Research On Internal Control Of Listed Companies On SME Board

Effective internal control is conducive to improve the quality of listed companies andstrengthen the investor confidence. It is the precondition for exploring effective regulationto make an analysis on the internal control environment of Listed Companies on SME Board(“LCSMEB”). Through the questionnaire survey， this paper is to analyze the currentsituation of internal control of LCSMEB and its origin and make suggestions for regulationon internal control of LCSMEB based on drawing on the experience and lessons whenLCSMEB carrying out the SOX. The following conclusions are reached:1. The internal control consciousness of LCSMEB was enhanced. The full-riskmanagement concept and active role of overall listing were recognized by companies.Besides， the companies have an good understanding of internal control regulation made byregulators and are willing power to learn the internal control theory， method and the bestpractical experience. Most of the companies consider that LCSMEB have both specialadvantages and disadvantages compared with big companies.2. LCSMEB have gradually established the internal control system and the active effectof the system and regulation have been revealed. Listing takes an active role in improvingthe internal control. The development needs is the main impetus for establishing the internalcontrol system. Private SMEs have the overall advantage on control activities. Besides，companies have willing power to reveal their intern control information.3. It is generally recognized by LCSMEB that they have internal control defect more orless and there is a wide gap between the internal control situation and the <The BasicStandard of Enterprise Internal Control>. Corporate governance， risk assessment，information system and execution defect are the main weakness currently. Execution defectis the weakest part for private companies and information system for state-owned companies.It is highly probable to find defects in new business， some important points for traditionalbusiness and non-important points. The internal control information disclosure is withselectivity to some extent. The macro-environmental factors have obvious effect on internalcontrol execution. Therefore， LCSMEB have different views on whether new internalcontrol regulations for LCSMEB are needed.4. Cost is the not main obstacle for establishing internal control system. Assurance feein China is less than that of US due to the difference between auditing regulations，timing of related guidance publishing and disciplinary mechanism. However， the independence ofinternal control assurance is a problem. It needs to define more clearly the internal controladvisory business and the specific standards for discriminating between advisory and auditbusiness.5. Currently， the internal control system of LCSMEB in China is gradually taking itsrole，however，there are still some defects. There is still a certain gap between practice andthe new internal control regulation which is resulted from not only the history factors butalso the specific nature of LCSMEB， including lack of uniform internal control frameworkwhich has influence on harmony of internal control system building， high point of the newinternal control regulation emphasizing on risk management with not enough time forLCSMEB to adapt to， slow development for equity incentive system which means that itneeds time for LCSMEB， mostly controlled by family， to improve the corporategovernance， lack of direct disciplinary mechanism on violating internal control system，specific characteristic for LCSMEB， ect.6. The implementation of the new internal control regulation is a good chance forLCSMEB to improve level of their internal control system， especially in the transitionperiod of implementation. This report is going to make proposals for regulation authoritiesfrom the angle of the regulation enaction， implementation， disciplinary mechanism andother aspects， which are shown as below:(1) Regulation enaction: The authority should fully consider the internal controlcharacteristics and development needs of the multi-level capital markets in China.Regulation should focus on both the key regulation point and moderate supervision elasticity;improve the maneuverability of supporting guidelines and the coordination of internalcontrol supervision system and clearly define what the material defects are for internalcontrol; strengthen the regulatory requirements for internal control information disclosureand bring the internal control information disclosure into the regulatory system fordisclosure.(2) Implementation: The Supervision authority may give the companies transitionperiod to adapt to the new regulation with force; the Stock Exchanges strengthen thecharacteristic analysis so as to explore the regulatory focus; the authority should recognizethe responsibility for the board of directors for internal control effectiveness and improve theaccountability system to promote the full play of independent directors and the AuditCommittee; and enhance the internal control regulation regime and awareness of risk andresponsibility for sponsor institution， accounting firm and other intermediary organizations and strengthen the sustained supervision responsibility of sponsor institution and the qualitycontrol of accounting firm.(3) Disciplinary mechanism: The existing legislation system should be improved andthe ristriction clause be detailed; to enhance the punishment for internal control failure andbring in the remuneration refund mechanism when necessary; to play the cooperativeregulatory advantage between regulatory bureau and the Stock Exchanges and enhance theimplementation of punishment; to make clear the punishment clause for intermediaryorganizations， industry self-discipline mesures and its implementation way.(4) Other aspects: to enhance the communication and learning between companies andactively explore the best internal control practice suitable for China’s national condition; topay suficient attention to how the company development factors， strictness degree ofregulation，external auditing standards and change of audit fee influence the execution cost;to adjust the regulation timely.