CENTRAL UNIVERSITY OF SOUTH BIHAR

SCHOOL OF LAW & GOVERNANCE

COMPANY LAW-II
TOPIC
Legislative Development In India On Cost Audit & Social Audit:
Recent Development

Submitted to: Dr. Pradip Kumar Das

Assistant Professor

SubmittedBy:-
RAJEEV RAJ
B.A. LL.B. (Hons.) 8th Semester
Enrolment - CUSB1513125033
 ACKNOWLEDGEMENT

ACKNOWLEDGEMENT

During the course of writing this project, I have received the help, encouragement from my
teacher, colleagues, friends and others. I am very thankful to all of them.

I am practically very thankful to my “COMPANY LAW” Assistant Professor, Dr. Pradeep

Kumar Das for encouragement and support that he provided during the preparation of the
project.

I am deeply indebted to the eminent legal experts and company law experts and other
scholars of repute whose valuable work has been highly useful in writing this project.

RAJEEV RAJ
RESEARCH METHODOLOGY

The research is based on legislative developments in India on cost audit & social audit:
Recent development. Basically the data which has been collected for the research purpose is
particularly of qualitative nature. It has been collected from various sites, magazines and
newspaper articles. So it was very difficult to use some typical statistical tools and
techniques. So basically the analysis has been done through editing and coding
the information.

LIMITATION OF THE STUDY

Everything faces little or more unfavorable situation that decline the performance of that.
This is limitation. We also face some limitation to conduct our study. Like

 Efforts will be made to accomplish the study according to the objectives. But as the
research team consists of only few members and they are scattered that had made
difficult to cover in detail.
 The cost audit information is not available in published financial statement and is not
disclosed to unauthorized persons.
 Confidentiality of data is another important barrier that may be faced during the
conduct of the study. Every organization has their own secrecy that is not revealed to
others.
 Necessary records, publication may not be available. This constraint may narrow the
scope of the study.
 Rules and regulations regarding cost audit are not clearly described.

RESEARCH OBJECTIVE

 Understanding the legal provisions regarding cost audit & social audit.
 Compare rules and regulations with practical
 Understanding the attitude of companies regarding cost audit & social audit.
  Evaluate the awareness level of the companies.
 Evaluate rules and regulation regarding cost audit & social audit is suitable
accordance with current industrial requirements.
 Evaluate whether cost audit objectives accomplish successfully.
 Examining the main problem regarding cost audit & social audit
 Discover the potential solution of these problems.

RESEARCH QUESTIONS

1. Do you think cost audit & social audit need to impose mandatory for every
organization?
2. Do you think cost audit & social audit as only approach for reducing cost in an
organization?
3. Cost auditor should be independent. Will it be beneficial for every organization?
Introduction to Cost audit:

Cost audit is the audit of cost records. According to Chartered Institute of Management Accountants1,
London , cost audit is “the verification of the correctness of cost accounts and of the adherence to the
cost accounting plan”. In other words, cost audit is the verification of the cost of production of any
product, service or activity on the basis of accounts maintained by an enterprise in accordance with
the accepted principles of cost accounting. This definition of Cost Audit is relevant to the voluntary
Cost Audit without any statutory backing.

The Institute of Cost and Works Accountants of India on the other hand, defines cost audit as “a
system of audit introduced by the Government of India for the review, examination and appraisal of
the cost accounting records and attendant information, required to be maintained by specified
industries.” Thus the concept and scope of cost audit as defined in India is more specific and lays
emphasis on the evaluation of the efficiency of operations and the propriety of management actions
as introduced by the Government of India for specified industries. In this sense, cost audit in India
appears to be synonymous with efficiency audit mainly as a guide for management policy and
decision making besides being a barometer of actual performance.

The justification for mandatory Cost Accounting and Cost Audit provisions has been very well
explained in the Parliamentary Debate that led to the adoption of Companies Amendment Bill 2 ,
incorporating the provisions related to Sections 209 (1) (d) and 233B. Smt. Tara Ramchandra Sathe3
stated during the relevant Rajya Sabha Debate as under: What is Cost Audit? The Cost Audit is quite
different from the Financial Audit. It is to see whether the labour is efficient or not, whether the
industry has provided efficient labour or the labour which is required by that industry is less than
what is required, whether every material and every part of the machinery is used to the optimum,
whether any material is wasted, etc. As we all know, we are short of material, there is so much
material which is imported, when we are short of foreign exchange. In these circumstances, it is very
essential that there should be cost audit. In fact, it should be introduced in almost all the industries,
but the Government is trying this in certain cases only. So by this we will know whether there is a
proper utilization of the material or not. It is very essential, no doubt, and in factories and industries,
everywhere, this cost audit should be emphasized4.

1
CIMA
2
1965
3
MP for Maharashtra
4
Proceedings of Rajya Sabha, 14th September, 1965: Columns 3944 and 3945
Thus Cost Audit in India refers to the statutory Cost Audit of the selected companies covered under
the relevant provisions of the Companies Act, 1956. These requirements are mandatory and non-
compliance may invite penal provisions also.

Origin of Cost Audit:

Methods and techniques of ‘cost accounting’ and audit of ‘cost accounts’ in India can be traced back
to the year5 when large number of firms were given contracts by the Government of India on “cost
plus” basis and the Government started verifying and investigating the cost structure of such firms.

