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Companies Act 2013

Gearing up to be incontrol of Internal
Financial Controls

understood and enforced Clearly defined. and the timely preparation of reliable financial information. reflect the continuation of this trend. According to the Companies Act 2013. inter alia. the Directors’ Responsibility states that directors. accuracy and completeness of accounting records.Gearing up for implementing Section 134 Preamble Indian regulations have been modified to reflect the developments in the Western world. Introduction of Internal Financial Controls (IFC) in the Companies Act 2013. Schedule IV: 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. Requirements as per the New Companies Act 2013 Section 134: In the case of a listed company. Detective controls and monitoring processes are technology enabled with one version of truth 2 Assess the current state of IFC Roles and Responsibilities All stakeholders are aware of their roles and responsibilities with respect to processes and controls Behaviour Management Information System The culture of compliance with laid down guidelines and procedures is evident through the actions and behavior of individuals and teams This should ensure that adequate and accurate information is available for reporting and decision making | Companies Act . the term IFC has been defined as the policies and procedures adopted by the company to ensure orderly and efficient conduct of its business. prevention and detection of frauds and errors. Section 177: ► Audit committee may call for comments of auditors about internal control systems before their submission to the Board and may also discuss any related issues with the internal and statutory auditors and the management of the company ► Audit committee should act in accordance with the terms of reference specified in writing by the board. detailed and harmonized procedures are available across the organization Technology Several controls are preventive in nature and automated. have laid down IFC to be followed by the company and that such controls are adequate and operating effectively. Assess the controls set-up in your organization using the following grid: Policies/Guidelines Operating Procedures Key policies are defined. which should. including adherence to company’s policies. include evaluation of IFC and risk management systems Section 143: The auditor’s report should also state whether the company has adequate IFC system in place and the operating effectiveness of such controls. Call to action Familiarize the Board of Directors (especially the Audit Committee and Independent Directors) and Senior Management Personnel with respect to their enhanced responsibilities regarding IFC. safeguarding of its assets.

What are its components? ► The expanded coverage and focus goes way beyond the “Financial Reporting Controls” and the focus is on “all the elements” of a Controls Framework including tone at the top. which attempts to highlight all the different building blocks of an Internal Financial Controls Framework Entity Controls ► Ethics & Values strategy ► Culture ► Communication Control Governance & Standards ► Policies & Procedures ► Oranisational Structures ► Performance Objectives ► Roles & Responsibilities Control Design ► Risk Identification ► Capacity to Deliver Objectives Control Operation Control Compliance Monitoring ► Control Systems ► Continuous Improvement ► Compliance Monitoring ► Control Monitoring . policies and procedures. controls design. operating controls. controls monitoring etc.Decoding IFC . The figure shows a Controls Framework.

How to implement IFC and who all need to be involved? The “Three Lines of Defense” model provides a simple and effective way to enhance communications on Internal Financial Controls by clarifying roles and duties. ► The first line is responsible for setting up the controls. but a monitoring tool for the management ► The third line provides the independent assurance on the activities of first and second lines of defence ► Audit Committee and board of directors provide overall direction and oversight Board of Directors/Audit Committee Senior Management 1st Operational and Business Units (design and operation of controls) Management Assurance (Ongoing Controls Monitoring) | Companies Act 3rd Line of Defense Independent Assurance Internal Audit Regulators 2nd Line of Defense External Audit 4 1st Line of Defense . It is not an independent assurance function. mitigation of risk and defining policies and procedures to be complied with ► The second line monitors compliance with the laid down controls.

Business Operations and Compliance? ► Are our policies and procedures easy to access and comprehend? Are these maintained and updated on the technology platform on a regular basis? ► Do we regularly up-skill our employees to address the emerging needs of your organisation in areas such as GRC.? ► Do we have common understanding on the “Risk that Matter” among relevant stakeholders? ► Do we consider fraud risks as part of the risk management exercise and address them with clear action. assess and refresh our controls framework in line with emerging guidance around applicable standards like COSO? Implementation ► Are authority.? Monitoring & Reporting ► Do we periodically update the key stakeholders on Controls and Risk management effectiveness of our organization? Is there a technology platform to enable proactive and timely monitoring of controls effectiveness? ► Do we have adequate and reliable information to certify compliance with IFC requirements according to the Act? ► Have we considered self-assessments and automation of control monitoring? ► What kind of assurance is provided to the Management and Board on IFC by internal audit and external audit? Well prepared Requires consideration . IT controls. responsibility and accountability clearly (delegation of authority and segregation of duties) defined such that decisions are made and actions taken at an appropriate level? ► Do we periodically assess and optimize controls to improve effectiveness. analytics for continuous controls monitoring etc. communicated and monitored? ► Do we periodically review. reduce costs and support business performance? ► Do we have policies and procedures covering all domains such as Finance and Accounts. compliance with guidelines etc. whistle blowing.r.Questions to be considered by a CXO Structure/Framework ► Do we have a structure/program to train our employees on their role in the overall internal controls process? ► Do we have relevant skills (skills around fraud risks. covenants. IT controls.). risk assessment. focused teams and bandwidth to the support the IFC agenda? ► Do we have entity level controls w. fraud indicators and perform periodic independent verification in this area? ► Do we effectively track and proactively monitor our compliance agenda around domestic/ international footprint. accountability and ownership? ► Do we pay adequate focus on safeguarding of assets. that are clearly established. ethics etc.t policies and procedures. fraud risks etc.

Structure/Framework Implementation Monitoring & Reporting Notes 6 | Companies Act .

segregation of duties etc. business processes. contract compliance etc. prevent v.ey. Related EY service offerings ► Enterprise Risk Management ► Compliance Management ► Business Performance Management ► Controls Transformation To measure the gap that you need to bridge to comply with the Act and understand more about how we are assisting our clients with IFCs. please contact us at ifcsolutions@in. automated ► Establish a comprehensive Risk Management Framework and/or targeted intervention in areas such as: ► Identifying and prioritizing risks that matter ► Automating the risk monitoring process ► Defining “value at risk” and/or “risk impact” ► Monitoring and management of fraud risks ► Continuous controls monitoring and fraud risk analytics through Data Analytics lab ► Design and implement controls self-assessment ► Design and assist in implementation of delegation of 7 . detect. compliance and IT) in line with leading industry/controls practices ► Benchmark controls against leading practices. fraud. ► Implementation support for GRC rollout ► Develop standard operating procedures including relevant policies and guidelines ► Rationalize and automate current controls portfolio to reduce overall cost of control while improving effectiveness ► Design MIS and board reporting pack to facilitate evaluation of IFCs ► Train employees on their role in the overall internal controls process and on leading practices for managing emerging risks in areas such as IT. manual v.How can EY assist you in your IFC journey? Areas of intervention Do I need support? ► Train Board members (including Audit Committee and Independent Directors) on IFCrelated requirements of the Act ► Establish internal controls framework covering both Entity Level Controls and Process Controls (covering finance and accounts. IT controls.

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