Strategy-Oriented Internal Control System Of Group Company: Theory And Practice

China National Petroleum Corporation (CNPC) has established a complicated internal control system to meet the related requirement of SOX. This paper is focus on the research of the relationship among the internal control of group companies, financial risk and enterprise value. Based on theoretical research, we proposed a strategy-oriented internal control model. Through our case analysis we found that the internal control system established by CNPC is consistent with our model. We also did an empirical study on the effectiveness of the CNPC's internal control system.This paper fist reviewed the origin of internal control and then reviewed related literature on the cause of internal control and related empirical study. And then, we presented definition of internal control, principles in the implementation of internal control, the objectives, elements and significance of the internal control system. Through the review of the historical development of internal control we did a thorough clarification on the existence of internal control system and its theoretical argument. A sound internal control system can reduce financial risk thus improves business value. It is emphasized that an efficient and effective internal control system is crucial to the smooth operation of enterprise. Enterprise is a profit-oriented organization and is exposed to various risks in its operation. Financial risk is one of the risks around enterprise operation and an important risk source needs to be handled by enterprise. This paper introduced the concept of financial risk and analyzed its nature. We pointed that the financial risk management can improve the efficiency and effectiveness of enterprise's financial activities and it can also enhance transparency of corporate financial systems thus enable a right direction of enterprise development to increase business value continuously.This paper proposed a strategy-oriented group companies'internal control model considering the theory of internal control and the special characteristics of group companies. The model consists of five elements, which we presented as follows:The first element is the internal environment. Group companies'internal environmental groups mainly refers to its culture, organizational structure, management system, as well as the management style of the parent company's operation, philosophy of management, risk philosophy, risk preferences, control awareness. Efficient in mind can improve the cohesion and can overcome the problem of"free rider"to a certain extent. At the same time this mind can maintain the royalty of current members and can win the trust of new members. Therefore, the internal environment has attractions to external human recourse. Compared with a single law-person enterprise, due to the differences in the operational line, activities and life cycle between parent company, and subsidiaries, internal environment of group companies shows significant variances. In the implementation process of internal control, group companies should make a thorough analysis of the differences in the internal environment of subsidiaries in order to determine the optimal control procedures and control methods.The second element is the risk assessment. Due to the big size, complex levels of management and operational diversification, group companies tend to be insensitive to risk factors. This requires group companies establish a risk management departments, which is responsible for the identification of potential risks and its solutions. Parent company and its subsidiaries face respective risks so they employ different risk control methods. Compared with an one-person company, the risks faced by subsidiaries of show significant externalities, that is the parent company can transfer risk from one subsidiary to another since group companies are concerned with the risk on the whole level. Therefore, based on the risk control of subsidiaries, parent company should reconsider the risk factors and control the overall risk within acceptable level.The third element is capital controls. Group companies control its subsidiaries through capital control. In order to maintain the interests as a whole, group companies must strengthen the controls in the operational activities of its subsidiaries to improve the overall financial condition. Parent company should control financial management and capital flow of its subsidiaries. In the routine controls, financial control is the focus. According to financial control and principal-agent control, group companies should design a property-based incentive system to achieve goal congruence and the maximization of capital value.The fourth element is the communication system. A good communication system will enable enterprise get information about the operational results and enable management get decision-making related information timely. Compared with one-person company, group companies have complicated organizational structure with more serious obstruction of information and insufficient information supply. By focusing on the information dimension, communication system can make a more effective identification and evaluation of risks. Information processing capabilities determine the company's operational cost-effectiveness. We believe that information management departments, which is responsible for the identification of potential risks and its solutions. Parent company and its subsidiaries face respective risks so they employ different risk control methods. Compared with an one-person company, the risks faced by subsidiaries of show significant externalities, that is the parent company can transfer risk from one subsidiary to another since group companies are concerned with the risk on the whole level. Therefore, based on the risk control of subsidiaries, parent company should reconsider the risk factors and control the overall risk within acceptable level.The third element is capital controls. Group companies control its subsidiaries through capital control. In order to maintain the interests as a whole, group companies must strengthen the controls in the operational activities of its subsidiaries to improve the overall financial condition. Parent company should control financial management and capital flow of its subsidiaries. In the routine controls, financial control is the focus. According to financial control and principal-agent control, group companies should design a property-based incentive system to achieve goal congruence and the maximization of capital value.The fourth element is the communication system. A good communication system will enable enterprise get information about the operational results and enable management get decision-making related information timely. Compared with one-person company, group companies have complicated organizational structure with more serious obstruction of information and insufficient information supply. By focusing on the information dimension, communication system can make a more effective identification and evaluation of risks. Information processing capabilities determine the company's operational cost-effectiveness. We believe that information for other elements of the control elements. In short, any single control element can not operate without each other. Five control elements work as a whole can achieve the internal control objectives.Considering the characteristics of the group organization this paper divided the strategy-oriented internal control model into four levels. From top to bottom, the four levels are monitoring level, management level, department level and unit level.Monitoring level is the highest level of internal control model. The strategy management of this level is set according to the overall strategy objectivities of the enterprise. The strategy management of management level is relatively independent to achieve overall goal. The strategy of this level must serve for the overall goal and make way for the company's overall strategy when necessary. The strategy of department level is that various department at this level is responsible for the human and material resources within its control. This level needs to resolve talent strategy, technology development, marketing strategy, as well as funding strategy. The strategy management of unit level is to ensure that the tasks assigned by upper level are completed appropriately.In order to evaluate the implementation result of strategy-oriented internal control model, this paper selected the internal control system of China National Petroleum Corporation, whose internal control system is consistent with our model.CNPC prepared for the internal control system improvement from the end of 2003 and implemented the improved system early 2006. The internal control improvement involved three stages: the initial planning stage, and gradually implemented and feedback tests stage, fully operational phase. In this paper, we take the North China Division of CNPC as our research focus. Through our empirical study it is found that the implementation of strategy-oriented internal control system improved the financial indicators including liquidity, assets management and profitability significantly thus improved business value.