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Thursday, June 30, 2011

Cost Audit Rules 2011-finally recognizes management accountants

For ages, Board of Directors dealt with atleast 3 auditors. The statutory auditor for accounts/tax, the internal auditor for improvements and the cost auditor for cost accountancy. Internally, there was this feeling that cost auditors are just the Government's spy, who do not give any value add to the company. Though the cost audit report did contain an optional space for cost auditor's to fill, the bulk of the report entailed verifying numbers/ratios from management accounts, mainly for purposes of tariffs, taxes and subsidies. Otherwise, the report did not add value directly to the company, and expected it to analyze the numbers itself.

The Cost Audit Report Rules 2011(http://www.icwai.org/icwai/docs/Revised_Report_Rules_03jun11.pdf) framed in June-11, promise to bring a paradigm shift. The Cost auditor has to submit a performance appraisal report to the company's Board of Directors.The report format is reproduced below.

 Name of Company: __________________________ Period of Report: ______________ 
(indicative list of areas to be covered in the report)y(emphasis added) 
1.  Capacity Utilization Analysis  
2.  Productivity/Efficiency Analysis  
3.  Utilities/Energy Efficiency Analysis 
4.  Key-Costs & Contribution Analysis 
5.  Product/Service Profitability Analysis 
6.  Market/Customer Profitability Analysis 
7.  Working Capital & Inventory Management Analysis 
8.  Manpower Analysis 
9.  Impact of IFRS on the Cost Structure, Cash-Flows and Profitability(emphasis added)
10. Application of Management Accounting Tools(emphasis added)  

While any well managed company would be anyway doing most of this, the report serves as a second opinion. Also, given that IFRS will impact Indian companies from this fiscal(2011-12) onwards, Boards would be interested in knowing the effect of IFRS on their reported earnings etc. And then, a cost auditor with multiple clients is well equipped to comment on the application of management accounting tools.

Anyways, if the report is done by the auditor himself(instead of cut pasting internal audit reports), then respect for the profession will increase. And it would certainly be a value add, and intellectually challenging exercise.

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