Need for large scale industrialization immediately after the independence required lot of concessions
and facilities to the entrepreneurs to establish industrial undertakings for production of common
man’s goods and essential services. Power, electricity and other inputs were provided at concessional
rates. Liberal finances were provided by the banks and other financial institutions. Land was made
available with all infrastructures. Transport facilities were also provided. However, there were only
very few industrial groups and it was a suppliers market in almost all the areas. There were many
bureaucratic hurdles in opening of new industries along with need for licenses and permits. Imports
were mostly prohibitive due to scarce foreign exchange and very high rate of custom duties on
imports. Therefore, consumers had very few choices and there were often complaints of excessive
pricing, which encouraged smuggling and other malpractices like under invoicing of imports to save
custom duties or over-invoicing of exports to get higher export benefits. The high prices were often
justified on the basis of higher indigenous cost of production. Thus the government felt the need for
price controls.

The investigations of Dalmia-Jain group of companies further brought out the need for more effective
audit. Thus “cost audit” gained recognition, both as an effective tool of cost-control in the hands of
management to control costs and produce at competitive rates and also as a monitoring mechanism
on behalf of other stakeholders including the consumer and the government. Cost Audit as a tool in
the hands of Management enabled them to identify the inefficiencies. It acts as a review of the
activities of the various cost centres of the company and points out the avoidable wastages and losses.
The expertise and experience of the Cost Auditor helps them in knowing the exact areas having the
scope for cost control and cost reduction through inter-firm comparison with standard industrial

5
1925
norms or peers in the industry. Government in turn ensured that the consumers are able to obtain their
requirements at a fair price and do not pay for the inefficiency of manufacturers.

Consequently, the Companies Act, 1956 was amended in the year 1965 to incorporate the provisions
relating to the maintenance of Cost Accounting Records and Cost Audit. These amendments were
made on the basis of recommendations from the Vivian Bose Commission, Dutta Commission and
the Shastry Committee.

Relevance of Cost Audit:

In the initial years, Cost Audit was taken merely as a tool for ‘price control mechanism’ for consumer
and infrastructure industries in India. The main objective of Cost Audit when statutorily introduced
under the provisions of Companies Act6, was to meet the Government requirements for regulating
the price mechanism in core industries like Cement, Sugar, Textiles and consumer industries like
Vanaspati, Formulations and Automobiles. The objective was to provide an authentic data to the
Government to regulate the demand and supply in the country through a price control mechanism.

The liberalization of the economy and consequential globalization has further enhanced the need for
authentic data. Therefore, the Cost Audit Report Rules have been amended from time to time to
ensure that the comprehensive authentic information is available in the format required. The basic
structure of the cost audit was laid down by the Cost Audit (Report) Rules, 1968 as prescribed under
the relevant provisions of Companies Act, 1956. They were superseded by the Cost Audit (Report)
Rules 1996, which were notified vide GSR 511(E) dated 5.1.1996. These Cost Audit (Report) Rules
1996 were also subsequently superseded by the Cost Audit Report Rules 2001, which were notified
vide GSR 294(E) dated 27.12.2001.

The necessity for and utility of properly documented information is more keenly felt now than ever
before. In most parts of the world, free competition co-exists with appropriate rules and regulations
to ensure free trade and absence of unfair practices. Therefore, in the present competitive scenario of
globalization, the Cost Audit Reports have assumed greater importance and significance being the
important source of reliable and authentic feedback to the government and its various departments
and agencies. It may be clarified here that the Cost Audit Reports do not only contain merely the cost
details, but are full of information related to all aspects of business organization which, if harnessed
properly can provide a comprehensive analysis about the company, the industry and the economy as

6
1956
a whole. The Cost Audit Report serves as an effective tool of information in the hands of directors
on the Board ensuring good corporate governance.

In an environment of increasing foreign trade under WTO7 regime, dumping of products at very low
prices have become a serious issue in the international trade. This dumping of products, often well
below the cost price, if not properly countered may harm the indigenous industry. The cost records
and the cost audit report play a very critical role in defence of local industry to substantiate their fair
approach against any allegation of dumping. Similarly, when dumping allegations are levied against
the exports by the Indian companies to any foreign company, the Cost Audit Reports can provide the
valuable feedback to protect the interest of Indian companies.

The practice of selling below cost to ward off competition attracts the penal provisions of the
Competition Law. This necessitates the availability of authentic cost details of the products marketed
by industry and business houses to determine normative pricing or fair pricing. In fact, Competition
Law to be effective against any anti-competition activity presupposes the availability of reliable and
authentic cost data.

The transfer pricing issue has gained considerable momentum in international scenario. Cost Audit
Report Rules8 include the provisions to take care of this aspect in right perspective. The fundamentals
of transfer pricing are based on “arm’s length” throughout the world. The cost details form the very
basis of determining arm’s length transfer pricing policy of any country. An audited cost records and
the resultant Cost Audit Report becomes a major source of information, which can be effectively
used by both Indirect and Direct Tax Authorities. The Central Excise Authorities also use Cost Audit
Reports for verifying claim of the companies relating to ex-factory prices of the excisable goods
especially in the case of inter-unit transfers.

The Tariff Commission relies on authenticity of the cost audit reports and makes use of these reports
extensively in fixation of tariffs for the products covered under Cost Accounting Records Rules. The
Cost Audit Reports are also made use of by the respective administrative Ministries of Government
of India for fixation of administrative prices and working out subsidy, etc. Fertilizer Industry
Coordination Committee9 under the Department of Fertilizers and the Directorate of Sugar under
Ministry of Food use Cost Audit Reports extensively in taking decision with respect to the Industries
under their purview. The Cost Audit Reports relating to Bulk Drugs and Formulations are used by

7
World trade organization
8
2001
9
FICC
the National Pharmaceutical Pricing Authority for fixation of prices of various drugs and
formulations covered under the Drug Price Control Order10.

