The Companies Act, 2013, has levied specific accountabilities on the Board of Directors for its internal financial controls. And among other things, it also requires the Board to state that the company has established internal financial controls to be supported by the company and that such internal financial controls are adequate and operate effectively. From the financial years starting on or after 1 April 2014, these changes are successfully implemented.
At present, several organizations, including internal control over financial reporting process, analyze the effect these new standards would have on the company’s operations and processes.
Internal financial controls include policies and procedures implemented by the organization to ensure that the organization performs the business in an orderly and effective manner, including regulatory enforcement and fraud and error prevention and detection, thereby covering not only controls over effective reporting of financial statements (more generally referred to as Internal Financial Reporting Controls (‘IFCFF’)
It is not unrealistic to conclude that substantial efforts would be made to set up comprehensive internal financial control structures to fulfill the new reporting standards, based on experiences globally where ICFR has been mandated. Companies must act expeditiously on this requirement in coordination with the Board and Audit Committees and complete the process of making the required improvements by 31 March 2015 to report on the adequacy and operational effectiveness of such a requirement.
The role of the Board and the IFC Audit Committee in the supervision of internal control has become increasingly important due to the structured accountability implemented under the 2013 Act. In creating the control framework, the board plays an important role, including clarifying standards about fairness and ethics and adherence to codes of conduct, and clear accountability for the performance of internal control responsibilities.
It is necessary for the Board to assess the risk of managerial override of internal control and to create open communication lines between management and the Board, as well as to have separate communication lines (e.g., whistle-blower hotlines). A crucial success factor in meeting the new requirement of the 2013 Act is the need for Boards to conduct this self-evaluation and ensure the preservation of sufficient skills and expertise.
Committees for internal audit controls play a vital role in monitoring internal control. Although their primary emphasis may be on IFCFR, the Audit Committees are now, more than ever, leading the way in monitoring internal financial controls over compliance and operational, financial reporting. Due to improved company and external auditor reporting standards, perceptions of the Audit Committee position have changed, along with an increased emphasis on enforcement by regulators.
Has the company been established with a system for internal financial controls (e.g., COSO 2013)?
Will the system require activities and compliance with legislation as well?
Were the internal controls/internal audit controls mapped to the specified framework?
Are there any gaps in current processes, control activities, or citations based on the established structure, and if so, how are they addressed?
Is the business educating leadership & executive management and regulating owners in the system about the content?
What procedures are in effect, and who is accountable to external parties (e.g., third-party service providers) to communicate internal control/ internal audit controls’ considerations?
Will the firm use information management and data processing to help track internal financial controls on an ongoing basis?
The 2013 Act aims to align corporate governance and financial reporting principles with global best practices by putting more oversight and liability on the Board and Audit Committee concerning internal financial controls. Many of the advantages that enterprises will encounter with appropriate and efficient internal financial controls include:
Senior Management Responsibility
Improved internal financial controls over financial reporting process
Enhanced investor confidence in the activities of the company and the financial reporting process
Encourages an entity’s culture of accountability and transparency
Trickling back on operational management responsibility
Improvements in the financial reporting and financial controls of the Board, Audit Committee, and senior management
More accurate, precise financial statements
Make IFC audits and Internal Financial Controls Over Financial Reporting precisely detailed
Internal financial controls also become vital as they help gain values in the form of:
Independent review of key business processes
Identification of new openings for operational processes
Updated organization documents on formal, organized, and controlled internal financial controls for Internal Financial Controls Over Financial Reporting
Enhanced CEO / CFO credential help
Enhanced atmosphere of regulation, thereby minimizing risk
Better knowledge about the dangers of intrinsic and residual nature in internal controls.
Management should take a step back to assess how it handles the organization’s threats in terms of the scale, scope, global reach, and risk profile of the enterprise to unlock the value gained by implementing internal financial controls for IFC audits. In the application of internal financial controls by businesses, there is a distinction between doing the minimum and doing the right thing to address the criteria effectively.
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