CA, CS, CMA, Advocates are available for Free Consultation!!!

   +91 85400-99000   A98, Nanhey Park, Uttam Nagar, New Delhi, India

Financial Control Services in India

As a business owner, ensuring the proper management and control of finances is crucial for success. This is where internal financial control services come into play. With the policies and procedures set in place, companies can ensure not only the accuracy and completeness of their accounting records, but also the prevention and detection of fraud. In India, these services have been made mandatory for several companies and are regulated under the Companies Act 2013. AKGVG & Associates and Rödl & Partner are two reputable firms that offer these services in India. In this blog post, we will discuss the importance of internal financial control services and how they can benefit companies in India.

1. The Importance of Internal Financial Control in India

Effective financial controls play a vital role in ensuring the smooth and efficient functioning of any organization. In India, the Companies Act, 2013 has set increased responsibility and accountability on the Board of Directors, Audit Committee, Senior Management, and Independent Auditors. The approach that companies should adopt is that of a comprehensive risk management program – Enterprise Risk Management (ERM). The primary objective of IFC is to identify opportunities for improvement and to draw up recommendations & good practices that can be used as a benchmark to develop or strengthen their internal control systems and enhance the reliability of their financial statements.

An effective internal financial control system not only helps to improve controls over the financial reporting process, but it also improves investor confidence in the entity’s operations and financial reporting process. It promotes a culture of openness and transparency within the organization, trickling down accountability to operational management. Moreover, it can help in rationalizing the number of controls across the organization, moving to smart and automated controls, and standardizing policies and procedures for multi-location/multi-business companies.

“A robust internal financial control system is an essential component of good corporate governance and assists companies in achieving business objectives. It also provides assurance to the CEO/ CFO and improves business performance,” says a COO – Risk Assurance Transaction Advisory Services & Business Development Director. Therefore, it is crucial for organizations to create and implement a comprehensive and efficient internal financial control system to mitigate risk and enhance the reliability of financial information. 

2. Legal Requirements for Internal Financial Control

Compliance with legal requirements is a must for all companies when it comes to internal financial control (IFC). Section 134(5) of the Companies Act defines IFC as the policies and procedures adopted by a company for ensuring the orderly and efficient conduct of its business, including adherence to company policies, safeguarding its assets, prevention and detection of frauds and errors, accuracy and completeness of accounting records, and timely preparation of reliable financial information. In addition, Section 143(3)(i) of Companies Act 2013 requires the statutory auditor to comment on the adequacy of the internal financial controls system in place and the operating effectiveness of such framework of controls.

It is essential to understand who is exempted from IFC compliance and who is not. Private companies with less than INR 50 crores in turnover or aggregate borrowings below INR 25 crore are exempt from IFC compliance, subject to certain conditions. However, if such companies have defaulted in filing their financial statements with the Registrar of Companies, they are not exempt from IFC compliance. The exemption doesn’t apply to companies with audit committees, and all entities with an audit committee must evaluate internal financial controls and risk management systems.

Chartered accountancy firms such as AKGVG & Associates can provide a roadmap to implementing IFC and meeting legal compliance. By documenting and revising IFC controls, they can help companies fulfill their legal requirements and enhance board and audit committee engagement. TaxGyata can also offer complete solutions to GST, income tax, and company laws. Students of accounting and finance and professionals in the field should strive to keep themselves up-to-date with legal compliance and global best practices. As ICAI recommends, entities should not limit the definition of internal financial controls to financial reporting only, but make it more comprehensive. Implementation of a robust IFC framework can mitigate financial risk, compliance risk, operational risk, and strategic risk, ultimately leading to growth in the company’s value. 

3. Internal Control over Financial Reporting (ICFR)

Internal over Financial Reporting (ICFR) is a crucial aspect of internal financial controls. It is a process that helps ensure the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The policies and procedures that encompass ICFR are designed to maintain accurate and fair records of the company’s transactions, provide reasonable assurance that transactions are recorded as necessary, and prevent or timely detect any unauthorized acquisition, use, or disposition of the company’s assets that could impact its financial statement.

