CLR Note: Ministry of Corporate Affairs had recently issued notifications for appointment of Cost Auditors. Companies are having procedural queries with regard to the appointment of Cost Auditor, which has been clarified by ICWAI through its given questioner where the doubts have been sorted out for better understanding of everyone to implement it.
Q.1 Has the Government prescribed a new procedure for appointment of cost auditor by the companies?
Ans. Yes. The procedure has been modified by the Cost Audit Branch of the Ministry of Corporate Affairs vide General Circular No. 15/2011 dated 11th April 2011. The circular shall be effective from the financial year commencing on or after the 1st day of April, 2011.
Q.2 What is the difference between new and old procedures of Appointment of Cost Auditor by Companies?
Ans. Existing procedure for appointment of cost auditor required prior approval of the Central Government under Section 233B (2) of the Companies Act, 1956. However, under the present procedure, the prior approval would be deemed to have been granted if the Central Government does not raise any query within 1 month of filing of Form 23C.
Q.3 Will this procedure supercede the previous order issued in this regard?
Ans. Yes, with the issue of this new procedure, all earlier circulars issued with respect to the Appointment of Cost Auditor by Companies will be superceded.
Q.4 Who can act as cost auditor?
Ans. The Company required to get its cost records audited under Section 233B(1) of the Companies Act, 1956 shall appoint a cost auditor who is a Cost Accountant as defined in clause (b) of sub-section (1) of Section 2 of the Cost and Works Accountants Act, 1959 (23 of 1959) and who holds a valid certificate of practice under sub-section (1) of Section 6 of that Act and includes a Firm of Cost Accountants.
Q.5 Who is competent authority in companies to appoint cost auditor?
Ans. The first point of reference will be the Audit Committee and the Board of Directors will appoint Cost Auditor on the basis of recommendation of the Audit Committee. The Audit Committee shall ensure that the cost auditor is free from any disqualification as specified under Section 233B(5) read with Section 224 and sub-section (3) or sub-section (4) of Section 226 of the Companies Act, 1956. [Draft model letter in this regard is given after FAQs at Annexure -1] In those companies where constitution of an Audit Committee of the Board is not required by law, the words “Audit Committee” shall stand substituted by the words “Board of Directors”.
Q.6 Is a cost auditor required to give any certificate in respect to his independence and arm’s length relationship with the appointing company?
Ans. Yes, the cost auditor is required to give a separate certificate to the audit committee in respect to his/its independence and arm’s length relationship with the company. [Draft model letter in this regard is given after FAQs at Annexure-2]
Q.7. How many cost auditors can be appointed under Section 224 (1B)?
Ans. Section 224 (1B) imposes a ceiling on the numbers of audits that an auditor or firm of auditors can undertake. Accordingly, the ceiling on the number of cost audits would operate as follows: (a) In case a firm of cost accountants:- Twenty companies (other than private companies) for every such partner of the firm who is not in full time employment. Not more than ten out of twenty companies should have a paid up share capital of Rs. 25 lakh or more. (b) In case of individual cost accountant who is in full time employment:- Twenty companies (other than private companies) of which not more than ten should have a paid up share capital of Rs. 25 lakh or more.
Q.8 What procedure is required to be followed by a company in respect of appointment of cost auditor?
Ans. The Company shall e-file its application with the Central Government on www.mca.gov.in portal, in the prescribed Form 23C within ninety (90) days from the date of commencement of each financial year, along with the prescribed fee as per the Companies (Fees on Application) Rules, 1999 as amended from time to time and other decuments as per existing practice i.e. (i) certified copy of the Board Resolution proposing appopintment of cost auditor; and (ii) copy of the certificate obtained from the cost auditor regarding compliance of section 224 (1-B) of the Companies Act, 1956. [Draft Letter as per Annexure 1]
Q.9 What will happen if Central Government doesn’t give its approval within 30 days of submission/ re-submission of the application?
