Internal Financial Controls under Companies Act, 2013 in India
As a reflection to recent frauds world over, many countries enacted stringent legislations in an attempt to control frauds, make internal control framework more robust, improve the state of corporate governance introduced the concepts of internal financial controls (IFC) and internal controls over financial reporting (ICOFR).
Under the Companies Act, 2013, Section 134 (5) (e) which is applicable to listed companies, requires the Directors’ Responsibility states to directors, to lay down IFC to be followed by the company and such controls be adequate and operate effectively.
Section 177 (4) and (5) which is applicable to listed as well as a select unlisted companies casts responsibility on the audit committee to evaluate IFC and risk management systems. Also, empowers it to call for comments of auditors about internal control systems before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company. Further, as per Schedule IV, the independent directors should satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible.
Lastly, Rule 8 (5) (viii) of Companies (Accounts) Rules, mandates the Board report of every company (including private/small company) to contain details in respect of adequacy of internal financial controls with reference to the financial statements (ICOFR).
Additionally, in terms of Section 143 (3) (i), auditor’s report should also state whether the company has adequate IFC system in place and the operating effectiveness of such controls.
View above, all the private limited companies, regardless of their size, ownership structure etc. are covered within the ambit of internal controls over financial reporting.
My discussions with a few CFOs of mid-sized companies have revealed that they are yet to catch up with these requirements!
Would like to understand from you, has your company implemented IFC/ICOFR? If yes, what was your experience? If not, do you need any help?
PS: We wrote a whitepaper on this subject. It is available on http://bit.ly/21cg69q. Hope you find this useful!