Analysis on Internal Control of China Family Business

Source: China Paper Download Center.

introduce

At present, family businesses account for more than 90% of private enterprises in China. As an important part of China's national economy, family business, especially after China's entry into WTO, is facing a more severe competition situation, so the research on family business is a subject with modern significance. This paper analyzes the present situation and difficulties of internal control of family enterprises in China by using the method of comparative analysis, according to the relevant basic data of enterprises, and draws lessons from COSO's internal control experience to strengthen the internal control channels of family enterprises in order to benefit the internal control practice of family enterprises in China.

1? Internal control and the concept of family business

1. 1? The meaning of internal control

Enterprise internal control refers to the policies, measures and procedures formulated and implemented by enterprises to ensure the effective conduct of business activities and the safety and integrity of assets, to prevent, prevent and correct errors and frauds, and to ensure the truthfulness, legality and integrity of accounting information [l]. It is a management method, which is jointly formulated by the board of directors, management department and other personnel of an accounting entity, aiming at providing reasonable guarantee for the effectiveness and efficiency of enterprise operation, the reliability of financial report and the compliance goal of implementing various laws and regulations. Internal control includes control environment and control procedures. Control environment refers to the general attitude, consciousness and relevant measures taken by management authorities on internal control system and its importance to enterprises. Control procedures refer to the procedures and measures set up to achieve specific goals of enterprises.

2? Problems in Internal Control of Family Enterprises in China

2. 1? Insufficient understanding of internal control and lack of restraint in post setting.

Family-owned enterprises have a single business activity and a small scale, and the staffing often has two or even several jobs, which leads to the lack of constraints in post setting. For example, the purchasers, custodians and even recipients of inventory materials in some family businesses are all the same person. And some people who are not qualified at all stay in the accounting position of the family business by virtue of personnel relations. These people only do things according to the will of the chief executive, and they don't know much about laws, norms and systems. However, there are no statements that they dare not publish, no money that they dare not spend, and cronyism makes it difficult to carry out internal control normally. People's quality and professional ethics are uneven, and it is inevitable that they have insufficient understanding of internal control.

For a long time, whether it is formal accounting education or continuing accounting education, the content of internal control is simple but not systematic, and financial personnel are very short of knowledge about internal control. Although some accountants have a certain professional level, due to ignoring the study of new business knowledge and new accounting laws and regulations, accounting treatment violates the requirements of new accounting laws and regulations, which undoubtedly poses great hidden dangers to the smooth development of internal control in accounting basic work.

2.2? Family business management lacks internal constraints.

The organizational structure of family business is characterized by the fact that shareholders are mainly natural persons, accounting for the majority of shares, which embodies the characteristics of centralized management [2]. However, there is a close kinship between shareholders and key managers in family enterprises, which determines that the separation of ownership and management rights in family enterprises is not great, and the characteristics of family management make enterprises lack the separation of two rights and internal control structure under the modern enterprise system.

2.3? Poor control over accounting information, assets and business activities.

2.3. 1? The phenomenon of accounting information distortion is widespread.

In 2008, the Ministry of Finance organized local financial inspectors' offices to conduct spot checks on the accounting information quality of 159 enterprises. The results of spot checks show that the accounting statements of many enterprises that have been spot-checked fail to truly reflect the financial status and operating results of enterprises, and the accounting information is distorted to varying degrees, and some problems are quite serious. A large number of enterprises and their leaders deliberately distort the information in financial statements in order to achieve a certain goal. Accounting information distortion and accounting fraud have become common problems in China.

2.3.2? The safety integrity coefficient of assets is low.

Because the internal control system of family-owned enterprises has not been paid enough attention, many shortcomings have been exposed in asset management: ① lax cash management has caused idle or insufficient funds. ② The turnover of accounts receivable is slow and it is difficult to recover funds. (3) Poor inventory control leads to sluggish funds. (4) Pay more attention to money than power, resulting in serious loss of assets. Managers of many enterprises have poor management of raw materials, semi-finished products and fixed assets. And no one is responsible for the problem, resulting in serious waste of assets.

2.3.3? Business activities lack effectiveness, legitimacy and compliance.

Compared with large enterprises, family enterprises have the advantage of flexible operation, but they can't compete with them in strength, capital and popularity, so most of them can't escape the bad luck of losing money. In the implementation of national laws and regulations, family enterprises lack legitimacy and compliance more than large enterprises when carrying out business activities. For example, the control of cash only considers the quantity of cash receipt and payment, without considering the quality of cash receipt and payment, that is, cash receipt and payment activities are not completely carried out in a legal state; Inventory control only considers the reasonable needs of production for inventory, and does not consider the circulation of inventory in a legal state.

3? Reasons for the present situation of internal control of family enterprises in China

There are many reasons for the confusion of internal control in family enterprises in China.

3. 1? The market economy is underdeveloped.

From the development history of internal control, we can see that the external motivation of internal control development is the intensification of market competition. China has just transitioned from a planned economy to a market economy, and the influence of the planned economy is ever-present. Market competition is not standardized, and the inertia of planned economy thinking affects the development of internal control.

3.2? The risk awareness of enterprises is not strong, and the control environment is ineffective.

Environmental control and risk assessment are the keys to improve the efficiency and effectiveness of enterprise internal control [3]. Many enterprises that are about to get into trouble or go bankrupt don't do risk analysis at all when making decisions, not to mention establishing a risk early warning system within the enterprise, lending indiscriminately, investing indiscriminately, guaranteeing indiscriminately and setting up stalls indiscriminately. Once the capital chain breaks or business risks occur, it will directly lead to the decline of enterprises.