The Cost Audit Reports have great potential in government procurements especially in case of non-
competitive procurements. There are no effective anti-trust laws in India. This always leaves a scope
for the traders/suppliers to charge exorbitant prices from the government supplies. For example,
‘Clayton Act’ in USA clearly provides that any discrimination in price, services or facilities shall be
unlawful in USA. It also prohibits the discrimination in rebates, discounts or underselling in particular
localities. This ‘Act’ further provides that any differential in prices etc., shall have to be justified on
the grounds of differences in the cost of manufacture, sale or delivery resulting from the differing
methods or quantities in which such commodities are sold or delivered and the burden of rebutting
the prima-facie case shall be upon the person charged with a violation of this act. The ‘Clayton Act’
also provides that it shall be unlawful for any person to induce or receive a discrimination in price,
which is prohibited under the act. In other words, each seller of product or service can charge a
uniform price only in the USA. However, this is not the case in India, where each purchaser may be
charged a differential price by the supplier or the trader. A significant portion of the government
budget is spent every year on procurements, where reasonability of purchase price is always an issue.
Therefore, Cost Audit Reports can always fill the vacuum in government procurements ensuring
reasonability of prices. Similarly in USA, an “Incurred Cost” statement is made with respect to major
projects funded out of Government budgets. This incurred cost is nothing but Cost Audit Report.

In addition to above, Government has been giving various incentives for exports by the Indian
Industries. These incentives are mainly to refund the taxes paid in the country to provide level playing
field to the Indian Industry. Similarly many of the exporters import duty - free material for exports
after further processing, where actual productivity is a major issue. Cost Audit Reports provide not
only the actual amount of various taxes paid by any unit but also provide the actual productivity and
wastage. Thus Cost Audit Reports can benefit the Indian Industry to get at par with global
competitors.

10
1995
Features of Cost Audit:

The cost audit of the companies under the relevant provisions of the Companies Act, 1956 has the
following features:

 Assessing compliance of the relevant cost accounting records rules as applicable to the
product under review.

 Study of the costing system to assess whether it is adequate for the cost ascertainment of the
product under review.

 Evaluation of the operating and other efficiencies of the organization under audit with special
reference to the product under review; to ensure the submission of necessary details required
under the Cost Audit Report Rules, 2001 as amended from time to time.

 Submission of Cost Audit Report in the format prescribed.

Since cost audit is carried out under the various provisions of the Companies Act, 1956, a thorough
and comprehensive knowledge of the Indian Companies Act including various rules prescribed
thereunder and the circulars issued by the Ministry of Corporate Affairs is essential for conducting
an effective Cost Audit.

Objectives of Cost Audit:

Cost Audit has both general and social objectives. The general objectives can be described
to include the following:-

 Verification of cost accounts with a view to ascertaining that these have been
properly maintained and compiled according to the cost accounting system
followed by the enterprise.
 Ensuring that the prescribed procedures of cost accounting records rules are
duly adhered to.
 Detection of errors and fraud.
 Verification of the cost of each “cost unit” and “cost center” to ensure that
these have been properly ascertained.
 Determination of inventory valuation.
  Facilitating the fixation of prices of goods and services.
 Periodical reconciliation between cost accounts and financial accounts.
 Ensuring optimum utilization of human, physical and financial resources of
the enterprise.
 Detection and correction of abnormal loss of material and time. Inculcation
of cost consciousness.
 Advising management, on the basis of inter-firm comparison of cost records,
as regards the areas where performance calls for improvement.
 Promoting corporate governance through various operational disclosures to
the directors.

Among the social objectives of cost audit, the following deserve special
mention:

 Facilitation in fixation of reasonable prices of goods and services produced by the

enterprise.
 Improvement in productivity of human, physical and financial resources of the
enterprise.
 Channelizing of the enterprise resources to most optimum, productive and profitable
areas.
 Availability of audited cost data as regards contracts containing escalation clauses.
 Facilitation in settlement of bills in the case of cost-plus contracts entered into by
the Government.
 Pinpointing areas of inefficiency and mismanagement, if any for the benefit of
shareholders, consumers, etc., such that necessary corrective action could be taken in
time.
Scope of Cost Audit

Section 227(2) of the Companies Act11, requires the auditor of a company to state whether
the accounts in his opinion give a true and fair view of the state of the company’s affairs in
the case of the balance sheet and of the profit or loss for its financial year in the case of the
profit and loss account. Therefore, statutory financial audit of a company conducted by the
Chartered Accountant is an essential annual feature of all the companies registered under the
provisions of Companies Act, 1956. The Board of Directors of every company has a statutory
obligation to place its audited annual accounts viz. Profit and Loss Account and Balance
Sheet before the shareholders in the Annual General Meeting, duly certified by a Chartered
Accountant appointed as an ‘Auditor’ under the provisions of Section 224 of the Act 12 .
However, there is no corresponding statutory provision for compulsory annual audit of cost
accounts of a company covered under Section 209(1) (d) of the Companies Act or under
relevant Cost Accounting Records Rules.

One of the pre-requisites of cost audit is the maintenance of cost accounting records by the
company. Section 209(1) (d) makes it obligatory for a company pertaining to any class of
companies engaged in production, processing, manufacturing or mining to maintain such
particulars relating to utilization of material or labour or to other items of cost as may be
prescribed, if such class of companies is required by the Central Government to include such
particulars in the books of accounts. The rules provide that only those companies, which are
covered under Section 209(1) (d) of the Companies Act and a specific Cost Audit Order has
been issued with reference to a specified product by the Cost Audit Branch of Ministry of
Corporate Affairs are required to get their cost accounts audited with respect to that specific
product. Moreover, Cost Audit Report is not placed before the shareholders during the
Annual General Meeting.

