With the rising complexity of commercial transactions, accuracy and transparency have become paramount. Internal Control Over Financial Reporting (ICFR) and Internal Financial Control (IFC) play a major role in ensuring the reliability of financial records. Let’s understand the nuances of the Internal Control Over Financial Reporting (ICFR Applicability) and Internal Financial Control (IFC) in detail.

Understanding ICFR Applicability and IFC Applicability as per the Indian Regulatory Environment

Internal Financial Control (IFC)

  • It is akin to a company-wide system to ensure checks and balances
  • IFC Audit is mandatory for all the listed companies in India
  • IFC Audit ensures that the overall operations of the company are in line with the regulatory requirements and are running efficiently. For instance, it is fruitful in determining that the purchases of the company are approved by the authorized personnel, safeguarding of the assets of the company etc.

Internal Controls Over Financial Reporting (ICFR Reporting)

ICFR Audit are more specific rules within the set of IFC that focus on the financial reporting

  • It is not mandatory to follow the ICFR as per the law. However, it is encouraged to follow the same by the companies.
  • The board of directors of the company are required to report on the controls over financial reporting in the company. Therefore, it is beneficial to have the ICFR practices in place.

ICFR Process: Key Steps to Deploy Effective ICFR

Organisations should focus on carefully developing and executing the ICFR process to ensure optimum effectiveness and efficiency. Here are the key steps to develop an effective ICFR process in your organisation:

  • Examine Your Existing Processes: It all begins with examining your existing processes to understand the flow of transactions and operational aspects of your organisation. Mapping out the processes can be effective like procure-to-pay, hire-to-fire, sales order-to-payment etc.
  • Identification of Risks: The next step involves the identification of the lacunas and gaps in the processes that could impact the financial reporting. This will help identify the major risks in the processes and set forth the direction for developing measures.
  • Implementation of Control Measures: Once the areas of risks are identified, relevant controls should be implemented to bridge the gap and safeguard the integrity and accuracy of the financial data.
  • Continuous Evaluation of Controls: Implementation of the control is the first step but you need to continuously evaluate the controls. This ensures that the controls remain dynamic and responsive to the ICFR framework. Further, the controls should be adaptable and evolving in line with the changing economic and operational landscape.
  • Automation: As the business expands and operations grow, it is important to automate the controls and processes. Deploying automation tools ensures that the controls and processes are effective, efficient and prone to manual errors.

What is the difference between ICFR and IFC?

Some of the key differences between IFC and ICFR include the following:

  • IFC is mandatory for listed companies while ICFR is not mandatory but recommendatory.
  • IFC overlooks the entire business control while the ICFR specifically focuses on the control over accuracy of the financial reporting.

What is the Difference Between ICFR and SOX?

Sarbanes Oxley Act, popularly known as SOX, was passed in the USA in 2002 after the unearthing of major corporate scandals like Enron, WorldCom etc. The Internal Control Over Financial Reporting (ICFR) is particularly focused on the controls over financial reporting aspect and is a part of the SOX framework. SOX not only focuses on the ICFR but also on corporate governance and financial transparency that includes ICFR. While SOX requires the establishment and assessment of the ICFR, it also covers auditor independence, stricter corporate governance requirements as well as executive accountability. 

What is the Difference Between IFC and Internal Audit?

Internal Financial Controls (IFC) has been explicitly defined by the Companies Act, 2013 so as to include policies and procedures adopted by the companies to ensure that the business is conducted in an orderly and efficient manner and the company’s policies are being adhered to. Further, it also aims to safeguard the assets and prevention and detection of frauds and errors. Another significant aspect of the IFC is to ensure the completeness and accuracy of the accounting records and the timely preparation of the financial statements.

While the IFC focuses on the controls relating to the financial aspects of an organisation, internal audits are more focused towards the entire internal control policies and procedures, which also include the operational aspects of the organisation. The overall aim of internal audit is to improve the effectiveness of governance, control processes and risk management. 

ICFR vs Internal Audit: Is ICFR Part of Internal Audit?

Both ICFR and internal audit are different processes and focus on different areas of the business. While the internal audit focuses on the internal controls and processes established within the organisation, ICFR specifically focuses on the financial reporting controls. Financial reporting controls may be a part of the internal audit procedures of the auditor but it is not the only area that an internal auditor focuses.

What is the Purpose of ICFR?

The purpose of ICFR is to ensure adequate control over the procedures and process of financial reporting. This helps ensure that the financial statements and reports reflect a true and fair picture and enhances the transparency and credibility of the financial reporting. It acts as a bedrock for investor and public confidence in the financial reporting processes of any organisation, especially the listed entities.

Is ICFR Applicable to Private Companies?

The Ministry of Corporate Affairs, vide notification dated 13th June 2017 exempted the following private companies from the applicability of ICFR:

  • Small company and One Person Company (OPC)
  • Companies having turnover less than Rs. 50 crores or aggregate borrowings from banks or financial institutions or anybody corporate less than Rs. 25 crores at any point of time during the financial year.

