BUSINESS ADVISORY
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Internal Financial Control (IFC)
Internal financial control refers to the system of processes, policies, and procedures implemented by an organization to ensure the reliability of financial reporting, safeguard assets, and promote operational efficiency. These controls are designed to mitigate risks of errors, fraud, and misstatements in financial statements, thereby enhancing transparency, accountability, and compliance with regulatory requirements. Effective internal financial controls are essential for promoting sound financial management, protecting stakeholders' interests, and fostering confidence in the integrity of the organization's financial operations and reporting.
Implementation of an effective internal financial control structure starts with an elaborate internal audit of the operations and financial records of an organization. Involvement of business consultants with a balanced expertise of business dynamics and auditing capabilities provides necessary traction in the internal audit exercise to set the optimal control structure for a business to run smoothly. As a first step, Internal Financial Control over Financial Reporting (IFCoFR) system is implemented which is further developed as a full fledged Internal Financial Control (IFC) structure.
Regulatory requirement of Internal Financial Control (IFC) framework in India
Under the Companies Act 2013, every company is required to have an effective system of internal financial controls to ensure that its financial statements are accurate and reliable, and to prevent fraud and mismanagement. Section 134(5)(e) of the Companies Act 2013 requires the Board of Directors of every company to state in its annual report that the company has an adequate system of internal financial controls in place and that such controls are operating effectively. Additionally, section 143(3)(i) requires the statutory auditor of the company to report on the adequacy and effectiveness of the internal financial controls in place at the company. Therefore, it is applicable to all companies registered under the Companies Act 2013 to have an effective system of internal financial controls in place, and the Board of Directors and statutory auditor are required to provide assurance regarding the adequacy and effectiveness of these controls.
IFC is applicable solely to all listed entities. It may, however be noted Companies (Accounts) Rules, 2014 needs the Board of Directors’ report of all companies to state the details in respect of adequacy of internal financial controls with regard to the “financial statements”. Although, MCA, vide its notification dated 13th June 2017 (G.S.R. 583(E)), provided exemption from Applicability of Internal Controls over financial reporting (ICFR Applicability) to following private companies: 1. Which is one-person Company (OPC) or a Small Company; or 2. Which has turnover less than Rs. 50 Crores as per latest audited financial statement or which has aggregate borrowings from banks or financial institutions or anybody corporate at any point of time during the financial year less than Rs. 25 Crore. Additionally, the above-mentioned Companies will be exempted from IFC Applicability only if it has not committed a default in filing its financial statements under section 137 of the Companies Act 2013 or annual return under section 92 of CA 2013 with the Registrar.
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