【Daopin Diagnosis】:
China’s companies are becoming increasingly market-oriented, and market competition has become even more intense. In our long-term management consulting experience, having consulted with companies of various industries and scales, Daopin Consulting believes: despite the differences in financial management among companies based on their different industry business models, there are similar issues that exist within internal controls based on financial control. Daopin Consulting summarizes these as follows:
Financial management fundamentals are weak, and internal financial controls are lacking. Although modern accounting or management software has been widely adopted, which greatly improves efficiency and ensures the accuracy and timeliness of accounting data for finance personnel, the current basic financial management level of companies still falls short of management's expectations for financial data. For example, problems arise in areas such as internal control standards for financial documentation, implementation of position separation principles, auditing, authority management, decision data support, strategy management, and performance management. The role played by finance does not achieve the desired results. This is why many companies feel that finance does not effectively supervise and control operations but rather becomes a formality to fulfill necessary procedures. Many enterprises have chaotic process controls and unclearly designed processes; especially in working capital management processes, such as accounts receivable, accounts payable, inventory management, cash, and bank deposits, leading to the company's inability to meet its capital needs in terms of fund management and working capital turnover speed.
The functionality of financial management is insufficient, clearly lacking excellent and effective financial management tools and internal control methods. In practical management processes, many tools and techniques are not implemented or utilized by management personnel, such as budget management, key performance indicators, internal control standards, and financial early warning mechanisms. In actual management processes, finance personnel spend a lot of time and energy on financial data collection, organization, accounting, and preparation of financial reports, rather than actively participating in processes like data classification, cost reduction, performance management, budget control, and strategy management. Instead, they retreat into the role of merely providing data and information support.
The overall company lacks internal control mechanisms and standards. Companies do not recognize the benefits that internal controls can bring. In many multinational corporations, standardized and comprehensive internal control standards have been established, integrated into process design and improvement, and extensive employee training and education have been conducted to deeply embed internal control standards into all employees' daily work and behavior, thereby reducing business risks and preventing abnormal commercial behaviors such as fraud and embezzlement, maintaining a good corporate social image, and protecting shareholder interests.
【Definition of Internal Control】
COSO framework defines internal control as: a process carried out by the company's board of directors, management, and other employees to provide reasonable assurance for achieving objectives such as operational effectiveness and efficiency, reliability of financial reporting, and compliance with applicable laws and regulations. For Chinese enterprises, internal control also includes adopting appropriate measures to ensure the effective operation of various internal business processes, including setting control points and separating authorities.
Another meaning of internal control refers to the review and inspection of the company's internal operating processes; when implementing internal control specifically, relevant internal control auditors need to conduct a comprehensive review and inspection of the company's various operational procedures, including using necessary audit techniques such as analytical testing, internal control level assessment, investigation, and on-site inspections. Comprehensive audit working papers and management reports are required, and the auditor must report any issues found during the audit process and offer management suggestions to the company's management.
【Benefits of Internal Control】
Internal control is the modifier and track for process management. The implementation of internal control requires the company to have relatively complete operational processes and process manuals. During actual audits and inspections, according to the company's operational processes and manuals, it is easy to determine the differences between reality and expectations or prior specifications, identify redundant and non-value-adding parts in the process, and standardize them.
Internal control is an indispensable part of a company's internal management. In fact, internal control is the foundation and cornerstone of internal management work within a company. All operational and management processes of the company need to be included within the scope of internal control standards.
Internal control helps achieve major creative ideas and optimal corporate objectives. During the process of designing internal control standards at Daopin Consulting, attention is paid to the company's shareholders and strategic objectives. Beyond basic control measures, internal control standards for strategic management can help companies effectively achieve their strategic goals.
Internal control helps protect the company's assets, information, and technology. Many principles in internal control can assist the company in safeguarding the security of assets, information, and technology, such as good review and validation procedures, regular reporting and recording procedures, authority management, etc., which can help companies protect the integrity of assets, information, and technology.
Internal control helps ensure the company obtains reliable and timely operational reports and financial statements. Because internal control standards have very effective techniques and methods for safeguarding the security and completeness of financial information and financial data, and since internal control standards are considered the most critical control aspect of internal control, there is reason to believe that internal control standards are very effective in safeguarding and improving a company's financial information.
