A Cost Accountant as defined in clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who holds a valid certificate of practice under sub-section (1) of section 6 of that Act and including a Firm of Cost Accountants can be appointed by a Company as Cost Auditor.
The cost accountant or partners of a firm of cost accountants should be in whole-time practice and should not be holding any other employment.
As per provisions of section 233 B(2), the Board of Directors of a Company can appoint a cost auditor after obtaining prior approval of the Central Government (India).
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As per the amendments made in 2011, Cost Accounting Record Rules, 2011 and Cost Audit Report Rules, 2011 a revised procedure has been laid down for the appointment of a cost auditor.
Under the revised procedure, the first point of reference will be the Audit Committee of the Board of Directors of the Company and the Audit Committee is required to ensure that the cost auditor is free from any disqualifications as specified under section 233 B(5) read with seciton 224 and sub-section (3) or sub section (4) of section 226 of the Companies Act 1956.
The audit committee should also ensure that the cost auditor is independent and is at arm’s length relationship’ with the company. After ascertaining the eligibility, the Audit committee will recommend to the Board of Directors for appointment of the Cost Auditor.
The Board of Directors of the company shall pass a resolution accordingly. In those companies where constitution of an Audit committee is not required by law, the functions of the ‘Audit Committee’ as per the procedure will be discharged by the ‘Board of Directors’.
Appointment of Cost Auditor
According to the revised procedure for appointment of a cost auditor, the company is required to e-file its application with the Central Government on www.mca.gov.in portal, in the prescribed form 23C within ninety (90) days from the date of commencement of each financial year, alongwith the prescribed fee as per the Companies (Fees an application) Rules, 1999 as amended from time to time and other documents as per existing practice, i.e.
- Certified copy of the Board Resolution proposing appointment of cost auditor; and
- Copy of the Certificate obtained from the cost auditor regarding compliance of section 244(1-B) of the Companies Act, 1956.
After filling the online application by the company, the same shall be deemed to be approved by the Central Government, unless contrary is heard within 30 (thirty) days from the date of filling such application, the central government directs the company to re-submit the said application with such additional information or explanation as may be specified in that direction, the period of thirty days for deemed approval of the Central Government will be counted from the date of re submission of Form 23C by the Company.
After obtaining approval of the Central Government (deemed or otherwise), the Company will be required to issue a formal letter of appointment to the Cost auditor.
The Cost auditor is required to inform the Central Government within thirty days of receipt of formal letter of appointment from the company. Such intimation is required to be done in prescribed e-Form 23D alongwith a copy of such appointment.
The Company is required to disclose full particulars of the cost auditor alongwith the date and actual date of filing of the cost audit report by the cost auditor, in its Annual Report for each relevant financial year. Since the notification has been made effective from April 1 2011 companies under cost audit are required to furnish the details in its Annual Report from the financial year 2010-11.
Since the cost audit report of a particular financial year may not have been submitted before publication of the Annual Report, relevant details of due and actual date of filing for the last financial year and the due date of filing for the current year may be published in the Annual Report.
If a company contravenes any provisions of the Cost Audit Act, the company and every officer thereof who is in default, including the persons referred to in subsection (6) of section 209 of the Act shall be punishable as provided under subsection (2) of Section 642 read with sub-section (5) and (7) of section 209 and sub section (11) of section 233 B of Companies Act, 1956.
Relevant provisions of section 209 of the Companies Act, 1956 are as follows:
Sub-section (5) of Section 209 provides that if any of the persons referred to in sub section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been the cause of any default by the company thereunder, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both.
Provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeking that those requirements were complied with and was in a position to discharge that duty :
Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.
Sub-section (6) of section 209 provides that the persons referred to in sub-section (5) are the following namely:
- where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company,
- where the company has neither a managing director nor manager, every director of the company;
Sub-section (7) of section 209 provides that if any person, not being a person referred to in sub-section (6), having been charged by the managing director, manager or Board of Directors, as the case may be, with the duty of seeing that the requirement of this Section are complied with makes default in doing so, he shall in respect of each offence, by punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both.
Relevant provision of section 642 of the companies Act, 1956 is as under:
Sub-section (2) of section 642 provides that any rule made under sub-section (1) may provide that a contravention thereof shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during which such contravention continues.
Non Compliance by Cost Auditor
If default is made by the cost auditor in complying with the aforesaid provisions, he shall be punishable with fine, which may extend to five thousand rupees.
