Introduction: Explore the intricacies of Cost Auditor appointments, remuneration, and related processes under the Companies Act, 2013. From determining applicability to understanding Section 148 and the Companies (Cost Records & Audit) Rules, 2014, delve into the criteria for mandatory cost audits. Discover the nuances of appointing cost auditors, fixing remuneration, and handling casual vacancies.
“Cost Auditor Appointment, remuneration, removal, resignation etc Under Companies Act 2013”
To determine the applicability of Cost Audit for a company, it must satisfy the criteria specified in subsections 1 & 2 of Section 148 of the Companies Act, 2013 read with rules 3, 4 and 5 of the Companies (Cost Records & Audit) Rules, 2014 (CCRA Rules). https://taxguru.in/company-law/cost-record-maintenance-audit-applicability-companies-act-2013.html
Upon the applicability of cost audit, it becomes mandatory for an organization to appoint a Cost Auditor and a Cost Auditor to conduct an audit of the company’s cost records. To understand this process, it’s essential to comprehend subsections 3, 4 and 5 of Section 148, along with rule 6 (upto subrule 3A) of the CCRA Rules.
Subsection 3 of Section 148
According to subsection 3 of section 148, the audit mentioned in subsection 2 of section 148 should be conducted by a cost accountant appointed by the Board. A cost accountant is defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 and must hold a valid certificate of practice under sub-section (1) of section 6 of that Act.
The first proviso to subsection 3 states that the person appointed under section 139 as an auditor of the company cannot be appointed as a Cost Auditor. In other words, Statutory Auditor of a company cannot be appointed as Cost auditor.
The second proviso to subsection 3 states that the auditor conducting the cost audit should comply with the Cost Auditing Standards. Cost Auditing Standards refer to the standards issued by the Institute of Cost Accountants of India, which is constituted under the Cost and Works Accountants Act, 1959 and has the approval of the Central Government.
Subsection 4 of Section 148
It is important to note that the audit conducted under section 148 is in addition to the audit conducted under section 143. Section 143 (powers and duties of auditors and auditing standards) is about “Statutory Audit”. In short, Cost Audit is in addition to Statutory Audit.
Appointment of Cost Auditor
Rule 6 (Cost Audit) of CCRA Rules, 2014
Sub-rule 1
Category of companies specified in Rule 3 of CCRA Rules, 2014 and threshold limit laid down in Rule 4 of CCRA Rules, 2014 shall within 180 days of the commencement of every financial year, appoint a Cost Auditor. Before such appointment, a written consent / certificate from the Cost Accountant and certificate from him has to receive as mentioned in sub rule 1a of Rule 6.
Sub-rule 1A
Proposed individual / firm has to submit a certificate which contains
1. is not disqualified for appointment under the Act, the Cost and Works Accountant Act, 1959 including as per their respective rules and regulation;
2. Satisfies the criteria provided in Section 141 of the Act, so far as may be applicable;
3. Within the limits laid down by or under the authority of the Act;
4. Shall include in certificate the list of proceedings against the Cost Auditor or Audit firm or any partner of the audit firm pending with respect to professional matters of conduct;
Sub rule 2
According to Subrule 2, after the board accepts the appointment of the Cost Auditor, the company should inform the concerned auditor and file a notice of such appointment with the Central Government in electronic mode in Form CRA-2. This should be done within 30 days of the Board meeting in which the appointment was made or within 180 days of the commencement of the financial year, whichever is earlier. The filing should be accompanied by the fee as specified in the Companies (Registration Offices and Fees) Rules, 2014.
Sub rule 3
The Cost Auditor appointed shall continue in such capacity until the expiry of 180 days from the closure of the financial year or till he submits the cost audit report for the financial year for which he has been appointed.
As per the 1st proviso to Subrule 3, the Cost Auditor appointed under these rules may be removed from his office before the expiry of term by way of the Board resolution, after giving a reasonable opportunity of being heard and recording the reason for such removal in writing.
As per the 2nd proviso to Subrule 3, Form CRA-2 should be filed to intimate the appointment of another Cost Auditor along with the Board resolution in case of removal.
Moreover, the 3rd proviso states that nothing contained in this sub-rule shall prejudice the right of the Cost Auditor to resign from such office of the company.
Sub rule 3A
As per this subrule, any casual vacancy in the office of the Cost Auditor, shall be filled by the Board of Directors within 30 days. The company should inform the Central Government in Form CRA-2 within 30 days of such appointment of the Cost Auditor. A casual vacancy means a vacancy arising due to resignation, death, or removal of the Cost Auditor.
Remuneration to Cost Auditor
The remuneration for the Cost Auditor will be determined by the members in accordance with Rule 14 of the Companies (Audit and Auditor) Rules, 2014 (CAA Rules, 2014). There are two subrules under Rule 14, namely a and b. Subrule a applies to companies that need to form an Audit Committee, while subrule b is for companies that don’t require an Audit Committee.
For companies falling under subrule a of Rule 14 of CAA Rules, 2014, the board shall appoint an individual Cost Accountant or a Firm of Cost Accountants in practice as Cost Auditor for the company based on the recommendation of the Audit Committee. The remuneration of the Cost Auditor will be approved by the Board after considering the recommendation of the Audit Committee. The remuneration approved by the Board will be subsequently ratified by the shareholders.