The objective of ICFR testing is to assist management in evaluating and testing the effectiveness of financial controls that are in place to mitigate the risks faced by the company and thereby achieve its business objectives. Auditors play a limited role in evaluating ICFR, focusing only on financial reporting controls. They rely on the assessment and view of the audit committee and may request additional information, if required.

Directors and independent directors have specific responsibilities when it comes to ICFR. The director’s responsibility statement should state that the directors have laid down internal financial controls to be followed by the company and such controls are adequate and operating effectively. The board of directors is required to report on the adequacy of internal financial controls with reference to financial statements.

The implementation of ICFR includes entity-level controls that help identify processes, sub-processes, activities, controls, policies, and procedures that are currently being followed. Once these have been identified, the company can design and implement a robust framework of internal controls that are aligned with acceptable standards.

In conclusion, ICFR is a critical component of internal financial controls that can help companies achieve their business objectives. It allows companies to accurately report their financial information, prevent fraud, and ensure a fair and transparent financial system. 

4. AKGVG & Associates: Your IFC Solutions Provider

If you’re looking for an IFC solutions provider, look no further than AKGVG & Associates. With their expertise in internal financial control, they can help ensure that your company’s financial information is reliable and accurate. As an integral part of their overall internal financial controls program, they prioritize the prevention and detection of frauds and errors, as well as the timely preparation of financial information.

AKGVG & Associates understands the legal requirements surrounding IFC in India, including the need for a statement ensuring implementation of adequate internal financial control and adherence to policy and procedures adopted by the company. Their one-stop solution includes devising business process narratives, risk control matrix, and establishing tests of controls for each business process. They can also evaluate existing narratives and matrices as needed.

Their commitment to providing clients with high-quality services is evident, and they aim to ensure the effectiveness and efficiency of companies’ operations while maintaining compliance with applicable laws and regulations. As they say on their website, “Our clients’ satisfaction with our services is our top priority.”

To further emphasize the assurance they offer their clients, AKGVG & Associates states on their website that they provide “reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance,” which is the primary goal of IFC. So, if you’re looking for an IFC solutions provider that won’t let you down, consider AKGVG & Associates. 

5. Benefits of Robust Internal Financial Control

Internal Financial Control (IFC) is an essential tool in ensuring the reliability of financial information, mitigating financial risks, and preventing fraud. Adopting a robust IFC system provides several advantages for companies, including:

– Enhanced Senior Management Accountability & Responsibility: Effective IFC ensures that management is held accountable for the company’s financial performance and adherence to financial policies.

– Improved Stockholder Confidence: A comprehensive IFC system helps establish higher levels of trust and confidence among the company’s shareholders, stakeholders, and investors.

– More Accurate Financial Statements: By maintaining accurate financial records and complying with Generally Accepted Accounting Principles, companies can create more reliable and transparent financial statements.

– Development of the Board’s Financial Reporting Capabilities: Implementing IFC helps establish a culture of financial reporting, which maximizes compliance with financial standards and best practices.

– More Comprehensive Audits: A robust IFC system aids auditors in developing audits that are more comprehensive, transparent, and reliable.

In conclusion, an effective IFC system ensures that companies can deliver reliable financial information, prevent fraud and financial risk, and improve the overall financial performance of a company. Therefore, companies must maintain a robust IFC system while adhering to Generally Accepted Accounting Principles to ensure financial transparency and reliability. 

6. Roadmap to Implement Internal Financial Control

A comprehensive roadmap can be the key to successful implementation of internal financial controls (IFC). The roadmap should enable companies to assess the current state of internal controls, embrace a widely accepted framework or guidelines, and set the right tone at the top i.e. those charged with governance. Companies should also ascertain organizational risks which have a financial impact and define the Control Objectives and Control Activities to mitigate the risk. Ongoing and continuous monitoring of the functioning of controls and obtaining independent assurance on the effectiveness of these controls is vital, and companies can consult independent auditors to achieve this objective.

