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Total Number of Subscribers: 426 |
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Date: 8th July 2008 |
Compiled by Mr. M. Sathya Kumar |
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The role of
mandatory cost audit in enhancing trust: the case of India Abstract
Purpose – The purpose
of this paper explores whether cost audits as governance mechanism
affected the trust of the users of financial statements and whether they
provide the benefits intended by regulators. 1 Introduction
Auditing of financial reporting status is not a new phenomenon.
The function of formal auditing of financial reporting existed even before
the publication of Luca Pacioli's chapter on the double entry accounting
system in 1494. Whenever the advance of civilisation brought about the
requirement of one person being entrusted to some extent with the property of
another, some kind of check upon the fidelity of the former was advised.
Auditors and auditing both have been referred to in Like any other product or service, the auditing of financial
statements involves the incurrence of costs by organisations. Corporate
auditing has been criticised due to the economic costs associated with it in
recent times (Lee,
1994). The marginal increase in the cost of auditing should equal
the marginal decrease in information error cost (Shakun,
1978). Keeping this principle of economics in the forefront,
regulators of many economies are considering changing the audit requirement
threshold. For example, from March 2004, private limited companies reporting
annual turnover of up to £5.6m in the Globally, after the collapse of the American energy giant Enron
and the subsequent collapse of the accounting firm Arthur and Anderson,
doubts have been raised over the benefits of auditing compared to its cost.
In addition, there lies an expectation gap between the users of financial
statements and the auditing profession, which could damage the essence of the
auditing profession, that is, trust (Fadzly
and Ahmad, 2004). PriceWaterhouseCoopers sold their international
consulting firm to IBM in the summer of 2002 for $3.5 billion. That sum was
significantly less than the $18 billion Hewlett Packard offered in 2000. In
just over a year, the loss of trust within the final four large international
accounting firms led to the reduction of the value of PWC's consulting arm by
80 per cent (McMillan,
2004). Normally, the audit function is performed in two ways, external
audit and internal audit. While the external audit of financial statements is
mandatory for corporations in almost all economies, internal audit is not
mandatory. Another form of mandatory auditing function, which is relatively
uncommon globally, is getting its foothold in some of the South Asian
countries, including Based on the definition of cost audit provided by the ICWAI, Basu
and Das (1999) point out that the objectives of cost audit include
the determination and control of cost together with providing data for making
judgements and decisions on various matters, such as operational efficiency.
The Government of India (GOI) is making cost audit mandatory for more and
more industries each year. For example, the GOI has added industries involved
in the manufacturing of plantation products together with the petroleum and
telecommunication industries in 2002 to the list of industries requiring
mandatory cost audits (www.myicwai.com). Hence, it seems that the GOI is
increasingly giving more emphasis to cost auditing. Basu
and Das (1999) identified a number of benefits of mandatory cost
audits as intended by Indian regulators from the viewpoints of five
interested parties, as follows:
It is still unknown as to whether the mandatory cost audit has
achieved the intended benefits outlined above. Further, the potential for
cost audit to enhance various stakeholders' trust in the information provided
in financial statements has not been substantially explored. Following the
dearth of literature in this direction, the present study investigates
whether mandatory cost audits in The rest of the paper is organised as follows: we first provide
a discussion on the profiles of the mandatory cost audit functions in 2 Cost accounting and audit
in
During the early years of World War II, the concept of cost as
an independent entity emerged as a beginning in the industrial circles of the
world. Owing to the prohibitive cost of defence operations, governments of
that time at war faced difficulties in ascertaining the price of defence
equipment and hence evolved the concept of cost plus contracts. This mandated
the contractors to submit the cost of the work to be undertaken by them, in
order to be awarded the contract (www.myicwai.com). The war ended in 1945, and the nations affected by the war
