Towards stronger corporate governance framework

Filed under Corporate Governance |

By A N Raman

The Ministry of Corporate Affairs (MCA) at the Centre has spearheaded various initiatives over the last few years. Its recent notifications relating to the maintenance of cost accounting records and related reporting is a significant step towards improving the quality of governance.

Background
The Cost Accounting Record Rules and Report Rules (CARR and CART) were introduced in the backdrop of the misuse of national resources and the intimidation of market forces in the 1970s and 1980s, leading to several enquiry commissions. But the impact of these rules was not publicised by the policy makers at that time as they were used mainly as interventionist policies. Even at that time, Parliament had envisaged it as a scheme for monitoring resource utilisation by the corporate sector. Since the framework was very incisive, bringing more transparency in operational areas, it was never welcomed by the business world of yesteryears.

In continuum of corporate law reforms, post-liberalisation, MCA formed an Expert Group (EG) in 2008 to study and suggest suitable changes to remould cost accounting/audit to a framework that would facilitate the competitive regime and also protect the stakeholders wherever relevant. It is pertinent to note here that the EG consisted of nominees from FICCI, CII, Assocham, the IIMs, academia, ICWAI , ICAI , ICSI and other stakeholders. The EG submitted its report in 2009, with the sole dissenting note from ICAI. The report was open to public comment. The current notifications are a result of the consensus reached on the EG deliberations hosted countrywide.

Recommendation of EG Report

The notifications issued by the MCA on CARR and CART were premised on the following conclusions of the EG:

1. Some business sectors concerning the common man will continue to be under administrative price control and the concerned regulators will need reliable cost information.

2. Good governance does not mean complying with the laws alone or showing a healthy bottom line through unsustainable means. Financial statements and their annexure alone cannot present insights into business performance internally. This is validated by various reports of the International Federation of Accountants (IFAC) and the evolution of business reporting projects.

3. Good governance has another side to it called Performance Governance (IFAC document on Governance published in 2008). For performance governance, entities charged with governance, such as the board of directors (BOD), should ensure the existence of internal performance management systems. ERM systems is one such requirement ensured through Clause 49 of the Listing Agreement. ERMs are internal systems but yet have an impact on the investor community. Environment systems are now emerging in the same way through an emphasis on ESG.

4. Not all companies in corporate India present a high level of maturity in cost management. An enabling mechanism could nudge the corporate sector towards good management practices (Such a statement was enshrined even earlier in the Onkar Goswami report on Company Law.) to induce confidence in investors.

5. Highly cost competitive companies whose cost accounting systems are at a best practice level would, in any case, be beyond the basic costing systems (supporting good governance) and, hence, should not be impacted by any reforms in the CARR and CART.

Notifications Aligned with the Above Tone

The notifications that have been issued by the MCA are in line with the above thought processes. The salient features of the notification, if understood properly, will make amply clear the lofty ideals behind the same:

1. Product-specific costing record rules now apply to just eightindustries from 44 earlier. The regulatory bodies of these eight industries — including power, telecom, bulk drugs, formulations, fertilisers — that are under the price control regime today, would need externally attested cost information.

2. The remaining 36 industries have been brought under a single general cost accounting rule that is not prescriptive but only says that the cost accounting information should be available to the minimum standard prescribed by ICWAI through its cost accounting standard board (CASB). It may be noted here that CASB has nominations from CII, FICCI and Assocham, among others.

3. The scope of application of these 36 has been further expanded to inculcate a cost accounting discipline for improved governance in many other sectors.

4. The minimum standard on cost accounting by ICWAI will not accept financial accounting information maintained as per accounting standards as cost information. They will expect resource utilisation discipline for performance assurance under an enhanced governance framework at the entity level.

5. Other than the eight core industries and another set of eight industries of national priority, including cement and steel, the remaining companies need not undergo any cost audit by an external cost accountant. Instead, even a cost accountant who is an employee, can file a compliance report to the board of directors that the notifications are being complied with.

6. As a result of the above notifications, a well-managed company with a good existing cost accounting system will benchmark itself with the minimum standards required on cost accounting. If an entity has such a robust system, there will not be any need for maintaining any extra records and will be compliant with the rules.

7. Further, in the 16 industries that will be subjected to cost audit, the board (and not the MCA) will receive a performance management appraisal report about various aspects of cost competitiveness and resource utilisation, including the impact of IFRS vis-a-vis the historical cost structure.

Are there any similar Global Practices?

It may be useful for those who look for similar global practices that any company doing business with the Federal US Government needs to compulsorily maintain cost accounting records subject to certain threshold limits. The Korea Accounting Regulator has issued cost accounting standards to be used in financial statements. Way back in 1962, the Japanese Finance Ministry issued circulars prescribing cost accounting practices, calling it a social discipline framework for the corporate sector. The IFAC document on costing holds the auditability of cost information as a best practice.

The MCA move on costing, therefore, is a step in the right direction and if taken in the right perspective will build best management practices for a competitive environment and bolster governance. India can, therefore, show the world the way to setting a new trend in governance framework.

(The author is President, South Asian Federation of Accountants.)

(The Hindu Business Line)

 

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Posted by on Oct 11 2011. Filed under Corporate Governance. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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