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In this Feb 2003 issue of On Target :
The Cost Audit: Should it be Made Mandatory?
What's On
Bookshelf
The Cost Audit: Should it be Made Mandatory?
The Institute of Certified Management Accountants believes that bodies involved in the management accounting profession should urge the Governments of the countries in which their members are represented to initiate suitable amendments to the Companies Acts of these countries so as to make the cost audit mandatory for all the companies on the lines of financial audit, and to mandate the appointment of cost auditors at Annual General Meetings (AGMs) of the companies on par with statutory auditors.
Governments then would need to recognise cost accounting guidelines (or standards) released by the various Cost Accounting Standard Boards such as that newly constituted by the Institute.
Australia and other industrialised countries have been lagging in this respect. The Cost Audit has been in practice since 1956 in India and since 1984 in Pakistan and in Bangladesh since 1994. In Bangladesh for instance, its Companies Act of 1994 has made provision for audit of cost accounts by Cost and Management Accountants for the companies engaged in production, distribution, marketing, transportation, processing, manufacturing, milling, extraction and mining activities. In India, The Institute of Cost and Works Accountants (ICWAI) has gone further, by now requesting the Government to make it mandatory for the companies to follow cost accounting standards issued wherever they were required to maintain cost accounting records under Section 209 (1)(d) of the Indian Companies Act. The ICWAI believes that it should be made obligatory for companies to maintain cost accounting records as per their Cost Accounting Standards in a uniform way. Stating that only little over 2,400 cost accountants of the 35,000-odd qualified in India were currently practicing the profession and only around 3,000 units were availing of their services, the ICWAI President and the Vice-President said the measures suggested to bring cost auditors on par with financial auditors would help utilize the services of cost accountants and boost economic growth and the competitive edge of the Indian industry.
The Institute of Certified Management Accountants (Australia) believes that a Cost Audit should be performed not merely for employments sake but to provide a Value-Adding service to companies. Also, with the issue of Corporate Governance high on most regulators’ agendas, a cost audit will form the platform that ensures that a company is managing an important aspect of its competitive advantage in an appropriate manner. The benefits of Cost Audit are many fold. It can help management in diagnosing operational inefficiency at all levels and suggest remedial measures to the shareholders. To the consumer; it helps getting the product at lowest possible price by reducing wastage and inefficiencies; and to the Government it gives actual picture of an industry resulting in formulation of satisfactory tariff and taxation policies.
The Institute’s syllabus has been designed keeping in view the changing global environment, focuses on areas such as management accountancy, performance management, information system and technology, quantitative methods, operations and project management control, strategic management and marketing, and financial strategy and reporting.
A Cost Audit Report should briefly describe the cost accounting system existing in the company, keeping in view the requirements of the Cost Accounting Guidelines and Standards applicable to the class of companies manufacturing the product or providing the service, and also its adequacy or otherwise to determine correctly the cost of production, cost of sales, sales realisation and margin of the product and services.
Typically, the Cost Audit will cover the following areas :
The adequacy or otherwise of the cost accounting system including inventory valuation, and suggestions for the improvement.
The adequacy or otherwise of the budgetary control system.
Areas where the company is incurring losses or where there is considerable decline in profitability, the cost auditor should comment on the reasons, including indicative break-even points. The cost auditor should also comment on the default, if any on the payments due to the Government, financial institutions and banks, penal interest levied thereon and its impact on the cost of sales and profitability;
Steps required for strengthening the company under a competitive environment, especially under a Cost Leadership strategy.
Comment on comparative profitability and pricing policy of the company for domestic and export sales.
Comment on the scope and performance of internal audit of cost records,
The Cost Auditor should also suggest measures for making further improvements in the performance in respect of cost control and cost reduction.