According to Rödl & Partner, “Internal control is an important tool for a company to achieve its objectives and the framework can be customized to the needs of the company and the industry.” Therefore, the companies should focus on testing and creating the framework of internal controls to adequately mitigate financial and strategic risks.

The roadmap can help companies standardize policies and procedures for multi-location/multi-business companies, foster a control conscious work culture for people behind controls, and provide assurance to the CEO/CFO as well as improve business performance. Additionally, effective internal financial controls can improve controls over financial reporting process, promote culture of openness and transparency within the entity, and trickle down accountability to operational management. The enhanced support to CEO/CFO certifications can also benefit the company’s stakeholders.

The implementation may require some effort and resources, but with the right roadmap and a strategic view to compliance, companies may end up strengthening their financial records and position themselves positively in the market. 

7. Enhancing Board and Audit Committee Engagement

One of the key elements of effective corporate governance is ensuring engagement and collaboration between the Board and the Audit Committee. The role of the Audit Committee has become increasingly critical in overseeing internal control, ensuring reliable financial information, and compliance with global best practices. The Companies Act 2013 emphasizes the importance of the Board and the Audit Committee in overseeing internal control, which remains an essential aspect of effective governance.

Deloitte India’s insights highlight the role of the Audit Committee in enhancing confidence in the integrity of an organization’s processes and procedures relating to internal control and corporate reporting, including financial reporting. The Audit Committee provides an ‘independent’ reassurance to the Board through its oversight and monitoring role, thus becoming one of the main pillars of the corporate governance system in Indian public companies.

Audit Committees are entrusted with transparency and accuracy of financial reporting, effectiveness of external and internal audit functions, and effectiveness of anti-fraud ethics and compliance systems. Audit Committees also play a significant role in the oversight of the company’s risk management policies and programs.

In steering companies through today’s complex business environment, boards need strong leadership from their Audit Committees. They should consider expanding their field of vision, clearly defining who is tracking the company’s risk radar, and taking a step back to re-evaluate their performance. Chief audit executives and audit committees must be aware of the new regulatory pressures, increased scrutiny, accelerating risk, and intensifying competition, which pose critical challenges for today’s CAEs.

In summary, effective Board and Audit Committee engagement is critical in ensuring reliable financial information, internal control, compliance with global best practices, and overall effective corporate governance. As mentioned, audit committees play a vital role in this process. Therefore, it’s essential to entrust the Audit Committee with the required resources and authority to fulfill its critical role effectively. 

8. Responsibilities of Stakeholders in IFC

Internal Control (IFC) is a crucial aspect of corporate governance that involves identifying, evaluating, and mitigating risks to ensure that reliable financial information is provided to stakeholders. It is vital that all stakeholders in an organization understand their role in ensuring the efficacy of IFC. Some of the key stakeholders and their responsibilities include:

The Board of Directors: It is their responsibility to ensure that the company has a robust IFC system in place. They must establish control objectives, assess the effectiveness of IFC, and make necessary changes to the system. According to the Companies Act 2013, they must lay down a framework of IFC to be followed by the company and ensure its adequacy and operating effectiveness.

Senior Management: They are responsible for the implementation of IFC throughout the organization. They must ensure that all employees are trained on IFC, and their compliance with the policies and procedures are checked regularly. They need to provide an updated formal centralized and managed internal financial controls documentation for the company.

Audit Committee/Independent Directors: They are responsible for overseeing the effectiveness of IFC, reviewing audit plans and working with the internal and statutory auditors and management of the company to address issues and concerns.

Statutory Auditor: They are responsible for providing an opinion on the adequacy and effectiveness of the IFC system, which includes the evaluation of the operating effectiveness of the IFC.

