Mandatory requirement of implementing Internal Financial Controls for all Companies
Companies Act, 2013 has introduced a new requirement for listed companies and also all other companies making the Board of Directors (Sec 134), Audit Committee (Sec 177) and Independent Directors (Sch. IV) responsible for laying down internal financial controls (IFC) and to conform on adequacy and operating effectiveness of the framework for IFC.
The revised guidance note issued by the ICAI recently have also extended the requirement of opinion from the external auditors to the consolidated financial statements, thereby emphasizing the focus required on completing the management design and testing across all companies within a group.
These provisions are applicable for the Financial Year 2015-16 and subsequent years. Considering the limited timeframe available to ensure adherence to the requirements and also meet conditions of external auditors, companies need to immediately embark on this initiative. Following are some of the important features one has to bear in this regard.
Ø Internal Financial Control:
As per the Guidance Note issued by Institute of Chartered Accountants of India, Internal Financial Control over Financial Reporting shall mean:
“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. A company’s internal financial control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) 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 authorisations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.”
It is clear from the above that there should be a process in the company according to which the activities of the Company has to be carried out. The process document defining the manner of carrying out the activities are called as Standard Operating Procedures [SOPs]. Hence, it is necessary for all the Companies to have SOPs. In case any of the Company does not have SOP, the same has to be drafted and implemented before 31.03.2016.
In case there are no Standard Operating Procedures available in the Company and you require us to draft Standard Operating Procedures for your company, kindly let us know at the earliest as the same has to be drafted and implemented before31.03.2016.
Ø Management’s Responsibility:
The Companies Act 2013 has significantly expanded the scope of internal controls to be considered by the management of companies to cover all aspects of the operations of the company.
Section 134(5)(e) of the Act requires the Board of Directors of listed company to state in the Directors’ Responsibility Statement that the company has laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
Rule 8(5)(viii) requires the Board of Directors’ Report of all companies to state the details in respect of adequacy of internal financial controls with reference to financial statements. This Rule lays down the responsibility on Board of Directors of all companies which covers private limited companies also.
Hence, the requirement of reporting on internal financial controls over financial reporting is applicable to the private limited companies.
Ø Auditors’ Responsibility:
Section 143(3)(i) requires the auditors to state in the auditors’ report whether the Company has adequate internal financial control system in place and the operating effectiveness of such controls.
The auditor’s objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company’s internal financial controls over financial reporting and the procedures in respect thereof are carried out along with an audit of the financial statements. The company’s internal controls cannot be considered effective if one or more material weakness exists. The auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management’s assessment.
The Auditors’ Report shall be given for the internal financial controls over financial reporting in place in the Company for the period 01.04.2015 to 31.03.2016.
Ø Action Plan
- Preparation of Standard Operating Procedure, if the same is not available.
- Implementation of processes stated in the SOP;
- Test check the existence and operating of internal financial controls over financial reporting with SOPs;
- Identification of material weakness; and
- Correction and implementation of proper measures to rectify the weakness before 31.03.2016.
Ø How Vishnu Daya & Co will help in complying with this new requirement:
- We will help in preparation of SOPs, in case SOPs are not available with the Company.
- We will help in implementation of the SOPs by test checking the internal financial control over financial reporting with the SOPs.
- We will help in checking the correctness and adequacy of SOPs in case the SOPs are available with the Company from time to time.
Kindly let us know for any further clarifications in this regard. In case of any help required from us, kindly feel free to let us know the same.
Best Regards
Vishnu Daya Alert Team
Vishnu Daya & Co.,
Chartered Accountants,
GF No.7 & 3rd Floor, Karuna Complex, No.337,
Sampige Road, Malleswaram, Bangalore – 560003
Office: +91-80-23312779 | +91-80-23560633
Cell: +91-9880715963 | Fax: +91-80-23313725
Website: www.vishnudaya.com
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