Applicability of Internal Financial Controls for Private Companies

Minakshi Bindhani

18 Mar, 2023

The Internal Financial Controls under the Companies Act 2013 provide the applicability as mentioned under section 134(5) of the Companies Act 2013.

The directors of the listed company lay down financial controls to abide by the company and ensure that such financial controls are adequate and operative effectively.

IFC under section 134(5) of the Act.

The procedures and  policies  adopted by the company to ensure the business runs efficiently, including adherence to the company’s  safeguarding of its assets and policies, the accuracy  of the accounting records, the detection and prevention  of errors and frauds, and the timely preparation of financial information;

Section 143(3)(i) of the Companies Act 2013^[1] states that the auditor report provides. However, M.C.A. vides its notification dated 13th June 2017, provides an exemption from Internal Financial Controls to the following private companies:

A one-person or small company has a turnover of less than Rs. Fifty crores as per the latest audited financial statement.

Objective of IFC

The primary objective of the IFC is to identify opportunities for improvement and make recommendations which can be used as a standard to develop or strengthen the internal control systems and enhance the reliability of their financial statements.

• Effectiveness and efficiency in operations
• Prevention of error and fraud
• Safeguarding assets accuracy and completeness of accounting records and reliability of Financial Reporting

Advantages

By placing more responsibility and accountability on the board and audit committee concerning internal financial controls, the 2013 Act attempts to align the financial reporting standards and corporate governance for global practices. The IFC includes  the benefits that companies would experience include the following:

• Senior Management Accountability Improved controls over the financial reporting process;
• Improved investor confidence in the entity’s operations and financial reporting process;
• Promotes transparency within an organization;
• Maintain the accountability of operational management;
• Improvements of the audit committee and Board and senior management engagement in financial controls and reporting;
• More reliable and accurate financial statements make the audits more comprehensive.

Purpose

Internal financial controls also become essential as they derive values through a fresh independent look at crucial business processes, identify potential operating process opportunities, and update formal, centralized documentation for the company.

• Enhanced support to C.E.O. certifications
• Enhanced the internal control environment and residual control risks.
• Helps in business process & cost containment opportunities.
• Helps in rationalizing the number of controls across the organization – moving to intelligent and automated controls
• Helps in standardizing policies and procedures for multi-location/ multi-business companies
• Fosters a control-conscious work culture for people behind controls. Assures the CEO/ CFO as well as improves business performance. Sometimes, it also serves as a base for implementing optimal procedures while considering ERP.

Applicability

The limit for applicability of  IFC:

IFC is defined under section 134(5)(e) of the Companies Act 2013 as the procedures and policies adopted by the companies to ensure the economic conduct of their business and adhere to the company policies and safeguarding of its assets.

• Prevention of errors and fraud.
• Accuracy & completeness of accounting records and
• Timely prepare the financial information.

The companies Act, 2013 under section 134(5)(e) provides the applicability of IFC for the following persons:

 Define the director’s responsibility and financial statement & provide adequate board report. Additionally, the auditor presents an opinion about the adequate IFC system and the operating effectiveness of such controls.

Conclusion

IFC over financial reporting means the process is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of statements for external purposes by generally accepted accounting principles.

IFC applies solely to all listed entities. It is noted that Companies (Accounts) Rules, 2014 states that the board of directors’ report of all companies gives the details regarding the adequacy of IFC regarding the “financial statements”. Although, the notification provided an exemption from the applicability of internal controls over financial reporting  to the following private companies:

• One-person Company (O.P.C.) or a Small Company; or
• The company has a turnover of less than Rs. 50 Crores per the latest audited financial statement or which has aggregate borrowings from banks, financial institutions, or anybody corporate during the financial year less than Rs. 25 Crore.

Also Read:
Internal Controls- A Guide for directors
Internal Control System- Analysis of Benefits & Limitations