Recently number of Companies are receiving the Notice for Non-Appointment of Cost Auditor or Non submission of Cost Audit Reports for FY 2016-17, 2017-18 & onwards. As we are aware Cost Audit is mandatory after crossing threshold turnover limit of 50 Cr for regulated Industries & 100 Cr for Non-regulated Industries under section 148 of the Companies Act, 2013 read with the Companies (Cost Records and Audit) Rules, 2014.
Text of the Notice is as under:
“WHEREAS, as per the turnover and product codes information contained in Form AOC-4 XBRL filed by your company for the financial year ended on 3/31/2016 (MM/DD/YYYY), conducting cost audit and appointment of Cost Auditor for the same is mandatory in case of your company for the financial year 2017-18 as per Section 148 of the Companies Act, read with Rule 6 of The Companies (Cost Records and Audit) Rules, 2014.
2. WHEREAS, a notice was issued on xxxxxxxx directing you to explain the reasons for non-appointment of cost auditor. The reply submitted by your company in this regard has been found to be unsatisfactory.
3. And WHEREAS the default is made for not appointing the cost auditor/ non-submission of cost audit report, as required under Sec. 148(2), 148(3) and 148(6) of the Act read with Rule 6 of CCRA Rules, 2014 and, the Company and every Officer who is in default, shall be punishable in the norms laid down in section 148(8) (a) read with section 147(1) of the Act.”
Following could be possible reasons for such action:
1. Non filing of CRA-2 form for appointment of Cost Auditor: Companies have not filed CRA-2 for appointment of Cost Auditor although they are covered under Cost Audit
2. Not checking applicability of Cost Audit under the Companies (Cost Records and Audit) Rules, 2014: Clause IV of CARO mentions specifically about applicability of Cost Records, Financial Auditors need to be extremely careful about applicability. It’s been observed that this clause is many times merely carried forward from previous report without going in details.
3. Wrong mention of the turnover and product codes information contained in Form AOC-4 XBRL filed by the company: Due timelines pressure this aspect is overlooked by professionals leading to wrong filling of information.
4. Wrong Classification of Trading turnover leading to addition to product code covered under Cost Audit
5. Wrong presumption that Cost Audit is applicable to only manufacturing companies: Revised Cost Audit Rules i.e. The Companies (Cost Records and Audit) Rules, 2014 prescribe Cost Audit for specified Services as well as for certain class of Trading Companies.
6. The Companies (Cost Records and Audit) Rules, 2014 check applicability based on Customs Tariff Act (CTA): Although there are no major difference between CTA & HSN codes, this aspect has to be taken into consideration.
7. CTA (Customs Tariff Act) codes & unit of measurement (UoM): Notices are also being served for use of different UoM than specified under CTA codes. Companies need to prepares note in case they using different UoM other than mentioned in Customs Tariff Act (CTA)
What are implications :
A. Company: Non compliance may attract default as under—
(a) the company and every officer of the company who is in default shall be punishable in the manner as provided in sub-section (1) of section 147;
B. Auditor: (b) the cost auditor of the company who is in default shall be punishable in the manner as provided in sub-sections (2) to (4) of section 147.
Section 147 Punishment for contravention.—
(1) If any of the provisions of sections 139 to 146 (both inclusive) is contravened, the company shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to one year or with fine which shall not be less than ten thousand rupees but which may extend to one lakh rupees, or with both.
(2) If an auditor of a company contravenes any of the provisions of section 139, section 143, section 144 or section 145, the auditor shall be punishable with fine which shall not be less than twenty-five thousand rupees but which may extend to five lakh rupees:
Provided that if an auditor has contravened such provisions knowingly or wilfully with the intention to deceive the company or its shareholders or creditors or tax authorities, he shall be punishable with imprisonment for a term which may extend to one year and with fine which shall not be less than one lakh rupees but which may extend to twenty-five lakh rupees.
(3) Where an auditor has been convicted under sub-section (2), he shall be liable to—
(i) refund the remuneration received by him to the company; and
(ii) pay for damages to the company, statutory bodies or authorities or to any other persons for loss arising out of incorrect or misleading statements of particulars made in his audit report.
4) The Central Government shall, by notification, specify any statutory body or authority or an officer for ensuring prompt payment of damages to the company or the persons under clause (ii) of sub-section (3) and such body, authority or officer shall after payment of damages to such company or persons file a report with the Central Government in respect of making such damages in such manner as may be specified in the said notification.
What to do in such situation:
1. Go through in detail the contents of Notice received from Cost Audit Branch
2. Take Expert opinion about applicability based on the Companies Act 2013 read with the Companies (Cost Records and Audit) Rules, 2014
3. In case there could be anomalies in filing AOC-4, do consider other implication as it may result in filling of wrong information in AOC-4 which has much serious implications.
4. Take unbiased opinion about applicability reading in detail provisions of the Companies (Cost Records and Audit) Rules, 2014 along with previous submissions made, if any.
5. If not applicable kindly revert to notice along with necessary evidences and justifications
6. If applicable kindly comply with relevant provisions & reply to Cost Audit Branch with proper justification
7. Be careful for subsequent filling & disclosures wrt to Cost Records & Cost Audit in all financial reporting especially in Annual Report, Tax Audit Report, GST fillings & Auditor’s Report.
About the Author: CMA Harshad S Deshpande, M.Com, FCMA, CS, CISA (USA), CIMA (UK), IP, RV, ID, DFA, SA.
CMA Harshad Deshpande is a senior Cost Accountant with over 20 years of experience in practice. He has recently been elected as a Central Council Member of ICMAI. For more information, please visit www.hsda.in.