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Total Number of Subscribers: 426 |
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Date: 24 June 2008 |
Compiled by Mr. M. Sathya Kumar |
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Audit of Contract Labour Introduction : Darius Mehta was the Chief Internal Auditor of a medium-size fertiliser manufacturing company. He was a respected
member of the top management team, and the executive management looked
forward to his inputs on matters affecting operations. The Plant Head, who
had recently joined the organisation, in one of the
reviews with the Managing Director, indicated that he perceived
some scope in manpower rationalisation at the
plant. When the figures were reviewed, it was noticed that the number of
contract labour being used was high. It was felt
that in addition to rationalisation, there appeared
to be some discrepancy in the numbers being reported and requisitioned.
Darius was called in and requested to undertake the audit of the contract labour. The Company had clear norms that under no circumstances, any
violation of company policy or statutory requirements would be tolerated and
those found guilty would be punished as compliance was considered paramount. Methodology : Darius selected a team which had prior exposure to contract labour audits. This was now being undertaken after a gap
of 2 years. The earlier audit checklist was taken up for review. Data on
contract labour in the factory was obtained for the
last 3 years. Departmentwise and gradewise labour requirement
was also obtained from Accounts. Given the concern on numbers, a physical
verification process was also decided to be conducted. The statutory checklist
was reviewed in this light and revised. There was a system of obtaining
certifications from the officials on compliance to statutes and no
non-compliance had been reported. Armed with this preparation, the team undertook the audit at the
factory as a surprise visit starting with physical verification. The focus was driven towards evaluation of the system of
deploying contract workmen, requirement identification of the same, minimum
wages payment compliance, contractors licensing in terms of availability/non-availability/excess
deployment in violation of licence, maintenance of
registers and records, submission of returns and other procedural issues. Gist of observations and recommendations : A. Statutory compliances : 1. Company Registration : The Company had not
updated their registration with the Labour Commissioner’s Office with
the current strength of contract labour. 2. Contractor’s Licensing : As stipulated under
the Contract Labour (Regulation and Abolition) Act, 1970, no contractor shall
undertake or execute any work through contract labour,
except under and in accordance with a licence
issued by the licensing officer. Contractors have to obtain a licence from the Labour Commissioner’s Office when
he employs 20 or more persons. The team was informed that in a few cases, contractors were not
liable for ‘licence’, as the number was
below 20. The list of those who held licences along
with their labour strength was also taken. However,
an analysis of the attendance record proved contrary. There were several
contractors who were employing more than 20 labourers
during a day, but who had not taken the licence. In
several other cases, where licences were available,
the labour strength as given in the licence and that deployed was different. Further, in one
case, the contractor’s licence had expired
and had not been renewed. It was seen that a proper control over the Contract Labour did
not exist. It was desirable to obtain copies of the contractor’s licences and a work sheet should be drawn up, preferably
on a monthly basis, for contract labour based on
the labour available with the contractor within the
permitted strength. Cases of excess engagement should be brought to the
notice of the management. 3. Payment of wages : Authorised
representative of the company was not remaining present during wage
disbursement by the contractor. As stipulated under the Contract Labour
(Regulation and Abolition) Act, 1970, the contractor shall be responsible for
the payment of wages. The payment shall be made either directly or to an authorised person on a working day at the work premises,
in the presence of an authorised representative of
the principal employer. The principal employer shall ensure the presence of
his authorised representative at the place of
disbursement of wages. However, wages disbursement was not being made in the
presence of an authorised representative of the
company. Payment was made either directly to the concerned contractor or to
the contractor’s nominated supervisor. 4. Registers and records : As stipulated under
the Contract Labour (Regulation and Abolition) Act, 1970, the principal
employer shall maintain a register of contractors. There were 3 contractors
who were not listed in the register maintained. 5. Late submission of annual returns : As stipulated under
the Contract Labour (Regulation and Abolition) Act, 1970, the principal
employer shall send annual return in duplicate to the registering officer,
not later than 15th February of the succeeding year. As per the prevailing
practice, the acknowledged copy/proof of return, as an evidence of return
when submitted, was not maintained. 6. Minimum Wages Act, 1948 : Provisions of the
Act stipulate that wages for the current month be disbursed by 7th of the
succeeding month. However, this requirement had not been complied with and
the wages were in arrears at times for more than one month. B. System for hiring : 1. Contractor appointment process : Specific indent form for raising demand to meet additional
requirements of contract workmen, if any, was not in force. As and when need
for the same arose, concerned department intimated the security office to
allow specified number of contract workmen to enter the factory premises,
through a requisition made on a paper duly approved by the Head of the department. Policy of raising indents for meeting additional demand of
workmen, if any, should be implemented. Such policy should be made uniform
across various departments of the Company. This can be done by using a
variant for the indent or using the same indent as used for material. 2. Preparation of work order after commissioning of job : Work orders had been prepared by the time
office and issued to contractors after the work had already been
commissioned. Work order should be prepared and finalised
before the contractor actually commences the job. 3. Attendance recording system : A format for submitting attendance details of the contract
workmen by the concerned supervisor had been specified by the Company.
However, only four to five contractors followed the format. A system of affixing stamp by respective department of the
Company on attendance format submitted by supervisor concerned was not in
force. Only initials of the department head existed. Attendance was not updated in labour
cards. In various cases, attendance was not marked in cards for an entire
month. Hence, cards were submitted for a month other than the current month. C. Physical verification : The challenge for physical verification was the identification.
There was no practice to identify contract labour
separate from company labour. Further, given the
widespread geography of the unit, it was also not easily possible to check
attendance. Given this limitation, it was decided to conduct attendance at
the gate at the beginning of a shift, followed up with departmental visits
and at the end of the shift again at the gate. The team reviewed the attendance register prepared at the
security office, wherein attendance of the contract workmen was maintained on
a daily basis. During the team’s visit to the departments, discrepancies
between contract workmen shown in daily attendance report maintained at
security gate and their actual physical presence were observed. This was
explained in the form of alternative deployment. Workmen were found to be
deployed in a department other than that reflected in the attendance report.
For instance, a workman who was classified under civil department was found
serving tea in the administration department. The reasons put forth for such
variances were that the missing workmen might be working for different
departments or might have left for home early or might have gone to attend to
calls of nature, etc. Altogether, based on the team’s entire physical
verification process, although there were variations in the records
and physical, they were reconciled to the satisfaction of the auditors. Further, actual physical counting of contract workmen at
the time of their quitting the factory gate showed excess/shortage vis-à-vis
the attendance record at the security gate. D. Bill passing — Excess payments to labour contractors — Rs.100,000 : Contractor bills used to be authorised
by the concerned department, security, time-office and then forwarded to
Accounts for booking and payment. While signatures were available on all bills,
at no place were the calculations cross verified with the attendance records.
Each subsequent signatory was relying upon the earlier signature and Accounts
department was relying upon the ‘time-office’ signature. E. Other issues : Contractors had not made any arrangement for shoes for workers.
During the physical verification, it was noticed that around 75% of the
workmen entering the factory premises were without helmets and shoes. Conclusion : The audit effort was greatly appreciated by the Management and
the Audit Committee. It was mandated by the ‘audit committee’
that the internal audit of contract labour,
especially to ensure compliance with Labour laws, should be done on a
periodic basis to ensure that the company does not incur any liability for
violating procedural requirements. Article by Deepjee Singhal Manish Pipalia
Chartered Accountants |
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