11
1956
12
Company Act 1956
The Central Government prescribes the separate cost accounting records for each class of
companies i.e. companies manufacturing a particular class of product or activity13 these are
called the Cost Accounting Records Rules for that specific industry or class of companies.
When cost accounting records/formats are prescribed, they apply to those companies
engaged in the manufacture of a particular product or activity. In the case of companies
engaged in production or processing of other products or activities also in addition to
production, processing or manufacture of the specified product, the records will have to be
maintained only for the manufacture of particular product for which rules are issued and not
necessary for other products. A company manufacturing bulk drugs, formulation and
watches need not necessarily maintain cost accounting records in respect of watch making
activity if no statutory rules are prescribed for watch making activity. The detailed provisions
relating to the manner of prescription of cost accounting records, selection of the product,
the contents of the rules and the list of products/ industries covered by the statutory rules
under Section 209(1) (d) of the Companies Act. Thus Cost Audit under section 233B does
not embrace a particular activity of the company unless a separate cost accounting record
rule is already notified for that particular activity under Section 209(1)(d) detailing the nature
of cost accounting records to be maintained.

The legal provisions relating to statutory cost audit are applicable only to companies
registered
under the provisions of Companies Act, 1956. Therefore, cost audit is not applicable to other
enterprises like partnership, cooperative societies, etc. The Cost Audit is conducted by a Cost
Accountant in practice within the meaning of the Cost and Works Accountants Act, 1959.
The cost auditor is appointed by the Board of Directors of the company with the previous
approval of the Central Government. The report of cost auditor is to rendered to the Central
Government with a copy to the Company

13
Like cement, steel, chemicals and electricity etc.
Appointment of Cost Auditor

(a) Procedure

The cost auditor is to be appointed by the Board of Directors on the recommendation

of the Audit Committee, where the company is required to have an Audit Committee.
The cost auditor proposed to be appointed is required to give a letter of consent to the
Board of Directors 14. The company shall inform the cost auditor concerned of his or
its appointment as such and file a notice of such appointment with the Central
Government within a period of thirty days of the Board meeting in which such
appointment is made or within a period of one hundred and eighty days of the
commencement of the financial year, whichever is earlier, through electronic mode in
form CRA-2 along with the fee as specified in Companies15.

Any casual vacancy in the office of a cost auditor, whether due to

resignation, death or removal, shall be filled by the Board of Directors
within thirty days of occurrence of such vacancy and the company shall
inform the Central Government in Form CRA-2 within thirty days of
such appointment of cost auditor.16

(b) Who can be appointed cost auditor?

Only a Cost Accountant, as defined under section 2(28) of the
Companies Act, 2013, can be appointed as a cost auditor.

Clause (b) of sub-section (1) of section 2 of the Cost and Works Accountants Act, 1959
defines “Cost Accountant”. It means a Cost practice under sub-section (1) of section 6
of the Cost and Works Accountants Act, 1959

14
Refer appendix-2for specimen consent letter
15
Registration Offices and Fee Rules 2014
16
Copy of specimen Board Resolution is provided at Appendix-4
 and is in whole-time practice. Cost Accountant includes a Firm of Cost
Accountants and a LLP of cost accountants.

(c) Eligibility criteria for appointment as a cost auditor

Eligibility Criteria under Section 141 of the Companies Act, 2013 read with
Rule 10 of the Companies (Audit and Auditors) Rules, 2014 and Section
14817.
The following persons are not eligible for appointment as a cost auditor:

a) A body corporate. However, a Limited Liability partnership

registered under the Limited Liability Partnership Act, 2008 can be
appointed. [Section 141(3)(a)].

b) An officer or employee of the company. [Section 141(3)(b)].

c) A person who is a partner, or who is in the employment, of an officer or

employee of the company. [Section 141(3)(c)].

d) A person who, or his relative or partner is holding any security of or

interest in the company or any of its subsidiary or of its holding or
associate company or a subsidiary of such holding company. [Section
141(3)(d)(i)].

e) Relatives of any partner of the firm holding any security of or interest in

the company of face value exceeding Rs. 1 lakh. [Section 141(3)(d)(i) and
Rule 10(1)18.

f) A person who is indebted to the company or its subsidiary, or its holding

17
Companies Act 2013
18
Companies (Audit and Auditors0 Rule, 2014
 or associate company or a subsidiary or such holding company, for an
amount exceeding Rs. 5 lakhs. [Section 141(3)(d)(ii) and Rule 10(2) of
Companies (Audit and Auditors) Rules, 2014].

g) A person who has given any guarantee or provided any security in

connection with the indebtedness of any third person to the company or
its subsidiary, or its holding or associate company or a subsidiary of such
holding company, for an amount exceeding Rs. 1 lakh. [Section
141(3)(d)(iii) and Rule 10(3) of Companies (Audit and Auditors) Rules,
2014].

h) A person or a firm who, whether directly or indirectly, has business

relationship with the company or its subsidiary, or its holding or associate
company or subsidiary of such holding company or associate company.
[Section 141(3)(e) and Rule 10(4) of Companies (Audit and Auditors)
Rules, 2014].