Provisions Governing IFC Applicability and ICFR Applicability

Following are the legal provisions that govern the IFC Applicability and ICFR Applicability in the Indian legal landscape:

Section /Rule Area Regulatory Requirement Applicable on
Section 134(5) Director Responsibility Statement It should state that the directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and are operating effectively. Listed Companies
Section 177 Audit Committee The audit committee shall conduct the evaluation of internal financial controls and risk management systems. Further, it should call upon the auditors to comment on the IFC. Companies having audit committees
Section 149(8) read with Schedule IV Independent Directors Independent directors should satisfy themselves as to the integrity of the financial information and whether the financial controls and the risk management systems are defensible and robust. Companies having independent directors
Section 143(3)(i) Auditor’s Report The auditor’s report shall state whether the company has adequate internal financial controls with reference to financial statements in place and the operating effectiveness of such controls. All companies
Rule 8(5) of Companies (Accounts) Rules, 2014 Board of Directors Report The Director’s report shall state the adequacy of internal financial controls with regard to the financial statements. All companies
Clause 49 of the Listing Agreement CEO / CFO Certification

The CEO and the CFO shall certify to the board the following matters:

· They have accepted the responsibility for the establishment and maintenance of internal controls for financial reporting.

· The effectiveness of the internal control systems that pertain to financial reporting has been evaluated by them.

· The deficiencies in the design and operation of such internal controls of which the CEO / CFO is aware have been communicated to the audit committee and auditors and necessary steps have been taken or proposed to be taken to rectify such deficiencies.

· Necessary changes during the year pertaining to the internal control over financial reporting have been indicated to the audit committee and the auditor.

· Significant frauds involving an employee or management having a significant role in the internal control system over the financial reporting of the company have also been indicated to the audit committee and the auditors.

All the companies whose equity shares are listed on a recognized stock exchange except,

· Companies with paid-up share capital not exceeding Rs. 10 crores and Net

Worth not exceeding Rs. 25 crores.

· Companies have their equity shares listed exclusively on SME and SME-ITP platforms.

Why IFC and ICFR Compliance is Important in the Indian Business Environment?

The application of IFC and ICFR compliances is important for the following reasons:

  • Enhanced Transparency: The reporting associated with the IFC and ICFR enhances the transparency manifold. Checks and balances have been placed at each level, from the audit committee to the director’s report and then the auditor’s report. This also helps attract investors and partners.
  • Smoother Operations: The scope of IFC is not limited to just finances. It also helps ensure that everyday business is run smoothly and in line with the applicable laws and regulations. This can help save time and money in the long run.
  • Reduced Risks: IFC can help reduce risk significantly. It helps in the identification and prevention of financial problems before they happen. This saves the company from significant fraud and other costly repercussions.

How ASC Help with IFC & ICFR Applicability in India?

ASC Group is one of the leading professional firms in India with deep experience dealing with IFC and ICFR matters. Here’s how ASC Group helps businesses dealing with IFC and ICFR:

  • Identification of Risks: With years of experience, ASC Group is well-equipped to detect the potential risks and loopholes in your financial reporting processes. We help you identify the areas where the financial reporting processes are vulnerable followed by recommendations and effective strategies to mitigate those risks.
  • Building Safeguards: After the vulnerabilities are detected, what follows are the effective steps to bridge the gaps and create robust internal controls. ASC Group helps you establish strong safeguards to improve your financial processes. This ensures the elimination of loopholes and efficient systems for proper control and reporting.
  • Detailed Assessment: We conduct a detailed assessment of each and every aspect of your internal financial controls and reporting processes. This includes a thorough evaluation of the effectiveness and efficiency of your internal controls followed by tailored recommendations to improve the same.

ASC Group has been a reliable partner in helping organizations build and improve their financial controls and reporting processes. This not only ensures enhanced transparency and reduced risks but also ensures compliance with the legal requirements. Contact ASC Group now for more information.

Frequently Asked Questions

Q: What are the key differences between IFC and ICFR?

A: IFC is a broad framework that takes into account internal controls while the ICFR specifically focuses on the accuracy of financial reporting.

Q: Who is required to comply with the requirements of IFC and ICFR?

A: IFC is mandatory for the listed companies i.e., companies whose shares are listed on any recognized stock exchange. Further, most companies are encouraged to comply with ICFR in order to ensure financial integrity.

Requirement Applicability Public Listed Paid-up Share Capital >= INR 10 Cr Turnover >= INR 100 Cr Loans, Borrowings >= INR 50 Cr Others
Public Unlisted

Director’s Responsibility

Statement (Section 134)

IFC Yes        
Auditor Report (Section 143) ICFR  Yes Yes Yes Yes Yes
Audit Committee (Section 177) IFC Yes Yes Yes Yes  
Independent Directors (Schedule IV) ICFR Yes Yes Yes Yes  
Rule 8(5)(viii) of the Companies Accounts) Rules, 2014 – BOD report - Financial Statements only (ICFR) –ALL** ICFR   Yes Yes Yes Yes

Other Companies Having:-

  1. Turnover > 50 Cr as per the last audit report
  2. Outstanding loans & Borrowings > INR 25 Cr at any time during the current FY.

Q: How can businesses identify the potential risks in the case of financial reporting processes?

A: In order to identify the potential risks in relation to the financial reporting processes, businesses should conduct thorough risk assessments and implement IFC or ICFR. This not only enhances transparency but also mitigates potential risks.

Q: How does ASC Group assist businesses with IFC and ICFR compliances?

A: ASC Group is a reputed professional organisation that assists the businesses with identification of risks, thorough assessments and implementation of safeguards in order to ensure IFC and ICFR compliances.

Q: How do IFC measures benefit businesses in the long run?

A: Effective IFC measures help mitigate financial risks, promote transparency, enhance trust and ensure regulatory compliance. This contributes significantly to the long run success of any business.

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