Somewhere in the notice of every annual general meeting of an Indian cement, steel, pharmaceutical, fertiliser or sugar company sits an ordinary resolution that most shareholders vote on without reading. It ratifies the remuneration, usually a few lakh rupees, payable to a firm of cost accountants appointed by the board to audit the company’s cost records for the coming year. A few dozen pages later the Board’s Report contains a single sentence stating that the maintenance of cost records has been specified by the Central Government under section 148(1) of the Companies Act 2013 and that such records are made and maintained. And in the annexure to the statutory auditor’s report, under clause (vi) of paragraph 3 of the Companies (Auditor’s Report) Order 2020, the statutory auditor confirms, prima facie, that those records are being kept. That is the whole of it. Three sentences, spread across three documents, are all the annual report says about a process that produces one of the most detailed pictures of the company’s economics that exists anywhere.
The picture itself is the cost audit report. It is prepared on Form CRA-3 by a practising cost accountant, a member of a profession that is distinct from chartered accountancy and has its own statute and institute. It sets out, product by product, the quantity produced, the quantity sold, the cost of materials, utilities, labour, depreciation and overheads, the cost of sales, the sales realisation and the margin, and then reconciles all of that to the audited profit in the financial statements. It contains a statement on the arm’s-length character of the company’s related-party transactions, prepared by someone other than the statutory auditor. It goes to the board, and within thirty days of the board receiving it, to the ministry, in XBRL. No provision of the Act or the rules requires it to be circulated to members or annexed to the annual report, and companies do not do so. It is audited, filed and archived. It is not published.
India is very nearly alone in doing this. No other large equity market subjects its listed manufacturers to a statutory audit of product costs. The regime is sixty years old, has been rewritten three times, and survived an attempt to narrow it almost out of existence in 2014. For the reader of an annual report it matters in two ways. Negatively, the shareholder should know that a great deal of audited cost information exists and will not be shown to him, so that he does not mistake the segment note for the whole story. Positively, the three sentences, read against the rules that generate them, answer several questions the rest of the annual report does not.
Where the trail shows
The trail has three visible footprints and one that is invisible by design.
The first footprint is the resolution in the AGM notice. Section 148(3) of the Act provides that the cost audit is conducted by a cost accountant appointed by the board, and that the remuneration is determined by the members in the manner prescribed. Rule 14 of the Companies (Audit and Auditors) Rules 2014 supplies the manner: where the company is required to have an audit committee, the committee proposes the appointment and the remuneration, the board approves both, and the members ratify the remuneration; where there is no audit committee, the board appoints and the members ratify. The resolution is therefore one to ratify a fee, not to appoint an auditor, and its explanatory statement usually gives the firm’s name, the year, the fee, and sometimes the products or plants covered. The first proviso to section 148(3) bars the statutory auditor appointed under section 139 from being appointed as cost auditor, so the two names will always differ.
The second footprint is in the Board’s Report. Rule 8(5)(ix) of the Companies (Accounts) Rules 2014, inserted by the Companies (Accounts) Amendment Rules 2018 with effect from 31 July 2018, requires the Board’s Report to contain a statement as to whether maintenance of cost records as specified by the Central Government under section 148(1) is required by the company and, if so, whether such accounts and records are made and maintained. The standard wording is a single sentence of confirmation.
The third footprint is in the statutory auditor’s CARO annexure. Paragraph 3(vi) of the Companies (Auditor’s Report) Order 2020, which applies to financial years commencing on or after 1 April 2021, requires the statutory auditor to state whether maintenance of cost records has been specified by the Central Government under section 148(1) and whether such accounts and records have been so made and maintained. The statutory auditor is not the cost auditor and has not examined the records for accuracy; the customary formulation, following the Institute of Chartered Accountants of India’s guidance, is that the auditor has broadly reviewed the records and has not made a detailed examination of them. The clause is a statement of existence, not of quality.
The invisible footprint is the one the shareholder would most want to see. Section 148(6) requires the company, within thirty days of receiving the cost audit report, to furnish the Central Government with full information and explanations on every reservation or qualification contained in it, and section 148(7) allows the government to ask for further information. A qualified cost audit report is therefore a matter between the company and the ministry. Nothing in the Act, the rules or the listing regulations requires the company to tell shareholders that its cost auditor has qualified the report. The only route by which a cost auditor’s concern reaches the outside world is Rule 6(7) of the Companies (Cost Records and Audit) Rules 2014, which applies the fraud-reporting duty of section 143(12) to the cost auditor; a fraud report goes to the audit committee or the government, and would surface only if it triggered a disclosure under Regulation 30 of the listing regulations.