For companies falling under subrule b of Rule 14 of CAA Rules, 2014, the board shall appoint an individual Cost Accountant or a Firm of Cost Accountants in practice as Cost Auditor and set the remuneration for the Cost Auditor. The shareholders will then ratify the remuneration that has been fixed by the board.
Q&A: Cost Auditor Appointments, timeline, remuneration and Vacancies
Question 1: Can you explain the deadline for filing Form CRA-2 for the FY 2023-24 if the company appoints a cost auditor on 16th July 2023 or 19th September 2023 during a board meeting? Please provide relevant section or rules.
Answer: As per sub-rule 2 of Rule 6 of CCRA Rules, 2014, any company that appoints a cost auditor during a board meeting or within 180 days from the commencement of the financial year must file a notice of such appointment within 30 days of the board meeting or within 180 days from the start of the fiscal year, whichever is earlier, by submitting Form CRA-2.
In this example, if the cost auditor is appointed during the board meeting dated 16th July 2023, the company must file Form CRA-2 on or before 15th August 2023, which is 30 days from the appointment date.
Similarly, if the cost auditor is appointed during the board meeting dated 19th September 2023, the company must file Form CRA-2 before 27th September 2023, as it is the earliest deadline. This is because 30 days from the board meeting date is 19th October 2023, and 180 days from the start of the fiscal year is also 27th September 2023, whichever is earlier.
Question 2: As per Rule 6 of CCRA, Rules 2014, what is the latest date for appointing a Cost Auditor and filing Form CRA-2 for the fiscal year 2023-24? Is approval from the Central Government necessary for the appointment of the Cost Auditor?
Answer: As per Sub rule 1 of Rule 6 of CCRA Rules, 2014, the last date for appointing a cost auditor is September 27, 2023 (180 days from the commencement of the fiscal year). As per Sub rule 2 of Rule 6 of CCRA Rules, 2014, the last date for filing Form CRA-2 is either 30 days from the date of appointment or 180 days from the commencement of the fiscal year, whichever is earlier. Therefore, the latest date for filing the appointment of the cost auditor with the Central Government is September 27, 2023.
No approval from the Central Government is required for the appointment of the Cost Auditor. The only requirement is that the appointment of the cost auditor has to be intimated to the Central Government via electronic filing of Form CRA-2.
Question 3: Explain with relevant provisions, who appoints the Cost Auditor and Fix remuneration?
Answer: Subsection 3 of Section 148 read with Rule 14 of Companies (Audit and Auditors) Rules, 2014 speaks about appointment of Cost Auditor. As per subsection 3 of 148, Audit under subsection 2 of Section 148 shall be conducted by a cost accountant who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed.
Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has two subrule. Subrule a is for the companies which requires to constitute an audit committee under section 177. As per clause i Cost auditor (individual or firm of cost accountants) has to be appointed by the Board of Directors based on the recommendation from the Audit Committee. Audit committee should also recommend remuneration for such cost accountants.
As per clause ii of subrule a, remuneration recommended by the Audit committee shall be considered and approved by the Board of Directors and ratified subsequently by the shareholders.
Subrule b of the Companies (Audit and Auditors) Rules, 2014 is for Companies which are not required to constitute audit committee. As per this subrule board appoints cost auditor and remuneration approved by the board has to be ratified subsequently by the shareholders.
In short, subrule a is for companies which requires to constitute audit committee (as per section 177). As per this subrule audit committee recommends cost auditor appointment and remuneration and the same shall be approved by the Board and subrule is for other companies, here cost auditor is appointed and remuneration is fixed by the board. In both the subrules remuneration has to ratified by the board.
Question 4: Explain in detail about the date till which cost auditor of a company holds his office in such capacity, removal of cost auditor, casual vacancy, resignation, appointment due to vacancy
Answer: To understand the provision for date till which cost auditor of company holds his office in such company, removal of cost auditor, casual vacancy, resignation, appointment due to vacancy, we need to go through Subrule 3 to 3A of Rule 6 of Companies (Cost Records and Audit) Rules, 2014.
Sub-rule 3 of Rule 6
As per 1st para of this subrule, Cost Auditor holds his office in a company in such capacity (as cost auditor) till the expiry of 180 days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed
Removal of cost auditor from his office. As per 1st Proviso to this subrule After giving reasonable opportunity of being heard to the cost auditor and recording the reasons for such removal in writing, cost auditor can be removed from his office through board resolution.
2nd Proviso state that Form CRA-2 has to be filed with the Central Government for intimating appointment of another cost auditor. In Form CRA-2 relevant Board resolution to the effect has to be enclosed
3rd provision clarifies that this sub-rule does not in any way undermine the cost auditor’s entitlement to voluntarily resign from their position within the company.
Sub-rule 3A of Rule 6
In the event of a casual vacancy in the position of a cost auditor, whether arising from resignation, death, or removal, the Board of Directors is obligated to appoint another cost auditor within thirty days from the occurrence of the vacancy. Subsequently, the company is required to notify the Central Government of this appointment in Form CRA-2 within thirty days.
