International advisory firms like Mazars has raised serious concerns over the few provisions over internal financial controls (IFCs) and enterprise wide risk management (EWRM) in Companies Act 2013, provisions of Sections 134, 143 & 177 and Rule 8 of the Companies (Accounts) Rules, 2014.
The Companies Act of 2013 (the Act) has introduced many changes, which seek to enhance the state of governance of companies that are incorporated in India. However, the provisions of Sections 134, 143 & 177 and Rule 8 of the Companies (Accounts) Rules, 2014 ("the Rules"), apart from Schedule IV, have emphasized on specific sets of responsibilities for various stakeholders, in the context of internal financial controls ("IFC")s and enterprise wide risk management (EWRM).
According to Mazar, as a principal stakeholder, the board of directors ("the board") needs to play a key role in setting the ethical tone of a company. After all, high ethical standards are in the long term interests of a company as these serve as a means to make it credible and trustworthy, not only in day-to-day operations but also with respect to longer term commitments.
Expressing his views on this, Monish Chatrath, partner & national leader, consulting & markets, Mazars said, " "A list of rules laid down expands the realm of coverage to unlisted entities as well by specifying that the directors' report of all companies need to state details in respect of adequacy of IFCs, albeit with reference to financial statements only. It follows that while listed entities are required to have adequate IFCs covering aspects which go beyond financial reporting (such as those impacting operations and compliances), unlisted entities are currently required to ensure adequacy of their IFCs with respect to financial reporting only."
The Institute of Chartered Accountants of India ("ICAI") has recently made a clear distinction between IFCs and EWRM, while clarifying that EWRM is applied in strategy setting and cuts across business functions, whereas IFCs relate to processes within activities across business cycles, which in the case of unlisted entities impact financial reporting and in the case of listed entities is broader than financial reporting, Mazar said in a statement.
Chatrath added, "The repercussions are fairly severe. Defaulting companies are punishable with a fine (which can range from Rs 50,000 to Rs 25 lakh) and every officer who is in default, is punishable with imprisonment for a term which may extend to three years and/or with a fine (in the region of Rs 50,000 to Rs 5 lakh). The main difference is that the auditor is now required to report on adequacy and operating effectiveness of IFCs in the case of unlisted companies as well."