Why India has a cost audit at all
The regime is a product of the licence-raj economy and has outlived it. The Companies (Amendment) Act 1965 inserted section 209(1)(d) into the Companies Act 1956, allowing the Central Government to require companies engaged in production, processing, manufacturing or mining to keep particulars of the utilisation of material, labour and other items of cost, and section 233B, allowing the government to order an audit of those records by a cost accountant. The purpose was administrative: a state that fixed prices, allocated inputs, set excise duties by reference to cost and licensed capacity wanted an independent professional to verify what things actually cost to make. Between 1965 and 2008 the government issued industry-specific Cost Accounting Records Rules for some forty-four industries, from cement and sugar to bulk drugs and electricity, each prescribing its own cost-sheet formats, and issued cost audit orders company by company.
The first rewrite came in 2011. The Companies (Cost Accounting Records) Rules 2011, notified on 3 June 2011, superseded thirty-six of the industry-specific rules with a single general framework applying to companies above a size threshold, and the Companies (Cost Audit Report) Rules 2011 replaced the 2001 report rules. Six regulated industries, telecommunications, petroleum, electricity, sugar, fertilisers and pharmaceuticals, received their own 2011 rules in December of that year. The 2011 regime required the government’s prior approval of every cost auditor and a separate performance appraisal report to the board on Form III, in substance a consultancy document on capacity and productivity; neither survived.
The second rewrite came with the new Act. Section 148 of the Companies Act 2013 re-enacted the power, and the Companies (Cost Records and Audit) Rules 2014, notified on 30 June 2014, replaced the whole of the 2011 apparatus. The first version of the 2014 rules narrowed the regime sharply. Coverage was confined to a short list of strategic sectors such as defence machinery, arms and explosives, industries under a sectoral regulator, a list of public-interest industries, and medical devices, with audit thresholds of ₹100 crore of product turnover or ₹500 crore of net worth. Large parts of Indian manufacturing dropped out, and within six months the ministry reversed course. The Companies (Cost Records and Audit) Amendment Rules 2014, notified on 31 December 2014, substituted a new Rule 3 built on two tables, one for regulated sectors and one for everything else, with lower thresholds, and that structure is the one in force today.
The rules have been amended at intervals since: on 14 July 2016 (the captive-power exemption, the cost auditor’s consent and eligibility certificate, and an express XBRL filing requirement in Rule 6(6)); on 7 December 2017 (Forms CRA-1 and CRA-3 substituted to align with Ind AS, retrospectively from 1 April 2016) and again that month (Customs Tariff headings replacing excise headings after the goods and services tax); on 15 October 2019 (revised forms and a reconciliation of indirect taxes); and most recently on 30 May 2025, effective 14 July 2025, when electronic Forms CRA-2 and CRA-4 were substituted for the ministry’s V3 portal. The substance of what is recorded and audited has not changed since 2014.
Who must keep records, and who must be audited
The rules draw two lines, one for records and one for audit, and draw them differently for the two tables.
Table A of Rule 3 lists the regulated sectors: telecommunication services regulated by the Telecom Regulatory Authority of India; the generation, transmission, distribution and supply of electricity under the Electricity Act 2003; petroleum products, including activities regulated by the Petroleum and Natural Gas Regulatory Board; drugs and pharmaceuticals; fertilisers; and sugar and industrial alcohol. Table B lists the non-regulated sectors and currently runs to thirty-three items, defined mostly by Customs Tariff headings: defence and space machinery, arms and explosives, ports and aeronautical services, iron and steel, roads and infrastructure, rubber, coffee and tea, railway rolling stock, cement, ores and minerals, base metals, chemicals, jute, edible oil, construction, education, health services, plastics, tyres, paper, textiles, glass, machinery, electricals, medical devices, and a residual item for other goods and services. The list is long enough that most listed manufacturers fall within it.
For the maintenance of cost records, Rule 3 sets one threshold for both tables: an overall turnover from all products and services of ₹35 crore or more in the immediately preceding financial year. Micro and small enterprises within the meaning of the Micro, Small and Medium Enterprises Development Act 2006 are excluded. A company above the line must keep cost records in the form prescribed by Form CRA-1, which sets out principles for the treatment of material, employee, utility, depreciation, overhead and other costs, and requires product-wise cost statements. Rule 5 requires the records to enable the calculation of per-unit cost of production, cost of sales and margin for each product or service.