“Business Relationship” is defined in Rule 10(4) of C Rules, 2014 and the same shall
be construed as any transaction entered into for a commercial purpose, except
commercial transactions which are in the nature of professional services permitted to be
rendered by a cost auditor or a cost audit firm.

under the Act and commercial transactions which are in the ordinary course of business
of the company-likesale of atproductsarm’sorservices tolengththe p cost auditor, as
customer, in the ordinary course of business, by companies engaged in the business of
telecommunications, airlines, hospitals, hotels and such other similar businesses.

i) A person whose relative is a director or is in the employment of the

company as a director or key managerial personnel of the company.
[Section 141(3)(f)].
j) A person who is in the full time employment elsewhere or a person or a
partner of a firm holding appointment as its auditor if such person or
persons is at the date of such appointment or reappointment holding
appointment as auditor of more than twenty companies. [Section
141(3)(g)].

k) A person who has been convicted by a court for an offence involving fraud
and a period of ten years has not elapsed from the date of such conviction.
[Section 141(3)(h)].

l) Any person whose subsidiary or associate company or any other form of

entity, is engaged as on date of appointment in consulting and providing
specialised services to the company and its subsidiary companies:
[Section 141(3)(i) and Section 144].

(a) accounting and book keeping services

(b) internal audit

(c) design and implementation of any financial information system

(d) actuarial services

(e) investment advisory services

(f) investment banking services

(g) rendering of outsourced financial services

(h) management services

 m) Is Rotation applicable to cost auditor?

The provisions for maintenance of cost accounting records and cost audit are governed by
Section 148 of the Companies Act, 201319. The provisions of Section 148 clearly states that
no person appointed under Section 139 as an auditor of the company shall be appointed for
conducting audit of cost records of the company. Section 148 also provides that
qualifications, disqualifications, rights, duties and obligations applicable to auditors 20 shall
apply to a cost auditor appointed under this section. The eligibility, qualifications and
disqualifications are provided in Section 141 of the Act and powers and duties are provided
in Section 143. Section 143(14) specifically states that the provisions of Section 143 shall
mutatis mutandis apply to a cost auditor appointed under Section 148. There are no other
provisions governing the appointment of a cost auditor.

Section 139(3) of the Act, applicable to appointment of auditors (financial), and Rule 6 of
Companies (Audit and Auditors) Rules, 2014 deals with the provision of rotation of auditors
and these provisions are applicable only to appointment of auditors (financial). The Act does
not provide for rotation in case of appointment of cost auditors and the same is not applicable
to a cost auditor. It may, however, be noted that though there is no statutory provision for
rotation of cost auditors, individual companies may do so as a part of their policy, as is the
practice with Public Sector Undertakings.

Rule 14 of the Companies (Audit and Auditors) Rules, 2014 has laid down the
procedure of appointment and fixing the remuneration of a cost auditor. It states as
follows:

Remuneration of the Cost Auditor:

For the purpose of sub-section (3) of section 148,—

19
Refer Appendix -5 Provision of section 148
20
Financial
 A) in the case of companies which are required to constitute an audit committee—

(i) the Board shall appoint an individual, who is a cost accountant in practice, or a
firm of cost accountants in practice, as cost auditor on the recommendations of the
Audit committee, which shall also recommend remuneration for such cost auditor;

(ii) the remuneration recommended by the Audit Committee under (i) shall be
considered and approved by the Board of Directors and ratified subsequently by
the shareholders;

(b) in the case of other companies which are not required to constitute an audit
committee, the Board shall appoint an individual who is a cost accountant in
practice or a firm of cost accountants in practice as cost auditor and the
remuneration of such cost auditor shall be ratified by shareholders subsequently.

Specimen Agenda to be included in the Notice of Shareholders’Meeting for ratification

of remuneration of Cost Auditor21.

(f) Obligation to report offence of fraud

Sub-rule (7) of Rule 6 of the Companies (Cost Records and Audit) Rules 2014 states
that the provisions of sub-section (12) of section 143 of the Act and the relevant rules
made thereunder shall apply mutatis mutandis to a cost auditor during performance of
his functions under section 148 of the Act and these rules”.

As per sub-section (12) of section 143 of the Companies Act 2013, extract of which is
given above, it is obligatory on the part of cost auditor to report offence of fraud which
is being or has been committed in the company by its officers or employees, to the
Central Government as per the prescribed procedure under the Rules.

21
Given at Appendix-6
 As per the proviso to above sub-section, it has been stated that in case of a fraud
involving lesser than the specified amount, the auditor shall report the matter to the
audit committee constituted under section 177 or to the Board in other cases within
such time and in such manner as may be prescribed.

Cost Audit Report

As per sub-rule (4) of Rule 6 of the Companies22 amended, a Cost Auditor is required to
submit the Cost Audit Report along with his or its reservations or qualifications or
observations or suggestions, if any, in form CRA-3 to Board of Directors of the company
within a period of one hundred and eighty days from the closure of the financial year to
which the report relates.

Form for filing Cost Audit Report with the Central Government

As per sub-rule (6) of Rule 6 of the Companies (Cost Records and Audit) Rules
2014 as amended, every company to whom cost auditor submits his or its report
shall, within a period of thirty days from the date of receipt of a copy of the cost
audit report, furnish the Central Government with such report along with full
information and explanation on every reservation or qualification contained therein,
in form CRA-4 along with fees specified in the Companies 23.

