Issue of notices and Review of Cost Audit Reports by MCA: A warning signal for Auditors and Directors

The government has started relying on the professional and has given certain certification powers to the professionals who are being regulated by the professional Institutes. The duly certified data submitted by the professionals is relied upon by various organisations for various decision making activities. The purpose of providing certification/audit opportunities to the professionals is simple and clear that instead of diving deep into the data, the government should focus primarily on policy making.

It was noticed by the Ministry of Corporate Affairs (MCA) that the data being submitted by the organisations by way of submission of Cost Audit reports suffer from some infirmities and a need was felt that to ensure filing of reliable data, checks need to be exercised.

MCA has started issuing notices to companies and cost auditors to ensure that the data being submitted after approval by Board of Directors is sacrosanct and reliable. The notices stated;

"For monitoring the compliance of provisions of the Act by the companies and compliance of cost auditing standards by the Cost auditors, it is imperative to review the Cost Audit Reports."

It can be seen from various annual reports of MCA that the data is shared by MCA with other wings of the government like Serious Fraud Investigation Office, Ministry of Finance, Tariff Commission, Directorate General of Trade Remedies, CGST Audit Commissionerates etc.

We have already elaborated in our articles about the alignment of HSN codewise data being submitted to GST department with the HSN codewise data being submitted to the MCA.

The action by MCA has brought to fore the declarations being given by the Directors and Financial Auditors regarding maintenance of Cost Records. So, before making any declarations, the Directors and Financial Auditors of the company should also satisfy themselves regarding availability of costing data though at later stages it will be the responsibility of Cost Auditors.

This time the MCA has taken a long stride to ensure the data effectiveness in future so that if required, Industry-wise, Hsn codewise benchmarking be made available for the use of policy makers.

Policy makers of India per se need costing data which is luckily available in the form of Cost Audit Reports wherever applicable. So to harness the optimum use, accuracy of data is desired.

The MCA issued the notices with the subject " Review of Cost audit Reports for FY 2016-17". It seems that presently the review is being carried out for 2016-17 only and notices for the other years are in the pipeline. The companies should must get prepared to submit loads of authenticated data to MCA.

The notices issued by MCA read as under

" Reference is invited to Section 143 of the Companies Act 2013 which provided for various Duties of the Auditors. Section 143(14) provides that the provisions of this section shall mutatis mutandis apply to the Cost Accountant conducting Cost Audit under Section 148. Section 148(3), inter alia, provides that Auditor conducting the cost audit shall comply with the Cost Auditing Standards issued by the Institute of Cost Accountants of India constituted under the Cost and Works Accountants Act 1959, with the approval of Central Government.

Further, Section 148(7) provides that if, after considering the cost audit report referred to under this section and the information and explanation furnished by the company under sub-section (6), the Central Government is of the opinion that any further information or explanation is necessary, it may call for such further information and explanation and the company shall furnish the same within such time as may be specified by the Government. For monitoring the compliance of provisions of the Act by the companies and compliance of cost auditing standards by the Cost auditors, it is imperative to review the Cost Audit Reports.

Accordingly, it is hereby, directed to furnish duly authenticated copy of the Audit file containing Audit documentation, Audit Working Papers, Cost Audit Report and Annual Report/Audited Financial Statement in respect of ………………………………. For FY 2016-17 within 14 days of issue of this letter.

It may be noted that further information or explanation, as may be deemed fit, may be asked from the Cost Auditor and/or from the Company based on review of Cost Audit Report."

The seriousness of the MCA is evident from the last lines of the notices that if required, more information may be asked wither from Company of Cost Auditor, so both have to be on their toes to submit the documents to the regulators in the first go itself to avoid any type of issue later.

The company is required to comply with 24 Cost Accounting Standards (whichever applicable) and 19 Standards on Cost Auditing (Lists already communicated earlier/available on icmai.in)

Government of India, Ministry of Corporate Affairs, vide their letter no. 52/33/CAB/2013 dated 10th September, 2015 has, under section 148(3) of the Companies Act, 2013, granted Central Government's approval to the following Cost Auditing Standards:

1. Cost Auditing Standard-101 on Planning an audit of Cost Statements;
2. Cost Auditing Standard-102 on Cost Audit Documentation;
3. Cost Auditing Standard-103 on Overall objectives of the independent cost auditor; and
4. Cost Auditing Standard-104 on Knowledge of business, its processes and the business