Internal Auditor: They play a crucial role in ensuring the efficacy of IFC by conducting internal audits, identifying process improvements, deficiencies and areas of risk, and reporting their findings to the management and audit committee.

Implementing an efficient IFC system requires the involvement of all stakeholders, and they must work together to achieve the control objectives and ensure the efficacy of the system. As stated by the Companies Act 2013, “The approach that should be adopted by companies should be that of a comprehensive risk management program – Enterprise Risk Management (ERM).” By adopting a risk-based approach to IFC, organizations can address their risks and ensure the reliability of financial information for stakeholders. 

9. Compliance with Global Best Practices

Compliance with global best practices is essential for companies to establish a culture of openness and transparency within their entity. The Companies Act of 2013 in India has increased the responsibility and accountability of the Board of Directors, Audit Committee, Senior Management, and Independent Auditors towards internal financial controls. By aligning corporate governance and financial reporting standards with global best practices, the Act aims to improve controls over the financial reporting process and enhance investor confidence in entity operations.

One way to promote compliance with global best practices is through the adoption of a comprehensive risk management program, Enterprise Risk Management (ERM). Companies can also benefit from a robust internal financial control system, including identifying opportunities for improvement and drawing up recommendations and good practices that can be used as a benchmark to develop or strengthen their internal control systems.

Moreover, compliance with global best practices can lead to a trickle-down of accountability to operational management, enhance Board Audit Committee and senior management engagement in financial reporting and financial controls, and foster a control-conscious work culture for people behind controls. In some cases, compliance serves as a base for the blue print of optimal procedures while thinking about Enterprise Resource Planning (ERP).

As per Rule 8(5)(viii) of the Companies (Accounts) Rules 2014, directors have a responsibility to lay down IFC to be followed by the company and ensure operating effectiveness. The auditors’ report should also state whether the company has adequate IFC systems in place. The independent directors should satisfy themselves on the integrity of financial information and ensure that financial controls and systems of risk management are robust and defensible.

Overall, compliance with global best practices provides a framework for companies to address and mitigate risks and align with acceptable standards. As stated by Tim Leech, “The challenge for companies is to demonstrate that their internal control framework is not simply a compliance exercise, but a meaningful tool that truly adds value to the business.” 

10. Ensuring Reliable Financial Information with IFC

Internal Financial Controls (IFC) are essential for companies seeking to ensure the accuracy, completeness, and reliability of their financial information. The primary objective of IFC is to identify opportunities for improvement and draw up recommendations and good practices that can be used as a benchmark to develop or strengthen internal control systems. Companies must adopt a comprehensive risk management program – Enterprise Risk Management (ERM) – to ensure efficiency, effectiveness, and prevention of fraud and errors in their operations.

By placing more accountability and responsibility on the Board, the 2013 Act is attempting to align corporate governance and financial reporting standards with global best practices. With adequate and effective internal financial controls, companies experience a range of benefits, including improved controls over the financial reporting process, enhanced investor confidence in the company’s operations and financial reporting, and the promotion of a culture of openness and transparency.

Companies with robust IFC systems benefit from improved management engagement in financial reporting, business process redesigning to plug revenue leakages and cut costs, and better understanding of inherent internal control risks. They also foster a control-conscious work culture and provide assurance to the CEO/CFO while improving business performance.

As per the guidance note issued by the Institute of Chartered Accountants of India (ICAI), the definition of Internal financial controls under section 143(3) is restricted to only financial reporting. Therefore, it is also referred to as ICFR (Internal Controls on Financial Reporting). The whole framework of IFC is to mitigate strategic, operational, compliance, and financial risks. The first phase of implementing IFC for a company starts with identifying the entity level controls, discussing them in detail with each department process owner, and other stakeholders about the general processes, sub-processes, activities, controls, policies, and procedures currently followed.