Listed companies face stricter supervision next July when an internal-control rule will be enforced to strengthen corporate governance.

In June, the Ministry of Finance, the China Securities Regulatory Commission, the National Audit Office, the China Banking Regulatory Commission and the China Insurance Regulatory Commission jointly issued the Basic Standard for Enterprise Internal Control.

The new rule requires listed companies to conduct self-evaluation of their internal controls, disclose an annual evaluation report and employ qualified agencies to audit the effectiveness of the controls.

The rule is regarded as the Chinese equivalent of the Sarbanes-Oxley Act of 2002, ratified in the United States after the Enron scandal.

The American law aims at protecting investors by "improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws."

The Chinese rule, similarly, is expected to step up the standard of a good internal control system for companies to improve their corporate governance in the long run.

"The launch of the new rule will benefit enterprises, regulators as well as the stakeholders," said Rosa Yang, a partner in enterprise-risk service with Deloitte Eastern China.

Helen Wang, managing director of Protiviti, a global-risk, business-consulting and internal-audit firm, shared the view and added that the new rule would help enterprises to go through a process of self-assessment and allow their management to gain a better understanding of the impact of good internal control on corporate performance.

Revolution is by no means an unfamiliar word for China's listed companies. Since the birth of China's modern securities market, companies have been put under constant pressure to reach international standards and be globally competitive.

But there are still many loopholes in the structure of listed Chinese companies despite years of efforts and improvements.

The 2008 Corporate Governance Assessment Summary Report on the Top 100 Chinese Listed Companies, published by Protiviti, the Chinese Academy of Social Sciences and the China National School of Administration, pointed out several problems that regulators can't afford to ignore.

The assessment covered 64 companies listed on the Shanghai Stock Exchange, 30 companies listed on the Shenzhen Stock Exchange and six H-share listed companies.

Take information disclosure as an example.

Price rigging

"Illegal activities and irregularities such as stock-price rigging, insider dealings and misrepresentation were not uncommon," the report said. It found 33 percent of the firms had not established "robust information-disclosure management policies" in accordance with regulator requirements.

Many majority shareholders of Chinese companies exert control by directly appointing personnel onto the board of directors, board of supervisors and senior management. As a result, shareholders' meetings are mostly formalities, and minority shareholders' ability to exercise their rights is very limited.

In big decision-making processes, such as acquisitions and sales of assets, minority shareholders generally don't have the opportunity to participate and express their views.

Also, it is not easy in China to clarify the boundaries between the powers of shareholders, the board of directors and management over company-management affairs. The discrepancies result in significant gaps in the composition and functioning of boards of directors.

"To transform the standards of corporate-governance regulations and principles into real practice may take a considerable period of learning and adjustment," the report said.

The same is true for the new internal-control rule.

"You can't expect companies to meet the standard in one day ... it will be a long process and will require management's strong direction and support to make it work," said Wang. A Deloitte survey in May, which interviewed 126 companies, echoed her opinion.

More than half of the domestic listed companies in the survey admitted they had not established effective internal controls and about 91 percent of respondents said they had encountered obstacles when implementing internal controls.

Obstacles included the lack of a practical internal-control framework or a stringent supervision and monitoring system, and the absence of internal-control performance evaluation.

In the process of launching the rule, companies and the regulator may also have to weather challenges such as the shortage of internal-control professionals, or a good integration of a long-term internal-control mechanism with the daily operation activities.

"The establishment of the internal-control system is going to bring some changes to the regular operation of a company. Sometimes, there will be extra costs. But in the long term, the system can help to reduce spending and control risk for the company," said Yang.

Deloitte Check List

To help companies better respond to the new rules, Deloitte has named key areas that need attention:

The lack of support and guidance from senior management on internal control.

The lack of enterprise-wide control.

The shortage of qualified internal-control staff.

The lack of an effective supervision and monitoring system in internal control.

A focus on short-term results while ignoring the need to establish a long-term mechanism for internal control.

The inability to integrate control into daily operations.

A weak IT system or the failure to integrate an IT system with internal control requirements.