For the cost audit, Rule 4 sets two thresholds in each case, both of which must be crossed. A Table A company is audited if its overall annual turnover from all products and services in the preceding year was ₹50 crore or more and the aggregate turnover of the individual products or services covered by Table A was ₹25 crore or more. A Table B company is audited if its overall turnover was ₹100 crore or more and the aggregate turnover of the covered products or services was ₹35 crore or more. The product-level threshold matters more than it looks: a diversified company may be well above the overall line while none of its covered products crosses the product line, and would then keep cost records without being audited on them.
Rule 4(3) then provides three exemptions from audit, not from records. A company whose revenue from exports, in foreign exchange, exceeded seventy-five per cent of its total revenue is exempt. A company operating from a special economic zone is exempt. And, since the 2016 amendment, a company engaged in the generation of electricity for captive consumption through a captive generating plant is exempt for that activity. The export exemption is the one that most often explains the absence of a cost audit resolution at a large company: a pharmaceutical exporter selling nine-tenths of its output abroad will keep cost records but will have no cost auditor to ratify a fee for.
The cycle of forms
The regime runs on four forms and a calendar, and reading the trail requires knowing the calendar.
Form CRA-1 is not a filing but a format: the principles on which cost records are kept. Rule 6(1) requires a company subject to audit to appoint a cost auditor within 180 days of the commencement of every financial year. Since 2016 the company must first obtain the auditor’s consent and a certificate of eligibility under Rule 6(1A). Rule 6(2) requires the company to inform the Central Government of the appointment on Form CRA-2 within thirty days of the board meeting at which the appointment is made or within 180 days of the start of the financial year, whichever is earlier. A casual vacancy must be filled within thirty days under Rule 6(3A), and Rule 6(3) allows the board to remove the cost auditor mid-term only by a resolution passed after giving the auditor an opportunity to be heard and recording the reasons.
The company prepares the cost statements; the auditor audits them. Rule 6(3B), also from 2016, requires the cost statements, including other statements to be annexed to the cost audit report, to be approved by the board before they are signed on behalf of the board and submitted to the cost auditor. Rule 2(d) was rewritten in the same amendment to make the division of responsibility clear: the report is the auditor’s opinion on statements the company has prepared, as the statutory audit report is an opinion on financial statements the directors have approved.
Rule 6(5) requires the cost auditor to forward the report, on Form CRA-3, to the board within 180 days of the close of the financial year, together with the auditor’s reservations, qualifications, observations and suggestions, if any. The board is to consider and examine the report, particularly the reservations and qualifications. Rule 6(6) then requires the company, within thirty days of receiving the report, to furnish it to the Central Government on Form CRA-4 in XBRL format, in the manner set out in the Companies (Filing of Documents and Forms in Extensible Business Reporting Language) Rules 2015. A 2018 proviso lets a company granted an AGM extension under section 96(1) file CRA-4 within the extended section 137 period, and the ministry has repeatedly extended the deadline by circular.
Section 148(8) attaches the penalties of section 147: a default by the company or its officers falls under section 147(1), and a default by the cost auditor under section 147(2) to (4). The Companies (Amendment) Act 2020 removed imprisonment for officers under section 147(1), leaving fines; a cost auditor who contravenes wilfully with intent to deceive remains exposed to imprisonment and to refund of remuneration and damages under section 147(2) and (3).
The XBRL point deserves a moment. Cost audit reports have been filed in structured form since November 2012 under the 2011 rules, and the 2015 XBRL rules applied the requirement to financial years from 1 April 2014, so the ministry possesses a machine-readable product-level cost database for every audited company going back more than a decade, which it has said it reviews for internal inconsistencies. That database is one of the reasons the regime has survived: the fertiliser subsidy, drug price control under the Drugs (Prices Control) Order, electricity tariff determination by the central and state regulatory commissions, and anti-dumping investigations all draw on cost data, and the proviso to section 148(1) requires the government to consult the relevant sectoral regulator before prescribing cost records for a class of companies regulated under a special Act.
What the report contains
Form CRA-3 has two parts: a short audit report and a long annexure. The report proper is a page of opinion in a familiar form: the auditor has obtained the necessary information and explanations, proper cost records have been maintained, the cost statements agree with the books, and any observations and suggestions are appended. The annexure is the substance, and it is organised in four parts.