Ans. After filing the online application by the Company, the same shall be deemed to be approved by the Central Government, unless contrary is heard within thirty (30) days from the date of filing such application. However, if within thrity(30) days from the date of filing such application, the Central Government directs the Company to re-submit the said application with such addtional information or explanation, as may be specified in that direction, the period of thrity days for deemed approval of the Cenntral Government shall be counted from the date of re-submisson by the Company.
Q.10 How cost auditor will be appointed?
Ans. After compliance of the matters hereinabove described, the Board of Directors of the Company shall issue formal letter of appointment to the cost auditor, as approved by the Board of Directors.
Q. 11 What is the obligation of appointed cost auditor with respect to the information to Central Government
Ans. The Cost Auditor shall inform the Central Government within thrity days of receipt of formal letter of appointment from the Company. Such intimation shall be done in the prescribed form alongwith a copy of such appointment. An e-form is being developed by the Ministry and the same will be notified shortly.
Q. 12 Is there any obligation on the part of companies regarding disclosure of appointment of cost auditor?
Ans. The Company shall disclose full particulars of the cost auditor along with the due date and actual date of filing of the Cost Audit Report by the cost auditor, in its Annual Report for each relevant financial year. Since the notification has come into effect from April 1, 2011, companies under cost audit will be required to furnish the details in its Annual Report from the financial year 2010-11. Since the cost audit report of a particular financial year may not have been submitted before publication of the Annual Report, relevant details of due and actual date of filing for the last financial year may be published in the Annual Report.
Q. 13 Is there any penalty provision for non-compliance of provisions of the said circular?
Ans. Yes, the circular states penal provisions both for companies and cost auditor as under:
¢ Non compliance by Companies
If a Company contravenes any provision of this circular, the company and every officer thereof who is in default, including the persons referred to in subsection (6) of Section 209 of the Act shall be punishable as provided under sub-section (2) of Section 642 read with sub-section (5) and (7) of Section 209 and sub-section (11) of Section 233B of Companies Act, 1956.
Relevant provisions of Section 209 of the Companies Act, 1956 are as follows: Sub- section (5) of Section 209 provides that if any of the persons referred to in sub-section (6) fails to take all reasonable steps to secure compliance by the company with the requirements of this section, or has by his own wilful act been the cause of any default by the company thereunder, he shall, in respect of each offence, be punishable with imprisonment for a term which may extend to six months, or with fine which may extend to ten thousand rupees, or with both:
Provided that in any proceedings against a person in respect of an offence under this section consisting of a failure to take reasonable steps to secure compliance by the company with the requirements of this section, it shall be a defence to prove that a competent and reliable person was charged with the duty of seeking that those requirements were complied with and was in a position to discharge that duty:
Provided further that no person shall be sentenced to imprisonment for any such offence unless it was committed wilfully.
Sub- section (6) of Section 209 provides that the persons referred to in subsection (5) are the following, namely:”
(a) where the company has a managing director or manager, such managing director or manager and all officers and other employees of the company; and
(d) where the company has neither a managing director nor manager, every director of the company;
Sub- section (7) of Section 209 provides that if any person, not being a person referred to in sub-section (6), having been charged by the managing director, manager or Board of directors, as the case may be, with the duty of seeing that the requirements of this section are complied with makes default in doing so, he shall, in respect of each offence, be punishable with imprisonment for a term which my extend to six months, or with fine which may extend to ten thousand rupees, or with both.
Relevant provision of Section 642 of the Companies Act 1956 is as under: Sub-section (2) of Section 642 provides that any rule made under sub-section (1) may provide that a contravention thereof shall be punishable with fine which may extend to five thousand rupees and where the contravention is a continuing one, with a further fine which may extend to five hundred rupees for every day after the first during which such contravention continues.
¢ Non compliance by Cost Auditor If default is made by the cost auditor in complying with the aforesaid provisions, he shall be punishable with fine, which may extend to five thousand rupees