From TIOL site
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Make Cost Audit bedrock of economic efficiency
MAY 2, 2009
By Naresh Minocha, Consulting Editor
THE Government can usher in a paradigm shift in corporate accountability and governance by embracing whole-heartedly the recommendations of an expert group (EG)on cost accounting and audit (CAA).
It should in fact one step forward by making cost audit mandatory in all Government entities and non government organizations (NGOs) to improve the country's economic efficiency.
The Ministry of Corporate Affairs (MCA) recently made public the EG's voluminous report to elicit public comments on its recommendations on cost accounting record rules and cost audit (CARR & CA).
EG's recommendations are not a perfect recipe. It is thus bound to elicit adverse response from the so-called votaries of liberalization. Similarly, the champions of corporate governance might crib that EG has done tight-rope walking between conflicting requirements of corporate sector and all other stake holders including consumers and tax administration.
As it is, one EG member, from the rival chartered accountancy fraternity, has disagreed with the unanimous recommendations of all 16 other members. Vinod Jain, representing Institute of Chartered Accountants of India (ICAI) has virtually given a dissent note. The other members have countered Mr. Jain's contentions.
Intellectual discourse on the report thus carries the inherent risk of delaying and diluting the acceptance and implementation of EG's recommendations. MCA must keep vigil on this count.
It would have been great if MCA had included one representative each of Tariff Commission (TC), Finance Ministry’s Chief Advisor (Cost) (CAC) and Competition Commission in EG to draw on their knowledge and experience in costing.
Both TC and CAC have done commendable work in the realm of administered pricing of goods and services and in detecting revenue leakages.
The Competition Commission itself has issued draft regulations called Competition Commission (Determination of Cost of Production) Regulations. Such regulations of all independent regulators should complement and supplement revised CARR recommended by EG.
Corporate lobbyists and their sympathizers in the Government have all these years checkmated the enlargement of ambit of CAA and its efficacy.
A week after the constitution of EG in January 2008, Confederation of Indian Industry (CII), for instance, proposed that - all Industries which are outside the ambit of Essential Commodities Act 1955, be exempted for the Cost Accounting Rules notified under the Companies Act with immediate effect. The scope of cost record rules may be considered to be limited to industries that produce goods that are of essential nature since intense competition due to globalization and removal of license raj perforce ensures Indian Industry to produce and market its quality output most efficiently and cost effectively.
CII should know that India's biggest corporate scam recently happened in a company (Satyam) that operated in a highly competitive industry (information technology services), which is out of the ambit of CARR &CA.
Would Satyam Scam have gone un-detected had the Government brought computer service companies brought under the CARR & CA rules?
Or for that matter, would there have been any need for special audit of Bharti Airtel and a few other private telecom operators accused of evading revenue running into a few thousand of crores of rupee payable to the Government?
These two cases and numerous cases of over-invoicing, under-invoicing, tax evasion, price cartelization and other malpractices in the Indian industry constitute a compelling need for mandatory introduction of CARR & CA across the entire economy.
It is pertinent to recall what the
Committee on Subordinate Legislation
said in its report to the Lok Sabha in December 2004.
Noting that CARR provision was incorporated in the Companies Act in October 1965 and rules notified in March 1967, the committee; noted that several industries are still not covered by these rules.
It said : 'the slow pace of framing rules negates the very purpose of the important provisions of the legislation passed by the Parliament.'
Before discussing EG's recommendations, we need to recapitulate the crucial importance of cost accounting record rules and cost audit (CARR & CA) specified under the Companies Act, 1956.
We all know the benefits of these twin tools. They help the companies keep a tab on their costs and thus imbibe the spirit of operational efficiency. They serve as a restraint for companies that are prone to cutting corners to earn a fast buck. They thus help minimize the risk of tax evasion, unfair trade practices, etc.
The Government and its appendages can utilize cost data to fine-tune policies, subsidies and tariff. The cost audit can help the administration in sniffing the avoidance and evasion of direct and indirect taxes.
The audit can also helps the Government in protecting the consumer. Above all, CAA facilitates the orderly growth and working of the economy.
Unfortunately, MCA has never given any empirical evidence to demonstrate the multi-facet benefits of these tools.
The public does not know what the Government does with the enormous data that it generates year after year on 44 industries covered by CARR & CA. A layman, for instance, would like to know whether cost audit of cement companies gave any inkling of cartelization, which has been talked about both by the Government and the construction industry for the last several years.
Does MCA regularly share the cost audit reports with officials of Central Board of Excise and Customs, Central Board of Direct Taxes and other revenue-related entities of the Finance Ministry? If so, has these reports led to detection of any scam?
