Companies Act 2013, referring to the Directors’ Responsibility Statement, explains Internal Financial Controls (IFCs) as“the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of accounting records and the timely preparation of reliable financial information”.
While policies and procedures have always been necessary for proper conduct of business, this requirement adds a “compliance “dimension and makes policies and procedures mandatory. In this context, I like to share my thoughts on how we could develop Organizational Policies and Procedures.
Organizational Policies
Organization conducts business through transactions. Procedures and established practices provide guidance to all concerned, on the manner in which transactions are undertaken.
However, the business of the organization itself is driven by Objectives and Goals set up by the top management. In order to realize these objectives and goals, it resorts to Organizational Structure, and lays down certain Policies as guidelines.
These policies could take the shape of Corporate Policies, Marketing Policies, Operations Policies, HR Policies and Financial Policies. Policies are relatively long term in nature and should reflect organizational ethos. They should also recognize the statutory, professional and environmental obligations, the organization has to meet.
Each Policy or a set of Policies may be supported by one or more Procedures. While policies lay down guidelines, relatively brief and long term in nature, Procedures could be elaborate and could get updated with changing work methods and practices.
For running organizations, policies may get evolved over a period of time. They may be enforced, but may not get documented or formally reviewed periodically. Now time has come for documenting them as well as sharing them with the external environment.
Processes and Procedures
To specify the right sequence, Policies must relate to Organizational Objectives, and provide direction and guidance for realizing the objectives. Procedure enable / help implementation of Policies. Procedures are also linked to Processes, which may be automated or manual. Earlier, organizations used to develop procedures and manual processes first, and automated some of the processes as scale of operations increased and developments in Information Technology supported automation. With all pervasive IT solutions today, some of the startups are straightaway going for automated processes. Thus today, processes may precede procedure development or go hand in hand.
Effective and relevant Organization Structure is essential for proper conduct of business and for procedure implementation. Apart from this, the organization needs meaningful Management Reports, for orderly and efficient conduct of its business. Such reports must be generated though systematic and consistent methodologies, from authentic data. All these aspects get addressed in proper procedure documentation and is generally being referred to as Standard Operating Procedures (SOPs).
Intangible Assets
Today’s fast growing corporates carry high business valuations, though the assets in their balance sheets may show much lower values. The difference is actually represented by Intangible Assets, in which apart from proper Leadership, organizational governance practices like efficient and effective Policies, Procedures and Processes figure prominently.
Role of the Function Heads
It is the responsibility of the concerned Function Head to identify, formulate and document policies and procedures for the function he or she is responsible for. Other Functional Heads also could suggest introduction of or modification to any policies and procedures, based on their functional need or organizational needs.
Proper documentation,including sequencing, numbering, validity and updating them as and when necessary, and circulating them to all concerned is the responsibility of the Function Head.
Concluding Remarks
Based on these inputs, can you review, in the organizations with which you are associated as an employee, auditor or consultant :
I. Whether Policies address all the business needs and relate to the Organizational Objectives?
II. Policies are supported by proper Processes and Procedures which are well documented, and updated?
III. Promote a culture that encourages good governance practices through proper Policies and Procedures?
For more articles from me, please read my book “Translating Operations into Money – Cases in Business Management” available for online purchase at Amazon.in or Flipkart. You could also visit www.operationstomoney.com.
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