A probe into the concept and function of internal control

In recent years, corporate fraud has emerged in an endless stream, which has had a great impact on the international capital market, and at the same time, it has greatly reduced investors' trust in enterprises and their senior management. The following is my collection of research papers on the concept and function of internal control for your reference, hoping to help friends in need.

Abstract: In recent years, events such as Sanlu, China Aviation Oil and Huarui Wind Power have caused investors and regulators to reflect on and attach importance to the existing internal control system of enterprises. In this regard, measures such as improving the internal control environment, establishing a good information communication system and establishing a risk early warning system are put forward.

Keywords: internal control; Control the environment; Risk warning

In recent years, corporate fraud has emerged in an endless stream, which has had a great impact on the international capital market, and at the same time, it has greatly reduced investors' trust in enterprises and their senior management. The appearance of these phenomena has a direct and inevitable relationship with the effectiveness of enterprise internal control. How to establish an internal control system and ensure that the internal control system can be effectively implemented is a problem that every enterprise should pay attention to.

first, the concept and function of internal control

(a) the concept of internal control.

enterprise internal control refers to the organizational mechanism and implementation procedures formulated by the board of directors, the board of supervisors, senior management personnel and all employees of the enterprise through internal self-adjustment, restraint and evaluation, on the basis of fully considering the internal and external environment. COSO Committee's definition of internal control: "The board of directors, the management and others should follow the relevant laws and regulations in order to achieve the reliability of financial reports, the efficiency and effectiveness of business activities". The internal control of enterprises in China refers to the process implemented by the board of directors, the board of supervisors, the managers and all the employees to achieve the control objectives.

from the concept of the two, the internal control framework system defined by COSO Committee in the United States is not the same as that in China, which is based on accounting control, but the two are similar. Internal control is a standardized management process, which restricts and regulates all aspects of the enterprise and the operation process of department personnel through a series of specific practices, and is an operating system specification.

(II) Role of internal control

1. It is conducive to the establishment of post responsibility system.

A small accountant of the National Natural Science Committee embezzled 22 million yuan of public funds for eight years, and was finally sentenced to death with a reprieve. The fact that a small accountant can misappropriate huge amounts of money lies in the lack of strict internal control system within the unit. In order to achieve the purpose of supervision and control, enterprises should set up internal institutions in combination with business characteristics and internal control requirements, and in order to enable everyone to exercise their functions and powers correctly, they should prepare internal management manuals. At the same time, there should also be corresponding supervision and inspection measures, such as separation of incompatible duties, in order to find and correct problems in time.

2. It is conducive to establishing a modern enterprise system and improving the corporate governance structure.

the focus of China's modern enterprise reform is to establish a modern enterprise system and improve the corporate governance structure. An important part of perfecting corporate governance structure is to establish a scientific and effective internal control system. In order to assess the performance of operators, we can improve the effective internal control system to fully reflect the performance and business behavior of operators.

3. It is beneficial to avoid and reduce various risks and improve the efficiency of operation and management.

In the increasingly fierce market competition, there will be many risks in the daily operation of enterprises, such as legal risks, political risks, operational risks and market risks. For example, on November 3, 24, China Aviation Oil (Singapore) Co., Ltd. caused huge losses of $554 million to the enterprise because of speculation. From the perspective of risk prevention, it can be said that an enterprise is a management process, that is, the process of constantly resolving the crisis. How to avoid and reduce all kinds of risks to the maximum extent and improve the effective operation of management is a problem that managers pay great attention to, and it is also a favorable guarantee for establishing and implementing an effective internal control system.

second, the problems existing in enterprise internal control

(a) the control environment is not perfect.

The control environment determines the tone of the enterprise and directly affects the employees' awareness of internal control. Whether there is a good control environment has a great influence on the results of the implementation of internal control. The defects of listed companies' governance generally include imperfect board structure, imperfect incentive mechanism for senior executives' evaluation, insufficient attention to human resources construction, vague distribution of powers and responsibilities, inadequate internal audit institutions and lack of anti-fraud mechanism.

