In the corporate landscape of India, maintaining robust financial governance is not just a good practice, but a legal obligation. The Companies Act, 2013, has made Internal Financial Controls (IFC) a cornerstone for ensuring accountability and operational transparency within organisations. From the Board of Directors to the Audit Committee, every stakeholder has a critical role in building and maintaining these controls.

Understanding and implementing IFC requirements is crucial for organisations to mitigate risks, safeguard assets, and ensure compliance. This blog aims to decode the key provisions related to IFC under the Companies Act, 2013, including responsibilities outlined in Sections 134, 177, and others. We’ll explore practical insights on why these controls matter, how they impact business operations, and what organisations can do to stay ahead in meeting these mandates.

Background

As per Section 134(5)(e) of the Companies Act, 2013, the term “Internal Financial Controls” means the policies and procedures adopted by the company to ensure:

1. Orderly and efficient conduct of its business, including adherence to the company’s policies
2. Safeguarding of its assets
3. Prevention and detection of frauds and errors
4. Accuracy and completeness of the accounting records, and
5. Timely preparation of reliable financial information.

As per Section 143 of the Companies Act, 2013, the term “Internal Control over Financial Reporting” is a process designed to provide reasonable assurance regarding the reliability of financial reporting and preparation of the Financial Statement.

(a) Maintenance of records

(b) Accurately & fairly reflect the transactions and dispositions of the asset of the Co.

(c) Prevention and detection of frauds and errors,

(d) Accuracy and completeness of accounting records, and

(e) Timely preparation of reliable financial information

Applicability

Internal Financial Controls (IFCs) apply to listed companies and certain public companies, but not to all private companies:

• Listed companies: IFCs apply to all listed companies.
• Public companies: IFCs apply to public companies with a paid-up capital of at least INR 10 crore, a turnover of at least INR 100 crore, or aggregate loans, borrowings, debentures, and deposits of at least INR 50 crore.
• Private companies: IFCs do not apply to private companies that are one-person companies (OPCs), small companies, or companies with a turnover of less than INR 50 crore. They also do not apply to private companies with aggregate borrowings of less than INR 25 crore, and that have not defaulted on filing their financial statements or annual returns.

Management’s Responsibility

As per Section 134(5)(e) of the Companies Act 2013, the Directors Responsibility Statement shall state that the directors had laid down internal financial controls to be followed by the company and that such internal financial controls were adequate and were operating effectively. Further, Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ report of all companies to state the details to the adequacy of internal financial controls about the financial statements only.

Auditor’s Responsibility

As per Section 143(3)(i) of the Companies Act 2013, the auditor’s report shall state whether the company has an adequate internal financial controls system in place and the operating effectiveness of such controls in the company in all material respects with respect to financial reporting only. Furthermore, it states that auditors will have to report in respect of both stand alone and consolidated financial statements.