China's state-owned enterprises (SOEs) are required to set up independent internal auditing agencies to supervise and assess the efficiency and legality of financial operations, budget designs and daily management of enterprises.

The State-owned Assets Supervision and Administration Commission (SASAC) released the full text of a provisional regulation on the management of SOE internal auditing recently.

The regulation, effective from August 30, said that enterprises should establish independent internal auditing agencies and enhance related auditing obligations.

Meanwhile, SOEs should set up auditing committees under boards of directors to supervise internal auditing procedure and results.

The committees should be independent in operation, taking members from board directors that have expertise in finance, accounting and auditing. And the committee director should be an external director of the board.

Furthermore, committee members and internal auditors will be responsible for liabilities if major flaws are found in internal control schemes or if major economic crimes occur in those firms they are responsible for.

The requirement now directly applies to all the central SOEs, and it will also be the basis for local State asset watchdogs to design relevant rules for local SOEs, SASAC said.

The launch of the auditing committees is expected to put in place a new force that regularly checks the operation, accounting and financial management of the enterprises. It will be also part of the authorities' efforts to improve efficiency in management and information disclosure of the SOEs and curb irregularities and frauds that lead to losses of State assets.

The auditing committees should supervise the quality of internal auditing and information disclosure by companies. They can also supervise the quality of external auditing, the appointment and changing of relevant auditors and their payments.

The committees will also hear complaints from the public and evaluate efficiency of the internal control schemes.

The regulation also clarifies the exact items to be audited and the relevant procedures.

Apart from regular auditing of financial management and operations, the internal auditors should also look into the economic liabilities of the enterprise executives and managers of the subsidiaries, as well as the budgets and operation of major procurement and construction projects.

Those who decline to co-operate or provide necessary documents will be punished.

The loss of State assets during the SOE reforms has become a major concern for both the public and the authorities, especially after Larry Lang, a professor with the Chinese University of Hong Kong, sparked controversy about alleged misbehavior of SOE chiefs in August, which fuelled public debate on the trend of the SOE reforms.

SASAC also said that irregularities exist in some SOEs and that executives had abused their power to seek personal gain, and promised to introduce more regulations to strengthen supervision.

The enhanced role and responsibility of auditors are expected to help, to a degree, in the prevention of wrongdoing, but more transparency in daily operations and asset transactions are more important, experts said.

To enforce that, SASAC has also released a notice on the transfer of state-owned assets and equities. It clarifies that transactions that involve State holdings in listed companies have to be approved by SASAC.

(China Daily October 8, 2004)