Archive for the ‘Audit’ Category

Cost of Compliance, Confidentiality they say? Really??

Tuesday, October 4th, 2011

Cost of Compliance, Confidentiality they say? Really??

This is a post by CMA Devarajan Swaminathan. He is a practicing member based in Thane - Mumbai.

It is interesting to observe when some people raise the pitch on cost of compliance and confidentiality when it comes to cost accounting, its audit and reporting.

Let me try allay some fears

Cost of Compliance:

One Example of the benefits of maintenance of cost accounting and its reporting:

Most of the information that this report contains are also there in the cost audit report. It seems to have plucked it up and consolidated from the cost audit report of various companies.

What does the DSIR actually do by publishing such reports?
Who is to benefit from such a report?
This kind of industry analysis and analysis of India vis-a-vis the world benefits whom?

The cost of compliance they ask? really??


How to make Paracetamol and its key ingredients?

Name a product that you say requires to be kept confidential irrespective of industry or kind of product and I will try to provide you the link of its DNA, its ingredients, its history and geography.

Confidentiality they say? Really??

The point is quite simple. Its about national resources, its pattern of consumption, its productivity, its efficient and effective use. These are national resources belonging to the nation to which each and every one belongs and has equal right. Just by paying a “price” it does not change anything if those resources are not put to use to achieve an end that is in the interest of nation.

This is from a societal and national perspective.
Lets look at it from an analyst perspective. Financial transaction talk about acquisition and use of resources. Resource consumption talks about what has been done with the resources that has been acquired and how best it has been put to use. This is seen in the context of the capital raised, deployed and the product and service that is generated and  provided to the customer and finally the revenue it generates.

Governance is not just about fill in the blanks of various compliance forms, the mad analysis of the financial report and the bottom line. It is essentially about managing business better by making uses of resources acquired and also ensuring that the resources are made available to be sustainable in the long run.

The mad obsession of analysing aggregates to find out what it comprises of without knowing what it actually comprises of makes no sense. Besides this may lead to misleading analysis. Even if it is cash to cash, its of little use if you do not know what the input cash has been put to use for, its most productive use, to generate the maximum output cash. (productivity).

More than anyone, it is the analyst community, financial institutions, banks and mutual funds who must demand cost audit report as an important document for making investment analysis before deploying funds. If the Income Tax Department, Central Excise Department, the Sales Tax Department make use of cost audit report to analyse the leakages in revenue then why not the investment community? Don’t they want to know what is being done with their money? why has a product vertical that was most profitable, in the name of unlocking value been hived off? What is the great secrecy that some want to maintain that they do not want their shareholders to know? This seems to be most prevalent in a family run business rather than a professional run or a public enterprise. What is it that family owned business house don’t want their minority shareholders to know?
I look forward to the analyst community/ providers of risk capital, demanding cost audit report sooner than later as the information that it contains has not been used to its potential by them.

In its Comprehensive Business Reporting Model the CFA Institute has recommended the following which is nothing but cost information reporting as envisaged in the cost audit report.

Principle 10. Changes affecting each of the financial statements should be reported and explained on a disaggregated basis.For investors to be able to understand the changes that have occurred in financial statements and, consequently, to their wealth, it is essential that they be able to analyze the individual forces at work that affect the company’s performance. Accounting standards currently permit assets and related liabilities, revenues, and expenses, as well as investing and financing cash inflows and outflows, to be reported on a highly aggregated or netted basis, causing much important information to be obscured or lost altogether. The information loss can result inmisleading analyses, distorted conclusions, and suboptimal investment decisions. Such aggregation and netting should not be permitted. Similarly, we do not believe that netting should be permitted for individual line items. For example, changes in the property, plant, and equipment account can arise as a result of (1) purchases and exchanges, (2) sales and abandonment, (3) self-construction, (4) mergers and divestitures, (5) leases, (6) foreign currency changes, (7) depreciation, and (8) impairment write-downs. Clearly, information as to the precise source of the change is essential if investors and other users are to evaluate managers’ investments in productive capital, the effectiveness of managers’ decisions to invest scarce capital, and the value of the company’s capital. It is important to note that IAS 16 requires a full reconciliation of the change in gross fixed assets and accumulated depreciation.

