On 28 June 2008, the Chinese Ministry of Finance, CSRC, CIRC, CBRC and the National Audit Office jointly issued a Standard (Draft version) relating to the internal control of listed companies, foreign invested companies and Small & Medium Enterprises.

This is the first time for the Chinese authorities to issue a formal level standard, which could effectively cover the majority of companies in China.

According to the regulation, the Standard takes effect from 1st July 2009 and its significance is both important and far-reaching for many companies. The Standard is mandatory for all listed companies on the China Stock Exchange. At the moment, the regulation does not force non-listed companies to comply, however they are encouraged to exercise good corporate governance through adopting sound internal controls in preparation for potential future compliance.

Similar with other laws/regulations related to internal control implementation, the China standard adopts the COSO (The Committee of Sponsoring Organizations of the Tradeway Commission) as the framework. Internal control is defined as a process effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of 5 objectives.

Those objectives are:

• Effectiveness and efficiency of the operation.
• Truth, completeness and reliability of financial information.
• Compliance with the national laws and regulations.
• Protection of the assets completeness.
• Enterprise strategy.

For enterprises listed on the China Stock Markets, the compliance work will be performed through two stages:

• The Management of the enterprise should conduct a self-assessment of its own internal control effectiveness.
• A qualified auditor should be appointed in order to issue a separate internal control assessment report.

For non-listed enterprises, the following points would need to be considered in advance of compliance to the Standard being enforced in the near future.

• An observation and analysis of the regulation.
• Comparison between US SOX, Japan SOX and the China Internal Control Standard.

To discuss how this new Standard may potentially impact your company, please contact Peter Chan, Senior Manager, Systems Processes & Assurance Department, LehmanBrown International Accountants on pchan@lehmanbrown.com

Additionally, to learn more about the purpose and business gains from an internal audit, please refer to our recent Insights e-newsletter on ‘The Objectives and Benefits of an Internal Audit’ by clicking here.