Mandatory Cost Auditing in Bangladesh

Mandatory Cost Auditing in Bangladesh

3. Role of Cost Audit
Cost audit evaluates performance of the company with regards to cost of production which financial audit does not perform. The main focus of financial audit is compliance to the law. Cost audit can enhance the performance and production efficiencies by detecting the deviations and reasons of visible and invisible losses, inefficiencies, unusual wastages while the main emphasis of financial audit is to see whether legal requirements have been complied with. Cost audit has its significant role that is not substitutable by financial audit (Siddiqui, 2000). Cost audit, by thorough analysis of all cost items in different functional areas such as manufacturing, distribution areas etc helps management identify where inefficiency lies and what strategy should they follow. To illustrate, we can use the example of distribution cost of an enterprise. Cost audit by providing details knowledge on different components of delivery costs and where the inefficiency lies, cost audit can help a company become aware of areas of weaknesses/inefficiencies with a reviewing its distribution strategy and consider: a) the discontinuation of sales in high cost areas b) reducing delivery frequency in high cost areas, so as to increase the tonnage per trip, drop densities and drop sizes. c) the merging of regional deliveries in 'fringe' areas. d) reducing the number of vehicles used in each region. e) making delivery charges for small consignments in outlying areas. f ) the comparison of company vehicle costs with published cost standards. In addition to establishing the transport and delivery performance in each area, various deficiencies in vehicle utilisation, load planning and vehicle routes are possible to identify through analysis of cost data (Williams, 1978). Strategic importance of cost audit- Cost audit does not focus only on improving operational efficiencies, but is has also strategic importance as well. It provides information for managerial decisions on optimum utilisation of resources on a continuous basis and aid the organisation's growth objectives. Cost audit methodology and deliverables thus can be aligned with the performance governance process. It bears significant importance in promoting shareholder value. Net worth of shareholders is eroded when products and processes contain wasteful spending resulting in uneconomic cost structures and erosion of profitability (Raman, 2007). Cost audit is a must anti-competitive (competition commission) authority when it wants to detect anti-competitive practices, and also for regulators that monitor prices of goods and services. In most developed countries, cost audit is in-built in the financial statements of public utility companies. Value Added Tax (VAT) department needs to have cost audit reports to estimate the excise and VAT liabilities for the industry concerned (the Economic Times, 22th August,2007). Basu and Das (1999) identified a number of benefits of mandatory cost audits: (1) For management: Cost audit detects errors, frauds and misappropriation and hence enhances efficiency. Companies become more cautious about keeping cost data, in cases where a cost audit were mandatory.
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Mandatory Cost Auditing in Bangladesh