SOCIAL AUDIT

22
(Cost Records and Audit) Rules 2014
23
(Registration Offices and Fees) Rules, 2014
The term ‘social audit’ may be interpreted in several ways. As far as common understanding goes, it
is an essential assessment of how well a company has discharged its social obligations. However
experts see it as a systematic and comprehensive evaluation of an organization’s ‘social performance’
which is interpreted as organizational efforts in enriching the general welfare of the whole community
and the whole society.
The need for social audit arises because of various reasons. In order to reach the objective of enriching
economic wealth for the shareholders, the firm do it at the cost of social and environmental disorder.
And since many would not take into account the social costs of such negative implications, their
prices do not reflect the real cost. The organizations do it more because of competitive reasons.
However if the larger interest of society is to be preserved, there has to be some consideration for
social good.
The company is expected to behave and function as a socially responsible member of the society like
any other individual. It cannot shun moral values nor can it ignore actual compulsions. There is a
need for some form of accountability on part of the management which is not only limited to
shareholder alone. In modern times, the objective of business has to be the proper utilization of
resources for the benefit of others. A profit may still be a necessary part of the total picture but it
should not be the only purpose. The company must accept its obligation to be socially responsible
and to work for the larger benefit of the community. Society expects businesses to share the fruits of
progress and growth. Moreover, the social concern by the organization proves to be an asset for them
in the long run especially under environmental distress because of the goodwill and the positive image
earned all through these years.

SCOPE AND OBJECTIVES

Social audit tries to make the traditional economic and technical values as two subsystems within the
larger social system. Social audit primarily tries to cover the following areas:

i) Ethical Issues: They offer a basis for determining what is right and what is wrong in terms of a
given situation. Ethics is best understood when we cite examples relating to unethical conduct.
Few such examples can be price discrimination, unfair trade practices, cheating customers,
pirating employees’ ideas, leaving the job without observing job contract.
ii) Equal opportunity: A second relevant social issue which comes under social audit is the equity
of treatment in employment and a fair justice system in the organization. Employment decisions in
an organization should be based on merit and ability and not on the basis of arbitrary quotas based
on gender, race or religion.

iii) Quality of Work Life: Besides demands for safe, healthy and human work environment people
are seeking greater meaning in their lives. Greater responsibility, growth, freedom and flexibility,
fair reward system are few things which employees have preference for. There is also a growing
demand for employee assistance programmes keeping in mind the present day stressful situations
they are exposed to.

iv) Consumerism: Business has a special obligation towards the consumer as the business exists to
serve and satisfy the needs of the consumers. It is the principal duty of business to make available to
the consumer items of daily needs in the right quantity at a right time, price and of the right quality.
However many Indian products are not safe at all and the consumers suffer at hands of corrupt, and
dishonest corporate houses.

v) Environmental Protection: Growing water, air and environmental pollution by various industries
in recent times has led to a public outcry demanding ‘environmental protection’ at any cost.

CSR AND CORPORATE ACCOUNTABILITY

One of the most significant developments in the field of corporate social responsibility (CSR) over
the past few years has been the growth in public expectations that companies not only make
commitments to CSR, but also develop systems to manage, implement and systematically assess and
report on progress relative to those commitments. Corporate accountability encompasses the systems
a company establishes to develop policies, indicators, targets, and processes to manage the full range
of its activities. The scope of operations for which companies are expected to be accountable has
increased dramatically in recent years to include not only companies’ own performance but also that
of business partners and other actors throughout the company’s value chain. The mechanism a
company uses to demonstrate accountability are varied and inevitably need to change and grow as a
company evolves, but effective systems for increasing accountability generally allow a company to
be inclusive, responsive, and engaged with its stakeholders. Corporate accountability today spans
emerging CSR issues like business ethics, diversity, marketplace behaviour, governance, human
rights, and labour rights as well as more and more traditional areas of financial and environmental
performance. Interest in the inter-relationships between issues will also increase the complexity of
the corporate accountability debate; in many areas of the world, social issues are now in ascendance,
and these qualitative, complex issues are likely to be the ones against which companies find it hardest
to measure and verify performance.
Effective and accountable management systems help companies shape cultures that support and
reward CSR performance at all levels. As part of this effort, many companies are working to increase
accountability for CSR performance at the board level. This can lead to changes in who serves on the
board, how directors handle social and environmental issues, and how the board manages itself and
fulfils its responsibilities to investors and other stakeholders. Companies are also seeking to build
accountability for CSR performance at the senior management level, in some cases by creating a
dedicated position responsible for broad oversight of a company’s CSR activities. Finally, many
companies are working to integrate accountability for CSR performance into actions ranging from
long-term planning to everyday decision making, including rethinking processes for designing
products and services and changing practices used to hire, retain, reward, and promote employees.
Demand for increased corporate accountability today comes from all sectors. Evidence of this is
found in the increasing number of sustainability-related market indices and by external demands for
certification or labelling of certain products. Underpinning this demand for increased corporate
accountability is the expectation that companies can and should be more transparent, which
essentially means measuring, reporting on, and continuously improving social, environmental, and
economic performance. These increased demands are in part a result of recent events that have
contributed to erosion in the trust extended to companies. Stakeholders now expect companies to
provide access to information on impact of their operations, to engage stakeholders in meaningful
dialogue, and to be responsive to particular concerns unearthed in the dialogue process. To increase
the credibility of what is disclosed, leadership companies are also investigating carefully the value of
various types of assurance that might support their reporting efforts.

TYPES OF SOCIAL AUDIT

The various types of social audit may be listed as below:

1) Social Process Audit

It tries to measure the effectiveness of those activities of the organization which are largely taken up
to meet certain social objectives. Corporate executives in this case try to examine what they are doing
and how they are doing.
The method involves four steps:
i) Find circumstances leading to the starting of the social audit programme
ii) List out goals of the social programme
iii) State how the organization is going to meet such goals
iv) Qualitatively evaluate what is actually done as against what has been planned

2) Financial Statements Format Social Audit

In this type, financial statements show conventional financial information plus information regarding
social activities. About associates a management consultancy firm proposed that the balance sheet
should show a list of social assets on one side and social commitments, liabilities and equity on other
side. The income statement should reveal social benefits social costs and the net social income
provided by the company operations to the staff community, general public and clients.
This approach has been criticized as many feel that it may create confusion of complicating issues
further and defying easy understanding.

