In December 2023, the Ministry of Finance of China (“MOF”) published new regulations requiring listed companies to disclose assessments of internal control approved by their board of directors, as well as internal audit reports issued by public accounting firms. These regulations became effective upon the release of the 2024 annual report. Additionally, in the same year, the China Securities Regulatory Commission (“CSRC”) disclosed 20 cases related to significant weaknesses, failures or even fraudulent behaviours in internal control, identified during regular inspections.
Beyond large and medium-sized Chinese enterprises, multinational companies with a presence in China (Foreign Invested Enterprise or “FIE”) have also been placing significant focus on the internal control of their China subsidiaries. Moreover, companies are increasingly using technology and data-driven insights to enable management to react quickly and make decisions across an increasingly broad horizon. In the context of China’s economic transformation and the restructuring of supply chain, these changes bring into play a broader scope of business activities that require effective internal control.
Traditional objectives of internal control include the following:
- Efficient conduct of business
- Safeguarding assets
- Preventing and detecting fraud and other unlawful acts
- Ensuring completeness and accuracy of financial records
- Timely preparation of financial statements
While the fundamental objective and principles of internal control generally remain consistent across different countries, China's internal control practices consist of specific features that are influenced by its legislative environment.
For instance, consider the case of conducting a Gap Analysis on the Key Processes of a Foreign Invested Enterprise (FIE) manufacturing company, prompted by suspected fraudulent behavior related to waste disposal. Following an in-depth internal investigation into the fraud, the company initiated comprehensive reviews of all key processes as preventive measures.
Simultaneously, we assisted the company in accessing the effectiveness of improvement procedures on the waste disposal. Additionally, as a manufacturing company with over 400 employees, the company sought opportunities to enhance the efficiency of its current internal control procedures.
In another scenario, a recurring internal control review was conducted for a FIE manufacturing company. With no internal audit function within the group, the board of directors from the US headquarters directly engaged us to perform recurring reviews of 8 major business cycles over a three-year period. Our primary focus was on the procurement and payment cycle, particularly on vendor selection procedures. We helped in establishing standard operating procedures (“SOP”) for vendor selection and monitored the effectiveness of their implementation.
Our solutions are designed to enhance control effectiveness, streamline processes, reduce slippage, eliminate wastage, maximise revenue potential, and improve profits. In addition to traditional internal audit services, we offer outsourcing of internal audits, performance reviews for internal audit, assistance in establishing internal control functions, and internal audit training. Leveraging our industry knowledge and understanding of diverse cultural backgrounds, our professionals can assist multinational companies in designing and implementing localised internal controls that align with group policies. Furthermore, we offer continuous auditing, recommendations, and monitoring to ensure optimised internal controls and operational efficiency.
China Updates
Accounting and Taxation
- The Announcement on Individual Income Tax Policies Relating to Equity Incentives of Listed Companies has introduced new regulations regarding stock options, restrictive stock and equity incentives granted by domestic listed companies to individuals.
Upon completing filing formalities with the competent tax authorities, individuals receiving these incentives may pay individual income tax within a period of up to 36 months from the date of exercising stock options, lifting of moratoriums for restrictive stock, or obtaining equity incentives (referred to as "exercise of options"). If a taxpayer resigns during this period, he/she shall settle all taxes prior to resignation.
Effective from 1 January 2024 to 31 December 2027, taxpayers exercising options during this period may comply with the provisions of this Announcement. Those exercising options after 1 January 2023 and have not made full payment of taxes may also comply with these provisions, with the instalment payment period commencing from the exercise date. - To enhance support for border trade and foster a conducive environment for the diversified development of cross-border trade, the Ministry of Finance (“MOF”), the General Administration of Customs (“GACC”) and the State Administration of Taxation (“SAT”) jointly issued the Notice of the Non-Duty-Free List of Import and Export Commodities for Cross-border Trade on 8 April 2024. This notice will take effect immediately upon issuance.
Key points of the notice include:
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- With the exception of goods listed in the Negative List of Imported Goods for Mutual Trade between Border residents, border residents are permitted to import goods through mutual trade. The import duty-free quota for border residents engaged in mutual market trade shall be calculated and used by individuals.
- Goods prohibited by the State shall not be eligible for duty-free treatment through border exchange trade. Additionally, commodities subject to export duties and those for which export tax rebates have been cancelled shall be included in the list of export commodities not exempt from tax in border exchange trade.
- MOF, together with relevant departments, will continuously adjust the list of import and export commodities not exempt from duty in accordance with the actual development of cross-border trade.
Human Resources
- During the first half of 2024, the National Medical Insurance Bureau announced initiatives to address 12 key issues aimed at enhancing efficiency in various aspects of medical insurance. These initiatives include streamlining of processes and speeding up of services for medical insurance-related matters such as newborn insurance.
These initiatives encompass:
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- Form Optimisation: Improvements include the option for individuals to use social security cards for medical treatment purchases, as well as the introduction of scanning capabilities for medical insurance codes or facial recognition for reimbursement. Additionally, handling employee medical insurance personal account family support can now be done online without the need for in-person visits. Access to medical insurance-related information has also been made more convenient for the public.
- Process Streamlining: The establishment of an information-sharing joint office has streamlined processes for various tasks, such as newborn insurance reimbursement, maternity medical expense claims, retirement procedures for employee medical insurance participants, and verification processes for enterprises facing bankruptcy. Eligible individuals from low-income backgrounds can now directly receive basic medical insurance subsidies without the need for application or upfront payment. Moreover, the scope of direct settlement services for outpatient chronic diseases has been expanded, alleviating the burden of advance payments for individuals suffering from chronic illnesses.
- Service Acceleration. Maternity allowance payments can now be received within 10 working days after application submission. Pharmaceutical enterprises can also expect drug code reviews to be processed within the same timeframe. Additionally, prompt settlement of medical fees with designated institutions further reduces service processing times.
Corporate Governance
- On 2 April 2024, the Shanghai Municipal Administration for Market Regulation, along with two other departments in Shanghai, released the ‘Several Measures of Shanghai on Further Supporting Foreign-funded Enterprises in Participating in the Work on Standardisation.’ These measures aim to continually enhance the business environment, promote institutional openness in standardisation, and facilitate the establishment of a "dual circulation" development model. This model emphasises the leading role of the domestic economic cycle while integrating and supplementing it with the international economic cycle.
The measures consist of nine key initiatives, including the establishment of a collaborative platform for foreign-funded enterprises and the encouragement of their participation in international standardisation activities. Moreover, efforts are made to enhance convenience for their participation in drafting national, industry, and local standards. Notably, the measures advocate for the inclusion of representatives from qualified foreign-funded enterprises in the expert database for technical reviews of standardisation. These initiatives collectively aim to foster a more inclusive and conducive environment for foreign-funded enterprises to contribute to standardisation efforts, thereby bolstering production management and overall economic development.
