Chinese listed companies have made steady progress in implementing and evaluating their internal control system over the past three years but continue to face many challenges, such as insufficient professional talent and inadequate information system related to internal control, according to the recently released report "An internal control survey of Chinese Listed Companies in 2010" by business advisory firm Deloitte.
Given the tight timetable for internal control disclosure, it is necessary for companies to make early preparation to meet the deadline, stresses Deloitte.
Deloitte has been conducting an annual survey to understand the development of internal control among Chinese companies ever since 2007. This year, the survey interviewed 215 listed companies and focused on three aspects: the understanding of listed companies about the "Implementation Guidelines", the current state of internal control implementation, and their improvement undertaken to meet the regulatory requirements.
According to the implementation timetable set by the authorities, the Implementation Guidelines will become effective for companies dually listed in domestic and overseas stock markets from January 1, 2011. It will be extended to companies listed on the Main Boards of the Shanghai Securities Exchange and Shenzhen Securities Exchange from January 1, 2012.
According to the report, respondents generally agree that the Implementation Guidelines have generated positive impetus for their companies, helping to improve risk prevention and day-to-day operation and management control (88%), standardize the procedures, methods and approaches for internal control assessment and audit (79%), and comply with regulatory requirements (67%).
Allan Xie, Enterprise Risk Services Partner of Deloitte China, notes that some respondents believe that complying with the "Implementation Guidelines" will increase the workload of their staff and, thus their business costs. Thirty-seven percent of the respondents believe that the Implementation Guidelines will help control and reduce costs and expenses, a slight increase over last year (less than 30% of the respondents).
"We believe listed companies, assisted by related assessment and incentive measures, should take this opportunity to improve the overall standards in risk management and internal control, enhance their internal control infrastructures, and incorporate them into every facet of their business, including their day-to-day operation and corporate culture," says Xie.
According to the report, companies that are required to make disclosure will immediately release, or plan to release the audit report, the self-assessment report and the audit opinion from accountancy firms about their internal control. These companies, including those which have already made disclosure in previous years, account for 58% of the survey sample. Another 24% of companies will gradually disclose the information by December 31, 2010, December 31, 2011 and December 31, 2012 respectively. For companies that not subject to the disclosure requirements, 7% plan to make disclosure in the next audit year and only 11% do not have such a disclosure plan.
To actively respond to the regulatory requirements, companies will take the following measures including (i) organizing training sessions on their own about the interpretation of the Implementation Guidelines (53%); (ii) strengthening the review mechanism and reporting related to internal control assessment (45%); (iii) establishing joint taskforce comprising their own internal control employees and external experts (34%); and (iv) engaging external professional organizations to give internal control seminars (32%).
"Although companies have taken measures to meet the disclosure requirements, most of them (70%) find the reporting the Implementation Guidelines disclosure timetable tight. This is due to the fact that it is necessary to remain comprehensive and to cover the important elements for establishing concrete internal control. It also takes time for companies to rectify any internal control deficiencies discovered in their self-assessment," said Xie, advising companies to proactively schedule the establishment of their internal control systems.
However, when assessing the problems for establishing internal control systems, most companies consider insufficient internal control talent as the most common challenge (68%), followed by lack of related information system (46%), and incomprehensive internal control system and system design deficiencies (43%). The majority of companies also identify common weakness in their internal control system, such as improvement in risk identification and assessment (71% of companies), deficiencies in the internal control environment (61% of companies), and failing to continuously monitor their internal control (57% of companies).