For example, the shareholding structure of Sanlu Group is composed of Shijiazhuang Dairy Co., Ltd., the largest shareholder, and Fonterra Group, the second largest shareholder, with the shareholding ratios of 56% and 43% respectively. The remaining 1% is held by small retail investors. From the shareholding ratio, its shareholding structure is normal and reasonable, but the fact is that more than 9 old employees of Sanlu Group own about 96% of the shares, which is quite scattered from the actual proportion. Moreover, Tian Wenhua serves as the chairman and general manager of Sanlu Group at the same time. In actual work, he is the only controller of Sanlu Group, and the checks and balances between the chairman and general manager are simply nonsense. Therefore, it is inevitable for individuals to act arbitrarily, and the internal control checks and balances mechanism of the company are ineffective.

(2) the awareness of risk management is not strong.

risk management refers to the ability to identify, evaluate and analyze the realization of internal control objectives in time, and take corresponding measures to reduce risks for various unknown factors in the management process, which is an important step to implement internal control. At present, most listed companies in China pay insufficient attention to risk management and have not established a sound risk management mechanism. Risk management should be able to accurately identify internal risks and external risks. Even if a risk management mechanism is established, it cannot be well implemented, that is, the risk supervision mechanism is not perfect. For example, Zheng Baiwen's lack of risk awareness is mainly reflected in two aspects: blind expansion and credit sales. Zheng Baiwen's asset-liability ratio reached 68.9% when he went public, and reached 159.14% by 2. During this period, he also blindly acquired and expanded the company.

The triangular credit relationship with Changhong and China Construction Bank is the driving force for Zheng Baiwen's rapid development, and at the same time it eventually leads to its predicament. Cheng also lost to Xiao He and Xiao He. Because of this, the manufacturer passed on the sales risk to Zheng Baiwen, which finally made it difficult for the company to recover funds. The accounts receivable amounted to 762.64 million yuan and other accounts receivable reached 269.7359 million yuan.

(C) Internal control execution is insufficient.

internal control is a specific way to control the implementation of activities. Control activities are a series of procedures and implementation plans formulated by management to ensure the smooth realization of established goals. Different risks lead to different forms of defects in internal control. There are also great differences in the way of control. First of all, listed companies should formulate a perfect internal control design. If the internal control design is flawed, the risk will still exist. If there is nothing wrong with the internal control design, it is an execution defect. When an internal control regulation cannot be well implemented, it is impossible to prevent risks simply by strengthening control.

In the daily business activities of listed companies, production and operation management according to the process is the most basic control means to ensure the product quality. However, Sanlu Group's operation that violates the business process in the production process is conclusive. The "premature milk" incident has made consumers see that Sanlu executives are indifferent to its illegal operation of the process and ignore the interests of consumer groups, which makes people strongly question the credibility of its brand. At the same time, after the milk powder incident, Sanlu Group adopted the handling methods of pushing, dragging and hiding, repeatedly delaying the fighter plane, and the internal control system was ineffective, which eventually led to the deterioration of the situation and became out of control.

(D) Lack of effective communication and poor information flow.

Due to many management levels, listed companies often have slow information circulation in their daily work, and senior managers can't grasp the company's information in time. As a result, internal and external information is released slowly, employee feedback can't be solved in time, and company decisions can't be implemented on time. At the same time, listed companies are punished and condemned by the CSRC and the Exchange for their untimely or incorrect information disclosure, which hinders the company's further development to some extent.

For example, Huarui Wind Power, known as the "retail meat grinder", confirmed its income in advance in 211 by forging documents, and inflated its total profit in 211 by 277 million yuan, accounting for 37% of the total profit in that year. Due to its false statements, on May 31, 213, the CSRC formally filed a case against Sinovel Wind Power for allegedly inflating profits, inflating costs, inflating income and other illegal acts. On September 14th of the same year, informed criticism, a senior executive of Sinovel Wind Power, was awarded by Shanghai Stock Exchange for allegedly manufacturing and disclosing false information, financial data and operating conditions that were not truthfully reflected in the annual report. On November 2, 215, the CSRC finally imposed an administrative penalty of 6, yuan on the case of illegal information disclosure of Huarui Wind Power, and decided to take measures to prohibit five responsible persons from entering the market.

(5) the internal supervision system is not perfect.

supervision system is an important means to ensure the smooth and effective implementation of internal control of listed companies. Listed companies generally include self-supervision, accounting control, internal audit and external audit. However, in practical work, internal supervision can not give full play to its role. In order to achieve the key supervision of key points within listed companies, we can continuously supervise the overall internal control, submit inspection reports in time if there are problems, and put forward specific rectification measures.