began large-scale reconstruction of their economies through
industrialisation. Many nations gained their independence as a result of an
end in colonialism. The significance of cost accounting as the basis of the formation
of government policies provided the foundation of the rapid growth of the
profession. Cost accounting started as a mere exercise in estimating the
cost, which later on developed into a movement for efficiency and optimum
utilisation of scarce resources (www.myicwai.com). The provision of the statutory cost audit was first introduced
in Cost Accounting Record Rules have been framed by the GOI from
time to time for selected industries, with the objective of bringing them
under the provisions of Sec. 209 of the Companies Act, 1956. These rules
supply the guidelines for the companies in regard to the maintenance of cost
accounting records. The details of the rules differ in accordance with the
nature of the industry. The Cost Accounting Record Rules state the forms of
various cost statements in which the costs of the products are required to be
disclosed (Basu
and Das, 1999). Cost Accounting Record Rules have been prescribed
for 47 industries till 2005 (www.myicwai.com). Section 233-B of the Companies Act (as amended in 1974) states
that, the central government may direct any company that is required under
clause (d) of sub-section (1) of Section 209 to keep cost records, to have an
audit of cost accounts (Basu
and Das, 1999). In accordance with the provisions of Section 233-B
of the Companies Act, cost audit of certain establishments, to be directed
from time to time, has been made mandatory. Cost Audit (Report) Rules, 1968
(as amended in 1969 and 1971) have been framed, that apply to every company
where the Central Government u/s 233-B of the Companies Act has ordered a
cost audit. It is significant to note in this regard that, audit of cost
accounts ordered by the Central Government u/s233-B of the Companies Act is a
statutory audit and it is different from the audit of cost accounts by
internal or external persons appointed by the management for whatever reason
(Basu
and Das, 1999). Section 233-B of the Companies Act, as amended in 1974, states
that the audit is to be conducted in such a way as may be specified in the
order by an auditor who shall be a cost accountant as specified under the
meaning of Cost and Works Accountants Act, 1959. The meaning of the term “cost accountant” has been specified in
the Cost and Works Accountants Act, 1959. The section also refers to the fact
that, if sufficient number of cost accountants are not available, the central
government may notify in the official gazette that, for that specific period
chartered accountants under the meaning of Chartered Accountants Act, 1949,
possessing the required qualification, may also conduct the audit of cost
accounts (Basu
and Das, 1999). In this regard the prescribed qualification for a
chartered accountant refers to a pass in the final examination of the ICWAI
(www.myicwai.com) or of the 2.1 Differences between cost and financial audit in
The Institute of Chartered Accountants of India (ICAI) was
established in 1949 (Act No. XXXVIII of 1949) to regulate the profession of
chartered accountancy in While the chartered accountant certifies the books of accounts,
a cost accountant offers to perform or perform services concerning the
costing or pricing of goods and services or the preparation, verification or
certification of cost accounting and related statements. One of the primary
objectives of the ICWAI is to develop the function of cost and management
accountancy as a powerful tool of management control in all aspects of
economic activities (www.myicwai.com). Hence, it can be suggested that cost
accounting/auditing is a part of the financial auditing process, as cost
auditors only concentrate on the computation of cost of a range of products.
However, financial audit is broader in scope and hence may not concentrate on
costing of products at the same level as that of cost auditing. 3 Theoretical resource: trust
and trustworthiness
In a recent seminal article, Llewellyn
(2003) argues that the value of qualitative research is largely
influenced by the underlying theoretical resource that is used to make sense
of empirical evidence. Following this argument, we draw on trust theory (role
of trust) to understand whether cost audit in Despite the level of interest shown in “trust”, accounting researchers have not generally considered
the
exploration of trust theory as a methodological resource. A notable exception
in this regard is the study conducted by Seal and
Vincent-Jones (1997) who explored the role of accounting in
enhancing systematic trust during the transition period of the post Researchers have devoted considerable attention to clarifying
the meaning of “trust” in different social contexts.
