[The following post is contributed by Nivedita Shankar of Vinod Kothari & Company. She can be reached at firstname.lastname@example.org]
Putting all speculation to rest, the Ministry of Corporate Affairs (MCA) on June 30, 2014 finally came out with the final rules relating to cost audit and cost records. Although, the rules are yet to be gazetted, yet the finalized rules have surely given an indication of the road ahead for cost audit and maintenance of cost records. It however, remains to be seen if the delay in finalizing the rules will actually uphold the age old saying ‘better late than never’.
The reigning confusion till June 30, 2014
The rules come at a time when confusion reigned about the procedure regarding appointment of cost auditor. With section 148 of Companies Act, 2013 being enforced with effect from April 1, 2014 and the allied rules remaining to be enforced, confusion prevailed regarding filing of e-forms for appointment of cost auditors. This confusion was further fuelled by the provisions of rule 14 of Companies (Audit and Auditors) Rules, 2014, which required ratification of remuneration of cost auditors by shareholders. Thus, when the requirement to appoint a cost auditor was itself not clear, the very reason to comply with rule 14 also got defeated. Although the other question which arose was if by way of finalized rules any company was mandated to appoint a cost auditor and thereby also ratify the remuneration, then for the purpose of ratification will the company have to convene a general meeting or conduct a postal ballot?
Highlights of Companies (Cost Records and Audit) Rules, 2014
1. Applicability of Rules
The Rules have undoubtedly cut down the number of industries to which they shall apply. This may come as a relief for companies engaged in industries like textile, plywood, and paints. The Rules have listed down the ‘strategic sectors’ to which the requirement to maintain cost records shall apply, but this list has been left open with the use of the phrase ‘Companies engaged in the production of following goods in strategic sectors, such as’. Apart from this companies engaged in an industry regulated by a sectoral regulator or a Ministry or Department of Central Government, companies involved in public interest like railways, companies engaged in the business of production, import and supply or trading of following medical devices shall also be covered by the cost audit rules. Thus, notably the scope of applicability of rules has been pruned down.
Threshold limits have been laid down for the requirement of cost audit for such companies.
2. Method of appointment of cost auditor
Reading section 148 of Companies Act, 2013, it is evident that the appointment of cost auditor shall happen only at a board meeting. Surprisingly, the need to take the prior opinion from the audit committee has been seemingly done away with. This is also clear from a review of the e-form CRA-2. One may choose to take a different view though looking at the provision of section 177(4)(i) of Act, 2013. However, considering rule 14 of Companies (Audit and Auditors) Rules, 2014 the remuneration of cost auditors has to be recommended by the audit committee.
Further, companies are also supposed to file a notice of appointment of cost auditor in e-form CRA-2 within 30 days of board meeting in which such appointment is made or within 180 days of commencement of FY, whichever is earlier.
3. Submission of cost audit report
The rules have cast a duty on the cost auditor to submit cost audit report in form CRA-3 within 180 days of end of FY. Every company to which the Rules apply to shall within a period of 30 days from the date of receipt of cost audit report furnish the same to the central government in e-form CRA-4.
4. Requirement to maintain cost records
Companies covered by Rule 3 including all units and branches shall for each financial year maintain cost records in form CRA-1.
5. Performance appraisal report
Seemingly, this has been done away with. Under the erstwhile rules, this formed a part of cost audit report.
6. Non-applicability of Rules
The companies covered by Rule 3 and
i. whose revenue from exports, in foreign exchange, exceeds seventy five per cent of its total revenue or
ii. which is operating from a special economic zone (SEZ).