For example, in the CAO incident, the Singapore company was basically monopolized by Chen Jiulin, and the over-the-counter transactions were not conducted in accordance with the company's rules and regulations. The group company could not manage and control the business of the Singapore company, and could not find out his actions in the company's operation through financial statements. It was impossible to supervise and stop his various violations of the company's system. For Chen Jiulin, the internal control system was just a decoration, which was not binding on it, and eventually led to huge losses.

iii. suggestions on improving the internal control of enterprises

(1) improving the internal control environment. The tone of an enterprise is determined by the control environment, and it also affects the control consciousness of all employees in the enterprise. Control environment is the basis of the other four elements, which provides the basic structure and basic rules of internal control. The control environment includes employee's integrity, enterprise's management style and philosophy, responsibility authorization and division method, personnel policy and practice, management control method, internal audit, etc. The governance of listed companies is mainly completed by the mutual restraint of senior leaders, such as the board of directors, the board of supervisors, the owners and senior managers. To improve the internal control environment, we should start with strengthening the management functions of the board of directors, such as improving the board structure, clarifying the responsibilities of the board of directors, giving play to the role of independent directors, and improving the independence of the board of directors.

(2) Establish an effective risk management system.

define the risk management objectives, set up an independent risk management department, independently evaluate the risks of listed companies, introduce professional identification methods, such as fault tree analysis and environmental analysis, and establish a sound risk management system. Carry out in-depth professional ethics education for all employees of the company and strengthen their awareness of risks. Conduct ideological and political education for relevant personnel, analyze typical cases, strengthen their self-discipline and enhance their sense of responsibility.

in order to continuously improve employees' professional knowledge and business ability, we can carry out continuous and effective professional knowledge education, and finally achieve the goal that all staff are competent for their jobs and reduce operational errors in business processing, and at the same time cultivate their early warning ability for abnormal situations in production and operation to reduce risk losses. We can set up a major risk early warning mechanism and an emergency response mechanism as special measures to control activities, and at the same time formulate corresponding emergency plans to deal with major risks or emergencies that may occur at any time, so that emergencies can be properly solved in time.

(3) improve the execution of the internal control system.

for listed companies, the perfect system will be empty talk if it is not strictly and thoroughly implemented. Therefore, it is necessary to formulate a complete, rigorous and reasonable internal control system, which can be implemented in daily operations, otherwise the system will be like a dead letter. Listed companies should establish a strict accountability mechanism or accountability system to clarify the specific responsibilities of each employee, so as to form a scientific and effective checks and balances mechanism, and also use high-tech means to improve the efficiency of internal control. At present, the use of network internal control has become an efficient means to implement internal control, such as fingerprint identification and password verification. At the same time, for the key points in internal control, special control measures should be formulated to prepare for the complete and comprehensive implementation of internal control.

(4) Establish an effective information communication system.

In a broad sense, effective communication is the all-round transmission of information. In order to ensure the smooth transmission of information, all employees of the company should actively cooperate and participate, and at the same time be responsible for the accuracy of information by adhering to the principle of prudence. Senior leaders should also keep information flowing with subordinates, communicate with employees in time, understand their ideas, and listen to their opinions and suggestions. Clarify the process of collection, integration and processing of information related to internal control, and ensure the accuracy, timeliness and smoothness of the company's information communication system.

(5) Strengthen the internal supervision system.

Perfect and effective internal control supervision is the guarantee for the normal operation of the internal supervision system. In order to monitor the internal control system, it can be achieved through continuous monitoring behavior, independent evaluation and the combination of the two. Audit departments should do a good job in internal audit, the audit objectives must be clear and feasible, standardize audit methods, enhance the credibility of internal audit, ensure the independence and authority of internal audit, and at the same time conduct pre-audit and in-process audit to ensure the reliability and integrity of information, so as to ensure the orderly development of each stage of the company in accordance with the company system. Strengthen the management concept of senior leaders, enhance the supervision consciousness of employees, and establish an effective incentive mechanism.

References:

[1] Huang Huiying, Wang Jindong. Analysis on the problems of internal control of listed companies in China from Sanlu incident [J]. Enterprise Technology Development, 21.7.

[2] Song Yun. Analysis on the countermeasures to strengthen internal control of listed companies [J]. Management, 21.1.