In short, another cost auditor to be appointed with in 30 days of casual vacancy and intimation of appointment so made has to be intimated to Central Government within 30 days of such appointment. Casual vacancy means vacancy arise due to resignation, death or removal by the board of Cost Auditor.
Question 5: What content does the written consent from the cost auditor to the board entail? Additionally, clarify the certification requirements the board must receive from the cost auditor before their appointment, in accordance with the relevant provisions.
Answer: As per 1st proviso to subrule 1 of Rule 6 of CCRA Rules, 2014 prior to the appointment, the cost auditor must provide written consent, and a certificate as per sub-rule (1A) is required.
As per subrule 1A, the cost auditor appointed under sub-rule (1) must furnish a certificate
Clause a: ensuring eligibility and absence of disqualification under the Act and the Cost and Works Accountants Act, 1959 and the rules and regulation made thereunder.
Clause b: The certificate must affirm compliance with section 141 criteria, so far as may be applicable
Clause c: adherence to appointment limits defined by the Act, and
Clause d: an accurate disclosure of ongoing professional conduct proceedings against the cost auditor or audit firm and its partners.
Below is the Bare Act/rules.
Subsection 3 of Section 148 of the Companies Act, 2013:
The audit under sub-section (2) of section 148 shall be conducted by a cost accountant who shall be appointed by the Board on such remuneration as may be determined by the members in such manner as may be prescribed:
Provided that no person appointed under section 139 as an auditor of the company shall be appointed for conducting the audit of cost records:
Provided further that the auditor conducting the cost audit shall comply with the cost auditing standards.
Explanation.—For the purposes of this sub-section, the expression “cost auditing standards” mean such standards as are issued by the Institute of Cost Accountants of India, constituted under the Cost and Works Accountants Act, 1959 (23 of 1959), with the approval of the Central Government.
Subsection 4 of Section 148:
An audit conducted under this section shall be in addition to the audit conducted under section 143.
Rule 6 (Cost Audit) of Companies (Cost Records and Audit) Rules, 2014
Sub rule 1
The category of companies specified in rule 3 and the thresholds limits laid down in rule 4,shall within one hundred and eighty days of the commencement of every financial year, appoint a cost auditor. Provided that before such appointment is made, the written consent of the cost auditor to such appointment, and a certificate from him or it, as provided in sub-rule (1A), shall be obtained
Sub-rule 1A
The cost auditor appointed under sub-rule (1) shall submit a certificate that –
(a) the individual or the firm, as the case may be, is eligible for appointment and is not disqualified for appointment under the Act, the Cost and Works Accountants Act, 1959 (23 of 1959) and the rules or regulations made thereunder;
(b) the individual or the firm, as the case may be, satisfies the criteria provided in section 141 of the Act, so far as may be applicable;
(c) the proposed appointment is within the limits laid down by or under the authority of the Act; and
(d) the list of proceedings against the cost auditor or audit firm or any partner of the audit firm pending with respect to professional matters of conduct, as disclosed in the certificate, is true and correct;
Sub-rule 2
Every company referred to in sub-rule (1) shall inform the cost auditor concerned of his or its appointment as such and file a notice of such appointment with the Central Government within a period of thirty days of the Board meeting in which such appointment is made or within a period of one hundred and eighty days of the commencement of the financial year, whichever is earlier, through electronic mode, in form CRA-2, along with the fee as specified in Companies (Registration Offices and Fees) Rules, 2014.
Sub-rule 3
Every cost auditor appointed as such shall continue in such capacity till the expiry of one hundred and eighty days from the closure of the financial year or till he submits the cost audit report, for the financial year for which he has been appointed.
Provided that the cost auditor appointed under these rules may be removed from his office before the expiry of his term, through a board resolution after giving a reasonable opportunity of being heard to the Cost Auditor and recording the reasons for such removal in writing;
Provided further that the Form CRA-2 to be filed with the Central Government for intimating appointment of another cost auditor shall enclose the relevant Board Resolution to the effect;
Provided also that nothing contained in this sub-rule shall prejudice the right of the cost auditor to resign from such office of the company;
Sub-rule 3A
Any casual vacancy in the office of a cost auditor, whether due to resignation, death or removal, shall be filled by the Board of Directors within thirty days of occurrence of such vacancy and the company shall inform the Central Government in Form CRA-2 within thirty days of such appointment of cost auditor.
Subsection b of Section 2 of the Cost and Works Accountants Act, 1959;
“Cost Accountant” means a person who is the member of the Institute (The Institute of Cost Accountants of India),
Subsection 1 of Section 6 of of the Cost and Works Accountants Act, 1959;
No member of the Institute shall be entitled to practise, whether in India or elsewhere, unless he has obtained from the Council a certificate of practice.
Conclusion: Cost Auditor appointments under the Companies Act involve a detailed process, from determining eligibility to fixing remuneration. Complying with Section 148 and the Companies (Cost Records & Audit) Rules, 2014 is crucial. Understanding timelines, written consents, and certification requirements ensures smooth adherence to regulatory provisions.
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