Internal control helps companies comply with relevant laws, regulations, and conventions, avoiding damage to the company's reputation and status. In internal control standards, Daopin Consulting places significant emphasis on protecting the external environment, especially laws, regulations, and conventions. There are already many painful cases where companies suffered harm, both in short-term economic benefits and long-term social benefits, due to ineffective implementation and enforcement of internal control standards leading to violations of laws and business conventions.
【Internal Control System】
Specific internal control evaluation criteria can be divided into two levels: the first level is the internal control factors evaluation criteria; the second level is the internal control operational level evaluation criteria. Drawing from the research results of the U.S. COSO report, internal control components include control environment, risk assessment, control activities, information and communication, and monitoring. Each component can further be subdivided into more items. For example, the control environment component covers projects such as ethics and values, execution ability, board of directors, management philosophy and business model, organizational structure, responsibility allocation system, human resources policies and practices, etc. Operational level evaluation criteria mainly refine the control activities component. Control activities are policies and procedures established to ensure that instructions from management are carried out, aiming to help the company ensure that necessary actions have been taken regarding "risks that could prevent the achievement of company objectives." Control activities are designed based on control points, and companies generally design control activities according to the characteristics of their production and business activities.
Generally, designing internal control standards primarily focuses on the operational level evaluation criteria.
【Daopin Consulting Internal Control Design Process】
In designing an internal control system for a company, Daopin Consulting follows the following consulting process:
1. Diagnosis Phase:
During the design of internal control standards, Daopin Consulting pays attention to the internal control environment. In the process of designing internal control standards, Daopin Consulting needs to focus on:
- Shareholder interest needs;
- Generally accepted accounting principles and auditing standards;
- National and regional laws and regulations;
- Specific legal requirements and other requests from the securities regulatory commission;
- Customer needs;
At the same time, Daopin Consulting also pays attention to:
- Financial policies and procedures;
- Audit requirements;
- Employee behavior codes, etc.;
2. Analysis and Research Phase:
In modern companies, the establishment of internal controls must be viewed from a systemic perspective. Internal control is not a task that can be independently accomplished by a single department.
Typical internal control systems include:
- Employee behavior code;
- Internal control standard training;
- Work procedure guidelines;
- Financial guidelines;
- Electronic information security standards;
- Other company standards and policies.
After comprehensively considering these factors, Daopin Consulting analyzes and redesigns various processes within the company.
- Based on internal control content and best business practices, consultants and management jointly develop business process diagrams and business process analyses, marking each key control point, confirming the internal control methods and means for each control point, and establishing necessary management reporting systems. All internal control procedures and flowcharts are then compiled into a complete internal control document.
- Based on internal control standards and best business practices, consultants and company management jointly adjust processes, eliminating non-value-adding parts, shortening process run times, and improving efficiency. In the process design phase, the following principles should be followed:
- Define job responsibilities based on the purpose of the work rather than the process;
- Eliminate parts that add no value to internal or external customers;
- Integrate internal control standards into process design;
- Establish a performance evaluation system in the process design phase;
- Cost-benefit analysis to improve the cost-effectiveness ratio;
3. Implementation Phase:
After entering the implementation phase, the following steps are carried out:
The implementation phase is crucial, determining the effectiveness of the internal control system's execution. It requires cooperation from all departments within the company. The outcome of this stage will produce internal control implementation details, authority (decomposition) lists, and control point responsibility decomposition tables, serving as a work manual to guide personnel in various positions.
4. Education Phase:
In the education phase, Daopin Consulting provides auxiliary guidance services for the implementation of the internal control system, correcting deviations that occur during implementation, and evaluating the process and results to promote the comprehensive and effective implementation of the system.
【Conclusion】
Since China's companies do not face external environments that require them to strengthen internal control standards, this immature market-oriented operating method leads companies to disregard the economic and social benefits that internal control standards can bring. Companies believe that taking "borderline" approaches and ambiguous controls can help them achieve desired benefits without considering the potentially fatal damage caused by the ineffectiveness of internal controls. The consequences of internal control failure can be seen in events like the "Ping An" incident.
Therefore, only by enhancing their own awareness and hiring professional companies to perfect their internal control systems can enterprises effectively improve the accuracy of internal information, enhance operational efficiency, control operational risks, and achieve sustainable growth!