It’s a measure of efficiency & governance : Kunal Banerjee President, ICWAI

Corporate governance has taken centre-stage in all business models since the Enron debacle. But recent happenings have shown that a governance structure should also support an organisation’s efforts to improve performance. There is a need to move from compliance governance to business governance.

The governance structure has to expand its horizon to include a system that ensures optimal utilisation of resources while meeting societal expectations. There has to be a shift from compliance- or rule-based governance to a performance management framework with enterprise governance in mind.

In the context of evaluating the economic competitiveness, the significance of cost management in enterprises cannot be underestimated. CII had studied the cost management practices in different companies, both in the manufacturing and services sector. The study evolved the concept of maturity levels of companies in cost management. It also suggested the mechanism of certification of cost management practices in companies so as to make them more efficiency driven and competition conscious.

It is true that in a market economy, government control is unwarranted. However, market forces do not eliminate the need to regulate the prices, profits and quality of various products and services to modify the economic behaviour of individuals and firms.

Regulatory apparatus needs to foster efficiency and investment by eliminating outdated restrictions and promoting sustainable growth. Regulators are required to frame right regulations in the interest of the industry as a whole and also in the interest of the consumers and other stakeholders. Cost audit, supported by cost accounting standards, can provide relevant and credible cost and revenue data to the regulators to support their decisions.

Cost audit mechanism under the Companies Act, which is a measure of efficiency and performance and Corporate Social Responsibility can serve as an important tool for effective enterprise governance. Clause 49 of Sebi guidelines on Listing Agreements speaks about performance monitoring.

It is required to be amended to focus and to conform to the cost audit structure so that companies report on the efficiency performance in greater detail enabling the stakeholders to make better evaluation. Cost audit provisions can also help an enterprise to achieve management maturity.

An appropriate cost management system is required in all business units to remain competitive and the government should ensure through a legal framework that such a cost management system is in-built in the governance structure of every company. The ministry of corporate affairs constituted an Expert Group to review the existing mechanism of statutory cost accounting records and cost audit.

The group, in its report submitted in December, 2008, has recommended a radical shift of cost accounting records and cost audit from being compliance- or rule-based governance to performance management framework with focus on three key objectives viz. enterprise governance, competitiveness and strengthening the regulatory mechanism.

These recommendations acquire great significance in the current context of governance failure. Cost audit methodology as structured originally under Section 233B and the existing Cost Audit Report Rules, is proposed to be realigned with the cost management perspectives.

The Group has redefined the cost audit objectives focussing on the efficiency review aspect making the entire mechanism a value-adding exercise without losing the legal backup and the mandatory force it gives for compliance and has aligned the same with cost management and better enterprise governance.

Internal processes good enough :  YK Modi , Chairman & CEO, Great Eastern Energy Corporation Ltd

There are certain laws which might have been relevant when they were made but with the passage of time have lost both sheen and purpose. Under Section 209 (1)(d) of Companies Act, 1956, companies belonging to certain industries require to not only maintain cost audit records but file them with the government. This is a law that has clearly outlived its purpose.

The stated purpose behind introduction of this section was to ensure the maintenance of proper records of cost as also utilisation of material and labour by companies engaged in production, processing, manufacturing or mining activities. This section was introduced in the mid-60s when the government was having the view that everything pertaining to business should be under its control and it was deciding what and how much a company should produce.

There was continuous shortage of goods and services and the government thought that by introducing this law, it will be able to control cost of the products and services of companies. However, since its introduction around 45 years ago, this piece of legislation has not benefited anybody. The government and the society at large have not benefited from mandatory cost audit, not to speak of companies and other stakeholders.

Meanwhile, the business and industrial environment in the country has changed drastically. Globalisation and liberalisation have resulted in cut-throat competition. Every company, for survival, needs to utilise its resources in the most economical and efficient manner.

Under stringent corporate governance norms, highest internal and statutory audit standards, risk management systems and independent directors, no company can afford to ignore the need for a cost-efficient and economical organisation. Clearly, only those who can produce and deliver goods and services in the most cost-effective manner would survive in a competitive environment.

In such scenario, maintenance of cost accounting records by force of law has become redundant and outdated. Today, for the effective utilisation of material and labour, companies establish specialised departments by recruiting qualified and trained people.

Such information is among the most guarded asset of any company and would determine whether it can have a competitive edge in the business it is in. Submission of strategic cost accounting records to the government may prove detrimental to business interests of the companies.

Companies would incur extra cost for maintaining such records. Also, sharing the information with government, and therefore with the public at large, could be somewhat risky. The government should desist from imposing mandatory cost audit policy on the entire spectrum of the industry.

The applicability of the relevant provision in Companies Act should, if at all, be limited to only those industries where government controls the selling price based on cost-plus formulae or those in which government funds are disbursed in the form of subsidies.

In any case, such pricing mechanism is inefficient as it does not encourage cost-efficient working. Laws such as these neither control the cost nor help the industry in any way. Government’s role should be that of a facilitator and not of a controller. It should provide good infrastructure be it physical, social or legal for India to have a competitive industry.

For all other companies which need to face immense competition and their survival depends on how efficiently they manage their resources, the requirement of mandatory cost audit must be done away with.

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