RESPONSIBILITY OF DIRECTORS: AS REGARDS MAINTENANCE OF COST RECORDS
ASSURANCE CERTIFICATE FOR MAINTENANCE OF COST RECORDS
Maintenance of Cost Records and data generated through the Cost Audit Reports approved by the Directors of the companies has caught the eyes of the regulators. The activities undertaken by the Ministry of Corporate Affairs along with the issue of notification with regard to disclosures concerning cost records in the Directors'Report in the recent past is a testimony to it.
Summary for quick reference is given below:
a) MCA issued a notification on 31st July 2018 mandating disclosure with regard to the cost records in the Directors' Report
b) MCA released a report on Costs and Prices. Data was generated from the Cost Audit Report duly approved by the Board of
Directors. The report included HSN code wise costing and profitability etc. and no other report in India provides such authentic costing data at HSB codes level for the regulators. It may be the beginning of bench marking of costs and pricing for various revenue authorities and other associations.
c) Institute of Cost Accountants of India has released a guidance note on disclosure in Feb 2019 with regard to the cost records for the directors
The Institute of Cost Accountants of India has also issued a guidance note on the 'RESPONSIBILITY OF DIRECTORS:AS REGARDS MAINTENANCE OF COST RECORDS' in January 2019. The guidance note aims to provide the guidance to the company to obtain aAssurance Certificate for Maintenance of Cost Records before incorporating the disclosure with regard to the
Cost Records in Director's Report
The maintenance of cost records showing product wise profitabilities finally by any organisation has its own benefits with regard to the timely flagging of the areas of concern may it be negative contributions from products, lesser capacity utilisations, improper product mix etc., yet maintenance of cost records and cost audit is considered as additional statutory compliance. It's high time for the organisations and concerned directors to realise that central government is placing high importance to the costing within the organisations. The notification no. GSR E 725 issued by Ministry of Corporate Affairs on 31st July 2018 is a testimony to the same.
Ministry of Corporate Affairs, Government of India has notified the amendment in the Companies (Accounts) Rules, 2014 which mandates the directors to report on requirement and the maintenance of cost records under section 148 of the Companies Act 2013.
In the Companies (Accounts) Rules, 2014, in rule 8, (i) In sub-rule (5), after clause (viii) the following clauses shall be inserted, namely: -
'(ix) a disclosure, as to whether maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company and accordingly such accounts and records are made and maintained,
The disclosure with regard to cost records is in two parts
1) Whether maintenance of cost records as specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013, is required by the Company
2) Whether accounts and records have been made and maintained accordingly (please note that for this companies have to refer to CRA-1 issued by the MCA vide notification no 425 dated 30 June, 2014 and recently amended vide notification GSR no 1498 dated 7 Dec, 2017
The maintenance of accounts/cost records is the responsibility of the management of the company. It is the top management of company which has to ensure that it is complying with the provision of the Companies Act. Penal provisions are also made applicable to the officers and Key Management Persons of the company.
One needs to refer to Section 134, sub-section (5) read with clause (c) of sub-section (3) of the Companies Act 2013 mandates The Directors Responsibility Statement, to state that-
'the directors had devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.'
Non-compliance of section 134 envisages the following penalties:
Section 134, sub-section (8) provides for penal provision as under-
'If a company contravenes the provisions of this section, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.'
The Directors of the companies especially where cost audit is not applicable can devise the mechanism for obtaining the Assurance Certificate for Maintenance of Cost Records annually as released by Institute of Cost Accountants of India as part of their responsibility to devise the proper system to ensure the compliance of section 148 read with section 134 of the Companies Act 2013.
Not only the directors but the Financial Auditors of Companies not under cost audit especially may obtain an Assurance Certificate for Maintenance of Cost Records to ensure
1) Whether cost records are applicable or not
2) Whether cost records as prescribed have been made and maintained, if the cost records are applicable
Please note that keeping in view of the determination criterion with regard to the applicability of Cost records or cost audit, it is imperative for each and every company (excluding companies in the sectors like trading, finance, insurance, banking, AMC etc.) not covered under cost audit to obtain this certificate on annual basis.
A similar provision also exist wherein the financials auditors have to report on the maintenance of cost records.
Rule 3 of The Companies (Auditor's Report) Order, 2016 with regard to Matters to be included in the auditor's report requires the financial auditor to report:
(Vi) whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act, 2013 and whether such accounts and records have been so made and maintained.
The Assurance Certificate for Maintenance of Cost Records will the serve the twin purpose of providing comfort to the Directors and the Auditors with regard to the determination of applicability and status of maintenance of cost records as per section 148 of the companies Act.
Way forward for the companies.
The companies not covered under cost audit should seek an opinion with regard to the applicability of cost records under section and if applicable, immediately start the system of maintenance of cost records as per CRA-1 so that Assurance Certificate for Maintenance of Cost Records could be obtained before submission of cost record maintenance disclosure in the Director's Report.
The Assurance Certificate for Maintenance of Cost Records by a cost accountant is just to ensure the maintenance of cost records by the company not to be construed and cost audit and no document is required to be filed with regard to the appointment
The specimen of the Assurance Certificate for Maintenance of Cost Records is given as annexure.
The author can also be reached at firstname.lastname@example.org.
Disclaimer: The view expressed here are purely personal and based on our interpretation of the law. The author requests the readers to go through the relevant provisions and documents like guidance notes released by the Institute of Cost Accountants of India.
Form of Assurance Certificate for Maintenance of Cost Records
[For Maintenance of Cost Records as required under Section148 (1) of Companies Act, 2013]
I/We, _____________________ , having been appointed as Cost Accountant(s), to provide Assurance certificate for Maintenance of Cost Records as per Section 148 (1) of The Companies Act, 2013 (18 of 2013), by/of …………………..……………….……(mention name of the company) [CIN : ……………………..…] having its registered office at ………………………. (mention registered office address of the company) (hereinafter referred to as the company), have examined the Cost Records and other relevant records of the company for the year ________________ certify as under:
1. I/We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of this Assurance Certificate.
2. in my/our opinion, proper cost records, as per The Companies (Cost Records and Audit) rules, 2014 prescribed under sub-section (1) of section 148 of the Companies Act, 2013, have been maintained by the company so as to give a true and fair view of the cost of production/service, cost of sales and margin of the products/services of the company covered under the said rules.
3. In my/our opinion, detailed unit-wise and product/service wise cost statements and schedules thereto in respect of the products/services are maintained by the company.
4. In my/our opinion, the said books and records give the information required by the Companies Act, 2013 in the manner so required.
5. In my/our opinion, the said books and records are in conformity with the generally accepted cost accounting principles and cost accounting standards issued by The Institute of Cost Accountants of India to the extent these are found to be relevant and applicable.
6. Annexures A & B, attached to this certificate give the summary information based on the Cost Records maintained by the company.
B. Observations & Suggestions
My/Our Observations & Suggestions based on our scrutiny of Cost Records maintained by the company are summarized below.
Date: ____________________ Place: __________________
Name of the Cost Accountant(s):
Annexure A & B will be company specific and contain the quantitative and value data at HSN code level