Principle 11. Individual line items should be reported based upon the nature of the items rather than by the function for which they are used. By “nature,” we mean that items should be reported by the type of resource consumed, such as labor or raw materials, rather than by the function or purpose for which it is used, such as cost of goods sold or selling, general, and administrative expense. Categorization according to nature can greatly enhance comparability across companies and consistency within the statements of a single company. Currently, users of the statements cannot determine from the statements or related disclosures where individual items, such as pension expense and depreciation, are recorded in the income statement. The statistical distribution properties of the various resources consumed in operations behave very differently over time. Consequently, aggregation by function, the current practice, merges items with different properties, reducing the information content of the items and significantly reducing their value as decision-making factors. We believe that functional disclosure is best reserved for segment reporting where the categories are most likely to be more nearly homogeneous and, therefore, more meaningful for assessing the profitability of individual units.

More later.

Draft Scheme of “On Site Audit” in context of Post Clearance Audit (PCA) for Imports

Monday, November 29th, 2010

Draft Scheme of “On Site Audit” in context of Post Clearance Audit (PCA) for Imports

This is a guest post by Mr. Indraneel Sengupta. Indraneel is a CMA Student. He is also a financial and economics writer and a research analyst.

INTRODUCTION:  “A good beginning makes a good end”. Hope this comes true for the draft scheme of “On site audit”. Export-Import is an important determinant of growth of a country. A strict policy regarding the import-export may become an obstacle in the growth of the country while a liberal policy may prove destructive to the morals and safety of the country. So, while crossing the custom frontiers of the country, the goods are presided by a number of Rules and Regulations. “On site Audit” is a step towardsliberalization of the import procedures, wherein it is proposed to allow the clearance of goods on the basis of declaration given by the importer as followed by the onsite audit. In this article, we are discussing the draft of on-site audit and pros and cons of the same.

PURPOSE: At the time of entry of imported goods at customs barriers the Customs Authorities more often examine the goods physically and all the documents relating to import are also verified. The main reason for this is to ensure that the imported goods should not be undervalued, the poor quality of goods are not imported and the goods actually imported are the goods declared by the importer. However, this process of verification of documents and goods increase the time of clearance thereby increasing the storage, warehousing and other related costs. For lessening the cost and for saving time the Government has proposed to allow the imported goods to be cleared on the basis of documents and for conducting of “On site Audit” in the context of postclearance audit (PCA).


As per the Draft, the said scheme is being introduced based on the international trade agreement GATT. In Article VIII of GATT, the provision has been given for post clearance audit. It has been provided that if the goods are cleared at the time of the import on the basis of self assessment without examination of goods and the importer later on subject themselves to post clearance audit, this will result in saving cost as well as time. The underlying idea is to benefit both the importer as well as the Revenue.

Another International trade agreement, the Kyoto Convention of World Customs Organization (WCO) is the genesis of the Post clearance audit. It is prescribed that the customs control should be kept to the minimum necessary to meet the objective of maximum facilitation of international trade and travel.


THE KYOTO CONVENTION OF WCO: “International Convention on the simplification and harmonization of Customs procedures” commonly known as the ‘Kyoto Convention’; is an international instrument on the harmonization of Customs techniques covering all aspects of Customs legislation. It was done at Kyoto, Japan, on 18 May 1973 and entered into force in 1974. The Kyoto Convention, as has been revised in year 1999, gives the techniques and measures of custom clearances that commensurate with current demands of international trade.



Based on the Kyoto convention, the Board has already introduced the Risk Management System (RMS) in November 2005 for Accredited Clients and Post Clearance Audit (PCA). It has also been extended it to certain other category of importers. The RMS was introduced in order to facilitate the speedy clearance of imported goods. Audit Based Control was introduced in the form of Post Clearance Audit (PCA) to ensure compliance.

However, the PCA introduced by the Board was different from the PCA envisaged in the Kyoto Convention. Thus, the international norms are not being followed word to word.

Accredited Clients Programme (ACP) was introduced to assist the importers provided they comply with the laws framed by the Customs Department. Further, the ACP clients are required to workout a reliable system of record keeping and internal controls. Theiraccounting system was also supposed to meet the recognized standards of accounting. In assurance of all these compliances, the importers were required to produce a certificate from a chartered accountant to this effect in a prescribed form. However, as of now, there is no such requirement for granting the ACP status and the documents are also not audited on site later on.

