New Delhi: The corporate affairs ministry has underscored the importance of effective and timely cost audits to curb manipulation by unscrupulous elements, a development that comes amid increasing bids by fraudulent companies to mislead authorities with dodgy information about inventory value or related party sales.
In a communication for stakeholders, the ministry said any discrepancies between the inventory value presented in the financial statements of companies and the cost audit report raise red flags, indicating potential misrepresentation of facts. “Companies often overvalue inventory to mislead banks and financial institutions into providing higher credit facilities or loans,” it said. “Similarly, companies understate sales to related parties, resulting in undervaluation to reduce GST (goods and services tax) liability, ultimately causing a loss of revenue for the government.”
The ministry said that from detecting discrepancies in inventory valuation to exposing misleading financial statements, the utility of cost audit in investigations extends far beyond the realm of mere cost control. Compliance requirements and data use Section 148 of the Companies Act, 2013, empowers the government to mandate certain classes of companies in 39 industries to maintain cost records. Such companies are required to e-file cost audit reports with the ministry, which are monitored by its Cost Audit Branch.
Crucial information relating to companies – such as abridged cost statements and related schedules (including capacity utilisation and major costs), reconciliation of profit and indirect tax data, and related party transactions – usually feature in such reports.
Upon requests, the Cost Audit Branch shares these reports with various investigative agencies – including the Director General of Corporate Affairs, Registrar of Companies, Serious Fraud Investigation Office, Central Board of Indirect Taxes and Customs, and Central Board of Direct Taxes – for necessary action.
Government departments and regulatory bodies, including the National Pharmaceutical Pricing Authority and Directorate General of Trade Remedies and Department of Fertilizers, use such product-wise financial and costing data for subsidy determination, monitoring the pricing of essential goods and services, valuation of goods under anti-dumping measures, tariff fixation and detection of direct or indirect tax evasion cases, the ministry said in the communication.