(2) For shareholders: Cost audits conducted by external auditors detect the standard of efficiency of management; hence it helps in the improvement of the standard of utilisation of material, labour and other resources. (3) For the government: It helps in accurately determining costs of production. Thus cost audits help govt to take prudent decisions whether a particular industry/sector needs tariff protection. It also helps the government to settle those cost-plus contracts entered into by the government without any complications. VAT authority of the government can determine proper value added tax liability and hence detect evasion if cost audit is done rigorously. (4) For customers: Customers may buy products at the most competitive price due to effective cost control and cost reduction as a result of a cost audit. (5) For cost accountants: Cost accountants, who work as employees in the audited firms, can enjoy a share of all benefits derived by the company from a cost audit. It may arise due to its limited scope of application in the related fields of operation (Saha, 2008). Although it has been suggested by the critics of cost audit that competition between businesses and industries can help reduce cost control, this is not the case in reality. There are sectors where a dominant player or a number of players control the majority share of the market and competition is absent there. In those sectors, cost audit can play a significant role in cost control and rationalisation of prices. In assessing value addition with a view to assessing proper VAT liability in manufacturing and processing industries, cost audit can play a significant role. In this regard, it is worth noting Cost Accountants (within the meaning of Cost & Works Accountants Act, 1959) in Maharashtra, India are made eligible to audit dealers accounts under section 61 of Maharashtra Value Added Tax Act, at par with Chartered Accountants [By an amendment made in the Maharashtra Tax Laws (Levy, Amendment & Valuation) Act, 2007] (Bose, 2007). The Government can rely upon the audited cost statements in fixing proper prices on cost basis and thus help in curbing profiteering in case of scarce goods and protect consumers. Considering the immense potential of cost audit in protecting consumer interest, order was given by the competent authority in India to conduct mandatory cost audits on 70 electricity and 90 pharmaceutical companies. Cost audits were ordered on drug makers in the wake of reports that exorbitant trade margins exist in the sector. A Comparison of medicines production cost with their retail price could expose this (Prasad, 2007), paving the way for the government to adopt some policy measures for the benefit of the consumers. It appears from the discussion that cost audit can provide significant benefits in terms of production efficiency, reduction of wastage, settle cost plus contracts by government, determination of proper Value Added Tax Liability (especially for manufacturing industry) and providing consumers essential products at right prices. The scope of mandatory cost audit (under section 220 of the Companies Act, 1994) should therefore be enhanced to include manufacturing and service industries that are at present outside the scope of mandatory cost audit. Provisions may be made in the securities law that will require the companies as mandated by the cost audit rules to have their cost accounting books audited by a cost auditor in order to raise their capital and to be listed with the stock exchanges. It seems relevant to mention here that Securities Exchange Commission of Pakistan (SECP) took a decision to award cost audit under Section 258 of the Companies Ordinance exclusively to Cost and Management Accountants (Siddiqui, 2000). at better price. The role of cost audit is thus getting more pronounced for firms and industries to be competitive in international trade in the WTO regime. On balance, cost audit enhances the business performance of organizations by ensuring production, marketing, sales and other aspects of a business are managed in the most cost effective way. Therefore, Government may consider requiring services of cost and management accountants mandatory in some private sector organizations (especially in power, steel, cement, engineering, soap batteries and cellular mobile telecom service etc) as well as using the services of cost auditors in a number of public sector organizations which are considered to be inefficient and mismanaged. r
[ One of the authors of this article who is studying in Australia now has dealt with, inter alia, the financial audit, more comprehensively in another article, which will be published in a subsequent issue ].

Mandatory Cost Auditing in Bangladesh

Mandatory Cost Auditing in Bangladesh: Some Policy Options

ATM Tariquzzaman1, Mohammad Abu Yusuf2 Sabina Yasmin3
Abstract: This paper examines the significance of cost auditing. It employs a qualitative study based on secondary sources of data. We find that cost audit is an important phenomenon to enhance shareholder value through minimisation of wastages, misappropriation and inefficiency. Proper cost audit enhances overall welfare of the consumers by helping them provide products and services at the minimum cost. However, there is different opinion on its net benefit. Keywords: Mandatory cost audit, Transparency, Cost-plus contracts, Value Added Tax (VAT) Audit, Shareholder Value, Production efficiency Acknowledgement- The authors like to express their gratitude to Mr. Mahbub Hossain Majumder, FCMA, CAF, South East University, Dhaka for his useful comments and suggestions on the first draft of the paper.