In the procedure for appointment of the cost auditor, it is mentioned that the Audit committee of the Company is required to obtain a certificate from the cost auditor appointed that he / it has complied provisions under section 224 (1-B) and about his / its independence and arm’s length relationship with the company. The explanation about these is given below:
Section 224 (1B): “On and from the financial year next following the commencement of the Companies (Amendment) Act, 1974 (41 of 1974), no company or its Board of Directors shall appoint or reappoint any person who is in full-time employment elsewhere or firm as its auditor if such person or firm is, of the date of such appointment or reappointment, holding appointment as auditor of the specified number of companies or more than the specified number of companies:
Provided that in the case of a firm of auditors ‘specified number of companies’ shall be construed as the number of companies specified for every partner of the firm who is not in full time employment elsewhere:
Provided further that where any partner of the firm is also a partner of any other firm or firms of auditors, the number of companies which may be taken into account, by all firms together, in relation to such partner shall not exceed the specified number in the aggregate:
Provided also that where any partner of a firm of auditors is also holding office, in his individual capacity, as the auditor of one or more companies, the number of companies which may be taken into account in his case shall not exceed the specified number in the aggregate.
Provided also that the provisions of this sub-section shall not apply, on and after commencement of the Companies (Amendment) Act, 2000, to a private company.
Arm’s Length relationship
A Cost accountant proposed to be appointed as cost auditor of the company is required to provide a certificate to the Audit Committee or Board of Directors of the Company stating that he is at ‘arms length relationship’ with the company. Explanation about arm’s length relationship is provided by General Circular 68/ 2011 as under:
To ensure ‘arms length relationship’, cost auditor(s) appointed under section 233B(2) of the Companies Act, 1956 shall not provide services to the company relating to:
design and implementation of cost accounting system; or the maintenance of cost accounting records, or act is internal auditor, whether acting individually or through the same firm or through other group firms where he or any partner has any common interest.
Qualifications of Cost Auditor
A person who is proposed to be appointed as cost auditor of a company must possess the following qualifications:
- He / she must be a Cost Accountant as defined in clause (b) of subsection (1) of section 2 of the Cost and works Accountants Act, 1959 (23 of 1959).
- He / She must hold a valid certificate of practice issued by the Council of the Institute of Cost and Works Accountants of India under Section 7 of the Cost and Works Accountants Act, 1959.
A partner of the firm of cost accountants holding a valid certificate of practice is also qualified to be appointed as the cost auditor of the company. It is essential that such cost accountant or a partner of the firm of cost accountants should not be in the employment elsewhere.
In order to perform the of cost audit properly such cost auditor should possess the following qualities and characteristics:
- Knowledge of basic principles and methods used in the field of cost accountancy, financial accountancy, management accountancy and financial management since such fields are related to the work of cost audit.
- He should be honest and a person possessing integrate.
- He should not be influenced by officers and employees of the company in which he is carrying out the cost audit work. He should be capable of taking independent decisions while performing the cost audit.
- He should have professional competency of a high degree.
- He should possess communication skills to explain his ideas and concepts to the staff of the company in which he is working as the cost auditor. Using the skill he can obtain necessary co-operation from the members of the staff.
- He should be fully familiar with the technical and organisational aspects of the company in which he is appointed as the cost auditor.
- At present many companies use devices and appliances like electronic data processing, mechanized accounting, labor saving devices and cost audit software. Therefore, the cost auditor should possess adequate knowledge about such appliances and devices.
Disqualifications of Cost Auditor
A person cannot be appointed as a cost auditor of a company if he attracts any of the disqualifications listed in sub-sections (3) and (4) of section 226 of the companies act, 1956. the relevant sub-sections provide that the following cannot be appointed as a cost auditor (These are also applicable to a financial auditor of a company):
- A body corporate.
- An officer or employee of the company.
- A person who is a partner, or who is in the employment of an officer or employee of the company.
- A person who is indebted to the company for an amount exceeding one thousand rupees, or who has given any guarantee or provided any security in connection with the indebtedness of any third person to the company for an amount already specified;
- A person who is disqualified to be the cost auditor of its subsidiary or holding company or of another subsidiary of its holding company.
In addition to the above a person appointed as (financial) auditor of the company cannot be appointed to do cost audit of the same company.
In addition, the Government has notified by notification No. 52/196/CT/44/78 dated 20th January, 1983 that a person who is an internal auditor cannot also be the cost auditor of the same companyfor a period for which he is internal auditor of the company.
The provisions of Section 226 of the Companies Act, 1956 about disqualifications of a Cost Auditor have been reconfirmed by the Institute of Cost and Works Accountants of India by a notification dated 10th December, 1969.