Financial scandals in a country highlight the loopholes that exist in the laws and regulations and the way they can be misused. The Satyam Scandal of 2009 highlighted the loopholes in the regulations at that point in time and eventually, this gave rise to Internal Financial Control (IFC). However, often confusion revolves around the difference between Internal Financial Control (IFC) and Internal Control Over Financial Reporting (ICFR) and the significance of the same. Therefore, here is a brief guide addressing IFC and ICFR along with their applicability.
Internal financial controls (IFC) is defined under Explanation to Section 134(5)(e) as the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to the company‘s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information.
Internal control over financial reporting (ICFR) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Thus, a company’s ICFR includes policies and procedures that:
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Internal financial controls are aimed to ensure that business is conducted in an orderly fashion while ICFR addresses the financial reporting aspect. Various provisions along with the applicability of internal financial control have been summarized as under:
Sr. No. |
Section / Rule |
Area |
Regulatory Requirement |
Applicable On |
1 |
Section 134(5) |
Director Responsibility Statement |
Board of Directors shall provide a confirmation that they have laid down the IFC and such IFC is adequate and operating effectively. |
Listed Companies |
2 |
Section 177 |
Audit Committee |
The audit committee should evaluate the IFC and the risk management systems. It should call upon the auditors to comment on the IFC. |
All the companies have an audit committee. |
3 |
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. |
All the companies have independent directors. |
4 |
Section 143(3)(i) |
Auditors Report |
Auditors shall report whether the company has adequate IFC and upon the operating effectiveness of such controls. |
All Companies |
5 |
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 |
6 |
Clause 49 of the Listing Agreement |
CEO / CFO Certification |
The CEO and the CFO shall certify to the board on the following matters:
|
All the companies whose equity shares are listed on a recognized stock exchange except,
|
In a Nutshell
Internal financial control covers the overall organization within its ambit while Internal control over financial reporting is focused on the controls over the financial reporting of the organization. Nonetheless, organizations need to ensure compliance with the same in order to avoid contravention and levy of penalties.
In case of any assistance, please feel free to contact the ASC Group.
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