The major aspects of the proposal of on-site audit as discussed in the Draft scheme are as under:

- Jurisdiction of Audit: The manufacturers and service providers registered under the Excise/Service Tax who are already subjected to audit by the Central Excise or service tax Department; the on-site audit will be merged with that audit. Thus, only the importers engaged in trading activity and those units which are exempt/not registered will be left. It is proposed that the address of IEC code would decide the jurisdiction of the concerned audit party. In case the importer-manufacturer/service provider is having more than one premise in different Commissionerates, it is proposed that on-site audit will be conducted both at the factory premises as well as the business premises.

- Documents to be furnished: The Documents relating to the import of goods is going to have a major role to play in case of this scheme. Only when proper documents are maintained at all the time, can the scheme be effected in its essence. Thus, under the scheme it is proposed that all the relevant records relating to importation and sale of goods will have to be preserved for 5 years. These documents will be produced by the importer before the Audit party. The draft scheme gives the specimen list of documents like bill of entry, packing list, bill of lading, invoices, freight documents, bond records, duty paying documents, etc. Further, the importer may also be required to produce the financial records to the audit party including the Annual Financial Statements, Audit reports, credit notes, journal vouchers, etc.

- Procedure to be followed in on-site audit :It is proposed that the procedure for On-site Audit to be followed will be similar to the Central Excise Audit procedure which is done in line with EA-2000. Further, the full process to be followed by the importer and the audit party has been elucidated in the draft scheme. The procedure is more or less similar to a normal audit process. The guidelines have been given in the draft scheme regarding the selection of assessees, desk review, gathering information about the importer, internal control and revenue risk analysis, developing audit plan, site visit, verification, summarization of audit findings, reviewing the audit results, compliance of audit objections and future compliances.



The perusal of the scheme proposed for On-site audit in context of Post Clearance Audit (PCA) for Imports shows that the success of the scheme would depend on the full cooperation of the importer. The importer will have greater responsibility towards the goods which are being imported and will have to maintain near perfect records.

The timeliness or promptness of the audit will be the backbone of success of this scheme. This is due to the fact that since the physical verification will not be done at the time of import, so it would be essential to carry out the audit as soon as possible else the goods will be disposed off. In such cases, the goods may not be physically verified at all. This will make it impossible to check the quality of the goods imported. In such cases, this scheme will prove to be a weapon for the ill-intended importers. Further, this scheme will fail at the places where there is shortage of staff. The shortage of audit personnel will delay the audits of that area and every second of delay will defeat the custom conventions.

Anyhow, this procedure will facilitate the importers who will be saving a lot of time as well as money due to easy and quick clearance of goods. On the other hand, the risk lies with the customs of keeping the track of the imported goods with regard to the quality and quantity.

In the nutshell, on-site audit will serve its purpose only if done on time and in cases where the importers maintain the records genuinely without making undue advantage of this scheme.

Over and above all, this scheme is a good step taken by the government to facilitate the importers. However, time will tell whether the good beginning makes a good end or not

Auditor - UK & Indian Companies Acts

Thursday, August 14th, 2008

As per UKs Companies Act, the below are the Provisions governing the qualifications for Appointment of Company Auditor.


25.(1) A person is eligible for appointment as a company auditor only if he

(a) is a member of a recognised supervisory body, and

(b) is eligible for the appointment under the rules of that body.
(2) An individual or a firm may be appointed a company auditor.
A Recognised Supervisory Body means

30.(1) In this Part a “supervisory body” means a body established in the United Kingdom (whether a body corporate or an unincorporated association) which maintains and enforces rules as to

(a) the eligibility of persons to seek appointment as company auditors, and

(b) the conduct of company audit work,
which are binding on persons seeking appointment or acting as company auditors either because they are members of that body or because they are otherwise subject to its control.
On careful consieration of above provisions, it will be clear that UKs companies Act doesn’t prescribe / restrict any qualifications for Company Auditors.

It is the Body of Accountants established in UK which by its laws and regulations Supervise and control the Auditing Function is termed as “Supervisory Body” and its members are eligible for Company Audits.

