The "Failure" Of Internal Control Leads To The Chain Problem Of Listed Companies. What Is The Key Point Of Strengthening The Internal Control System?

With the increasing attention paid to the quality of listed companies, the internal control system, as the "foundation" of the quality of listed companies, has attracted more and more attention from investors. Practice also shows that the more sound and effective implementation of internal control, the better the business performance and development quality of enterprises.

On the contrary, defects in the internal control system may lead to a series of problems. In recent years, the occupation of funds by related parties of listed companies, the illegal provision of guarantees to the outside world, the "out of control" of foreign investment subsidiaries and the "missing of book funds" of listed companies are often caused by the "failure" of internal control.

Internal control failure causes chaos in the company

The internal control system of listed companies is similar to dominoes. Problems in one of the links will not only affect the authenticity and accuracy of financial statements, but also provide opportunities for violations of laws and regulations. Serious cases may even lead to devastating "thunder" events, affecting the healthy development of listed companies and the stable operation of the market.

What are the forms of internal control defects and what risks will they cause? It may be possible to find out through the internal control audit or assurance report with "non-standard" opinions.

Since 2018, there has been a rising trend of illegal behaviors such as funds occupation and illegal guarantee of related parties. The fundamental reason is that the listed companies fail to effectively implement a reasonable division of responsibilities system, strict examination and approval system, and strict custody and security system, which leads to the "independence" between the major shareholders and the listed companies, The non-standard opinions in internal control audit or assurance reports of nearly 20 companies involve the above situations.

St Xingyuan, the main board company of Shenzhen Stock Exchange, found that the company had major defects in external guarantee and internal control of related parties and related transactions, which led to the company providing 145 million yuan guarantee for the actual controller and other related parties without review and disclosure as of December 31, 2020. The annual audit accountant finally issued a negative opinion on the company's internal control.

Moreover, the defects of internal control in inventory, supplier management and human resource management are also the important reasons for issuing "non-standard opinions" in internal control audit or assurance reports of listed companies. For example, * ST Huaying's internal control audit report is issued and unable to express opinions, mainly due to the company's major defects in internal control related to monetary funds, inventory, other receivables and loans, the accountant is unable to evaluate the authenticity and effectiveness of the audit evidence obtained.

The loss of control of subsidiaries is also a common failure of internal control. Xinhongze and St Shunli are all caused by the company's out of control. The internal control audit or assurance report with non-standard audit opinions is issued, which reveals that the relevant companies have not established effective enterprise management system for subsidiaries.

In addition, the non-standard internal control of information disclosure has become a new form of internal control failure in recent years. Such situations are involved in both CSPC and Kerong environment. What's more, the failure of internal control has affected the normal operation of the company. For example, as many as 8 items of negative opinions were issued in the internal control assurance report of the company, involving all aspects of the company's operation.

In practice, there are still some cases in which the appropriateness of individual internal control assurance reports is questionable. For example, some listed companies have control defects in the approval of fund payment and related party transaction decision-making, but the annual audit accountant has issued an unqualified opinion with emphasis on the matter section because the fund occupation has been solved, but they have not judged whether the control defects are rectified in this year, so the appropriateness of the opinions is questionable.

Three measures to urge the system to return

To strengthen the internal control of enterprises and consolidate the foundation of high-quality development is an urgent problem to be solved at present, which is also an important part of the special action of "improving the quality of listed companies" by the CSRC. In the view of market participants, strengthening the internal control system still needs three aspects.

The first to bear the brunt is to return the "key minority" to their positions and fulfill their responsibilities. In most cases of failure of internal control, there are "key minority" of controlling shareholders, actual controllers and directors and supervisors of listed companies.

On the one hand, "key minority" should really have the concept of compliance operation, diligence and responsibility, correctly understand and consciously undertake its social responsibility and legal obligations as the "key minority" of listed companies. On the other hand, the system construction should be followed up in time, and the responsibility of "key minority" should be compacted and refined.

The reporter is concerned that after the registration system reform, the "gem stock listing rules" set up a special chapter to standardize corporate governance, further refine the requirements of "key minority" loyalty and diligence, and strengthen the obligation and responsibility.

Secondly, the listed companies should pay more attention to the internal control related information disclosure, and earnestly urge the intermediary agencies to fulfill the "gatekeeper" responsibility. At present, the daily information disclosure of listed companies mainly focuses on transactions, related transactions, business performance and other matters. The relevant information of corporate governance and internal control is mainly disclosed in regular reports. At the same time, listed companies are often reluctant to "expose their own dirty linen" and worry about the impact of falling stock prices caused by chaos, which will lead to the failure to form a better market constraint.

For example, * ST King Kong, due to the company's suspected false increase in income and profits, and failure to disclose non operating related party transactions and external guarantees as required, there were major omissions and false records in the annual report from 2016 to 2019. However, the company disclosed in the internal control evaluation report of relevant years that there were no major defects and major defects in internal control during the relevant reporting period, Relevant disclosure is mere formality.

Industry insiders appeal that listed companies should pay more attention to the disclosure of internal control related information, not only in regular reports, but also in the timely disclosure of internal control related defects when they occur and find out, and explain rectification measures to strengthen market supervision; At the same time, intermediary agencies should be diligent and responsible, uphold good professional quality, issue appropriate assurance opinions, and urge listed companies to disclose their own internal control defects, so as to promote the effective implementation of internal control.

Moreover, we should reward the good and punish the bad, and constantly improve the quality of internal control and the level of corporate governance. For a long time, the regulatory authorities uphold the "zero tolerance" attitude towards the violations related to internal control. According to statistics, in 2020 alone, the Shenzhen Stock Exchange has dealt with 124 violations of corporate governance and internal control. For example, zangge holdings, which has a large amount of capital occupation and financial fraud, was publicly reprimanded by the exchange in September 2019 and December 2020. At the same time, it publicly identified the actual controller of the company Xiao, the then chairman of the board, and Wu, the then director and deputy general manager, were not suitable to serve as "directors, supervisors and senior managers" of listed companies within five years and three years respectively. At the same time, the listed companies with higher internal control quality can get more support in the aspects of information disclosure assessment and capital operation.

Of course, improving the quality of internal control of listed companies is not achieved overnight, but a systematic project, which requires the establishment of a reasonable system and continuous and effective implementation, as well as the common guidance and supervision of all parties in the market. Only with sound and effective internal control as the "foundation" can the quality of listed companies be improved.