“An effective cost accounting system is a system of foresight”

Following is the speech delivered by COPE Chairman and Senior Minister D.E.W. Gunasekara at the International Management Accounting Conference, held at the Cinnamon Lakeside

yesterday on the theme ‘Sustainable Value Creation Through Cost Efficiency’

According to the Committee on Public Enterprises (COPE), 17 major State ventures out of the 60-odd public enterprises came under the scrutiny of the COPE are running at loss, which is a huge burden to the Treasury. Of the total loss, 95% relate to the four major State Institutions, namely, CEB, CPC, SriLankan Airlines and Mihin Airlines.

It gives me great pleasure to be in high company with a galaxy of professional accountants in business at a very important international conference. The theme chosen touches on sustainability, value creation and cost efficiency, which are areas that would be of great assistance to the Committee of Public Enterprises (COPE) which I chair.

Besides, this conference takes place at the most appropriate time, when the country’s attention is focused on critical issues on public finance and financial discipline. This is also the time when the process of the formulation of the country’s National Budget for 2014 has begun to operate.

The sustainability of development has become one of the impending global challenges in the context of (i) erosion of natural resources (ii) the need for improvement of environmental, social and economic performance and (iii) the changes in business culture and practices.

Cost and management accounting profession

As you all are aware, with the adoption of International Financial Reporting Standards as Sri Lanka Accounting standards by the Institution of Chartered Accountants of Sri Lanka with effect from 1 January 2012, the commercial public enterprises are required to apply these standards. But they do not have the capability and technical knowledge on these new financial reporting standards. The cost and management accounting profession which is entirely different from the financial accounting profession handling mainly the financial accounting was officially recognised by the Sri Lankan Government in the year 2009. After much debate, the Bill for the setting up of the Institute of Certified Management Accounts of Sri Lanka (CMA) was unanimously approved and the CMA set up by Act of Parliament No. 23 of 2003. This has given recognition to the practice of the cost and management accounting profession, which I believe will improve the cost efficiency and cost control of industry and service sectors and thereby contribute to the economic efficiency of Sri Lanka.

These two sectors – industry and services – account for 89% of Sri Lanka’s GDP. The services sector with its 59% contribution dominates the economy. This is precisely why the accounting profession has surfaced as a guiding profession in the economy which has hitherto been the exclusive privilege of the administrative or planning service. It is my view that the administrative service, planning service and accounting service should collectively guide the economic affairs of our country.

The costing and pricing of goods and services both for local and exports, economical cost of production at each stage of production, determining inefficiencies, control of stocks and raw materials, prevention and detection of wastage in material, man power, production and processes are some of the areas where cost management plays a major role.

Evaluation of economic competitiveness demands an important role to be played by the cost management.

COPE view

From the point of view of the Committee of Public Enterprises (COPE), I wish to provide you with some information to enable you to give thought to some of our problems. I am in the process of compiling my COPE Report to be presented to the Parliament. In fairness, I must report to you that things are better now than what it was a few years back from the point of view of financial discipline.

It was the first time in the history of our legislature that all institutions assigned to the COPE have been subjected to investigation by the COPE. Here I must mention, the assistance rendered by the Auditor General and his staff is commendable. The much-neglected Auditor General’s Department’s importance has been brought into focus, and its independence and prestige has been enhanced. Much remains to be done.

Coming back to the problem of losses incurred by four large commercial institutions, the contributory factors are varied. In my own view, there are deficiencies in our accounting system and standards. This is an area which needs careful investigation by your profession.

Sustainable cost efficiency

I am happy that your sessions will focus on sustainable cost efficiency in the electricity sector which has become a subject matter for deeper discussion in the society at large. Very soon, every household in Sri Lanka will be an electricity consumer – the entire 20 million population will be blessed with electricity. This is a higher stage of social development for an emerging lower-middle income country like ours.

When we introduced the concept of ‘electricity for all,’ we may have perhaps not gone into economics of such a massive project and its impact on our Budget. Energy is produced at three or four levels at varied cost of production. The question of sustainability has now surfaced.

We apparently lost sight of the fact that 62% of our work force come under the informal economy, with a poor purchasing power or spending capacity. The question has been raised whether cost of production is distributed in proportion to their earning capacity and in proportion to their level of consumption. In the final analysis, we are confronted with the question of sustainable cost efficiency.

Countries like India, Pakistan and Bangladesh have achieved sustainable cost efficiency through the application of mandatory cost accounting records, which provide a firm basis as per law for the preparation of pricing for electricity. They also get the conduct of an audit by a cost auditor, thus creating accuracy and transparency in the pricing and cost control.

They also highlight the inefficiencies and wastages of production and distribution which are really management weaknesses. So, the mandatory cost accounting records enable determination of the accurate cost of production and create confidence in the customers and the business community. This is applicable to both to the public and private sector. Therefore, the benefits of cost and management accounting application in enterprises are significant and provide relief to the consumers.

Cost efficiency of large commercial institutions

I have decided to make a recommendation to the Government through my COPE Report that it should take into account the important role that the cost and management accounting profession can play with regard to cost efficiency of large commercial institutions. This is the only way how the consumers’ interests can be safeguarded. It is a social responsibility. In this regard, the Institute of Certified Management Accounts of Sri Lanka (CMA) can play a lead role and should be given all support and assistance to prepare the cost accounting records for different industries and service sectors and to issue cost and management accounting standards, drawing lessens and experiences from our South Asian neighbours and also other global professional accounting bodies. In my view, an expert group comprising professionals and representatives of relevant ministries should be assigned this project.

I am firmly convinced that having a sound cost accounting system will provide enormous benefits and advantages to the management, employees, Government and people at large.

We are as members of the Parliamentary Committee on Public Enterprises are only engaged in post-mortem exercises. But an effective cost accounting system is a system of foresight. It turns losses into profits, speeds up activities, eliminates wastes and close loopholes for possible frauds and malpractices. It helps the management to prepare profit and loss statements on a realistic basis and it enormously helps the policy-framers.

I thank most profoundly the CMA for their kind gesture of inviting me to be the Chief Guest at the inaugural sessions.