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Finance

What is Internal Control over Financial Reporting (ICFR)?

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This article looks at the topic of Internal Control Over Financial Reporting (ICFR). It discusses the various aspects that make it up, including the importance of reliable financial reporting and having robust internal controls in place.

These not only ensure you are compliant with regulations, by putting rigid internal structures in place you also ensure all your accounting and financial statements are as secure, accurate and up to date as possible, which is good for your company and for the peace of mind of your shareholders.

Internal controls are an area of compliance that’s of particular importance to entrepreneurs and international investors. Understanding the requirements, and the responsibilities of public companies at both a national and international level, therefore, is of critical importance.

If you’re an HNWI entrepreneur and investor looking to navigate the often-confusing world of international investment, global capital markets, company operations, financial compliance and taxes, having the right advice can make all the difference. That’s where we come in.

Our international team of experts can advise you on a broad range of matters to ensure your company’s operations run smoothly, while also opening up new avenues for investment and legal tax reductions. Talk to us about becoming a Nomad Capitalist client today.

ICFR – TL;DR

ICFR stands for internal control over financial reporting.

It’s an area of compliance law concerned with providing a robust control environment to ensure that the financial statements of public companies are 100% accurate and above board.

The purpose of ICFR is to combat fraud and ensure more accurate financial statements, therefore boosting investor confidence and confidence in the markets generally. Internal control protocols help to guarantee and safeguard that confidence.

A company’s ICFR is primarily the responsivity of the CFO, though as with all areas of compliance, the onus is on each employee to be honest and vigilant in the fight against investor fraud.

What Is ICFR?

ICFR stands for Internal Control Over Financial Reporting.

It is an area of corporate compliance and financial oversight that’s of particular importance to publicly traded companies.

The need for corporate oversight cannot be overstated. It is a key component of our rules-based order, it works to eliminate fraudulent reporting while providing additional layers of protection and security for investors.

Internal Control Over Financial Reporting: Overview

Without investor confidence, capital markets would collapse resulting in economic disaster. By having internal control systems in place, however, this danger is mitigated.

The Securities & Exchange Commission (SEC) was founded following the Great Depression for that exact purpose. Its job is to ensure that all public companies in the US, as well as other financial operators and service providers involved in the investment sphere, are forthcoming and transparent with their financial reporting.

This ensures that the information investors receive is accurate and genuine allowing them to make their decisions based on real, actionable financial data.

Similar organisations exist throughout the world including the Canadian Securities Administrators (CSA), and the Financial Reporting Council (FRC) in Britain.

A company’s internal control structure requires robust internal financial control processes that include the provision of accurate and transparent financial reporting and risk assessment policies.

Ultimately, ICFR comes under the purview of the company’s Chief Financial Officer (CFO) and other financial executives, whose responsibilities it is to ensure full compliance with all relevant ICFR regulations, shore up any internal control deficiencies and identify areas of improvement.

With ICFR, as with all areas of compliance, it’s never a one-and-done thing, but rather an ongoing effort to ensure maximum compliance while continuously looking for new ways to make internal control processes as efficient and streamlined as possible.

ICFR And Financial Statements

It goes without saying that the accuracy of financial statements are vital to business success, but this applies especially to public companies.

If you’re a sole trader, having an error in a financial statement probably won’t cause an enormous amount of financial damage. Yes, repeated errors might get you in trouble with the taxman, but it isn’t as though you’re going to be investigated by the SEC.

If you’re the CEO or CFO of a publicly traded company, on the other hand, and you make a glaring error on a financial statement, well that’s a whole different story, which is why having a dedicated team and proper internal control procedures are so important.

Financial Reporting – Internal Controls

Imagine a blue chip company releasing an annual report that was full of errors and omissions – the result would be chaos.

That’s why it’s important to keep track of the company’s assets and debts, maintain secure and accurate accounting records, and provide reasonable assurance to investors as to the accuracy of available information.

A robust financial control environment also means having preventive and detective controls, whereby company employees can take a more proactive stance in helping to guarantee a more effective internal control environment, which, in addition to reporting, also encompasses risk assessment.

ICFR And Risk Assessment

Your internal control over financial reporting processes should also encompass risk assessment and, as such, include the input and oversight of your risk management team.

Its one thing to your company’s financial statements are accurate and transparent, but do they tell the full picture?

Are there unreported liabilities, loan repayments, debts, fees or unforeseen expenses not accounted for?

These could spell trouble.

Likewise depreciation, a potential drop in asset value or an anticipated drop in business performance (e.g. a seasonal dip) – all of these things need to be factored in ahead of time and disclosed to your investors.

Failure to disclose financial risk is a major breech of investor confidence, but failure to spot financial risk in the first place is also a major red flag.

But by being open and transparent in reporting, while also ensuring proper, proactive risk assessment processes as in place, you not only provide peace of mind to investors, you also demonstrate your adherence to relevant compliance legislation.

To ensure this, your finance, compliance and risk assessment teams need to be involved in conducting regular, audits to ensure your internal control over financial reporting requirements are regularly met.

ICFR And Auditing

Following the accuracy of financial statements and risk assessment, the other key element of internal control activities is auditing. To be compliant with legislation both the company and external parties must share these duties equally.

By conducting an internal audit you ensure that you are being proactive in identifying the strengths and weaknesses within your own internal control methodology. The results of the internal audit provides actionable information with clear avenues for improvement. By being fully aware of any issues in advance you also address in a proactive manner.

The audit committee is the group who overseas audits and ICFR responsibilities generally. They also need to hire an independent auditor to conduct an external audit of the company.

Having an external auditor also helps to gauge the effectiveness of your internal auditing efforts, allowing you to find ways to improve operating effectiveness and overall audit quality.

ICFR & The Sarbanes Oxley Act (SOX)

Having proper internet control over financial reporting in place is a must for public traded companies both in the US and abroad.

In the US it is required by law under the Sarbanes Oxley Act (SOX) of 2002 and falls under the purview of the Securities and Exchange Commission (SEC).

Similar legislation exists worldwide to ensure proper internal control methods exist to protect investors and ensure ongoing confidence in the markets.

Internal Control Matters

Your company’s ICFR initiatives are of critical importance for your company’s wellbeing, that of your shareholders and, indeed, the the financial system as a whole.

Aside from the fact that having an error in a financial statement is irksome, as a public company, such errors, even small ones, can cause large problems. That’s why it’s so important to have the right help.

At Nomad Capitalist we have a global team of experts, plus an extended network of trusted partners standing by to advise on all aspects of your business and investments, to ensure you are fully compliant.

For more information talk to us today about becoming an Nomad Capitalist client.

Internal Control over Financial Reporting FAQ

What does ICFR mean?

ICFR stands for Internal Control Over Financial Reporting – an area of compliance concerned with ensuring the transparency and accuracy of the financial statements of public companies.

What Are Generally Accepted Accounting Principles (GAAP)?

GAAP is an accountancy standard set by the US Securities and Exchange Commission (SEC).

What Are Entity Level Controls?

These are a set of internal rules and systems which outline how different entities – e.g. managers, board members and other stakeholders – should behave and the actions they should take in relation to compliance-related matters.

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