Part A is general information: the company, the year, the cost auditor, and the company’s cost accounting policy, meaning the basis on which each element of cost is identified, allocated and apportioned, the method of valuing inter-unit and inter-company transfers, and the treatment of abnormal costs. It closes with a table of the products and services covered, keyed to Customs Tariff headings, noting which are audited.
Part B covers the manufacturing sector, product by product. For each product there is a quantitative statement of installed capacity, production, captive consumption, sales and closing stock, followed by an abridged cost statement running from materials consumed through utilities, employee cost, stores, repairs, R&D, depreciation and overheads to cost of sales, net sales realisation and margin, per unit and in total, with supporting schedules for materials, utilities and industry-specific expenses. Part C provides the equivalent for services.
Part D is the part that speaks to the shareholder most directly, though the shareholder does not hear it. It begins with a product-wise and service-wise profitability statement for the audited products, then for the unaudited products, and then for the company as a whole, reconciled to the profit before tax in the financial statements. It continues with a statement of value addition and its distribution, a statement of financial position and a ratio analysis. It contains a statement of related-party transactions, listing each transaction with a related party by product, the transfer price, the normal price and the basis on which the transfer price was set, which is to say an arm’s-length analysis prepared independently of the audit committee’s own review under section 177 and the Ind AS 24 note. And since the 2019 amendment it ends with a reconciliation of indirect taxes for the company as a whole.
Set beside the annual report, the gap is stark. Ind AS 108 requires segment reporting on the management approach, meaning at whatever level of aggregation the chief operating decision-maker uses, and Indian companies routinely report two or three segments where CRA-3 reports twenty products. Ind AS 2 governs inventory valuation but produces no product-level margin. The related-party note under Ind AS 24 and the listing regulations gives amounts and relationships but not transfer prices against comparables. The cost audit report is the only document in the Indian corporate reporting system in which an independent professional attests, product by product, to what it costs the company to make what it sells and what the company gets for it. The reader of the annual report should know that this document exists and should not confuse the segment note, which is what management chooses to show, with the underlying reality, which has been audited and filed elsewhere.
Reading the three sentences
If the report is out of reach, what can the trail tell the reader? More than it appears.
The first question is coverage. A manufacturer with turnover comfortably above ₹100 crore whose AGM notice carries no cost-audit ratification resolution is either outside both tables, or within Rule 4(3). For most industrial companies the tables are broad enough that the first is unlikely, so the reader should look for the exemption. The export exemption is usually the answer, and is itself a specific statement about the company’s market. If neither exemption applies and the resolution is missing, the Board’s Report statement under Rule 8(5)(ix) should be read carefully; “not applicable” at a company that appears to be within Table B is a discrepancy worth a question at the AGM.
The second question is scope. The explanatory statement to the ratification resolution often names the products or plants covered, and a comparison across years shows when a product crossed the ₹35 crore or ₹25 crore product threshold, which is a reasonable proxy for the growth of a line that the segment note may have folded into a larger category.
The third is continuity. Cost auditors change rarely, and a change, visible only by comparing successive AGM notices, is worth noticing for the same reasons a change of statutory auditor is, though the Act attaches none of the formality of section 140 to it.
The fourth is the fee. Cost audit fees are small in absolute terms and the resolution states them. A fee flat for a decade while the company has tripled in size, or a fraction of what comparable companies pay, says something about the depth of the audit being bought, as a statutory audit fee does.
The fifth is silence about qualifications. As explained above, a qualified cost audit report is invisible in the annual report. The one place a concern would surface is a fraud report under Rule 6(7) and section 143(12), which above the prescribed threshold goes to the Central Government and would ordinarily be a material event under Regulation 30. Its absence is weak evidence of a clean report, and no more.
The sixth is the CARO clause. Clause 3(vi) is a statement of existence. An auditor who writes that the records have not been maintained, or only partially, has said something unusual, and the remark should be read with the Board’s Report response under section 134(3)(f), which requires the directors to explain every qualification or adverse remark in the auditor’s report.
