Mandar D Rane, CS,LLB
What is IFC?
- As enumerated under Sec 134(5) of Companies Act, 2013(“Act”) , the Directors Responsibility Statement shall include a declaration from Director that internal financial controls to be followed by the company and that such internal financial controls are adequate and were operating effectively.
- Thus as stated in the explanation under the said section : IFC “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”
- Since the Act, envisages significant changes in the provisions related to governance, e-management, compliance and enforcement, disclosure norms, auditors and mergers. The Internal Control will enhance the applicability of provisions of the Act. It would give more power in the hands of shareholders and the Government.
- IFC gained its importance after Satyam imbroglio which erupted in 2009. Internal financial controls are designed to provide reasonable assurance that a company’s financial statements are reliable and prepared in accordance with the law.
Provisions under Act for IFC
1. Section 134 of the Act
In case of Listed Companies the Directors responsibility statement states that IFC shall be followed by the company and all the IFC are adequate and were operating effectively.
2. Section 143 of the Act
Pursuant to Sec 143(3) (i) has stated that the Auditors report shall state whether the company has adequate IFC system in place and the operating effectiveness of such controls
3. Section 177 of the Act
As per Sec 177(5) the Audit Committee shall call for the Comments of the Auditors about Internal Control system before submission to the Board.
Pursuant to Sec 177(4) (vii), the Audit Committee shall act in accordance with the terms of reference specified in writing by the Board pertaining to evaluation of IFC
4. As per Section 149(8) of the Act , which states the company and Independent Directors have to abide by Schedule IV ,the said schedule has put the onus on Independent Directors to statisfy themselves with financial control and risk management are robust and defensible
New Provisions on Act for Internal Control
- Inclusive definition of KMP has makes them liable in the event of default. As defined in Sec 2(51) of the Act KMP would include the Chief Executive Officer or the managing director or the manager; the company secretary; the whole-time director; the Chief Financial Officer; and such other officer as may be prescribed. In case of Sec 2(60) of the Act the Officer in Default includes KMP thus the onus on KMP has increased to maintain the compliance of Internal Controls.
- Precisely defining Independent Director under Sec 2(47) of the Act , setting up criteria under Sec 149(6) for appointment of Independent Director and a specific composition of Board has enhanced the involvement of all Directors has envisaged prompt and transparent decision making.
- Class Action Suits according to Sec 245 of the Act ,CAS can be filed against Company , Directors , Audit Firms , Expert , Advisor , Consultant or any other person and appointment of small shareholder director has enhanced the participation and accountability of stakeholders
- Whistle Blower Policy under Sec 177(9)
- Setting up of NCLT/NCLAT a specialized quasi-judicial body to faster and prompt resolution of corporate issues.
- Directors Responsibility Statement
- Maintenance of Electronic Records
- Disclosure as per Clause 55 of Listing Agreement
- Tenure of Auditors and not refrain then for rendering certain services
- Secretarial Audit as per Sec 204 of the Act
The Concept of IFC is in promoting good governance, total transparency, integrity and accountability of management and the board of directors