Content of internal management control

　　1.1 Definition of internal control

　　Internal control: any action taken by management to provide reasonable assurance regarding the achievement of objectives in the following categories:

　　<1> Reliability of internal control to safeguard the shareholders’ investment and the company’s assets

　　<2> Reliability of financial reporting to co

　　Legal and regulatory framework of director

　　<1> Legal rights: fees and expenses, remuneration and compensation

　　<2> Legal responsibilities: fiduciary duty

　　a. Duty of care: reasonable skill and competence, attend broad meeting, act honestly in the best interest of the company

　　b. Indemnify the company against loss caused by their negligence

　　<3> Conflict and disclosure of interests

　　a. The fiduciary duty of directors is to act in the best interest of shareholders. Conflict of interest is breach the duty. So directors have a duty to avoid a conflict of interest.

　　(a) Retain their freedom of action and not fetter their discretion

　　(b) Avoid a conflict of duty and personal interest

　　(c) Do not obtain any personal advantage from their position without the consent of the company

　　b. The types of remedy if breach of duty

　　(a) Account for a personal gain

　　(b) The contract may be terminated or rescinded by company

　　(c) Unlawful declared by court

　　c. Full disclosure: the company’s act states that companies are required, in the form of notes in the annual accounts, to disclose any material information concerning transactions involved by directors.

　　<4> Time-limited appointments:

　　a. A fixed period (constitution, service contacts, roles)

　　b. Directors should retire from board on 65-70 and no re-election

　　c. Higgs report: NEDs should normally serve two three years, if longer, explain the reason and face evaluation

　　<5> Service contracts

　　a. Terms and conditions of directors’ appointment

　　b. Available for shareholder inspection

　　<6> Retirement by rotation

　　a. Directors retire from the board and seek re-election once every three years

　　b. Regular opportunity for shareholders to vote directors out of office

　　<7> Departure from office – ways/reasons

　　a. Resignation (written notice may be required)

　　b. Not offering himself for re-election when his term of office ends

　　c. Death

　　d. Dissolution of the company

　　e. Being removed from office

　　f. Being disqualified (by virtue of company’s constitution or by the court or government action)

　　<8> Insider dealing/trading

　　a. A criminal offence to use inside information for personal interests

　　b. An abuse of directors’ role as agents

　　mpliance with applicable laws and regulations

　　<3> Effectiveness and efficiency of operations to achieve the objectives and goals of the organization

　　1.2 Objectives of internal control (Turnbull guidance on internal control)

　　An internal control system consists of the policies, processes, tasks, behaviors and other aspects of a company that taken together:

　　<1> Facilitate its effective and efficient operation by enabling it to respond appropriately to significant business, operational, financial, compliance and other risks to achieving the company’s objectives. This includes the safeguarding of assets from inappropriate use or from loss and fraud, and ensuring that liabilities are identified and managed

　　<2> Help ensure the quality of internal and external reporting. This requires the maintenance of proper records and processes that generate a flow of timely, relevant and reliable information from within and without the organization.

　　<3> Help ensure compliance with applicable laws and regulations, and also with internal policies of business.

　　1.3 Element of control systems

　　<1> Plan, target, standard, objective

　　<2> Sensor: detects the actual control system behavior, and gather information about it