Why Internal Control over Financial Reporting (ICFR) is Important

As per Section 134 of the Companies Act 2013, 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 the company’s policies, safeguarding of its assets, prevention and detection of frauds and errors, accuracy and completeness of the accounting records, and timely preparation of reliable financial information.

Definition

ICFR 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.

Why ICFR is Important?

1. Regulatory Compliance

Organizations consider ICFR as a regulatory burden and mainly focus to comply with regulatory requirements. 

2. Process Efficiencies

Organizations take ICFR as an opportunity to bring process efficiencies through control optimization, eliminate redundant/duplicate controls and extend control automation.

3. Value Enhancement

Organizations focus more on control issues related to new projects/ventures whereas existing critical controls get monitored through continuous monitoring tools.

4. Framework Development

To bring an effective governance culture and provides role clarity by developing an entity-specific ICFR framework based on financial reporting standards and leading control practices.

5. Operations Assessment

To assess the company’s operations and provide a value-centric mechanism to identify the process universe, reporting risks, and their mapping with financial statements.

6. Control Design Review

To leverage various walk-throughs, data analytics, and control dynamic techniques to assess the design adequacy of existing controls related to financial reporting.

7. Upgrading Internal Practices

Based on the control design gaps, this phase brings value to the business through re-engineering existing processes and introducing leading digital practices to strengthen control design.

8. Sampling Techniques

To deploy, various data-driven sampling methodologies to select the right value-centric approach to getting wider insights and assurance on the target population.

9. Effectiveness Testing

To use a mix of Data Analytics and conventional testing techniques to ensure that transactions executed during the period comply with financial reporting requirements.

10. Documentation and Representation

To remain active throughout the ICFR life cycle and provides an effective governance culture identifying clear roles, timelines, templates, etc. requirements.

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Article contributed by:

Team- Risk & Transaction Advisory Services