3) Macro-Micro Social Indicator Audit

This type of audit requires evaluation of a company’s performance in terms of social measures24
against macro social measures. The macro social factors include the social goals expected by society
in terms of health, safety, education, housing, accidents, pollution control measures, etc. The micro
social indicators are measures of the performance of the company in those areas measured by macro
social indicators.
One of the important problems with this approach is the non-availability of reliable macro social
indicators. Does an increase in family planning clinics indicate better medical facilities? Further it is
not easy to specify whether the individual actions initiated by a company have actually improved the
quality of life of a community, such individual actions may ultimately be labelled as irrelevant ,

24
Micro indicators
insignificant and sometimes, even unnecessary. In any case this approach helps all companies to
evaluate their contributions in improving social life on a rational basis.

4) Social Performance Audit

In developed countries, several interests groups including church groups, universities, mutual funds,
consumer activists regularly measure, evaluate and rank socially responsive companies on the basis
of their social performance. Regular opinion polls are carried out to find companies that initiate social
efforts in a proactive manner and earn the goodwill of the general public.

5) Partial Social Audit

In this case, the company undertakes to measure a specific aspect of its social performance ( e.g.
environment, energy, human resources) because it considers that aspect to be very important or
because its social efforts for the time being are confined to the area:
Environmental Audit: In developed countries people protest violently if the companies try to pollute
the environment and the companies not only comply with regulations but also proactively explore
opportunities to recycle wastes into useful products. An internal group constituted by the unit
concerned prepares a report about the way the environmental issues of importance are being taken
care of. This report is generally re-examined by an outside auditor to see whether air/ water pollution
measures, release of toxic wastes, safety regulations have been complied with or not.
Energy Audit: to conserve energy sources, energy audits are undertaken to investigate how energy is
obtained, consumed and preserved.
Human Resource Accounting25: The basic philosophy of HRA is that human resources are assets and that

the investment in acquiring, training, and developing these resources should be accounted for as an
asset. Conventional accounting methods write off investments in human capabilities and values as
operating expenses and thereby understate the profit. The current value of a company’s human assets
is not considered while computing expenses/revenues and, as a result, the balance sheet does not
portray the true and fair picture of the company’s state of affairs.

6) Comprehensive Audit
It tries to measure, verify and evaluate the total performance of the organization including its social

25
HRA
responsibility activities. It focuses mainly on management systems rather than on the actions or
events which are not so important. It aims at evaluating the quality of processes and the information
on which organizational decisions are taken.

Difficulties in Social Audit

Social audit presents numerous problems; its scope cannot be determined precisely. If we go for
listing all activities undertaken by an organization, say in an accounting year it may be difficult to
find out which activities are to be treated as ‘social’ and which not. After all most of the activities of
a company may have some sort of social relevance somewhere or the other. To avoid this if we take
only those activities that have tangible social advantage, the ‘scope of social audit’ is severely
constrained. The requirements of various groups such as employees, customers, shareholders,
general public, government, etc. may not be accurately and readily convertible into ‘social rhetoric’
always. Another serious problem as explained previously is with regard to the ‘determination of
yardsticks’ for measuring the cost and accomplishment of activities shown in the social audit.

KEY DEVELOPMENTS IN TRANSPARENCY AND REPORTING:

The Growth of Corporate Social Responsibility: The increased visibility of corporate social
responsibility has encouraged companies to better account for their actions in a wide range of areas,
including corporate governance, labour practices and employee relations, environmental policies and
practices, and community involvement. Increasingly, a broad range of stakeholder groups is seeking
specific, quantifiable information from companies on these topics. These stakeholders expect
companies to take a deeper look at the nature of their operations, and to publicly disclose both their
progress and problems in addressing these issues.
Increased Demand for Transparency: Government regulators, financial analysts, employees,
nonprofit advocacy organizations, labour unions, community organizations, and the media are among
the groups pressing companies to divulge greater amounts of information on CSR performance
targets, decision-making, and results. These demands represent concern by stakeholders that
companies will not hold themselves accountable for CSR commitments without public disclosure.
For example, the “Publish What You Pay,” campaign, a coalition of non-profit groups, is calling for
all publicly traded resource companies to be required by regulators to disclose aggregate information
about taxes, royalties, fees and other transactions with governments and/or public sector entities for
the products of every country in which they operate.
Growth in Sustainability Reporting: According to current estimates, almost 500 companies now
issue comprehensive reports on their social and environmental activities and impacts, a dramatic
increase over the seven reports that were issued in 1990, while thousands of companies produce
reports on aspects of CSR performance like the environment or philanthropy. At the same time that
the overall number of reports issued is increasing, reports are becoming increasingly rigorous in their
methodology, striving for consistency and relevance comparable to that enjoyed by annual financial
reports. For example, to demonstrate the level of importance the company gives its sustainability
report, Shell publishes its 2002 sustainability report under the same cover as its 2002 financial report.
While many companies find that comprehensive reporting can satisfy many stakeholders’
informational needs, there is considerable debate over the relationship between reporting and actual
changes in corporate behaviour. So, while sharing information is an important first step in creating
an accountable culture, stakeholders are now looking at how the process of reporting creates change
in company policies and practices.

