Preliminary Notice for non-compliance u/s 148 of Companies Act, 2013 – Non- Appointment of Cost Auditor for FY 2016-17
Cost Audit has been mandated by the government to create cost consciousness and to ensure optimal utilization of resources in this competitive world. Apart from the above, the Government collects data for policy decision making from various sources and one of the main source of collection of HSN codewise data is cost audit annexures which are filed alongwith cost audit report in XBRL on MCA portal.
Many companies avoid appointment of cost auditors though the cost audit is applicable exposing the Directors/other KMP to the action for not following the provisions of the Companies Act.
Section 148 of the Companies Act 2013 deals with the applicability of Cost Records and Cost Audit. Now the MCA has started identifying the companies who have not complied with the provisions with regard to the appointment of Cost Auditor due to ignorance or otherwise and have started issuing the notices like the one as is given below as preliminary Notices for the year FY 2016-17. It is important to note that the non-compliance is identified at the earliest by the management itself and appoint the cost auditors before the they receive the notice from the MCA.
Format of the Notice
Emal-id of company
Sub: – Preliminary Notice for non-compliance u/s 148 of Companies Act, 2013 – Non- Appointment of Cost Auditor for FY 2016-17-reg.
It has been noted from the details filed by your company in Form AOC-4/ AOC-4 (XBRL) filed for FY 2015-16, that the annual aggregate turnover of the company for the goods covered under maintenance of cost records under Companies (cost records and audit) Rules, 2014 is Rs. xxxxxxxxxxx and the total turnover of the company is Rs. xxxxxxxxxxxxxxxx. Accordingly, your company is meeting the prescribed criteria for appointment of cost auditor and conducting cost audit for the FY 2016-17.
2. It may be noted that appointment of Cost Auditor for conducting the cost audit and filing of e-form CRA-2 i.e. “Form of intimation of appointment of cost auditor by the company to Central Government” is mandatory under Section 148 of the Companies Act, 2013 read with Companies (cost records and audit) Rules, 2014 as amended from time to time. Non-compliance of the above provisions shall attract penal provisions against the company and its officers in default under Section 148(8) of the Act and Rules made thereunder.
3. In view of the above, you are requested to explain the reasons for non-appointment of Cost Auditor / non-filing of e-form CRA-2 for FY 2016-17, within twenty one days from the date of issue of this letter, through e-mail only at xxxxxxxxxxxxxxxxx. The reply shall be furnished only in the prescribed format enclosed herewith.
|Name of the Company
|CIN of the Company
|Annual turnover of the company during FY 2015-16
|4 digit CETA heading wise annual turnover of the company during FY 2015-16
|If e-form CRA-2 already filed, state the SRN and date of CRA-2
|If e-form CRA-2 not yet filed, state the reasons for non-appointment of Cost Auditor/ non-filing of CRA-2
|Other response, if any
|Whether e-Form GNL-3 is filed by the Company. If filed, state the SRN and date of the same.
Note: Attention is drawn to provisions of Section 448 read with Section 447 of Companies Act, 2013.
We need to keep in mind that the declaration/statement with regard to the applicability of cost records is required to be made every year through two different documents.
One is Companies (Auditor’s Report) Order and another is Director’s Report
In the Companies (Auditor’s Report) Order, 2020 further in the section Matters to be Included in the Auditor’s Report, the auditor is required to answer the following
Whether maintenance of cost records has been specified by the Central Government under sub-section (1) of section 148 of the Companies Act and whether such accounts and records have been so made and maintained; [Paragraph 3(vi)]
ICAI has issued guidance note on CARO 2020 which also mentions about the cost records applicability and actions to be taken by the auditor, relevant extract is given below:
Audit Procedures and Reporting
(e) This clause requires the auditor to report whether cost accounts and records have been made and maintained. The word “made” applies in respect of cost accounts (or cost statements) and the word “maintained” applies in respect of cost records relating to materials, labour, overheads, etc. The auditor has to report under this clause irrespective of whether a cost audit has been ordered by the central government. The auditor should obtain a written representation from the management stating (a) whether cost records are required to be maintained for any product(s) or services of the company under section 148 of the Act, and the Companies (Cost Records and Audit) Rules, 2014; and (b) whether cost accounts and records are being made and maintained regularly. The auditor should ascertain whether maintenance of cost records has been specified for the company by the Central Government or not. It is possible that maintenance of cost records has been specified for only some of the products/ activities of the company. In such a case, the auditor should limit his procedures to only such products/ activities. If maintenance of cost records has been specified, the auditor should obtain a list of books/records made and maintained in this regard. The Order does not require a detailed examination of the cost records. The auditor should, therefore, conduct a general review of the cost records to ensure that the records as prescribed are made and maintained. He should, of course, make such reference to the cost records as is necessary for the purposes of his audit of the financial statements.
(f) Where cost audit is applicable to the company, the auditor may obtain copy of cost audit report of immediately preceding year and note any qualifications or comments in the cost audit report. In case, there are any such observations, the auditor should enquire from the management, whether such observations have been properly addressed in the current year. The auditor should include this in the management representation letter.
Apart from the above, the disclosures by the directors are also required with regard to the applicability and maintenance of Cost Records. 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 was a testimony to the same.
Ministry of Corporate Affairs, Government of India had 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. Extract is given below:
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 as amended till date).
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.
The notice invites the attention towards section 448 read with section 447 of the Companies Act 2013 which talks about false statement and if now it is proved that the maintenance of cost records/cost audit was applicable but some the management and or the auditors have given the false statements, it will be really difficult for them to save themselves from adverse actions.
448. Punishment for false statement.
Save as otherwise provided in this Act, if in any return, report, certificate, financial statement, prospectus, statement or other document required by, or for, the purposes of any of the provisions of this Act or the rules made thereunder, any person makes a statement,—
(a) which is false in any material particulars, knowing it to be false; or
(b) which omits any material fact, knowing it to be material,
he shall be liable under section 447.
The Auditors/Directors may review the applicability of Cost Records and Cost Audit every year and better it would be if a certificate is taken from Practising Cost Accountant with regard to the applicability of section 148 of the Companies Act so as to avoid any adverse action at later stages.