Internal Control over Financial Reporting (ICFR)

Businesses in the UAE can take advantage of the numerous opportunities brought about by the region’s quickening, technology-driven change through reliable and accurate financial reporting. Due to the region’s development and the rising worldwide challenge from rivals using the newest data-driven financial reporting systems, businesses in the UAE may greatly benefit from ICFR. Since the adoption of the Sarbanes-Oxley (SOX) Act in 2002, authorities worldwide have increased the reporting obligations from this viewpoint. Internal controls regarding financial reporting are critical since they ultimately aim to safeguard the rights of investors and other stakeholders by mitigating the chances of fraud and other economic hazards.

Internal Control over Financial Reporting (ICFR) is a procedure created to give a person or organization a satisfactory level of assurance, ensuring the accuracy of financial reporting and the preparation of financial statements for use by outside parties in compliance with accounting standards guidelines.

The structure and operational performance of the controls and precautions management has implemented over accounting and financial reporting are critical factors in its capacity to carry out its financial reporting obligations.

Objectives of ICFR Implementation in UAE
In the better interests of diverse business stakeholders, improve the standard of financial reporting procedures.
Attempt to increase the accuracy and openness of financial reporting procedures, which will finally aid in integrating the financial data.
The importance of internal controls contributes to increasing trust in the accuracy of the financial data in line with international best practices.
The Key Components of ICFR
Control Environment: The set of guidelines, procedures, and organizational frameworks known as the control environment, will help to set up the foundation for implementing internal control throughout the business.
Risk Evaluation: The method used by the business to detect the risk in financial statements is referred to as risk assessment concerning ICFR. Individuals qualified to perform risk assessments for ICFR must be aware of the financial reporting, reporting requirements, and fraudulent risks.
Control Activities: Another essential element of ICFR is the measures taken through processes and regulations intended to reduce financial reporting risk. The following ideas can aid in understanding control activities:
Division of tasks
IT (information technology) Controls
Controls at the entity and process levels
Preventive and Detective Controls
Information Systems and Communications: This component in the ICFR relates to much of the information exchange and communication routes. The business needs information to fulfil its internal control obligations and to help it achieve its goals. Both internal and external sources are used by management to gather, produce, and utilize pertinent information of high quality. Communication must provide, share, and acquire information continuously and repeatedly. Internal communication is the process of disseminating information so that everyone in the company clearly gets the same message. In response to demands and expectations, external communication gives information to external parties.
Controls Monitoring: This component includes procedures that guarantee the effectiveness of controls with prompt identification and correction of flaws. The monitoring can be carried out by implementing Control Self-Assessment (CSA), in which each process owner regularly evaluates the control.
ICFR Deficiency
Suppose management or staffs are unable to deter or identify false statements in a timely manner while carrying out their required duties as part of the usual course of business. In that case, there is an ICFR deficit. Management must determine how seriously the flaws might affect the credibility of the company’s financial reporting procedures when deficiencies in control functioning are discovered.

The following categories apply to ICFR deficiencies:

Material Weakness: A deficiency strongly indicates that a significant deception of the company’s financial statements won’t be remedied or identified in a timely manner.
Significant Deficiency: A less severe deficiency that should indeed be addressed by those in charge of monitoring the company’s financial reporting
Deficiency: This means a flaw in a control’s design or functioning when it prevents management or staff from promptly preventing or identifying false assertions while carrying out their regular duties.
Roles and Responsibilities of ICFR in UAE
Management

The company’s management is in charge of developing, implementing, and maintaining ICFR
Periodically evaluate ICFR’s performance in compliance with the SOX act
To reasonably back its evaluation of the ICFR, keep evidence, including paperwork
Establish management’s accountability for ICFR in quarterly reporting
Report annually on the management’s assessment of the ICFR of the firm
Update the audit committee on the functioning and efficiency of the controls
Independent Auditors

Evaluate the whole financial reporting system using a risk-based approach, but pay more attention to the controls over the financial reporting sections most vulnerable to substantial error
Even in a financial statement-only audit, acquire the awareness of each element of the company’s ICFR
Any internal control flaws should be reported promptly to management and the audit committee
Report on the success of management’s ICFR while conducting an integrated audit
Audit Committees

Supervise the management’s creation of financial statements, as well as the controls’ design and implementation
Regulate financial reporting in line with SOX
Assess the evaluation of the hazards in financial reporting
Examine the management’s anticipated actions to the cited financial reporting threats
Monitor and keep an eye on the internal audit’s operations, including its reports
Employ and manage the outside auditor
Bottom Line

A slew of high-profile corporate scandals in the various industries that happened in the past has highlighted the significance of ICFR for Middle Eastern businesses. Along with the COVID-19 pandemic, these corporate failures warned businesses to examine their financial statements more carefully.

The organizations are recognizing and viewing ICFR activities as possibilities to improve the quality and efficiency of their business models, elevating them to the top of global practices. The auditors are needed to consider the sufficiency of ICFR and its usefulness. Therefore they must grasp the company’s procedures and regulations. This process will allow them to gather evidence for assessment, proving the controls’ adequacy. Thus, the company will need to provide the required information and supporting documents to identify significant factual errors and lower financial vulnerabilities.

ICFR Audit in UAE: The Assistance of HLB HAMT
HLB HAMT is well-equipped to assist you in setting up a robust internal control framework in conformity with the relevant regulatory standards, thanks to its expertise in successfully working with customers in several industries in internal and external audits, including the listed entities in UAE. We can help you by guiding you through each phase of the ICFR implementation.