Internal Financial Control over Financial Reporting (IFCR)

Question

Answer

The entities, for whom it’s mandatory of having IFC in place.

The companies act 2013 has expand the scope of internal control to be considered by the management of companies as well as Statutory Auditors to cover all aspect of the operations of the company.

Directors’ Responsibility

Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ report of all companies to state the details in respect of adequacy of internal financial controls with reference to the financial statements.

Clause (e)  of subsection 5 of section 134 of the aforesaid act requires the director’s responsibility statement to state that the directors - 

In case of listed as well as Unlisted/ Private company, had laid down internal financial control to be followed by the company and that such internal financial controls are adequate and were operating effectively. Since Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ report of all companies to state the details in respect of adequacy of internal financial controls with reference to the “financial statements”.

Auditors Responsibility

As per Clause (i) of Subsection 3 of Section 143 requires that that auditor’s report shall states that the whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.

In case of  listed as well as Unlisted/ Private  companies:

Section 143(3) applies to the statutory auditors of all the companies. Hence, it requires that the auditors of unlisted/ Private companies are required to report on the adequacy and operating effectiveness of the internal financial controls over financial reporting.

So from the above explanations we can conclude that the Internal financial controls over financial reporting is mandatory for listed as well as unlisted/ Private Companies due to the purview of the following rules and provisions of the law.

i. Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014

ii. Clause (e )  of subsection 5 of section 134 of the companies act, 2013

iii. Clause (i) of Subsection 3 of Section 143 of the companies act, 2013

Is there any reporting requirement for private companies - some compliance issues, if not followed IFC

As stated above, Rule 8(5) (viii) of the Companies (Accounts) Rules, 2014 & Clause (e )  of subsection 5 of section 134 of the companies act, 2013 require the Board of Directors’ report of all companies (Listed, Unlisted & Private Companies) to state the details in respect of adequacy of internal financial controls with reference to the financial statements and auditor’s responsibility regarding the same under Clause (i) of Subsection 3 of Section 143 of the companies act, 2013.

Consequences in case of any default of aforesaid mentioned provisions of the law:

Director’s Responsibility

As per section (8) of section 134 requires that the if a company contravenes the provisions of Section 1134, the company shall be punishable with fine which shall not be less than fifty thousand rupees but which may extend to twenty-five lakh rupees and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to three years or with fine which shall not be less than fifty thousand rupees but which may extend to five lakh rupees, or with both.

Auditor’s Responsibility

As per subsection 15 of section 143  of the act, If auditor of the company, in the course of the performance of duties as auditor , he shall be punishable with fine which shall not be less than one lakh rupees but which may be extended to twenty five lakh rupees.

 (Difference between Internal Control and Internal Financial Control over Financial Reporting)

Difference between Internal Control and Internal Financial Control over Financial Reporting:

Meaning

Internal control, as defined in accounting and auditing, is a process for assuring achievement of an organization's objectives in operational effectiveness and efficiency, reliable financial reporting, and compliance with laws, regulations and policies.

Internal financial control over financial reporting means “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 the accounting records, and the timely preparation of reliable financial information.”

Compliance Requirement

Section 138 of the Companies Act, 2013 makes Internal Audit mandatory for companies listed below to appoint internal auditor who shall be chartered accountant, cost accountant or such other professional as decided by the Board of the company to conduct internal audit and other functions of the company. The companies which are required to conduct internal audit are:

i. All Listed Companies;

ii. Unlisted companies having paid up share capital of Rs. 50 crores or more during the preceding financial year or turnover of Rs.200 crore rupees or more during the preceding financial year or outstanding loans or borrowings from banks or financial institutions exceeding Rs. 100 crores or more at any point of time;

iii. Every private company having turnover of Rs.200 crores or more during the preceding financial year or having outstanding loans or borrowing from banks or public financial institution exceeding Rs.100 crore or more at any point of time during the preceding financial year.

Internal financial controls over financial reporting is mandatory for listed as well as unlisted/ Private Companies due to the purview of the following rules and provisions of the law.

i. Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014

ii. Clause (e )  of subsection 5 of section 134 of the companies act, 2013

iii. Clause (i) of Subsection 3 of Section 143 of the companies act, 2013

Scope

Scope of internal controls is to cover all aspects of operations of the company including the policies and procedures adopted by the company, safeguarding its assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records and timely preparation of reliable financial information.

Scope of Internal Financial Controls Over Financial Reporting is to cover:

i. Controls at the entity level controls that help ensure that management directives pertaining to the entire entity are carried out. 

ii. IT General controls that apply to all systems components, processes, and data for a given organization or information technology (IT) environment.

iii. Controls at process / transaction level

Role of Management

Companies Act, 2013 defines the director’s responsibility in clause (e) of sub-section 5 of section 134. The act requires the directors of listed company to state that they have laid down the internal financial control which is required to be followed by the company. Directors are also required to state that the financial controls are adequate and they are operating effectively.

Further, as per Rule 8 (5) (vii) of Companies (Accounts) Rule, 2014 Board of Directors of all companies should state in details the adequacy of internal financial controls with reference to financial statement.

Companies Act, 2013 is however silent on the responsibilities of the management except for deciding the scope of internal audit in consultation with the internal auditor.

Reporting Responsibility

Internal Control

The internal audit report is generally presented to the Audit committee of the company or those charged with governance in the company. The internal audit report is considered to be internal document of the organization. The statutory auditor can however use the internal audit report as per auditing standard SA 610 “Using work of internal auditors” as per his / her discretion.

Internal Financial Control Over Financial Reporting

Clause (e)  of subsection 5 of section 134 of the aforesaid act requires the director’s responsibility statement to state that the directors In case of listed as well as Unlisted / Private Company, had laid down internal financial control to be followed by the company and that such internal financial controls are adequate and were operating effectively.

Report for the internal financial controls would be issued as per auditing standard SA 700 “Forming an opinion and reporting on the financial statements”. The report is issued as an annexure to the independent auditor’s report along with the financial statement of any company as per the requirement of clause (i) of sub-section 3 of section 143 of the Companies Act, 2013.