audit in manufacturing sector
Cost and management
accountants given preferential rights.
By FARAZ SIDDIQUI
Jul 24 - 30, 2000
Securities Exchange Commission of
Pakistan (SECP) has given the preferential right of cost auditing to cost auditors. It is
an important decision due to its significance for the countries like Pakistan where cost
audit is inevitable to boost the manufacturing sector, large scale sector in particular
and small scale sector in general.
The growth performance of over all manufacturing sector has been
lackluster at best in 1990s. after growing at an average rate of 8.2 per cent in the
1980's, the growth of large scale manufacturing slowed to an average of 4.7 per cent in
the first half and further to 2.5 per cent in the second half of the 1990s. The growth
rate of large scale manufacturing in Pakistan has been pathetic during July-March
1999-2000 with an almost zero growth in this year. Talking to PAGE Syed Jamil Ahmed
Rizvi, Director Research, Institute of Cost and Management, said, one of the major reason
for such a drastic slowdown is the input cost of industrial sector in Pakistan is
comparatively higher than other countries in SAARC region. the high cost of domestic
production has rendered our export uncompetitive, he added.
Most of the companies quoted on stock exchange have not performed well.
The equity base of these companies stand eroded and as such they are not in a position to
pay dividend to the stock holders or clear the bank loans. Industrial sickness is at its
peak. In the absence of cost audit, early warning signals were not available through the
cost audit reports well in time for remedial action.
Rizvi lauded the decision of SECP to award cost audit under Section 258
of the Companies Ordinance exclusively to Cost and Management Accountants. Pointing out
the importance of cost audit, he said that financial audit did not evaluate the
performance of the company with regards to cost of production. The main focus of financial
audit is compliance to the law. Cost audit lays emphasis on performance evaluation and can
enhance the performance and production efficiencies by detecting the deviations and
reasons of visible and invisible losses, inefficiencies, unusual wastages", he added.
Rizvi pointed out that cost audit can progressively change the growth
paradigm of manufacturing sector in Pakistan because this help in optimizing the cost of
production which is the main detriment to foster Pakistan's competitiveness in export.
Cost audit enhance the efficient running of organizations. Explaining the far reaching
effects, he said, at macro level, it will help the country by improving tax collections
and counter inflation by reducing cost. He further said that profit maximization would
improve the dividend payout and result in economic development. By applying various
management accounting techniques, cost audit results in reduced cost of production , added
competitive advantage and profit maximization.
Referring India, he said that India got lucrative benefits by adopting
cost audit in 1967 and so far almost 43 industries are covered under cost audit rules. It
is an undeniable fact that at international level competitiveness from India had improved
to a great extent just because of due implementation of cost Accounting Records Rules in
its industries at large. Bangladesh is the second best example in this regard which is
getting benefit of cost audit which the Bangladesh government is implementing for a wide
range of industries, he added.
Talking about Pakistan, he said, in Pakistan so far only vegetable and
cooking oil companies (Cost Accounting Records) was issued on 1st November 1990, Cement
Industry (Cost Accounting Records) was issued on 14th May, 1994. Companies (Audit of Cost
Accounts) Rules, 1998 were promulgated on 24th July, 1998, making Cost Audit mandatory for
these two industries. He further said that finally the decision has been taken by SECP in
a meeting with professional accounting bodies to give preferential right for appointment
as cost auditors by the directors of the companies with prior approval of
Likewise other manufacturing sectors such as sugar, fertilizer,
pharmaceutical, chemicals, paper, jute, engineering and other sectors can get the utmost
benefit by minimizing their cost of production without sacrifice of product quality. He
said, in Pakistan there are 73 operating sugar mills which are suffering from low capacity
utilization. Cost audit rules and compulsory maintenance of cost accounting records for
sugar industry, in line with the international cost accounting models in other countries
of the world, will be helpful in this regard.
Rizvi also emphasized the need for consistent policies for the
development of manufacturing sector in Pakistan. He further said, it is imperative for
manufacturing organizations specially textile sector to have a complete cost audit by cost
& management accountants to improve capacity utilization.
Cost audit should be taken up both in letter and spirit, cost audit is
not punitive in nature. It is rather suggestive and drives its force from the maxim
prevention is better than cure. Cost audit helps in getting early warning signals for
remedial actions. We have experienced a horrible national indebtedness, massive defaults
of bank loans and failure of corporate sector on account of mismanagement of productive