Cost audit and the other two audits
The Indian listed company is audited three times over: by a chartered accountant on the financial statements under section 143, by a company secretary in practice on compliance under section 204, and by a cost accountant on the cost records under section 148. Only the first two reports are annexed to the annual report. Section 148(5) applies the qualifications, disqualifications, rights and duties of sections 141 and 143 to the cost auditor, and the second proviso to section 148(3) requires compliance with the cost auditing standards issued by the Institute of Cost Accountants of India and approved by the Central Government; four such standards, numbered 101 to 104, have been approved and fifteen more await approval. The three audits overlap at one point, related-party transactions, and the overlap is instructive. The statutory auditor tests the Ind AS 24 disclosure and the section 188 approvals; the secretarial auditor tests the form of those approvals; the cost auditor tests whether the transfer price was at arm’s length against the normal price of the same product, a substantive test the other two do not perform. That the one substantive test sits in the one report the shareholder does not receive is an irony of the system, not a design.
How other markets handle the same question
The United States has no statutory cost audit for public companies. The Cost Accounting Standards Board, created by Public Law 91-379 in 1970, dormant from 1980 and re-established in 1988 within the Office of Federal Procurement Policy, has nineteen standards codified at 48 CFR 9904, but they apply only to covered federal contracts and are enforced through contract audit, not corporate reporting. A listed American manufacturer with no government contracts has no cost auditor to appoint. The United Kingdom has none either; the Chartered Institute of Management Accountants trains the profession, but no company law provision requires cost records in a prescribed form or an audit of them.
The nearest relatives are in South Asia. Bangladesh’s Companies Act 1994, section 220, and the Cost Audit (Report) Rules 1997 provide a statutory basis for cost audit of specified industries, on the Indian model. Pakistan had a functioning regime under the Companies (Audit of Cost Accounts) Rules 1998 and a 2008 general order covering cement, sugar, vegetable ghee, fertiliser, thermal power, refining, gas and pharmaceuticals, but the Companies Act 2017 left the Securities and Exchange Commission of Pakistan able to order a cost audit only on the proposal of a sector regulator, and the regime lapsed in practice; the Competition Commission of Pakistan asked in a policy note of May 2020 for it to be reinstated, on the ground that product-level cost data had been the commission’s best evidence in predatory-pricing and cartel cases. That argument, that the state needs verified cost data to regulate markets, is the Indian argument of 1965, and the reason the regime survived 2014.
The comparison leaves the Indian reader in an unusual position. In the United States or Britain no product-level cost audit exists, and the shareholder is not missing anything the state has. In India it exists, has been performed, sits in the ministry’s database, and is not shown to the shareholder. The information asymmetry is not between the company and the market but between the state and the market.
How to apply this
For a shareholder or analyst reading an Indian manufacturer’s annual report, the trail can be walked in eight steps.
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Find the ratification resolution in the AGM notice. Note the cost auditor’s name, the fee, the year covered, and any products or units named in the explanatory statement. If there is no such resolution, go to step 3.
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Compare the resolution with the previous three years’ notices: any change of auditor, any change in the products named, and the trend in the fee against the statutory audit fee disclosed in the payments-to-auditors note.
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Read the Board’s Report statement under Rule 8(5)(ix). If it says cost records are maintained but there is no ratification resolution, look for the reason: the export exemption in Rule 4(3)(i), a special economic zone, or product turnover below the Rule 4 threshold. If it says cost records are not applicable, check the company’s products against Table A and Table B and its preceding-year turnover against ₹35 crore.
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Read clause 3(vi) of the CARO annexure. Anything other than the standard confirmation that records have been made and maintained is unusual; read it with section 134(3)(f) of the Board’s Report.
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Read the related-party note knowing that the cost auditor has tested the transfer prices of related-party product sales and purchases against normal prices. The result is not shown, but it exists, and the AGM is the place to ask whether the cost audit report contained any observation on it.
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Check the company’s filing index on the ministry’s portal for Forms CRA-2 and CRA-4 and their dates. A CRA-4 filed late every year, or a CRA-2 outside the 180-day window, is a small indicator of compliance culture, of the same kind as late MGT-7 or AOC-4 filings.
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Check for any Regulation 30 disclosure or Board’s Report reference to a report under section 143(12) by any auditor. A fraud report by the cost auditor is the one route by which a cost audit concern is obliged to reach the market.
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Read the segment note in this light. Where a company reports two segments but its cost audit resolution names six products, segment margins are averages over products whose individual economics have been audited and filed but not shown.
The takeaway: The cost audit report is the most detailed independent account of an Indian manufacturer’s product economics that exists, and the shareholder is shown three sentences of it; read those three sentences against the rules that produce them, and never mistake the segment note for the audited whole.