References
Basu, S.P. and Das, M. (1999), Theory and Practice of Costing, 9th ed., Rabindra Library, Calcutta. Bose, C. (2007), VAT Audit by Cost Accountants in Maharashtra, The Management Accountant, Vol.42, No. 9, September, India (www.myicwai.com) Chatterjee, B. & Zaman, M.M.(2006), The role of mandatory cost audit in enhancing trust: the case of India, Qualitative Research in Accounting & Management, 3(1), pp. 27-45, Doval, P.(2007, Aug 25 ), Cost audit scope may be widened the Financial Express, India Government of Bangladesh (2005), Amendment to Cost Audit Report (Rules) 1997 via Bangladesh Gazette, SRO no. 17-Law /2005 dated 17 January, Ministry of Commerce Murthy, BVR.(2002), Presidents Communique, The Management Accountant, Vol. 37, No.8, ICWAI, India , August , Prasad, G.C.(2007), Mandatory cost auditing norms may be revised. The Economic Times, India, June 21 Raman, N.(2007, April 19 ), Aligning Cost Audit and Corporate Governance , The Hindu Business Line Saha, N. K.(2008), Introspection of Cost Audit under the regime of GATT and GATS, Management Accountant, Calcutta: Apr . Vol. 43, Iss. 4; pg. 209 Sen, D.K., Jain, S. C. & Bala, S.K.(2002), Cost and Management Accounting in the new millennium: Challenges and opportunities, The Management Accountant, ICWAI, India, August pp.569- 575 Siddiqui, F.(2000), Cost audit in Manufacturing sector, Finance & Markets, (accessed through www.pakistaneconomist.com/issue2000/issue30/f&m.htm on 27 Nov,2008 The Daily Star (2004, 20 August), Cost audit can help make industries profitable The Daily Star, Vol. 5, No.86, Dhaka The Economic Times, August 22, 2007, India The financial Express(2008, 31st October), Thrust on expanding scope of cost audit ICMAB team calls on commerce secy, Dhaka Williams, R. (1978) The cost audit: A tool for distribution Management, International Journal of retail & distribution management, Vol.6, Issue 2, pp.53-57
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4. Criticisms of Cost Audit

However cost audit has been criticised by some stakeholders. One of such criticism is that cost audit reports are not accessible to public. Skeptics believe that the benefits from cost audit are far less than costs associated with it. Critics of cost audit sees mandatory cost audit function as a waste of resources in this era of globalization where competition is everywhere to take care of the perceived operational efficiency expected to be gained through cost audit compliance. Some respondents view mandatory cost audit as simply a duplication of financial audit work (Chatterjee and Zaman, 2006).

Introduction
Cost audit is the process of ascertaining whether the production, marketing and sales processes, as well as other aspects of a business, are managed in the most cost-effective manner. This is essentially an internal audit and is carried out as a tool to optimise management efficiency (Pankaj Doval in the Financial Express, 25/8/2007). Cost audit is not widely known in global perspective. External audit of financial statements is mandatory for listed companies in almost all countries, while cost audit is being made mandatory in South Asian countries in recent years. India was the first country in South Asia (possibly in the world) to make cost audit mandatory for a number of its business sectors4 (Chatterjee and Zaman, 2006). Virtually, all major industries- petroleum, chemicals, textiles, engineering, cement, paper, electricity, steel, etc, are subject to cost audit in India. Telecom sector is the only service industry which is subject to mandatory submission of cost audit statements in its financial reports is telecom (the Economic Times, 22/8/2007). Bangladesh similarly, have introduced mandatory cost audit in some public and private sector manufacturing and processing industries. Cost audit play a vital role in ensuring good governance, transparency, accountability and financial discipline in the business and industrial sectors of the country (The financial Express, October 31, 2008). Cost auditing helps entrepreneurs make their units profitable through controlling costs of production and reducing wastage and overhead expenses (The Daily Star, August 20, 2004). It has significant role in adding value to shareholders. Similarly, it has important role to play in serving consumer interest through check on cost of production. It becomes essential when a government wants to
1 ATM Tariquzzaman, Executive director, Securities and Exchange Commission, Dhaka; currently pursuing higher studies in Deakin University, Melbourne, Australia. 2 Mohammad Abu Yusuf, Deputy Commissioner, Customs Excise & VAT, Dhaka, Now PhD candidate, Monash University, Melbourne, Australia; formerly lecturer, Department of Accounting, University of Dhaka. 3 Sabina Yasmin, Deputy Commissioner of Taxes, Dhaka 4 At present, under Section 209 1D of the Companies Act, cost auditing is mandatory in India on certain classes of companies; companies making products that involve subsidies or whose prices are administered, companies engaged in production of defence equipment, companies in industries consisting of public sector enterprises and companies in regulated industries