Therefore, different models of trust have very different implications
regarding how the problems of trust are framed and resolved. In this study we
adopted a view that trust is predicted on architecture of rational
expectations rather than one that views trust as a complex social process
that is embedded in complex social contexts. Following previous literature (McMillan, 2004; Rezaee, 2004) it can be argued
that the cost audit is expected to enhance “trust”
of users of financial statements (trustors) on those business organisations who
are under the purview of mandatory cost audit (trustees), compared to those
who are outside the scope of cost audit. The definition of “trust” provided by Schlenker et al. (1973) is most appropriate
for our study. Schlenker et al. (1973) define “trust” as the reliance upon information (e.g. accounting
information) received from another person (e.g. preparer of financial
reports) about uncertain environmental states and their accompanying outcomes
(e.g. use of accounting information in decision making such as buying shares)
in a risky situation. Shapiro et al. (1992) regard this type of
trust as “knowledge-based trust” and argue that information contributes to the
predictability of the other, which contributes to trust. Rousseau et al. (1998) regards this type
of trust as “calculus-based trust” which is based on
economic exchange and trust emerges when the trustor perceives that the
trustee intends to perform an action that is beneficial. There are other organisational
scientists who also define “trust” in a similar
fashion.
Coleman (1990) defines “trust” as an incorporation of risk into the decision of whether or not to engage in
the action by acting based on estimates of the likely future behaviour of
others. Quoting Sabel (1993), Barney and
Hansen (1994) define “trust” as “the mutual
confidence that no party to an exchange will exploit another's vulnerabilities.” Mayer et al. (1995) focus on trust in
an organisational setting involving two specific parties: a trusting party
(trustor) and a party to be trusted (trustee) and try to answer the question
why a trustor would trust a trustee. They also define “trust” as the willingness of a party to be vulnerable to the
actions of another party and they further argue that trust is not taking
risk per se, but it is the willingness to take risk. This
definition by Mayer et al. (1995) relates
appropriately to our research. This is due to the fact that we are exploring
whether the willingness of investors (trustor) to take risk, such as
investing in a business organisation (trustee), has been enhanced by
mandatory cost audit in Barney and
Hansen (1994) add that an exchange partner is trustworthy when it is
worthy of the trust of others. In other words, an exchange partner worthy of
trust is one that will not exploit other's exchange vulnerabilities. Mayer et al. (1995) indicate that
ability, benevolence and integrity of the trustee explain a major portion of
trustworthiness. While explaining “trust” and “trustworthiness”, Barney and
Hansen (1994) further point out that opportunism is the opposite to
trust. They argue that a firm's actions are opportunistic to the extent that
it takes advantage of another's vulnerabilities. Commonly, these researchers
view “trust” as an expression of confidence between parties in an
exchange of some kind, that is, confidence that they will not be harmed or
put at risk by the actions of other party. Elangovan and
Shapiro (1998) propose that given a certain level of motivation to
betray, the lower the trustee's penalty rating (e.g. low level of governance)
is, the higher the likelihood will be of an actual betrayal. The mandatory
cost audit introduced by the GOI is expected to increase integrity of the
information provided in financial statements, leading to trust and
risk-taking in the relationship between the trustor (the users of financial
information) and the trustee (the preparer of financial statements). The
trustor is expected to believe that it is contrary to the trustee's best
interests to cheat with accounting numbers, as a governance mechanism exists.
The users of financial statements make economic decisions based on the
information provided in financial statements. The GOI has introduced the
mandatory cost audit (governance mechanism) to control the opportunistic
behaviour of the preparer of financial statements. In this paper our central
theme is to explore whether the cost audit as a governance mechanism affected
the trust of the users of financial statements. 4 Research method
The research method involved unstructured open-ended
face-to-face interviews with cost auditors in practice, mid- to high-level
accounts and finance executives of companies and investors. The “interview” method of data collection has the advantage of flexibility as
it allows changing the questions as the researcher proceeds (Sekaran, 2003). For the purpose
of our study, which is explorative in nature, this method has been considered
as appropriate. On the other hand, unstructured interviews provided us with
the option of determining those areas that require further in-depth
investigation. Sekaran (2003) suggests that the
principle purpose of the unstructured interview is to explore and investigate
into the several factors in the situation that might be central to the broad
problem area. Similarly, Holstein and
Gubrium (1995) suggest that one of the major advantage of active
interviews is it brings out the alternative considerations. Twenty-three interviews were conducted over a five-week period
from December 2004 to January 2005 (Table I). A broad spectrum
of respondents from the Kolkata city of The length of most interviews ranged between 30 minutes and 1
hour. Most of the interviews were recorded and later transcribed but
respondent anonymity was guaranteed. However, in cases where recording was
not allowed, notes were taken of major issues raised by respondents. In some
cases interviews were taken two times as the respondent had other
involvements at the first time and hence our discussion could not be
finished. Hence, the discussion continued at a second meeting. The nature of questions asked varied according to the group of
interviewees, such as, cost auditors, preparers of financial reports and
investors to explore their attitude towards mandatory cost audit in Pseudo initials are used and specific position titles are not
given for anonymity reasons. 5 Cost audit and its role in
enhancing trust in reality
The findings of the interview analysis are presented below,
organised around the three groups of respondents: cost auditors, preparers of
financial reports, and investors. 5.1 Cost auditors and the mandatory cost audit in
The ICWAI has been lobbying for a long time with the regulators
of the Indian Government to make cost audit mandatory in … users of financial statements cannot
have access to cost audit reports, and it is not included in annual reports
of respective companies. It is not a public document. However, although it is not publicly available information, the
ICWAI publishes a list of companies on which a cost audit has been conducted.
