Internal Financial Control is a process which can be used to reduce the risk of fraud, financial error and mismanagement in an organisation.

Internal Financial Control procedures are put in place by senior management to ensure that the organisation operates effectively and is financially stable.

Internal Financial Control

Internal Financial Control is a financial tool that is used in the business environment to safeguard assets. Internal financial control involves accounting and auditing, budgeting and using internal checks and balances.

Internal financial control becomes important as the company grows. As companies grow, they must establish a system of checks and balances to ensure that all transactions are recorded correctly. They must also establish a system of internal controls to ensure that all transactions are performed correctly.

The Importance of Internal Financial Control

Internal Financial Control procedures are put in place to reduce the risk of fraud, financial error and mismanagement in an organisation. These procedures are also used to ensure that the business complies with relevant statutory regulations, rules and codes of practice such as accounting standards, tax laws and health and safety legislation.

It is important for employees to adhere to these policies and procedures so that the company can avoid financial loss, legal action or damage to its reputation.

Statutory Provisions under Companies Act 2013 related to Internal Financial Control

1. Section 134(5)(e) of Companies Act, 2013 provides that the Board of Directors shall ensure that a proper internal financial control system, commensurate with the size, scale and complexity of its operations is laid down and followed
2. Section 134(8) of Companies Act, 2013 provides that the CEO and CFO shall certify the following:
1. The financial statements and other financial information included in the annual report are in agreement with the books of accounts.
2. There are adequate internal control systems commensurate with size and nature of business for safeguarding assets from loss from unauthorized use or disposition and for preventing and detecting frauds and errors.
3. There is a proper system to ensure compliance with applicable laws.
3. Section 143(12) ensures that every listed company shall have a vigil mechanism, which will provide direct access to the chairman of the audit committee or any other director nominated by the board or to any person nominated by it, as may be prescribed, for reporting concerns about unethical behavior.

Internal Financial Controls: Many types of internal controls

Internal financial controls may be formal or informal. Formal systems have a paper trail and assigned responsibilities, while informal systems may be unwritten rules or customs within the company, like not allowing one person to order supplies and pay for them. A company can have many types of internal controls, including:

• Segregation of duties in accounting: This involves separating employees' responsibilities in order to avoid conflict of interest. For example, it is good practice to have one employee who records transactions but another who makes bank deposits.
• Authority levels: These establish how much decision-making power an employee has at each level of an organization.
• Independent checks: This involves having two people check important figures or transactions before they become finalized.
• Authorization limits: This limit tells employees how much they can spend without authorization from their supervisors.
• Monitoring: This includes audits so that management can monitor progress toward its goals and make corrections if necessary.

Internal Financial Controls - Why important? 

• Centralized, and managed for the organization.
• Support for CEO/CFO certifications
• Effective control environment, which reduces risk.
• Internal controls: a better awareness of inherent and residual control risks
• Aids in the redesign of corporate processes in order to plug income and cost leaks.
• Possibilities for containment
• Helps to reduce the number of controls in use across the organisation by implementing smart and automated controls.