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Listed companies

Listing rule requirements on internal control

Overview
The Stock Exchange of Hong Kong Limited ("HKSE") published the Code on Corporate Governance Practices (the "Code”) and Corporate Governance Report ("CGR") in November 2004, which was included into Appendices 14 and 23 of the Main Board Listing Rules and Appendices 15 and 16 of the Growth Enterprise Market ("GEM") Listing Rules.  The Code and CGR became effective for accounting periods beginning on or after 1 January 2005.

Decoding the code
Listed companies are required to confirm their compliance with the Code or, where they do not, to provide explanations for the deviations.  One of the key aspects of the Code and the CGR requirements are as follow:

Principle - C.2 of the Code states that:
“The board should ensure that the issuer maintains sound and effective internal controls to safeguard the shareholders’ investment and the issuer’s assets.”

Code provision - C.2.1 on “Internal Controls” states that:
“The directors should at least annually conduct a review of the effectiveness of the system of internal control of the issuer and its subsidiaries and report to shareholders that they have done so in their Corporate Governance Report. The review should cover all material controls, including financial, operational and compliance controls and risk management functions.”

CGR
The note to paragraph 2 of Appendix 23 (Main Board Listing Rules) and Appendix 16 (GEM Listing Rules) requires the listed companies to contain the following disclosure in the CGR:

"a statement that the board has conducted a review of the effectiveness of the system of internal control of the issuer and its subsidiaries (C.2.1 of the Code);"

The above requirements require the board of the listed company to focus on the most significant risks and then provide a platform that enables the company to review the way it is currently addressing these key issues.  Many listed companies find this provision very challenging. 

For the actual Code provision, please refer to the following:

Authoritative Guidance
Hong Kong Institute of Certified Public Accountants ("HKICPA"): Internal control and risk management - A basic framework

HKSE invited HKICPA to issue further guidance to help listed companies understand and implement the Code requirements relating to internal control and devise their internal control procedures.  This guidance is available at www.hkicpa.org.hk under the "Standards & Technical / Corporate Governance" section.

Learn more

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