The Implementation Guidelines for Enterprise Internal Control, issued by five agencies of the Chinese government yesterday, will contribute to raising the quality of financial reporting among companies in China and minimizing the risk of fraud. The guidelines will also provide clearer guidance for Chinese companies to raise their management standard and adopt best practices for risk management, according to Deloitte.
The new guidelines were built on the principles in the Basic Standard for Enterprise Internal Control (Basic Standard), jointly released by the Ministry of Finance, the China Securities Regulatory Commission, National Audit Office, China Banking Regulatory Commission and China Insurance Regulatory Commission in 2008.
"The Basic Standard is designed to improve the risk management of companies in China. However, many companies find it difficult to adopt the standards because of the lack of implementation guidelines. The new guidelines, which cover different aspects of business operation and management, will provide clearer guidance for companies to improve their internal control," says Danny Lau, National Managing Partner for Enterprise Risk Services, Deloitte China.
Lau says there is the general awareness of the importance of internal control in China, especially related to how it contributes to improving corporate governance. Citing a survey conducted by the Deloitte China Centre for Corporate Governance with about 100 listed companies in China in February and March, he says 84% of the respondent companies believe that the best way to improve corporate governance is to strengthen and improve internal control procedures.
"The new guidelines will support China to build up best practices in corporate governance, which has become more and more important in the wake of growing outbound and inbound investments in China. Effective internal controls will help raise the quality and reliability of financial information, which is important for participants in the capital markets to make their decision," Lau adds.
In most jurisdictions, including China, laws and regulations require all companies to comply with financial reporting standards. One of the major risks facing a company is related to the failure to conform to the standards. The new guidelines on internal controls are expected to promote more rigorous applications of accounting standards in financial reporting. Those controls will provide more reasonable assurance about the reliability of the financial information of companies in China, says Deloitte.
Deloitte adds that financial statements are sometimes affected by the risk of fraud, which can include management intentionally falsifying information or managing reported financial results. As effective internal controls will provide strong assurance that companies will comply with the financial reporting standards, this will also help minimize the risk of corporate fraud, notes the company.