impose anti-dumping duties. This is because, when cost audit is properly conducted, it gives an impression about what should be the ideal cost of a product. Government can use cost audit data in calculating the injury suffered by the domestic industry due to dumping. If it is found, after the cost audit that a product is being dumped into the country, government can initiate imposition of anti dumping duties. Cost audit is also useful necessary to determine if any firm or industry has actually resorted to transfer pricing technique to evade payment of tax. The Cost and Management profession in India and Pakistan has already made a significant contribution in their countries economic development by successful implementation of cost audit and provision of highly technical professional services (Sen, Jain & Bala, 2002 p.574). The remainder of the paper is organised as follows: In section 2 we provide a brief discussion about cost auditing in Bangladesh. Section 3 discusses the role of cost auditing, Section 4 presents some criticisms (often mentioned by sceptics) of cost auditing. Section 5 provides discussion about the role of cost auditing. Section 6 concludes.

5. Discussion:
Despite some criticisms, we argue that the benefits of cost audit are enormous. Cost audit can identify the major factors affecting costs, and makes some practical suggestions towards their reduction. Mandatory cost audit forces firms to be more efficient, the fruit of which reaches customers in the form of cost savings in buying their necessary commodities at right prices.Cost audit is indispensable for all organizations with a view to ensuring organizational growth and success through identifying unproductive or under productive employment of resources. Proper allocation of overhead costs can only be achieved through successful implementation of cost audit. Financial audit cannot serve this purpose. We therefore argue that it is not a duplication of financial audit, it is rather a separate audit having distinctive objective of creating and preserving shareholder value as well as protecting consumers interest through checking inefficiencies and wastage in production and service activities. Shareholder value is preserved when profitability is maintained and/or enhanced when cost minimization is achieved with the help of cost audit. It has been vividly observed, In today's world, under cut throat competition, everyone focuses on Top Line and Bottom Line but nobody mentions the middle line, which is Cost. Unless the middle line is watched and controlled, the desired bottom line does not take place. This is where our core competence lies and it can be exploited for finding novel ways for the business community to improve upon the middle line (Murthy,2002 p. 563).Cost audit helps capacity utilization as cost auditors make comments on the best utilization of installed capacity of the machineries. Therefore, cost audit should have no limitation of its own. If any limitation is imposed, it does not relate to the objectives for which it has been introduced.
The Cost and Management, January-February, 2009

2. Cost auditing in Bangladesh

The provision of the statutory cost audit was first introduced in Bangladesh by the Companies Act, 1994. The Company Act, 1994 Section 220 contains provisions under which the government of Bangladesh may, by order, direct an audit of cost accounts be conducted of the company by a Cost and Management Accountant. The meaning of the term cost and management accountant has been specified in the Cost and Management Accounts Ordinance, 1977 (L III of 1977). This cost audit (of the cost accounting books) is to be conducted every year and shall be in addition to the statutory audit of accounts conducted under section 210. Cost auditing function is administered and facilitated by the Cost Audit(Report) Rules ,1997, Order of the Government for Cost Audit, CMA Ordinance, 1977 (Ordinance No. LIII of 1977)and CMA Regulations, 1980 (and subsequent amendments. Already, the government promulgated statutory notification making cost audit mandatory in the public sector sugar mills and public limited companies in fertiliser, textile, pharmaceutical, fuel, pharmaceutical, jute sectors and edible oil and ghee (The Daily star, 20th August, 2004; GoB,2005).
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6. Conclusion:
Despite some scepticism about the viability of cost audit, cost audit can play a significant role in the growth paradigm of manufacturing and service sector. This is because cost audit helps in optimizing the cost of production. In this competitive world, the competitive edge of a firm/industry lies in its ability to deliver the same quality products

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