After reading this article you will learn about the Objections in Publishing Cost Audit Report.
The publication and circulation of annual Financial Audit Reports to the members and shareholders of a company are mandatory and compulsory. But the position with respect to Cost Audit Reports is entirely different. The cost auditor submits his reports to the company and to the Central Government.
There is no provision in the Companies Act, 1956 for disclosure of information contained in the Cost Audit Report and therefore, the shareholders and members do not come to know of the detailed affairs of the company.
The Central Government’s views on the issue of disclosure of cost audit report can be discerned from the following:
‘In answering a question in the Rajya Sabha as to whether Government directed the industry, to publish their cost audit reports every year, the Hon’ble Deputy Minister in the Ministry of Law, Justice and Company Affairs, had stated on 16.12.1974 that since the cost audit reports contain secret information and particulars concerning manufacturing, production, processing or mining activities of companies, publication of such reports as a matter of rule was not considered desirable’.
At the time of amendment of the Companies Act, sometime back, it was held by the Government that the cost audit report should be treated as a confidential document as it contains vital statistics regarding the company’s financial position, profitability, productivity, costs of various processes and products, cost accounting system, process of manufacture, etc.
They were of the view that disclosure of such information would affect the competition in the trade of the individual units in an industry. With this objective, the cost audit reports are not filed with the Registrar of Companies as is the practice in the case of the Balance Sheet and Profit and Loss Account.
In the recent past, there had been some rethinking on the part of the Government based on the demands from the Members of Parliament as to the justification for treating the entire Cost Audit Report as secret and confidential.
The Members (who represent the general public) and the Institute of Cost and Works Accountants of India in particular are of the view that under the provisions of Section 233B (10) of the Companies Act, 1956, the Government is vested with the powers to direct that the whole or portions of the Cost Audit Report be circulated to the shareholders. But these views have not been favorably taken in the trade and commercial circles.
The major reasons and arguments advanced by them against disclosure of the cost audit reports are:
(1) The interests of the company are most likely to be jeopardized if the details of cost, manufacturing processes, productivity, profit, etc., are given publicity
(2) The very functioning of the management and its processes and deliberations are likely to be disturbed if the shareholders come to know of the company’s internal information, which is meant for the management of the company and has no concern with the ordinary shareholders.
(3) The shareholders invest their capital and are interested to get the return on the money invested, and they have the right to such return in the form of dividends and others. The information available in the Annual Report and Financial Accounts are sufficient for them to judge the company’s performance before they decide their investment of capital.
The right to share a return on money invested would run counter if the right to company’s internal information is given as these shareholders by their very name as such are holders of shares and not participants in the management of the affairs of the company.
(4) There is a likelihood that the shareholders would be inclined to interfere with the company’s internal administration in raising queries, genuine or otherwise, and undesirable point of order at the annual general meetings—which could possibly hit the very foundation of the Board of Directors. The Directors are elected by the shareholders and their terms of office can be determined by them based on information available from the existing published accounts and other considerations.
(5) The disclosure of the cost auditor’s report is quite likely to assist the competitors in the industry to take advantage of the information to their own benefit. The failures and weaknesses of the management would furnish clues directly or indirectly to the competitors—which run counter to the ethics of fair trade and competition.
(6) The shareholders, specially in Indian context, are generally laymen and not knowledgeable about the intricacies of the management, its elaborate system of functioning apart from the complexities inherent in the financial and cost accounting. They would become unnecessarily concerned about the disclosures or revelations without understanding the real significance of the information disclosed. The maxim ‘little learning is a dangerous thing’ on the part of the majority of the shareholders could play havoc to hit the foundation of a corporate structure that has been built over the years.