Therefore, users of financial reports can have information on the status of
the cost audit of various companies before making their investments decision.
Respondent PB particularly emphasised that: Insurance companies and the income tax authority do not seek
cost audit reports, but sales tax authority of While discussing trust, PB suggested that: I have a strong feeling that cost audit enhances the trust of
investors, banks, insurance companies and various government authorities. He went on to comment that: … customers are aware of cost audit and I am
sure that it has enhanced their trust on companies under the realm of
mandatory cost audit. He also opined that mandatory cost audit helps in the detection
of the standard of efficiency of the management: … by ensuring the accuracy of cost
data that helps in a more accurate comparison of actual and expected results. PB also suggested that cost audit is totally different from
financial audit as: … cost audit is conducted throughout the
year, whereas financial audit is only conducted at the end of a financial
year. Respondent SCM suggested that mandatory cost audits have surely
enhanced the trust of various user groups, including existing and prospective
investors, financial analysts, banks, insurance companies, the income tax
authority, and other government authorities, and of course, customers. He
opined that, “ … mandatory cost audit helps in the
reduction of the utilisation of raw materials helping in more effective
utilisation of scarce resources. As a result better quality goods can be
produced at less cost thus enhancing the operational efficiency of a company. He was of the opinion that a cost audit is totally different
from a financial audit “as its scope is broader”. SCM further suggested that companies become more cautious about
keeping cost data, in cases where a cost audit has been enforced, “enhancing trust of various user groups of financial reports.” He was also of the
opinion that a mandatory cost audit by cost auditor(s) helps in the detection
of the standard of efficiency of the management, as: … mandatory cost audit provides more
accurate data in regard to cost of various items and quantity of materials
consumed thus helping in proper calculation of quantity variance and hence
the productivity. Respondent MKT believes that a mandatory cost audit enhances the
trust of “prospective investors more than the existing ones”. This is due to the fact that existing investors access
various other information sources to make their investment decisions compared
to prospective investors. Apart from investors, he also opined that mandatory
cost audit has enhanced the trust of various user groups of financial
statements, such as, financial analysts, banks, insurance companies, income
tax authority together with other government authorities, and, lastly
customers. MKT further stated that the mandatory cost audit “definitely makes companies more cautious about keeping cost
data”, and hence provides “a better tool to accurately measure the
detection of the standards of efficiency of management.” SM was a strong supporter of mandatory cost audit, stating that: … cost accounting records enhances trust only
when it is done properly and I believe that it is done properly when it is
mandatory only. He further argued that: … mandatory cost audit specifically
enhances the trust of insurance companies as it helps in more accurate
valuation of stock. SM raised the matter of conflict of interest between industries
and the government, as companies always try to reduce their income tax
liabilities, and as a result they are opposed to mandatory cost audit. The
reason being by providing a proper valuation of stocks mandatory cost audit
is expected to help in an accurate computation of income tax of companies.
