Mandatory Cost Audit.Cost compliance for the FY 2011-12

Sub: Latest amendment with relation to Cost Records (Section 209(1)(d) and Cost Audit (Section 233B) of Companies Act to be complied from the year 2011-12 onwards

Sir,

Ministry of Corporate Affairs has recently issued various notifications/circulars relating to cost records and Cost Audits. Through this communication, we would like to provide you a birds eye view of the various provisions/amendments.

The recent changes with respect to Section 209(1)(d) and 233B have been compiled herewith with explanations.

We request you to contact us in case of any further query

Recent Changes (In brief)

The Ministry of Corporate Affairs has introduced various changes in costing domain like

1. Method of appointment of Cost Auditor has been changed vide circular No 15 dated 11/04/2011

2. New Cost Audit Orders issued for 14 Industries rather than for companies

3.New Cost Accounting Record Rules vide notification number GSR 429(E)dated 03/06/2011 issued in suppression of 36 notifications. Now instead of preparing specific formats for Cost Records, the company may prepare Cost Records as per its requirement subject to fulfillment of certain conditions

4.New Cost Audit Report Rules issued vide GSR 430(E)dated 03/06/2011

Background relating to Costing under Companies Act;

1. Cost Records: Section 209(1)(d) of the Companies Act mentions about the preparation of cost records by certain class of companies (Earlier only 44 Industries were covered) wherein any company falling under that industry and having turnover exceeding Rs Ten crores had to prepare and maintain cost records as notified vide various notifications.

2.Cost Audit: Section 233 B mentioned about Cost Audit. It stated that

(1) Where in the opinion of the Central Government it is necessary so to do in relation to any company required under clause (d) of sub-section (1) of section 209 to include in its books of account the particulars referred to therein, the Central Government may, by order, direct that an audit of cost accounts of the company shall be conducted in such manner as may be specified in the order by an auditor who shall be a cost accountant within the meaning of the Cost and Works Accounts Act, 1959 (23 of 1959)

As per the current practice, Central Government used to issue Cost Audit Order on Specific Companies which resulted in inequities as various companies though very big were being left out of the Cost Audit purview. To overcome these, few amendments have been made as summarized above. The detailed version is given below:

Changes/Procedure with regard to Appointment of Cost Auditor (Summarized)

a) The Audit Committee of the Board shall be the first point of reference regarding the appointment of cost auditors

b) E-Filing of application (Form 23C) on MCA website

c) Filing to be done within 90 days from the commencement of each financial year i.e. by 29^th of June

d)The following two documents needs to be filed along with form 23C

1) Certified copy of the Board Resolution proposing appointment of the cost auditor; and

2) Copy of the certificate obtained from the cost auditor regarding compliance of section 224 (1-B) of the Companies Act, 1956.

e) Now there is no need for the Central Govt to accord approval for appointment of Cost Accountant, the appointment will be deemed to be approved unless any objection is received from Central Govt within 30 days of filing the application

f)The company has to issue formal letter of appointment after expiry of thirty days.

g)The Cost Auditor has to file Form 23D with MCA within thirty days of receipt of formal letter of appointment

New Cost Audit Orders issued for 14 Industries rather than for companies

The industries which have been brought under compulsory Cost Audit are:

New Cost Accounting Record Rules 2011

Earlier there were different notifications for each of the 44 industries for preparation of Cost records i.e. Cost Accounting Record Rules (CARR):

With the new Cost Accounting Record Rules 2011 having been notified, CARR for 36 industries have been superseded.

New Cost Accounting Record rules 2011 are applicable from year 2011-12 onwards

Now, all the companies including foreign companies which are engaged in the production, processing, manufacturing, activities and which fulfill the following criteria have to mandatorily prepare Cost Records showing margin for each and every product manufactured/produced/constructed or services provided. Also the companies will be required to file Compliance Certificate with the MCA within 180 days of the close of financial year

a) wherein, the aggregate value of net worth as on the last date of the immediately preceding financial year exceeds five crores of rupees; or

b) wherein the aggregate value of the turnover made by the company from sale or supply of all products or activities during the immediately preceding financial year exceeds twenty crores of rupees; or

c) wherein the company's equity or debt securities are listed or are in the process of listing on any stock exchange, whether in India or outside India

these rules shall not apply to the activities or products covered in any of the following rules,-

(a) Cost Accounting Records (Bulk Drugs) Rules, 1974
(b) Cost Accounting Records (Formulations) Rules, 1988
(c) Cost Accounting Records (Fertilizers) Rules, 1993
(d) Cost Accounting Records (Sugar) Rules, 1997
(e) Cost Accounting Records (Industrial Alcohol) Rules, 1997
(f) Cost Accounting Records (Electricity Industry) Rules, 2001
(g) Cost Accounting Records (Petroleum Industry) Rules, 2002
(h) Cost Accounting Records (Telecommunications) Rules, 2002

Basic requirements to be fulfilled while preparing Cost records:

Margin per units:

The cost records shall be kept on regular basis in such manner so as to make it possible to calculate per unit cost of production or cost of operations, cost of sales and margin for each of its products and activities for every financial year on monthly/quarterly/half-yearly/annual basis.

Compliance with Cost Accounting Standards (presently 13 in number):

The cost records shall be maintained in accordance with the generally accepted cost accounting principles and cost accounting standards issued by the Institute; to the extent these are found to be relevant and applicable. The variations, if any, shall be clearly indicated and explained.

Reconciliations:

All such cost records and cost statements, maintained under these rules shall be reconciled with the audited financial statements for the financial year

Period for preservation of Cost Records:

The records are required to be kept for eight years

Penalties:

If a company contravenes any provisions of these rules, the company and every officer thereof who is in default, including the persons referred to in sub-section (6) of section 209 of the Act, shall be punishable as provided under sub-section (2) of section 642 read with sub-sections (5) and (7) of section 209 of Companies Act, 1956 (1 of 1956).

Every company to which CARR-2011 applies shall file Compliance Certificate with MCA which has to be in prescribed format

Compliance certificate will be duly signed by a Cost Accountant

The Annexure prescribed with the compliance report, as certified by the cost accountant, shall be approved by the Board of Directors before submitting the same to the Central Government by the company.

Authenticity of compliance certificates;

Auditors and company secretaries who have made false or incorrect certification will face penalties, including cancellation of their licenses, said an official at the ministry of corporate affairs (MCA).

The ministry, which has entrusted professionals such as chartered and cost accountants and company secretaries to ensure that integrity of documentation is maintained, has observed fraudulent and irresponsible certification happening, said the official, who declined to be named.

The ministry has decided to take strict action after it found fraudulent certification being done by professionals in publicly traded firms affecting a large number of shareholders as well as privately held ones.

The concerned professional can be debarred from submitting any document on the MCA portal and the ministry may ask their respective institutions to take disciplinary action against them, said the official. Digital signatures of errant professionals will automatically be rejected by MCA21, the ministrys portal through which documents are filed.