Government flags concerns about cost auditing at companies
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Taking a tough stance against shortcomings in the auditing procedures of a large number of companies, the government has said that the corporates and their 'cost auditors' are not doing their job seriously.
To address the issue and ensure highest quality standards, the Ministry of Corporate Affairs has proposed a minimum fee structure for cost audit and related services and capping of compliance reports to be filed by the cost auditors.
'Cost audit' refers to an auditing procedure for assessing the operational efficiencies and resource management of a company. It helps in ascertaining whether a company's production, marketing, sales and other business activities are being done in a cost-effective manner or not.
"Examination of cost audit reports of previous few years show that in large number of cases, the quality of such reports are not satisfactory/up to the expected level," the Ministry said in a communication on Tuesday.
The Ministry said that similar such shortcomings have been observed by many other government agencies.
"This poses a serious problem with regulators and other user agencies in the government who uses these reports as key inputs in their decision making process," the circular said.
According to the Ministry, it has been observed that in majority of such cases, the company and the cost auditor have not taken the job seriously.
"One of the key reasons appears to be very low audit fee which is not commensurate with the size of the company and nature of its activities.
"Though it may not be proper to draw such direct correlation between quality of services rendered with that of fees paid, but such a hypothesis cannot be ignored," it said.
To ensure the highest level of quality standards, the Ministry has advised companies and cost auditors to follow the minimum fee structure suggested by the Institute of Cost Accountants of India for cost audit and non-audit services.
"While there is no law governing the audit fee payable by the companies (or charged by the auditors), there appears some justification in creating a sense of discipline among the entities so as to ensure that cost audit mechanism instituted by law fulfills its intended purpose," the circular said.
Such a fee structure for cost audit and compliance would be prepared by the Institute and the Ministry.
Looking to curb concentration of compliance certificates, the Ministry has proposed to fix a limit of 50 compliance reports for each practising cost accountant or for each partner of a firm of cost accountants.
All the changes are proposed to be made effective from the financial year starting on or after January 1, 2013.
The Ministry has sought comments on these proposals till November 25. (PTI)
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