Customers also benefit from a cost audit as: … it makes companies more efficient, the
fruit of which reaches customers in the form of supplying goods to them at
right prices. Like his colleagues, SM emphasises that companies become
cautious about keeping cost data when a mandatory cost audit is imposed on
them, and the process of mandatory cost audit accurately detects the standard
of operational efficiency of management. Respondent SB suggested that mandatory cost audits enhance the
trust of various user groups of financial statements. He specifically
stresses that, “it enhances the trust of central
excise department.” He also opined that: … it helps in proper costing
leading to proper pricing of goods thus enhancing the trust of customers. In context to whether mandatory cost audits make companies more
cautious about keeping cost data he exclaimed “definitely”. From the above discussion it is evident that the cost auditors
in practice interviewed are supportive of the mandatory cost audit in 5.2 Cost audit and the preparers of financial reports
The preparers of financial reports that were interviewed are not
supportive of mandatory cost audits (Table II). They think that mandatory cost audit is
simply a duplication of financial audit work. They have the opinion that
external auditors carefully investigate various cost and expense maters of a
company before signing an audit report. Therefore, there is no need to create
extra burden by the regulators to make cost audits mandatory. It is a
time-consuming affair and also involves an extensive outflow of cash, as the
companies have to pay fees to cost auditors. For example, respondent AC
mentioned that cost audits have not at all enhanced the trust of existing and
prospective investors of his company due to the very fact that investors have
serious doubts about the integrity of the whole process of cost audit. He
further opined that the cost audit has no significance to financial analysts,
banks and insurance companies: Cost audit has no relevance to the income tax authority together
with other government authorities and they only refer to financial audit. He emphasised that: … cost audit is a useless burden which is not
even beneficial to companies and to various user groups so the question of
trust on cost audit does not arise. He suggested that the cost audit is just a duplication of
financial audit as “cost audit is a part of the
financial audit process” and hence cannot be perceived as value-added
service. According to him “spending a single rupee Respondent DB opined that “cost audit
report is not a public document” and hence it does not enhance the trust of any
user groups of financial statements and customers. He also suggested that
mandatory cost audit has “no benefits”. He opined that, “I do not find any validity of the whole exercise of mandatory
cost audit.” The only reason that he could think of is political lobbying
by the
ICWAI. He believes that: … the cost associated with a mandatory
cost audit is not too much, except a nominal fee of the auditor, which is a
waste of money. He was also of the opinion that cost audit does not carry much
value for businesses, investors and customers and it does not enhance the
chance of detecting errors, frauds and misappropriation since “it is a duplication of a part of financial auditing process, nothing
more.” He also disagreed that a cost audit helps in the supply of
more accurate cost data concerning closing stock, work-in-process and profit. Respondent TKM had a slightly different view concerning the
scope of mandatory cost audit. He suggested that: … cost audit is not a duplication of
financial audit but it can as well be done by financial auditors. For example, one of the audit issues of cost auditors is to
investigate whether appropriation of overhead expenses have been done
properly. The financial auditors could easily perform this investigation.
Like the opinions of his other colleagues, he also has the opinion that a
cost audit does not enhance the trust of various user groups of financial
statements and customers. The principle purpose of introducing the cost audit
in … the government wants to make the cost
accountants happy and to keep these cost accountants employed. He opined: … the cost of cost audit should
not be too high. However, the benefits obtained from it do not surpass the
cost as there is no benefit of conducting a cost audit on top of financial
audit in this era of perfect competition. He had a different opinion from his colleagues about the
advantage of cost audit as he believes that cost audit enhances the chance of
detecting errors, by carefully computing costs of each individual process
and/or departments. However, he also believes that financial auditors could
perform this job. Respondent AA suggested that the cost audit is a duplication of
financial audit. He also opined that, “cost audit
report is not available to the public and hence to investors.” Hence: I do not think that cost audit has a role in enhancing trust of
users of financial statements and customers. In a similar tune as other respondents he suggested that the
cost audit has been introduced in It is evident from the above discussion that the preparers of
financial reports interviewed are highly sceptical of the perceived benefits
of a mandatory cost audit in 5.3 Cost audit and the investors
The experiences and expectations of the investors interviewed
with regard to the perceived benefits of a mandatory cost audit are similar
to the preparers of the financial reports. For example, SL, an experienced
investor with about 11 years of experience opined that the mandatory cost
audit has not enhanced his trust on the operational efficiency and accuracy
of financial report numbers of a company. However, he stated that one of the
