[Opinion] Internal Financial Control—Need to Focus?

CA Bimal R. Bhatt – [2024] 166 taxmann.com 366 (Article)

Purpose – To enhance better controls and reporting through adequate and right processes, systems, procedures and practices.

A. Text of section 134 (5)(e) of the Companies Act, 2013

“The directors, in the case of a listed company, had laid down internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively”. Explanation. —For the purposes of this clause, the term ?internal financial controls? means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;”

B. Meaning of Internal Financial Control Over Financial Reporting

A company’s internal financial control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal financial control over financial reporting includes those policies and procedures that:

1. pertains to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
2. provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorisations of management and directors of the company; and
3. provide reasonable assurance regarding prevention or timely detection of unauthorised acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

C. Extracts from the Board of Directors (BOD) Report

1. The Company has designed and implemented a comprehensive Internal Financial Controls System over financial reporting to ensure that all transactions are authorised, recorded and reported correctly in a timely manner. The Company’s Internal Financial Controls over financial reporting provide reasonable assurance over the integrity and reliability of the financial statements of the Company. The Company has detailed work instructions, Standard Operating Procedures (SOP), policies, processes and manuals that lays down roles, responsibilities, and actions required. Functional heads are responsible for ensuring compliance with all laws and regulations and also with the policies and procedures laid down by the management.
2. The Company’s Enterprise Resource Planning (“ERP”) system of SAP S/4 HANA is well leveraged and implemented towards day-to-day transaction accounting and financial reporting. The Company’s ERP along with allied information technology solutions provides a strong technology architecture for financial reporting controls. The Company’s investment in an advanced automation system to enable automated accounting and financial closing procedures in various areas has resulted in better accuracy and faster financial reporting with fewer manual interventions. The financial statement preparation has been automated to ensure end-to-end system-driven reporting across the Group reducing the scope of manual errors.
3. The Company’s Shared Services Center has taken ahead the digitalisation journey and delivered aggressive targets for on-time payment processing with near zero errors. The efforts towards digital processing, touchless processing, use of a virtual assistant, on-the-fly intelligence tools, use of optical character reader technology, mobile apps for employee reimbursements, car hire, hotel and travel booking, have created strong delight to stakeholders with related efficiencies in the process. The Company is continuously investing in new technology to enable smoother and error-proof processes.
4. The Company actively tracks all changes in Accounting Standards, the Act, and other applicable regulations and makes changes to the underlying systems, processes, and financial controls to ensure adherence to the same. With increased business complexities, detailed accounting and financial treatment are decided for dealing with newer products, services, assets, commitments, contracts, and arrangements. All resultant changes to the policy and impact on financials are disclosed after due validation with the Statutory Auditors, to the Audit Committee.
5. The Company has refreshed the Risk Assessment and Control Matrix for all processes involved in financial reporting and periodically tested them for design and operating effectiveness. The results of these tests are reported to the Audit Committee.
6. The Company gets its standalone financial results audited every quarter by its Statutory Auditors. The policies ensuring uniform accounting treatment are followed by the subsidiary companies as well. International subsidiaries provide the information required for the consolidation of accounts in the format prescribed by the Company. The accounts of the subsidiary and joint venture companies are audited and certified by their respective Statutory Auditors for consolidation. The Company has implemented an audit trail on the books of accounts.

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