pricing cases, causing transfer of economic resources to the related party at less than arm’s length price is necessitated for host of reasons ranging from evasion/avoidance of tax liability to siphon-off the resources. Transfer of resources to and from the related party should be at arm’s length and at arm’s length price. Any exception to this should be a subject matter of close scrutiny, proper disclosure and effective accountability.

2. Transactions with the related parties are currently subject to the requirements of the accounting standards, and financial as well as cost audit. In addition, various tax laws seek to regulate, and check the possible abuse for taxation purposes. The Companies Act, 1956 does provide for a frame work for transactions in which directors etc. are interested with a view to avoid situation of conflict of interest.

3. The requirements of transfer pricing transactions, at present, are to be addressed through Accounting Standards, (AS) – 18. The AS-18 came in the effect for the accounting periods commencing on or after 1^st April, 2001. The Standard provides for disclosure of related party relationships, and certain particulars of transactions with the related parties, in case of listed companies, and companies whose turnover exceeds Rs. 50 crores. The application of Accounting Standard would involve the following stages/processes:

i) Identification of related parties, and, then, transactions with those parties.

ii) Maintenance of proper records and documentation for the transactions entered into with the related parties, and the method/basis adopted for pricing such transactions.

iii) Ascertainment as to whether the arm’s length has been maintained and whether arm’s length price has been charged.

iv) Disclosure of particulars in regard to related party relationships and related party transactions as integral part of the financial statements. The AS also requires disclosure of particulars in respect of certain types of related parties which might have controlling interest even though no transaction might have had taken place during the course of the year.

v) Proper disclosures in case of non-compliance to the requirement, the fact of non-maintenance of arm’s-length or absence of arm’s-length price alongwith relevant details.

4. Section 217(2AA) casts responsibility on the Board of Directors for (i) preparation of annual accounts in accordance with the applicable accounting standards alongwith proper explanation related to material departure, (ii) selection and applicability of accounting polices and exercise of judgement so as to give true and fair view. The Directors responsibility as aforesaid would also extend to and cover the related party transactions.

5. The Board of Directors has to ensure compliance with the Accounting Standards and statutory auditor is required to verify the related partly relationship, and, the related party transactions. On that basis he is expected to express his opinion on the adequacy or otherwise of the disclosures made, and on reasonableness of the consideration/price charged in those transactions. If not satisfied, he is required to qualify his report bringing out the facts and the exact impact on the true and fair view of the financial statements.

6. The Cost Accounting Records Rules provide for proper maintenance of records in respect of transactions with the related parties including to indicate the basis followed to arriving at the rates charged or paid for such activities or services so as to enable determination of the reasonableness of such rates. The cost auditor is required to specifically give his observations, in his report, on cases, where price charged for related party transactions is different from the normal price and impact of such lower/higher price.

7. The segment-wise reporting has been exhaustively dealt with by the AS-17. The segment-wise costing has been exhaustively dealt with by the relevant Cost Accounting (Records) Rules and audit requirement in regard thereto. Under the Relevant rules, cost statement of each service (segment-wise and elements of cost) is Required to be given. The cost statement is also required to be submitted to the Audit Committee wherever set up under Section 292A of the Companies Act, 1956.

8. In the background of the above, the recommendations of the Export Group provides for :

i) Preparation by a company of a policy statement on transfer pricing.

ii) Preparation by a company the implementation report to document compliance with the policy and detailed computation on transfer pricing for every transaction with related party or in regard to the internal business segment.

iii) Separate audit of record of transactions (related party) and expression of opinion thereon. The record of transactions in the prescribed format to form part of the audit report.

iv) Verification of the report on implementation on transfer pricing, by the separate auditor.

v) Disclosure in Directors’ Report/Annual Report:

§ Record of Transactions as per Schedule A.

§ Transfer Policy Statement (a comprehensive and detailed one).

§ The aforesaid disclosure are to be given in the Director’s Report alongwith those required under Accounting Standard –18 (disclosures as per AS –18 form part of accounts and, therefore, would require to be re-disclosed in the Directors’ Report.)

§ Director’s certificate of compliance on Transfer Pricing.

§ Separate Auditors report alongwith the Record of Transactions.

9. The requirements under AS 18 are based on principles based definition of the term related party, disclosures by exception, and, additionally provide for disclosure of critical relationships (even without any transactions). The due diligence process to be adopted for the framework suggested by the Group would essentially be the same as listed out at para 3 above. The requirements of separate audit suggested by the group is in fact re-audit or repeat of the work which a statutory auditor would do in any case, and is therefore wholly unnecessary. Rule-based definition of related party within the ambit of broad principles as suggested by the Group would only encourage non-compliance while remaining within the confines of the legal framework. The group has adopted the definition of ‘related party’ given under Income Tax Laws for the purpose of bringing in to focus international transactions with the related parties. Such a definition would fall short of requirements from corporate governance perspective. The definition of related party under AS-18 is wholesome and principle based. It is compatible with the definition of the term given in the relevant International Accounting Standard.

10. Financial and or non-financial disclosures should be relevant and meaningful for the users’ need. Detailed disclosures generally run the risk of addition to the size of the Annual Report without corresponding value addition. The users interest is well served if they are informed whether or not good practices have been followed, and, if not, what has been the impact on the true and fair view of the financial statements or on the quality of the governance. Leaving the small investors as they are in India, to the complexities of the details would cause more harm than good. On these parameters the nature and the level of disclosures suggested by the Expert Group may not be worthwhile proposition. The same information, for example, record of transactions is required to be disclosed at three places with minor variations/additions, as per the guidelines suggested by the Expert Group.

11. In our view the requirement under AS-18 meets the intended purpose. The Standard has come into effect only very recently and the financial statements based on the applicability of the Standard would be available only by the end of September, 2002. At best the disclosure requirement as per AS-18 could be re-looked into to provide explicitly additional disclosure in respect of each of the transactions where arm’s length has not been maintained and the arm’s length price has not been charged (including impact thereof individually as well as in aggregate on the true and fair view of the financial statements). It should be re-emphasized that such a requirement is implicit under the current Standard. The applicability of AS-18 could be extended to include all the corporate entities. As stated there is no case for re-audit more so when the Directors’ policy statement seeks to provide for approval of the policy and methods of pricing in each case by the Board of Directors through the Audit Committee. In terms of Section 292A areas of disagreement between the Board and the Audit Committee would require to be brought to the information of shareholders.

12. While there could be a case for the Board of Directors adopting a Statement of Policy on Transfer Pricing, there is no need for disclosure of such a detailed statement in the Annual Report. Ground rules for adoption in the policy could be prescribed. These would then in the normal course be looked into by the auditors for compliance and wherever required for reporting. Needless to add that Audit Committee/Board are also expected, in the normal course, to monitor/ensure compliance.

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