The Companies Act, 2013 imposed certain obligations on the Board of Directors in regard to the internal financial controls of the company. It requires the Board to state, among other things, that they have established internal financial controls to be enforced by the company and that those internal audit controls are adequate and operating effectively. These amendments in the context of internal controls are effective for fiscal years starting on or after April 1, 2014.
Many businesses are now assessing the effect of the emerging requirements of internal controls on their activities and procedures, especially the financial reporting process. In simple words, internal financial controls include the policies and procedures implemented by a company to ensure the efficient and orderly conduct of its business, including regulatory compliance and the detection and prevention of frauds and errors. It includes the controls on reliable financial statement reporting (commonly known as Internal Financial Controls over Financial Reporting).
Usually, five components of Internal audit controls systems are:
As a result of the formal accountability imposed by the 2013 Act, the involvement of the Board and the audit committee in internal controls oversight has become increasingly important.
The Board is expected to play an important role in determining the management framework, including establishing specific standards of competence and ethics, as well as adherence to codes of practice, and creating clear responsibility for fulfilment of internal control obligations. The Board's evaluation of the possibility of management override of internal controls, as well as the establishment of open lines of communication between management and the Board, as well as separate lines of communication. The need for Boards to conduct this self-evaluation and maintain relevant knowledge and experience is a vital success factor in fulfilling the current provision of the 2013 Act.
Audit Committees are important in controlling internal management. While their primary concern could be on internal financial controls over financial reporting, audit committees are required to take the lead in monitoring controls relating to regulatory and organizational issues more than ever. Moreover, the audit committee's position has grown in importance as a result of increased business and external auditor reporting standards, as well as regulators' increased emphasis on enforcement.
However, for efficient internal controls, it is advisable to leverage internal financial controls services from a reputed consultancy firm, such as TRC Corporate Consulting. Our professionals work closely with the Board of Directors and the internal audit committee of the client and devise strategies and give recommendations after performing internal audit controls -highlighting the areas that need to be worked upon.
The 2013 Act attempts to reconcile corporate governance and financial reporting standards with global best practices by increasing oversight and transparency for internal control over financial reporting on the Board and audit committee. Any of the advantages that businesses can gain by having appropriate and reliable internal financial management are as follows:
Internal financial controls have also gained importance as they extract values in the form of:
To unlock the benefits that can be derived by implementing internal financial controls, management can take a step back to assess how it is handling the threats to the business in terms of the company's scale, scope, geographic presence, and risk profile. There is a distinction between doing the bare minimum and doing the right thing when it comes to implementing internal financial regulations in businesses. Companies should choose to do the right thing and unlock value, reduce fraud risk, prevent financial reporting surprises, and support long-term market success.
Often, when companies embark on implementing and evaluating the effects of any governance program, it becomes quite challenging to measure the benefits. Nonetheless, high participation of functional/process consultants resulted in improved process owner accountability and promoted a culture of controlled consciousness within the entity. The companies also noticed an improvement in the financial reporting process and a reduction in errors.
The process of complying with the Companies Act 2013’s annual assertion requires efficient and effective planning, excellent communication and coordination, knowledgeable resources, etc. For successful implementation, it is important to understand the complexities of the business, stay updated and alert for opportunities to enhance efficiency and effectiveness, perform against tight deadlines, etc.
We, at TRC Corporate Consulting, have internal controls specialists who have provided Internal Controls over Financial Reporting (ICFR) and internal financial controls services to leading brands from various sectors, including finance, technical, hospitality, telecom, etc. They are also expert auditors of Sarbanes Oxley compliance programs and have a fair understanding of what auditor’s expectations are for such programs.
For further enquiry about our services, you can contact us now!