This article throws light upon the top three roles of a cost auditor. The roles are: 1. As an ‘Agent’ 2. As an ‘Officer’ 3. As a ‘Servant’.
Role # 1. As an ‘Agent’:
If the basis of appointment of the auditor by different parties is the criteria to establish relationship among different persons who are parties to the respective situations, then the cost auditor is to be considered as the representative of the shareholders of a company and also of the Central Government.
But in actual practice, the appointment of the cost auditor by the Board of Directors and its approval by the Central Government is just a question of formalities and to keep the process of business going. Under the circumstances, there is no denying the fact the cost auditor is the representative of the company management.
According to the Law of Contract Act, ‘an agent is a person employed to do any act for another or to represent another in dealings with third person’. The cost auditor, in this sense, may be considered as an agent of the shareholders of a company.
In another section, the Law of Contract Act provides that an agent is bound to render proper accounts to his principal ‘on demand’. But in actual practice, the cost auditor does not receive any such allowance or goods for which he will have to render proper accounts as and when demanded by the company. It is the primary duty of a cost auditor, whether demanded or not, to report to the company management regarding the cost and financial affairs of the company.
According to the Law of Agency, ‘he who does through another does by himself’, an idea may emanate that the act of an agent is the act of the principal. But this does not hold good in case of the duties of a cost auditor. Let us assume that the cost auditor in collusion with the company management distorts the cost statements; this act by any stretch of imagination should not be treated as the act of the principals (the Board of Directors).
Again the same law provides ‘the knowledge of the agent is the knowledge of the principal’. This maxim also does not find its application in the case of a cost auditor, who in actual practice does not disclose the material facts viz. status of business, future trend of the business, image of the business, other than the cost accounts and the financial and production statistics which even some of the directors of the company find it difficult to study between the lines. Thus from the point of view of Law of Agency, it is quite clear that the cost auditor cannot be the agent of the company management.
If the term ‘agent’ is meant to denote merely, a ‘person’ or ‘one who represents a person or persons’ then a cost auditor may be categorized as agent. A cost auditor may be agent of the company so far as it relates to the audit of cost accounts. For the purposes of the audit, the cost auditor will bind the directors of the company.
Role # 2. As an ‘Officer’:
It is really very difficult to state whether the cost auditor of a company is an officer or not. The legal decisions over the issue whether the financial auditor is to be considered as an officer of the company or not are not clear and they are conflicting each other on either basis—defacto or dejure. On this basis, it may be thought that a cost auditor is not an officer of a company.
Further the law does not specifically classify him as an officer of the company as has been found in the case of other officers, like Directors, Secretaries, etc. According to Section (30) (c) of the Companies Act, an auditor is considered as an officer only for some purposes and not for all purposes.
Again, the present Act does not clearly state whether the casual auditor employed by the company is to be considered an officer for specific purposes.
In one leading legal decision Findley vs. Maddell (1910), it was decided that casual auditor and a person to whom the work of preparing books of account has been handed over is not an officer of the company, whereas another leading case Connell vs. Himalaya Bank (1895) considers auditor as an officer of the company only when he is appointed in a general meeting.
Section 5 of the Companies Act defines ‘Officer in default’ as any officer of the company who is knowingly guilty of default, failure, noncompliance, refusal or who wilfully authorizes or permits such default, etc. It is yet to be decided without dispute whether the auditor would come within this definition.
Role # 3. As a ‘Servant’:
It is sometimes claimed that the auditor is a servant of the company as he is paid for his job. A cost auditor, who is a representative of the shareholders, can never be a servant of the company. The criterion to judge a particular person as a servant on the basis that ‘the servant is paid for the job’ would bring some confusion. The lawyers are paid for their job. For that the lawyer cannot be considered the servant of his client.
The physicians are paid for their job or service. Are they servants of the patient? In one leading case (London and General Bank Ltd., (1895) it was decided that ‘He (auditor) is not the servant of the Directors, and thus, the cost auditor should not be considered a servant of the company and of the directors. The relationship between the cost auditor and the company is that of a professional man and a client.