benefit cost audit may bring about is an increase in accuracy in product
costing thereby providing more accurate profit or loss figures. However, he
opines “the same function is done under financial audit as
well.” He suggested that, “cost audit is only essential in a
monopoly situation, but as in India companies are competing with each other
to sale their products and hence companies are always trying to improve their
operational efficiency to provide better quality goods at reasonable price”, cost audit is unnecessary. Therefore, : … companies are trying to get accurate cost
data to survive in competition and an enforcement of cost audit is not
necessary. He stated strongly that his investment decisions are not at all
influenced by whether there is a mandatory cost audit in a company, as his
trust in financial statements of companies has not been affected by the
mandatory cost audit. Respondent RB, having an experience of about ten years in the
share market, provided the same opinion as that of SL. He suggested that “I have serious doubt about the integrity of the cost auditors” and hence: I do not believe that cost audits have any role in providing
more dependable cost data concerning closing stock, work-in-progress and
hence profit. He was quite disappointed while discussing about the role of
cost audit in enhancing the level of trust on product pricing and numbers in
financial statements of those companies where cost audits are conducted, as
he claimed that “I have no trust in the
process as I told you before and how many customers are aware about the cost
audit exercise? To me cost audit affect product pricing by increasing it” by the cost of a mandatory cost audit. He also suggested that, the mandatory
cost audit to his belief; do not help in detecting the standard of
operational efficiency of the management. PA, the most experienced investor in this group of respondents,
with an experience of about 30 years was quite disappointed with the
implementation of mandatory cost audit in I myself am a Chartered Accountant, what do you think we do? We
do the same job. What's the use of cost audit then? Useless. Mandatory cost audits have not increased the trust of AP (an
investor with about 20 years' experience) concerning product costing, as he stated
that: … companies are competing with each other
here and hence trying to provide products to customers at low price to
increase their individual market share. Why do we need mandatory cost audit
then? Cost audits have also not enhanced his level of trust in
financial statements. He also stated that: I do not consider cost audit while making an investment
decision. I depend on the market. Audits are just a process, specifically the
cost audit. Respondent SA, having an experience of ten years in the share
market, opined that the mandatory cost audit has not at all enhanced his
trust on the costing efficiencies of the cost audited companies because “cost audit does not help in bringing down the cost.” He was also of the opinion that the level of trust in financial
statement numbers does not increase as a result of an enforcement of cost
audits and cost audits do not impact his investment decisions. The mandatory cost audit has not enhanced the trust of RL (who
possesses about 20 years' experience in the share market) concerning product
costing and accuracy of financial statement numbers. He commented concerning
the mandatory cost audit that, “Its relevance
is nil.” It does not play any role in his investment decisions as well.
He also opined that, the cost audit does not at all help in obtaining more
dependable cost data concerning the valuation of closing stock,
work-in-progress and profit. AD, a comparatively less experienced investor in the share
market, that is, only possessing an experience of one and a half years,
stated that: I do not consider cost audit while making investment decision. I
only look at the annual report and the financial auditor's report. However, I
depend on the market and my friends who are in share market a lot to make my
investment decisions. He disagreed that a cost audit helps in providing more
dependable cost data in regard to the valuation of closing stock,
work-in-progress and hence, profit. Respondent SR, having an experience of about two years in the
share market, opined that his trust on product pricing and financial
statements did not increase as a result of mandatory cost audit. He opined: … cost audit is a post-mortem
examination. It is done after financial statements are prepared for a
specific year. Hence, I believe that there is no relation between trust and
cost audited financial statements. He disagreed that it is better to buy securities of those
companies, where a cost audit is conducted. He further stated that a
mandatory cost audit does “not at all” help in obtaining
more dependable cost data concerning the valuation of closing stock,
work-in-progress and hence the profit figure. He also opined that mandatory
cost audit has “no role” in more accurately detecting the
efficiency of management. He exclaimed that: I do not at all believe in cost audit and it has only been
imposed to provide employment to cost accountants. AG, with about five years of experience in the share market,
opined that companies are now competing with each other to capture a
significant portion of the market, and hence they are trying to achieve the
highest level of operational efficiency. So, the mandatory cost audit has no
specific significance in enhancing trust concerning product costing and
financial statements numbers. He also opined that “investors compute ratios and do their own analyses before investing,
and mandatory cost audit has no role in it.” Hence,
according
to AG, the cost audit has not enhanced his trust in financial statements.
