"...For the financial years commencing on or after April 1, 2015, the report of the auditor shall state about existence of adequate internal financial controls system and its operating effectiveness," the ministry of corporate affairs stated. However, directors will have to mandatorily disclose the controls in their responsibility statement in the board report from 2014-15.
Internal financial controls are designed to provide reasonable assurance that a company's financial statements are reliable and prepared in accordance with the law. The Companies Act of 2013 has given wide scope to these internal controls, covering many aspects of a company's business.
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Yogesh Sharma, partner, assurance, Grant Thornton India LLP, said this step is significant, given that there is still no guidance from the auditing regulator or the MCA on these controls. "However, this does not defer the director's duties to ensure the implementation and operating effectiveness of such controls," he added.
Sai Venkateshwaran, partner and head-Accounting Advisory Services at KPMG India, said the ministry should provide similar relief to companies by deferring the directors' reporting requirement by a year, since the assessment and reporting by the board of directors and auditors would go hand in hand.
The Act makes it mandatory for auditors of a company to report that internal financial controls system are in place. Besides, auditors must also explicitly state the operating effectiveness of such controls.
An auditor's responsibility, experts point out, is limited to financial statements, but this new provision stretches it to operations as well.
Internal financial controls gained currency after the Sarbanes-Oxley Act of 2002 added this requirement for most public companies in the US following accounting scandals at Enron, Tyco International and WorldCom in the early 2000.
In India, internal financial controls assumed importance after the Satyam scandal erupted in 2009. The ministry also gave one year relief to companies, which only have an associate and/ or joint venture, from the requirements of preparing the consolidated financial statements.
Additionally, the government exempted "intermediate wholly-owned subsidiary" of another Indian company, from preparing such statements.
The requirement for consolidated financial statement for all companies arose due to provisions under section 129 of the Act. The section says every parent company, along with its standalone financial statements, has to prepare consolidated statements of itself and its subsidiaries, whether or not these are listed. The Act defines the word "subsidiary" broadly to include associate companies and joint ventures.
MCA, meanwhile, clarified that the recently allowed Real Estate Investment Trusts (Reits), Infrastructure Investment Trusts (InvITs), any other trusts formed under the Securities and Exchange Board of India regulations.