Analysis on Internal Financial Control under Companies Act 2013

Analysis of Internal Financial  Control under Companies Act 2013 

There are various Statutory Provisions under the Companies Act 2013 (the Act) which govern ‘Internal Financial Control’ in the Company. Relevant provisions of the Act, for the applicability of Internal Financial Control, is reproduced as under:

Under Section 134 (5) Companies Act, 2013: The directors of the Listed Company, shall lay down internal financial controls to be followed by the company and that such internal financial controls are adequate and operative effectively.

Meaning of Internal Financial Control  Under Section 134 (5) :

“Internal financial controls” means the policies and procedures adopted by the company for ensuring:

1. the safeguarding of its assets,
2. the prevention and detection of frauds and errors,
3. the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information;

Under Section 143(3)(i):  As per provisions of Section 143(3)(i) of Companies Act, 2013, the Auditor Report shall state whether the Company has adequate internal financial controls system in place and the operating effectiveness of such controls.

1. Which is one person Company (OPC) or a Small Company; or
2. Which has a turnover of less than Rs? 50 Crores as per the latest audited financial statement or which has aggregate borrowings from banks or financial institutions or any body corporate at any point of time during the financial year less than Rs. 25 Crore.

Meaning of Internal Financial Control as per Section 143(3)(i) of the Act. :

“Internal Financial Controls over financial reporting” shall mean “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. 

Section 177: All Companies which are required to constitute the Audit Committee shall evaluate internal financial Control and risk management systems.

Section 149 (7):  The independent directors shall satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible. 

Section 134(3)(q): Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ report of all the companies to state the details in respect of adequacy of internal financial controls with reference to the “Financial Statements”.