Govt to crack whip on firms not filing cost audits

The Ministry of Corporate Affairs is planning to pull the plug on companies that do not file cost audits in order to ensure that these businesses pay accurate corporation taxes and consumers know the pricing of products.

A senior official said that the ministry will examine companies across at least 10 sectors to identify companies that do not hire cost accountants and file reports. Textiles, machinery, insecticides, milk powder, glass, tea and coffee are some of the sectors that will be monitored.

The move will ensure that firms do not evade corporation tax, the official explained. Cost audit, which reflects efficiency of the company concerned, also provides the consumer an idea about the fair price of products.

The official stated that the plan is being thought of in the interest of investors as well. “Filing of cost audits will tell us if companies are fudging numbers, and will also tell investors what the company’s costing plan is,” the official added.

At present, there are 5,000 firms that need to file cost audits. However, only 1,000 companies actually do so. The government intends to start surprise checks to track and trace companies that do not comply. Any company that has an annual turnover of Rs 35 crore or more has to file a cost audit.

Meanwhile, sources also said that the ministry plans to ask banks to ensure that audit reports of companies are used for analysing the credibility of companies.

The ministry has identified 300,000 shell companies, post-demonetisation. Sources said that after demonetisation, the government had conducted a 50-day special audit of account movement before tracing these shell companies. According to Reserve Bank of India numbers, the loss incurred by banks due to fraud increased 72 per cent to Rs 16,770 crore in 2016-17 from Rs 9,750 crore in 2012-13. 

The government has cracked the whip on shell companies by deregistering them, disqualifying their directors and freezing bank accounts of such companies. Banks have also been asked to check with the government before lending to companies not filing statutory returns. 

Banks need to now ensure that the company they are lending to is not part of the disqualified list. Investigative agencies such as the Serious Fraud Investigation Office are investigating these directors. More than 100,000 directors associated with shell companies have been disqualified by the Ministry of Corporate Affairs. Action is also being taken against chartered accountants involved with these companies.

The ministry is planning an early warning system for the authorities to take action against companies that are non-compliant.

CHECKS & BALANCES

• Out of 5,000 companies, only 1,000 file cost audit  
• Cost audit gives consumer fair price of products
• It ensures companies do not fudge numbers
• It also ensures companies do not evade corporate tax