Prof D Mukherjee
The Ministry of Corporate Affairs (MCA), Government of India, constituted a committee led by the Chief Advisor (Cost), Department of Expenditure, Ministry of Finance, on October 4, 2023. The committee submitted its report on January 30, 2024, and the MCA made it available for public comments on July 10, 2024. This initiative is commendable and deserving of recognition. The comprehensive 329-page “Report on Cost Accounting Records and Cost Audit Framework” was developed and submitted after soliciting input from key stakeholders, including ICMAI, All India Cost & Management Accountants Association, FICCI, PHDCCI, CII, SCOPE, ASSOCHAM, and various Administrative Ministries, Departments, and Regulatory Authorities. The committee also examined cost accounting practices, the prevalence of cost audits, and the use of cost information in pricing and strategic decision-making. The report observes that almost all countries, including the USA, UK, France, Germany, Italy, Japan, and South Korea, have robust cost accounting and certification systems. These systems use cost information for cost-benefit analysis and decision-making across economic sectors. Notably, the UK applies costing techniques and cost information promptly across various sectors, including education.
In India, stakeholders generally view the effectiveness and importance of costing, cost information, and cost audit positively. However, some are critical of multiple audits, including financial, secretarial, internal, and cost audits. Among the critics, FICCI is notably critical of maintaining cost records, cost audit, and cost reporting practices. In chapter 5, section 5.5.3.(i) of their report, FICCI argues that cost audit, introduced post-independence for transparency and price control in key sectors, is less relevant today due to market competitiveness, which prevents excessive pricing. They contend that companies voluntarily maintain cost records to manage costs and stay competitive. Thus, mandatory cost audit is seen as unnecessary and potentially harmful by disclosing cost statements that could disadvantage firms competitively. Further, in section 5.5.3.(iii), FICCI states that statutory auditors already assure an organization’s financial systems, including inventory valuation and segment margins, making additional mandatory cost audits redundant and costly, which conflicts with India’s goal of improving ease of business. This practice is also uncommon in developed markets. Considering this, any discussion on ‘cost, cost management, cost accounting, maintenance of cost accounting records, cost auditors, cost audit, and cost audit report framework’ under section 233B of the Companies Act, 1956, and section 148 of the Companies Act, 2013, must acknowledge the formation of the Institute of Cost and Works Accountants of India (ICWAI), now ICMAI. This was established through the Cost & Works Accountants Act, 1959, and the statutory cost audit provision introduced by the Companies (Amendment) Act, 1965. These were based on the principles and necessity of efficiency measurement and providing significant information through efficiency audits, supplementing the inherent limitations of financial accounting and statutory financial audits.
The Justice Vivian Bose Commission Report, 1963, and the Daphtary Sastry Committee Report, 1963-64, highlight the necessity of mandatory statutory cost audit in India, following financial scandals like those involving the Dalmia-Jain Group of Companies. Competition has always been a constant, and unless a centrally controlled economic system is adopted-a scenario far from reality given the market-driven economy prevailing for the past three decades globally, including in India-cost remains the common denominator for measuring the performance of economic resources used in producing and distributing goods and services. Classical economists have clearly defined the factors of production as ‘land, labour, capital, and organization,’ with ‘organizations’ now referred to as ‘management.’ The functional definition and significance of each factor are evident. The objective of this write-up is to emphasize the essence and importance of this report, focusing on ‘effectiveness, efficiency, and economy,’ the three fundamental pillars of the cost accounting system, cost measurement, cost management, and reporting, with the fourth pillar being the assistance to the management of a firm.
Mathematically speaking, profit is the function of cost and sustainability is the function of profit or net value added under the value-added accounting perspectives and practices i.e. the economists’ version of performance measurement. Question of ‘cost’ and ‘cost management’ and ‘cost audit’ are likely to become redundant the moment competition and scarcity of resources do not exist in economics. The Chinese have been ruling many markets across the world including India because of its superior cost management strategy. Additionally, China is also having robust system of cost record maintenance and audit or certifications by competent agency, it may not have another professional body of cost and management accountants like CIMA, UK or ICMAI. The contemporary world economy is very competitive where a firm is price taker and the price is determined in the market itself by interactive forces of demand -supply and cost is the determinant of the fortune of firm. It is difficult for a firm to sustain in absence of profit or generation of sufficient surplus of revenue over expenses in any defined period of time. The Federal Government of India allocated INR 1.48 lakh crores in the 2024 Central Budget for education and skilling purpose. To call a spade a spade, it is hardly known to the guardian and education financiers what is methodology of education costing in India and whether money is spent properly otherwise why in every two college graduates, only one is employable as reported by Economic Survey 2024. UK and many countries do have robust costing system to generate cost information for use in strategic planning. In India, currently more than 50% education delivery system is under private sector. It is doubtful that the Government is aware of effective application for resources.
It is heartening to see stakeholder recommendations that the Companies Act, 2013’s provisions for appointment, retirement, rotation, and audit limitations for statutory financial auditors should apply to cost auditors as well. This overdue rationalization is expected to foster healthy competition among cost auditors and broaden opportunities for new cost and management accountants (CMAs) considering practice. Additionally, the proposed doubling of the threshold turnover limit for cost audits requires review, as cost audits should be viewed as essential for operational sustainability amid intense sectoral competition. The committee recognizes in every para of the report the necessity of cost accounting practices for use of cost information for efficient functioning god the organization. While some argue that cost audits should be voluntary, the mandatory CSR stipulations in Section 135 of the Companies Act, 2013, suggest otherwise. Further, an experiment with voluntary statutory financial audits could interest researchers in studying its impact.
Cost and management accounting are indispensable tools for effective performance measurement and strategic decision-making in any economy. Their role extends beyond mere financial oversight; they provide critical insights into cost behaviour, resource allocation, and operational efficiency. By integrating cost audits, organizations can ensure the authenticity and reliability of cost information, fostering transparency and accountability. This, in turn, supports informed decision-making, enhances competitiveness, and drives sustainable growth. In today’s dynamic global market, where firms are price takers, having precise and actionable cost data is paramount. Effective cost management allows businesses to optimize operations, reduce wastage, and maximize profitability. Moreover, robust cost audit mechanisms offer a layer of assurance, validating that cost records are maintained accurately and reflect true economic performance. Regardless of the economic system in place, the principles of cost and management accounting remain universally relevant. They bridge the gap between financial reporting and strategic management, enabling organizations to navigate complex market dynamics and achieve long-term objectives. Thus, embracing these practices is essential for any entity aiming to thrive in a competitive and ever-evolving economic landscape. When secretarial audit report is part of annual report and the same justified cost information at least in terms of effectiveness of the critical success factors and key performance indicators should be part of the annual report as the shareholders have every right to know how strategically their money is managed and today shareholder is educated to understand the value, Balance Scorecard besides volume.
(The author is an Educationist and a Management Scientist)
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