Stifling controls or self-regulation?

Sep 03 2014, 01:25 IST
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SummaryCost Rules 2014 focus on cost optimisation and management in sectors that are not compelled by market forces to adopt such initiatives.

There has been much noise amongst the cost accounting fraternity over the Cost Records and Cost Audit Rules 2014. The Institute of Cost Accountants of India (ICAI) stated that new rules defied logic, while certain academicians associated with ICAI stated that since managers are inherently opportunistic, it is necessary for independent directors to be made aware of the full details of costs so that managers do not manoeuvre board processes to get favourable board decisions.

Such an argument wrongly assumes that professional managers, in general, provide incorrect or incomplete information to the board and stakeholders.

Further, such statements go against the spirit of cooperation and openness propagated by the government, which has recognised the need for self-regulation in todays economic environment. While it is obvious that a strong system of checks and balances must remain in place to ensure compliance with statutory regulations, the answer lies in freeing up the entrepreneurial spirit of the private sector and providing a platform based on mutual trust and belief in a free market economy. Successive governments have realised this over years of economic liberalisation and this is manifest in legislations such as the Companies Act, 2013, which provides a comfortable degree of flexibility and autonomy to corporate entities in their operations while ensuring a framework of compliance with regulations.

The government recognises the right of board members to exercise their independence and seek information on matters as may be required by them. This does not translate to the need to impose a forced third-party authentication of all information placed before the board. Unlike shareholders, who need independent assurance from statutory auditors since the board acts in a fiduciary capacity on their behalf, professional managers are appointed by the board and work in the interests of the company while carrying out their responsibilities. Surely, the professional community is not going to risk its reputation and career by wilfully or negligently providing incorrect or incomplete information, neither can one imagine that they would all collude and conspire to misinform the board as the statement from some members of ICAI seems to be alluding. Internal controls prescribed by law and companies are responsible enough to ensure that they are followed in substance and spirit. The checks and balances for professional managers are exceedingly more complicated and rigorous than merely relying on an independent cost auditor to ascertain the correctness of information presented to the board.

In todays technology-driven environment, it

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