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More listed companies aware that internal controls are key

By Bi Xiaoning (China Daily)
Updated: 2009-07-13 08:09

A trader monitors stock transactions at a securities trading firm in Hong Kong. More of China's listed companies acknowledge the importance of tightened internal controls to guard against risk, but too few put that principle into practice, according to a recent Deloitte survey. [Agencies]

China's listed companies have increased their awareness of internal control principles, but more need to put those principles into practice, a new survey by Deloitte reported.

The international accounting firm this month released the results of its May survey of Chinese companies representing eight major industry sectors, including manufacturing, real estate, transportation, energy and finance.

About half of the companies surveyed have established designated departments to implement risk management and internal control policies, the survey found.

However, only 23 percent have advanced from written procedures to practical implementation, Deloitte reported.

And only 18 percent of companies surveyed have conducted reviews of their internal control efforts.

"It shows that companies are taking a 'fire-fighting' approach," said Danny Lau, national managing partner of the Enterprise Risk Services division at Deloitte China.

"They are still at a preliminary stage of establishing and implementing their internal control, which is not yet a routine practice or a long-term mechanism," Lau said.

The survey, entitled, "Internal Control Survey of China Listed Companies", is the third conducted by Deloitte. Earlier surveys were conducted in 2007 and 2008.

According to this year's survey, all enterprises recognize that tightened internal control systems can help guard against risks.

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However, only about 30 percent of business representatives surveyed believe that internal control systems can help manage and save costs, Deloitte reported.

Some respondents said implementing internal control systems would increase the workload of their staff and incur other expenses.

Deloitte reported that the implication is that corporate management might not fully understand the functions of internal control systems.

Only 6 percent of the businesses surveyed offer training to their internal control staff.

More than half of the enterprises indicated that internal control measures could not achieve expected results, which Deloitte said could be hampering efforts to implement controls.

About 40 percent of respondents placed the blame on the weak execution of internal control programs.

"There are long-standing problems and blind spots when enterprises implement their internal controls," Lau said.

"These problems showed up in our survey results in 2008. But after one year, there is still no significant improvement," Lau said.

The report discovered an encouraging phenomenon with regard to internal control assessment, Deloitte reported.

Among 353 listed companies that released their internal control reports in 2008, nearly 100 disclosed this information on a voluntary basis.

However, about 27 percent of the enterprises admitted that they did not conduct a comprehensive assessment, nor did they keep a record of their reviews, Deloitte reported.

Only a few employed independent auditors, the survey found.

About 60 percent of the enterprises used internal audit departments, and 35 percent relied on the offices of boards of directors, finance divisions or other departments.

In May 2008, Chinese policymakers released the country's first guidelines on corporate governance for internal controls.

Called the Basic Standard for Enterprise Internal Control, the policy became effective on July 1.

"Companies need to quickly improve their support infrastructure for internal control. In particular, they should ensure they are meeting regulatory requirements," Lau said.

The Deloitte report suggested companies strive for inter-departmental cooperation.

"In addition, companies should change their mindset and take a more aggressive approach, under which the focus is not only on regulatory requirements, but also on building a stronger management foundation," Lau said.