Banking today is not as same as it was a few decades back. With evolving technologies, banks have shifted from the age-old Brick-n-Mortar system, to more advanced methods of banking including internet banking, UPI, ULI, Mobile Banking etc., which though brought lot of benefits to the system of banking, also brought with it huge amount of cost as well.
It is a known fact to anyone that every bank earns its profit through the difference in interest on deposit and interest on loan. However, despite having 100+ banks, each with more than 1000+ branches spread across the country, banks are struggling to maintain and increase their profit. Furthermore, they are being forced to launch new products and services due to increasing competition and the need to retain and grow their customer base, which in turn is increasing operational complexity.
This is where an often-overlooked tool, cost audit, which is traditionally associated with factories and manufacturing lines, is quietly gaining importance.
Cost audit is the tool that helps an organization answer the very question of how one is spending what it earns and suggests measures to spend more rationally.
While in India the current regulatory framework explicitly excludes the banking sector from the ambit of cost accounting and cost audit, the question each should ask is: are these regulations truly reflecting the changing economic trends and the operational overhaul that has happened in the sector over the last few decades, or are they just sticking to age-old principles and practices?
In fact, it is a known fact that cost is no longer something that relates only to the manufacturing and production sectors but is also applicable to the service sectors. Especially the banking sector, which is facing new and advanced challenges such as technological advancements—including the introduction of AI—changing economic environments, changing customer behaviours, etc., along with age-old challenges such as rising NPAs, tight margins, etc.
What is Cost Audit?
To understand cost audit, one must have an idea of what cost is, what cost accounting is, and how controlling the same can bring profit to any organization.
There is a misconception everywhere that cost and expenses are synonyms. But in fact, the concept of cost is more complicated than what expense is. While expense denotes a cost that is used by an organization in generating revenue, cost refers to the monetary value that has been given up to acquire an asset. Thus, expense is just a mere portion of the cost which has expired in the process of generating revenue.
Cost accounting thus denotes the accounting, allocation, and management of cost in a systematic manner whereby inferences can be developed to improve the profitability of an organization.
In a general economy, all organizations are working towards earning profit. Profit is thus the ultimate motive of almost all organizations (barring some which are meant for service).
However, in this competitive world, there are only two ways in which an organization can achieve its profit target—either through raising the price or through reducing the cost involved.
While the former seems a little too easy, the risk of losing healthy and loyal customers is involved.
This is where cost accounting and audit come into play.
Cost accounting helps organizations evaluate the cost involved in running the organization, and cost audit helps the organization in forming policies that can bring rationalization in costing, thereby making the organization more profitable.
Why Cost Audit when there is Financial Audit?
One of the most commonly asked question in any organization is, why they need to incur an additional expense by introducing a cost auditor when there is already a financial auditor? The answer to that question is, cost auditor is not just any expense but it’s an investment that one is making in the organization.
While the financial audit ensures compliance and transparency, and certify a true and fair view of the financial statements, it serves a limited purpose to the management. This is because financial audit does not provide a roadmap based on their findings. This is where the cost audit reports differ. The cost audit concentrates on internal efficiency and cost control focusing on value creation. It suggests to the management possible areas where cost can be reduced and how it can bring more profitability. It helps in optimizing the expenses/ cost within the entity, which can thereby improve the operational and financial efficiency of the organization.
Thus, one is not a substitute to the other but they are complementary. While one ensures that the numbers add up, the other asks whether they make sense.
Role of Cost Audit in Banks
Banks plays a significant role in the functioning of any economy. Being the catalysts of the economy, the cost they incur to remain available to the commoners is also high. While the current regulations in the country excludes banks from the ambit of cost audit, the implementation of the same in a bank is not illegal or waste of money.
In banking, cost is involved in different activities. Whether it’s for running branches, or for bringing a new technology, or for acquiring or retaining customers, bank goes through huge amount of cost. While the financial audit confirms the true and fair nature of the transaction, the question of whether the funds are being used optimally remains unanswered.
Questions such as, whether it is profitable to run a low performing branch? are we spending more on technologies which we merely use? whether we are optimally utilizing IT and Non-IT resources including human resources? Does our customer acquisition cost truly justify the pricing decisions we take? etc. are addressed only when we carry out a thorough cost audit.
Some of the areas where the cost accounting and audit can bring more efficiency in the banking sector are;
1. Cost accounting can help analyse product-wise, branch-wise, and segment-wise costs, allowing better pricing and resource allocation.
2. Cost audits if implemented effectively, can bring out inefficiencies in the operational side of the organization, such as high cost of customer acquisition, ATM maintenance, or compliance costs, which is not focused while carrying out statutory financial audits.
3. Cost audit can identify redundant and bottleneck activities which are hindering the organizational profitability and can suggest measures to overcome the same.
4. If implemented effectively it will serve as a tool to introspect the managerial decisions and can ensure optimum utilization of the available resources.
5. Decisions such as buying a new technology or developing the same inhouse, or analysing the cost-benefit of a product to decide whether to continue with the same or to scrap it, cost accounting and audit plays a significant role.
Implementation Hurdles.
It is hereby evident that cost accounting and cost audit, if implemented effectively and efficiently, brings to the table a lot of advantages like;
1. Sharper cost control
2. Better pricing strategies
3. Better profitability
4. Improved budgeting and forecasting etc.,
There remain challenges, the foremost being the lack of legal compulsion for the same. Cost audits aren’t mandatory under Indian banking regulations. This one hurdle itself is the most serious. Due to the lack of legal backing, there exists no standardized system of cost accounting for banks today. How to calculate the cost of the sector or how to effectively evaluate the same varies from bank to bank, creating a lack of uniformity and comparability. This creates difficulty in the sector in implementing the same.
Further, cost accounting and the audit report, being decisive in nature, contain not just figures or numerical data alone—they provide a blueprint of the organization’s past, present, and proposed future. Thus, making them more private and confidential.
A Call for Action
“If we have to succeed in the globalized world, we have to enlarge the scope of Cost Audit to cover all aspects of manufacturing and service sector activities including healthcare and education.” – These are the words of honourable former President of India, Bharat Ratna Dr. A P J Abdul Kalam.
In fact, this single statement by the visionary himself is the testimonial of how relevant the cost audit is in a globalized economy. This is because, cost plays a pivotal role in the day-to-day life of each and every one of us.
In manufacturing and infrastructure industries both cost accounting and cost audit plays a significant role in tracking efficiency, improved transparency, and informed decision making. However, in the Indian Banking System where exists immense operational complexity, cost accounting and audit tools are still underutilized either due to its not being regulatory compliance or because of the negligence of its immense importance. While it is not a compliance measure, the time is ripe for banks to examine the need to adopt cost accounting and audit practices to achieve strategic advantages.
In a sector where margins are tightening and compliance cost is rising, knowing your costs isn’t optional but a competitive necessity whole together.
