Attaching Importance to Risk Identification and Response While Setting Strategic Goals for Internal Control

The failure of some American investment banks engaging in high-risk business during the crisis was caused by their obsession with high profit combined with reluctance to conduct risk assessment and to identify and analyze risks associated with the goals, which would have created a foundation for risk control. Therefore, as a valuable driving factor, risk should be included in the internal control goal selection framework. While constructing the "risk and response" control factor, risks should be matched with the goals of the enterprise and divided into the following three tiers: (1) strategic risks, (2) operation and finance and relevant risks, and (3) specific business risks. Risk identification at every tier should be predicated upon event identification, or the identification of events that may potentially affect the goals. On that basis, risk analysis and assessment can be conducted, and the acceptable risk level can be determined. Risk response should avoid and reduce risks based on a reasonable risk level.

Attaching Importance to the Effect of Culture on Internal Control

Effective internal control entails not only hard control tools such as budgeting and internal audits, but also soft control tools such as corporate culture, management philosophy, and operation styles. With effective corporate culture, the employees take the ideals, objectives, and code of conduct of the company to heart. The corporate culture of many international investment banks favors lone wolf approaches. That, however, may cause a lack of opposition, which may severely compromise the effectiveness of information communication, leading to the failure of internal control. In their development process, Chinese securities companies should avoid lone wolf approaches as much as possible and establish an authority system with proper checks and balances. The checks and balances principle was set forth in the Securities Company Internal Control Guide released by the CSRC. A hasty operational style affects the employees deeply in a way that significantly amplifies the operation risks of the whole company, making it vulnerable in the face of price fluctuation. In their development process, Chinese securities companies should always remember that high profit always comes with high risks. They should follow the robustness principle as much as possible to improve the company's ability to deal with risks.

Appropriately Spreading Out Equity and Enhancing the Foundation of Internal Control

The internal control structure of a company is closely related to its equity structure. Therefore, the optimization of the equity structure is the foundation for the improvement of internal control. Such phenomena as insider control can be greatly curbed by improving the internal control mechanisms of the company. By taking full advantage of the internal mechanisms, the operation performance of the company can be promoted, which further enhances the prosperity of the entire securities market, giving rise to a virtuous cycle.

The Chinese securities industry should promote the diversification of property right entities, carefully select and introduce strategic investors from China and abroad, and adjust the equity structure to form a property right pattern in which the parties check and balance each other. In recent years, some Chinese securities companies started introducing foreign capital and absorbing private capital by means of equity participation. These practices have greatly promoted the improvement of the internal control structures of these companies. Securities companies should seize this opportunity, engage in constant innovation, and strive to broaden the channels for internal control reform to fundamentally improve their internal control quality.

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