Similarly, he stated that he does not believe that a mandatory cost audit
helps in obtaining more dependable cost data concerning the valuation of
closing stock, work-in-progress and profit. This is due to the fact that: … in He also opined: … cost audit is wastage of resources.
Companies do not want cost audit. They will go to any length to ward off
mandatory cost audit. Cost audit still exists because of lobbying by the
ICWAI. He also stressed that: … public does not know whether a company
is subjected to cost audit and hence the question of enhancement of trust in
financial statements due to mandatory cost audit does not arise. It is evident from the above analyses that these investors
support the views expressed earlier by the preparers of financial statements.
All of the respondents in the investor group opined that the mandatory cost
audit has not enhanced their trust on product costing and on the accuracy of
financial reporting numbers. Some of the respondents suggest that the job of
a cost auditor coincides with that of the financial auditor, and hence cannot
be perceived as a value-added service. All of the respondents in this group
also opined that the mandatory cost audit does not help in obtaining more
dependable cost data in regard to valuation of closing stock,
work-in-progress and profit. These respondents also stated that their
investment decisions are not influenced by a mandatory cost audit. They did
not agree with the statement that it is better to buy securities of those
companies where a cost audit has been made mandatory;, i.e. risk-taking (Mayer
et al., 1995). One of the reasons behind the fact that cost audit
has been unable to enhance the trust of investors appears to be that cost
audit reports are not publicly available. 6 Conclusion
It is apparent that the users of financial reports (trustors)
interviewed do not have much trust in the cost audit, as they do not consider
mandatory cost audit to have any role in their investment decisions that is,
risk-taking in relationship. It is interesting to note the differences in
opinion between cost auditors in practice and the users of financial
statements. In contrast to the opinions of the latter, all of the cost
auditors interviewed suggested that a mandatory cost audit enhances trust of
various user groups of financial statements. It could be argued that cost
auditors have an interest in promoting mandatory cost audits. It has also
been observed that the opinions of the preparers of financial reports are
similar to those of the users of these reports. They also stated that a
mandatory cost audit does not increase the trust of existing and prospective
investors on financial statement numbers. Hence, there lies a doubt concerning whether the mandatory cost
audit is fulfilling its purpose in the Indian context. All of the high-level
officials of the companies and sophisticated investors suggested that the
mandatory cost audit function is wasteful of money and resources in this era
where competition is vital between business organisations, which can take
care of the perceived operational efficiency expected to be gained through
cost audit compliance. The investors interviewed do not perceive cost auditors to
possess additional ability, compared to auditors, in performing the audits of
financial statements. Mandatory cost audit has not been perceived to provide
any value-based service as business organisations try to improve their
operational efficiency in order to provide better quality goods at reasonable
price so that they can compete at the market place. Similarly, the ability of
cost auditors to provide more accurate data concerning closing stock,
work-in-progress and hence profit has also been questioned by those investors
interviewed as they perceive that the financial audit also does the same
function. From this perspective, imposing a cost audit is a duplication of
the same job. The same opinion has been expressed by the preparers of
financial reports interviewed. These preparers of financial reports do not
believe that a cost audit has better ability to detect fraud and
misrepresentation as well. The benefit of the mandatory cost audit has also been questioned
by some preparers of financial reports and investors as the cost audit report
is not disclosed to the public and does not form a part of the annual report.
The integrity of the mandatory cost audit has been doubted by one of the
preparers of financial statements. Most of the respondents perceived few, if
any, specific benefits arising from the cost audit process, and suggested
that the main benefit of the implementation of mandatory cost audit in Considering the above, it can be suggested that the mandatory
cost audit in Finally, it can be suggested, following our findings, that
future research should carefully consider the usefulness and the cost and
benefit aspects of the mandatory cost audit. The extent to which the
financial audit enhances the users' trust in financial statements, which is
outside the scope of the present paper, should also be considered in this
regard. The Authors
Bikram Chatterjee,
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