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Internal Financial Control as per Companies Act, 2013

There are various Statutory Provisions under the Companies Act 2013 (the Act) which govern "Internal Financial Control" in the Company. Relevant provisions of the Act, for the applicability of Internal Financial Control is reproduced as under:

1) Section 134(5) of the Companies Act, 2013: The directors of the Listed Company, shall lay down internal financial controls to be followed by the company and that such internal financial controls are adequate and operative effectively. 

Meaning of Internal Financial Control (IFC) as per Section 134(5) of the Act.

"Internal financial controls" means the policies and procedures adopted by the organisation for ensuring:
  1. the systematic and efficient conduct of its business, including adherence to company’s policies,
  2. the safeguarding of its assets,
  3. the prevention and detection of frauds and errors,
  4. the accuracy and completeness of the accounting records, and the timely preparation of trustworthy financial information;

Based on the above provisions, IFC as mentioned under Section 134(5) of the Act, is applicable only to listed companies.

2) Section 143(3)(i) of Companies Act, 2013: As per provisions of Section 143(3)(i) of companies Act, 2013, the Auditor Report shall state whether the Company has adequate internal financial controls system in place and the operating effectiveness of such controls. However, MCA vide its notification dated 13th June 2017 provide exemption from Internal Financial Controls to following private companies:
  1. Which is an one person Company (OPC) or a Small Company; or
  2. Which has turnover less than Rs. 50 Crores as per latest audited financial statement or which has aggregate borrowings from banks or other financial institutions or anybody corporate at any point of time during the financial year, less then Rs. 25 Crore.


Further, the above exemptions available to a Private Company under section 143(3)(i) would be available only if private company has not involved in a default in filing its financial statements under section 137 of the said Act or annual return under section 92 of the said Act with the ROC.

Hence, Unless the private Company is covered under the above exemption, the auditor is required to report about the internal financial controls system in place and the pertaining effectiveness of such controls.

Meaning of Internal Financial Control (IFC) as per Section 143(3)(i) of the Act .

As per Guidance note of ICAI, "Internal Financial Controls over financial reporting" shall mean "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 and policies. A company's internal financial control system over financial reporting includes those policies and procedures that
  • pertain to the maintenance of financial records that, in reasonable detail, accurately and comparatively reflect the transactions and dispositions of the assets of the company;
  • provide reliable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles and policies, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company or organisation; and
  • provide reliable assurance regarding prevention or periodic detection of unauthorized acquisition, use, or disposition of the company's assets that would have a substantial effect on the financial statements."


As per Guidance note of ICAI, the term ‘internal financial controls’ mentioned under Section 143(3)(i) of the Act, implies and relates to internal financial controls over Financial reporting. It may be noted that the said Section specifies the auditor’s reporting on internal financial controls only within the context of audit of financial statements.

Based on the above legal provisions , it can be concluded that the Term " Internal Financial Control" used in Section 143(3)(i) of the Act is different from the "Internal Financial Control" as mentioned in Section 134(5) of Companies Act 2013, because, the scope for reporting on internal financial controls u/s 134(5), as mentioned earlier (applicable on Listed Companies) is significantly larger and wider than the reporting on internal controls with reference to financial statements u/s 143(3)(i) of Companies Act 2013.

Other Provisions governing Internal Financial Controls:

  • Section 177 of Companies Act 2013: All Companies which are required to constitute the Audit committee shall evaluate internal financial Control and risk management systems.
  • Section 149 (7) r/w Schedule IV(ii)(4) of the Companies Act 2013: The independent directors shall satisfy themselves on the integrity of financial information and that financial controls and the systems of risk management are robust and defensible. The said provision are required to be complied by the all the Companies which are required to appoint the Independent Directors in the Company.
  • Section 134(3)(q) r/w Rule 8(5) of Companies Accounts Rules, 2014:  Rule 8(5)(viii) of the Companies (Accounts) Rules, 2014 requires the Board of Directors’ report of all the companies to state the details in respect of proficiency of internal financial controls system with reference to the "Financial Statements". Hence, it appears that the auditors of even unlisted companies are required to report on the competence and operating effectiveness of the internal financial controls over financial reporting. The said provision is applicable to all Companies whether listed or unlisted except those companies which are exempted by the MCA notification dated 13th June 2017 as mentioned above.
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