Internal Financial Control
What is Internal Financial Control ?
The Companies Act, 2013, introduced significant reforms and regulations related to internal financial controls (IFC) to enhance corporate governance and financial transparency. These provisions are aimed at ensuring the reliability of financial reporting and preventing corporate fraud.
Internal financial control is a system of policies, procedures and practices that organizations put in place to safeguard their assets, ensure the accuracy of financial reporting, and prevent fraud and errors. These controls are essential for maintaining the integrity and reliability of an organization’s financial statements and for complying with various regulatory requirements.
Non-compliance with the internal financial control requirements under the Companies Act, 2013, can even result in penalties for the company, its directors and officers.
Key components of IFC:
- Segregation of Duties:
- Authorization and Approval
- Physical Safeguards
- Recording and Documentation
- Reconciliation and Review
- Information Technology Controls
- Monitoring and Reporting
- Compliance with Laws and Regulations
- Training and Awareness
- Continuous Improvement
FAQ
IFC is essential to maintain the integrity of financial information, protect assets, and ensure compliance with laws and regulations. It helps in building trust with stakeholders and investors.
The responsibility for implementing IFC lies with the management of the organization, including the board of directors, executives, and finance and audit committees.
IFC helps prevent fraud by establishing controls that deter and detect fraudulent activities. This includes controls over access to financial systems, regular reconciliation of accounts, and review of financial transactions.
Statutory aspects of IFC:
- The Board of Directors of the Company are required to report in their responsibility that they have laid down IFC to be followed by the Company and that such IFCs are adequate and operating effectively.
- The Statutory Auditor is required to report whether the Company has adequate IFCs in place and the operating effectiveness of these controls.
- Secretarial Auditor is required to verify and report on adequacy and operational effectiveness of Company’s IFCs.
- Internal Auditors appointed under the requirements of Company Law, is required to evaluate the adequacy and operational effectiveness of Company’s IFCs.
- The Managerial remuneration payable is based on profitability of the Company, which is subject to compliance with IFC.
- The Company is required to report in their annual report the details of IFCs, steps taken for their assessment and areas where improvement is needed.