By virtue of this provisons all Chartered Accounting Bodies (6 in number) which by its laws & regulations Supervising Auditing Functions fallen under Section 25 making their members eligible for Company Audits.

It is pertinent to note here that another Chartered Accounting body estabilised in UK i.e CIMA by its laws & regulations has not adopted the Supervision and control of Audit Function and always stayed as Customer to Audit Function.

Had CIMA adopted the Supervision / control of Audit Function , it would have been Classified as “Supervisory Body” under section 25 making its members eligible for Company Audit.

The conclusion is, it is not the Companies Act which is prescribing / restricting the Auditor’s qualifications, but it is the rules and regulations of the Accounting body defined as “Supervisory Body” which are dominant in making their members eligible or ineligible for Company Audit.

ICWAI, being one of the Two Statutory Accounting bodies established in India, from its incorporation has adopted in its object “Supervision and Control” of Audit Function apart from specialising in Cost and Management Accounting.

When our Political leaders always follow and copy the Laws of Western Countries, why the Audit provision in Indian Companies Act is made so restrictive as
226 (1) ” A person shall not be qualified as auditor of a company unless he is a Chartered Accountant within the meaning of Chartered Accountants Act,1949″

In UK Audit is not compulsory for all Companies and Exempted for certain Small companies subject to Turnover, Balance sheet total and number of employees criteria.
Day by day these threshold limits are getting enhanced and more and more companies are coming out side the purview of Compulsory Audit provisions. As per a Survey, nearly 75% to 90% of companies are outside the purview of Audit provisions.

But these companies have to file their Financial Statements with Government duly certified by a Reporting Accountant.
The provisions relating to Reporting Accountant are
————————————————————————————————————————————————————————————————————————————————–The reporting accountant
249D.(1) The reporting accountant shall be a person who is a member of a body listed in subsectin (3) and who, under the rules of the body is either

(a) entitled to engage in public practice and not ineligible for appointment as a reporting accountant, or

(b) eligible for appointment as a company auditor.
Bodies listed in Subsection (3) are

(3) The bodies referred to in subsection (1) are

(a) the Institute of Chartered Accountants in England and Wales,

(b) the Institute of Chartered Accountants of Scotland,

(c) the Institute of Chartered Accountants in Ireland,

(d) the Chartered Association of Certified Accountants, and

(e) the Association of Authorised Public Accountants.

f) the Association of Accounting Technicians,

(g) the Association of International Accountants, and

(h) the Chartered Institute of Management Accountants.”
On careful consideration of the above provisions, it is clear that CIMA is also a recognised body for certifying the Financial statements by its members as a Reporting Accountant. This is because

a) CIMA members are entitled to Public Practice as per its laws & regulation (though not Audit & Assurance Function)
b) CIMA has not made its members ineligible for appointment as “Reporting Accountant”
c) CIMA always advocated that they are Accountants in Business and the word “Accountant” rightfully belongs to them.
As per Regulation 7 of CIMA council related to Members in Practice

accounting services includes advice and services in connection with

(i) financial and management accounting;
(ii) book-keeping and accounting records;
(iii) the provision of tax returns, the computation or other matters of direct and indirect taxation (including DSS contributions);
(iv) budgets, forecasts, cash flows, and business plans;
(v) funding to businesses;
(vi) company secretarial matters; and
(vii) accounting systems and management reporting.

It is clear from the above that it is the CIMA’s rules that made their members eligible for appointment as “Reporting Accountant” as per seciton 209(D)(1)(a) of Companies Act. It is the maturity and the wisdom of the law makers.

Accordingly the practising members of CIMA are entitled to certify the Financial Statements of 75% to 90% of the companies as “Reporting Accountant” which are outside the purview of full Audit.

In Canada, in its wisdom, removed the Monopoly of CAs in Audit & Assurance functions of Publicly Traded companies and CMAs are equally recognised for Full Public Accounting Rights.

Again, why the Indian law makers who always follow the western laws and provisions are allowing only one out of TWO Statutory Accounting bodies for all the recognitions depriving the rightful position / benefits of the members of other Accounting body i.e ICWAI

Members are requested to share their views.

Thanks & Regards
CMA.Siva Rama Krishna Srirangam