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Internal Financial Controls – IFC

The new Companies Act 2013 has cast many stringent new reporting requirements in regard to assurance around internal controls and vigil mechanism. One of the key requirements posed by Companies Act has been the requirement around ‘Reporting on Internal Financial Controls’. The provisions are outlined under different sections like 134, 177, 143 of the Companies Act, 2013 and requirements for Schedule IV. The requirements lead to defining roles and accountability for the board, audit committee, statutory auditors and also the management. Indian companies are now mandatorily required to provide assurance about the effectiveness and soundness of Internal Financial Controls. The Companies Act 2013 requires the Board of Directors to be familiar with the Internal Financial Controls of the company.

For listed companies, the Companies Act 2013 defines the term IFC very widely as the policies and procedures adopted by the company to ensure orderly and efficient conduct of its business, including adherence to company’s policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records, and the timely preparation of reliable financial information. The management would therefore need to identify and document financial and non-financial controls, assure the boards of the adequacy of such controls and also demonstrate results of testing operating effectiveness of such controls.

From FY 2015-16, for both listed and unlisted companies, it is mandatory for statutory auditors to make their observations on operating effectiveness of internal financial controls.

Many Indian Companies are looking to use the COSO 2013 framework which is wide and comprehensive in its coverage, encompassing the overall internal controls of an enterprise as well as its financial controls and also controls for financial reporting. The framework states 17 principles across five components- (1) Control environment (2) Risk assessment (3) Control activity (4) Information and communication and (5) Monitoring and various Points of Focus within each of the principles. COSO recognizes that applying the framework can and should differ across different companies in accordance with their unique operating environments.

What can Phanindra & Associates do to advice, assist and apply IFC for organizations ?

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