Greater Government Regulation: Government regulators at all levels are calling on companies to
increase the quantity and quality of information they disclose to the public about their practices and
performance. On the whole, European governments have been more active in advocating regulatory
approaches than the U.S. government. For instance, newly amended French legislation, called the
Nouvelles Regulations Economiques (NRE), require as of the beginning of 2003 that all companies
listed on the French stock exchanges to report to shareholders and stakeholders on a range of social
and environmental issues. Countries such as Denmark, Sweden, Norway, and the Netherlands also
have enacted legislation requiring specified companies to report on aspects of their social and
environmental performance.
Increased Stakeholder Activism: Many stakeholder groups are engaging companies more directly,
utilizing a wide range of tools, techniques, and technologies to bring their interests to companies’
attention. These activists are also working to educate lawmakers, the media, and the public about
companies that are or are not deemed to be accountable. Among the tactics being used by stakeholder
groups are public information campaigns, public protests, boycotts, and class-action lawsuits seeking
action and redress for perceived company misdeeds. At the same time, stakeholders are developing
new strategies that involve finding commonalities with other groups to create alliances that cross
both geographic boundaries as well as issue area divides. In doing so, they are able to directly engage
companies with a much stronger voice and with a much broader agenda.
Increased Shareholder Engagement: Company shareholders, both individuals and institutions, have
become increasingly vocal and aggressive in pressing companies to be more accountable. Activist
shareholders’ call for increased accountability have included resolutions promoting greater disclosure
of environmental and social impacts, increased transparency in board actions and decisions, and
requisitions for company commitments to abide by internationally accepted social and environmental
principles. Whereas resolutions over the past few years often called for company endorsement of
specific standards such as SA8000, the CEREs Principles or the UN Global Compact resolutions
today most often use more general language on adhering to the highest and best social and
environmental standards appropriate to the company so as to have broader/greater shareholder
appeal. In addition, shareholder activists are pushing for public disclosure of companies’ voting
guidelines as well as proxy votes by mutual funds. For instance, the U.S. Securities and Exchange
Commission recently approved regulation that will require mutual funds to disclose how they vote
on shareholder resolutions, a move that was strongly supported by shareholder activists. Many
companies continue to engage shareholders at annual meetings or through the resolution process, a
mechanism that shareholders use to access management on issues of concern. However, some
companies now meet directly with shareholder activists and institutional investors in settings other
than the annual meeting. Some companies have developed staff positions or departments responsible
for addressing shareholder concerns on social and environmental issues.

The Growth of Information Technology: The Internet has provided companies and those seeking
greater corporate accountability an unprecedented ability to share and exchange information — both
accurate and inaccurate — on a large scale. Given the largely unregulated nature of this form of
communication, many companies are finding that they need to monitor and engage more actively in
the information being disseminated. A number of companies now use the Internet to report
proactively on their social and environmental activities. Increasingly, companies are using the
Internet not only as a place to electronically post information originally developed for print, but also
taking advantage of the medium to provide more periodic, interactive, and in-depth information about
their performance. The Internet also allows companies to receive feedback from stakeholders on the
information they are sharing. Some
companies are finding that they can dilute or eliminate the impacts of negative, Internet-driven
campaigns by engaging activists and other stakeholders directly, helping to ensure the information
they receive is as accurate as possible. At the same time, a variety of non-governmental organizations,
government entities, and for-profit enterprises have established Internet sites that provide detailed
information about companies’ environmental performance, philanthropy, and other social impacts,
in some cases on a facility-by-facility basis. Another growing use of the Internet is to allow
shareholders to vote their proxies online, potentially enhancing the ability of activist institutions and
individuals to mobilize fellow shareholders in order to influence company policy.

Increased Media Attention: Corporate social responsibility, and accountability more broadly, have
become topics of increased media attention and scrutiny, both in the business press and the
mainstream media. A number of publications now feature regular articles on such accountability-
related issues as board diversity and independence, CEO compensation, board performance
evaluation practices, and company responses to shareholder concerns. Media attention has forced
companies to examine, and in some cases revise, their policies and practices on a range of CSR issues.
For example, in a case that is poised to set a significant precedent in the area of corporate
transparency, the U.S. Supreme Court has agreed to hear a case against Nike, in which the company
is accused of falsifying commercial speech in defense of the working conditions at its supplier
factories overseas. Allegations against the company’s overseas labour practices have received
significant media attention over the past decade, leading to Nike’s assertion that the company should
be constitutionally protected to defend itself and highlight the human rights strides it has made.
Roughly 30 news organizations, including ABC, CBS, NBC and top newspaper chains as well as
organized labour and groups such as the American Civil Liberties Union, argued in court filings that
reporters will not be able to get company executives to talk freely about the safety of products, racial
discrimination or environmental concerns about their industry, because of the fear of future lawsuits
if the case against Nike should be upheld.
Greater Government Regulation: Government regulators at all levels are calling on companies to
increase the quantity and quality of information they disclose to the public about their practices and
performance. Particularly in the area of the environment, companies are facing new and growing
amounts of regulation and legislation aimed at increasing their accountability to society.
Conclusion:
The company is following all the required cost accounting sanders. They follow all the procedure need
to conduct cost audit. The company is going through profit because of good utilisation of cost control
method and due to cost audit.

Social Audit in business intends to examine an organization’s efforts in enriching the general welfare
of the whole community and the whole society. In modern times, the objective of business is to provide
benefits to others and the society expects businesses to share the fruits of progress and growth.
Corporate accountability.

Corporate Social Responsibility

encompasses the systems which a company establishes in order to develop policies, indicators, targets
and processes to manage the full range of its activities towards society. Demand for increased corporate
accountability today comes from all sectors and various types of social audit system is being developed
in order to take such accounts. Few key developments enabled by technology and information
revolution has broadened the scope for such an audit to be made within organizations and shared
Bibliography :
www.mca.gov.n
www.moshau.in
www.icai.org.in
icwai final cost accountancy book