It is expected that most Cost Audits will report on the process of manufacture, providing a brief note regarding the process of manufacture along with flow chart covering production, utility and service department of the product. Areas covered would typically include :
cost information, such as the major input materials / components consumed;
standard/ actual consumption of input materials per unit;
break-up of cost of input materials imported during the year
standard/ actual consumption of power, fuel and utilities in terms of quantity per unit of production ;
salaries and wages; repairs and maintenance;
fixed assets register and depreciation and lease rent;
overheads, and allocation drivers (e.g. ABC);
research and development expenses; royalty and technical know how charges;
quality control expenses; pollution control expenses;
abnormal non-recurring costs;
inventory valuation (at the end of the year) ;
sales of the products and the margin per unit of output;
competitive margin against imports;
value addition and distribution of earnings;
financial position and ratio analysis;
capitalisation of revenue expenditure;
related party transactions;
profit reconciliation;
qualitative information (e.g. the Balanced Scorecard);
The report should also briefly specify changes, if any, made in the costing system; including the basis of inventory valuation; method of overhead allocation; apportionment to cost centers/departments and final absorption to the product under reference etc., during the current financial year as compared to the previous financial year.
The Institute would like to hear its members views on a applicability of a mandatory cost audit in organisations in their countries
What's On
February 2003 :
CMA program launched in Lebanon at the University of Balamand
March 2003 :
[Dates to be confirmed]: CMA Exams-Singapore, Conducted by Open Learning Resources (AEC Center) and ICMA
March 27-30, 2003: Management Accounting 2020 4-Day Advanced Strategic Management Accounting program run by Universiti of Utara Malaysia and ICMA
April 2003 :
April 13-15, 2003 : Advanced Management Accounting: 3-Day Seminar in Sri Lanka, conducted by the Institute of Chartered Accountants of Sri Lanka and ICMA
April 20, 2003 : Advanced Strategic Management Accounting Exam - Malaysia
May 2003 :
May 1-3, 2003: Management Accounting 2020 3-Day Advanced Management Accounting program run by Universiti of Utara Malaysia and ICMA
May 18, 2003: Advanced Management Accounting Exam - Malaysia
May 8th-13 2003: Advanced Strategic Management Accounting: 4-Day Seminar in Sri Lanka, conducted by the Institute of Chartered Accountants of Sri Lanka and ICMA
Book Shelf
Recent professional journal feature articles have addressed the need to restore the accounting profession’s credibility, respectability and trust (see “Rebuilding trust”, Journal of Accountancy, December 2002, pp. 61-63 or “Man with a mission”, CA Magazine, December 2002, pp. 14-18) and more generally the benefits of corporate social responsibility (see “You know it makes sense”, Accountancy, November 2002, pp. 48-50.). The latter theme reminds us that organisations have a wide range of stakeholders other than just shareholders. “Managing the Extended Enterprise: The New Stakeholder View” by Post, Preston and Sachs (California Management Review, Fall, 2002, pp. 6-28), considers the full range of constituencies that are vital to the wealth-creating capacity of the corporation. Developing and integrating relationships with multiple stakeholders requires a comprehensive strategy as illustrated in this article.
Respected management guru, Charles Handy (“What is Business For?”, Harvard Business Review, December 2002, pp. 49-55) takes the debate to a deeper level, going beyond the notion of personal ethics and corporate wealth-creation to consider whether the model of American-style stock-market capitalism is corrupt and whether corporations have been pursuing the wrong goals.
Other influential writers are using similar language. Mintzberg, Simons and Basu (“Beyond selfishness”, MIT Sloan Management Review, Fall, 2002) suggest that the Enrons of the world are only “the tip of the iceberg” and that “far more dangerous … is the legal corruption taking place below the surface”. They suggest that the idea that “everyone has a price” legitimises corruption and greed, allowing shareholders to “buy-off” CEOs; and that referring to organisations as “lean and mean” is a sad sign of the times. They remind us that prosperity has social as well as economic dimensions.
Please feel free to share anything that you have found interesting. You can send your ideas to: Bill Richardson, Dept of Accounting & Finance, Monash University, PO Box 197, Caulfield East VIC 3145.
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