Does MCA compare and analyse the confidential cost data that companies submit to authorities in charge of anti-dumping and safeguard investigations while seeking tariff protection? Does the Government employ data mining tools to study cost data available with the sector-specific regulators such as Telecom regulatory authority of India and Central Electricity Regulatory Commission?
A search through EG's report and websites of MCA and Institute of Cost & Work Accountants of India (ICWAI) and Internet in general hardly yields any empirical evidence that can substantiate the benefits of CARR & CA.
It is almost impossible to stumble upon even a single case on the Internet that can show how cost audit led to unearthing of tax evasion or cartelization or transfer pricing, etc.
This is perhaps due to inclination of MCA, ICWAI and the auditing professionals towards the corporate demand for keeping under wraps the so-called confidential corporate data. They are also sympathetic to the corporate demand for liberalization and reducing the cost of compliance with CARR & CA.
The outcry over the cost of compliance does not hold water because all business per se have to keep record of expenditure for preparation of their own budget and for carrying out their activities.
Is it possible to run a company without keeping a record of its expenditure? Has any one compared the cost of compliance with the cost of non-compliance to the economy?
Similarly, the contention about confidentiality of corporate data is specious. For instance, Can any rival cement company outsmart ACC just by knowing its detailed cost of production? Can any rival enterprise come any where near Reliance Industries Limited by knowing the cost of production of its each every product?
No. The success in business is an interaction of too many fixed and variable factors plus the courage to stick one's neck out in the ruthless competitive world.
As put by ICWAI's Western India Regional Council (WIRC) in August 2007, 'The real problem is not cost of Cost Audit but the content of the Cost Audit Report. The presence of Cost Audit impairs the opportunities of leakages and malpractices by Company which is the real pinch. It is pertinent to find out who will be beneficiary of such artificial eye washing cost saving?
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In any case, the Government can always enact a law to impose severe penalties on its officials who leak corporate data to rival companies.
Coming to the prospects of paradigm shift in governance and accountability of various players in the economy, EG has rightly recommended 'all the services and other social sectors such such as healthcare, education, banking, insurance, financial services, transportation, information technology, public utilities & essential services such as municipalities, electricity, water supply, city transport, etc. should be brought under the mandatory mechanism of cost accounting and cost audit.'
Strict enforcement of cost audit in all these areas would not only bring efficiency but also serve as deterrent for revenue leakages, thefts and frauds.
EG has proposed that the ambit of CARR and CA should be extended to Government projects and schemes, departmental undertakings such as the railways and all Government procurements and contracts.
EG should have in fact recommended audit of the project cost as well as the operational expenditure of all projects implemented under public private partnership (PPP) format. This is because all such projects invariably involve dole-out of the Government as grant or as equity participation. There is a built-in risk of companies inflating the project cost to get a higher percentage of the Governmental dole-out.
The Union Finance Ministry's PPP guidelines provide for cash grant of 20% by the Centre and additional cash grant of 20% by the State or a statutory entity to make private sector-controlled projects viable. If 40% of the project cost need not be serviced either as debt or as equity and if the project is to be executed with debt-equity ratio of 2:1, then equity component would be only 20% of the project cost.
EG has recommended that 'all public service organizations should determine user charges based on most efficient costs. Subsidies meant for the poor may be decided after being fully aware of the opportunity cost, social factors and the shadow price. Even where cross-subsidization is necessary, it should be transparent and made known to the public at large.'
One may here like to ask Does the public, for instance, know the web of cross-subsidization in the oil and gas sector?
Another EG's recommendations that can have far-reaching impact reads as: - In all the non-corporate and/or not-for-profit organisations, the existing principles & practices of cost accounting and cost audit may be extended by the respective authorities by suitably amending their laws/statutes.”
This obviously reminds one of the need replacing outdated The Foreign Contribution (Regulation) Act, 1976 with a new law, though the Foreign Contribution (Regulation) (FCR) Bill 2006 was prepared in 2006. The bill provided for a ceiling on the administrative expenditure that can be incurred by NGOs that thrive on foreign donations.
The introduction of CARR and CA in the entire NGO, trusts and societies sector including the ones that ones that run private schools and universities can go a long way in preventing exploitation of the public as well as deter funds siphoning by trustees.;
Yet another recommendation that can go a long way in reviving the sagging confidence of public investors in the stock market reads as: - shareholders should be given the right to appoint cost auditors and have the cost auditor's report for better evaluation of the company's performance and risk management.”
The Government ought to implement this recommendation to empower minority shareholders.
Time is indeed ripe to implement all the radical recommendations. This would perhaps call for incorporation of changes in the Companies Bill 2008 that has been referred to a Parliamentary committee for scrutiny.
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