The factors that affect the failure of enterprise control environment in China are: the lack of independence of the board of directors and the imperfect supervision mechanism; The quality and professional level of business operators are low; Lack of good corporate culture atmosphere; Imperfect policies and low quality of employees.

3.3? Insufficient internal control

In the agent-led internal control system, there is no incentive and restraint mechanism for the principal, and the restraint of the principal mainly depends on the agent's consciousness, so the agent's internal control motivation is insufficient [4]. In addition, the agent-led internal control is expensive, and the cost of organization and management is borne by the enterprise itself, while the benefits of internal control are hidden, long-term and socialized. When the marginal management cost is higher than the marginal income, the internal control of the enterprise itself is obviously insufficient.

3.4? Lack of external supervision

Although China has formed an external supervision system of enterprises, including government supervision and social supervision, the supervision effect is not ideal. The main reasons are as follows: First, various regulatory functions overlap, standards are different, and decentralized management and lack of communication have failed to form an effective synergy; Second, some supervision did not follow the established goals, and some even aimed at balancing the budget and generating income. Coupled with individual shady transactions, the problem of weakening supervision is serious, and internal control problems are not reported or investigated; Third, the irregular practice environment and unfair competition of accounting firms, as well as the poor supervision of certified public accountants, have weakened the role of "economic police".

In addition, there are many other current situations, such as: poor information communication? For the purpose of tax evasion and whitewashing performance, the financial foundation of the enterprise is weak, the accounts are unclear and the information is distorted.

4? Methods and suggestions on strengthening the construction of internal control system of family enterprises in China

4. 1? Improve the staff's understanding of internal control ideologically.

Enterprise internal control involves not only accounting, but also the whole process of enterprise production and management, including procurement, production and management, sales, financial management, research and development, human resources and so on. Therefore, the control environment of an enterprise is jointly created by all employees of the enterprise, including the leaders, accountants and all employees.

4. 1. 1? Improving the management quality of leaders of small and medium-sized enterprises

It is the key to improve the management level and management thought of enterprise leaders and make them realize the importance and necessity of establishing internal control system.

4. 1.2? Improve the professional skills and knowledge level of internal control of accounting personnel.

As the main body of enterprise accounting control, the professional quality and internal control knowledge of accountants are particularly important. In view of the present situation of enterprise accountants, we should strengthen the management of annual accounting qualification certification system, promote enterprise accountants to learn accounting knowledge and accounting laws and regulations, improve their professional level and reduce technical errors in accounting business processing. At the same time, enterprises should educate accountants on professional ethics, enhance their self-discipline ability, and be law-abiding, honest and self-disciplined.

4. 1.3? Strengthen the moral cultivation of all employees and the education of internal control system.

Enterprises should regularly educate employees on internal control knowledge, so that every employee has the concept and consciousness of internal control system and knows that his every move must be bound by the internal control system.

Only by taking the internal control system as a good medicine for enterprise development and establishing a good internal control execution environment can the vast number of enterprises grow up healthily under the protection of internal control.

4.2? Establishing an effective internal control system in family business.

When the family business develops to a certain scale, it is necessary to break through the management mode of family system, effectively integrate social capital with family capital, and share the ownership, residual distribution and management control of enterprise assets with non-family members, thus completing the transformation of family business into modern enterprise.

4.2. 1? Change the ownership structure of family business.

The unreasonable ownership structure of family businesses makes paternalistic management gradually popular. Therefore, it is necessary to completely break the closed structure of family property rights by absorbing social capital and property rights flow, and form a reasonable ownership structure [5]. In this process, some family members will withdraw their shares, the proportion of middle and senior employees will be greatly increased, and qualified enterprises can even implement large-scale employee stock ownership plans. Through the reform of property rights system, enterprise leaders are closely related to the rise and fall of enterprises. Only when enterprise leaders have the motivation to implement the internal accounting control system can the internal accounting control system really play its due role.

4.2.2? Focus on solving the problem of incompatible job separation in enterprises

Separation of incompatible jobs means that incompatible jobs are handled by different departments or personnel respectively. Incompatible job separation includes: separation of authorization approval from business handling, separation of business handling from accounting records, separation of accounting records from property custody, separation of business handling from business audit, separation of authorization approval from supervision and inspection, etc. That is, a person cannot hold the position of concealing his mistakes and misconduct at the same time, and at least two or more individuals or departments participate in incompatible economic business. Authorization approval control requires managers at all levels to perform their duties within the scope of authorization, managers must handle business within the scope of authorization, and approvers should also conduct approval within the scope of authorization. The management of an enterprise must stipulate the proper authorization to complete economic business in the internal accounting control system, so that everyone or every department has a clear responsibility, which can ensure the implementation of the established policies of the enterprise and limit the abuse of power, thus not only helping to protect the safety of assets, but also enabling all economic business activities to be carried out normally and orderly [6]. For example, it is clear that cashier personnel shall not concurrently audit, keep accounting files and register income, expenditure, expenses, creditor's rights and debts; The special financial seal of the enterprise and the private seal of the legal representative are managed by different personnel, and the special financial seal and bank check are kept by the accountant and cashier respectively; Clarify the responsibilities and authority of the bookkeeper, the approver of economic and business matters and accounting matters, the handling personnel and the property custodian, so as to separate and restrict each other; Under normal circumstances, it is stipulated that more than two departments and more than two staff members are responsible for handling the whole process of each economic business or some important links in the whole process, which plays a role of mutual restraint. According to the control requirements of incompatible post separation and authorization approval, all links in the production and operation process of enterprises are controlled. Some enterprise leaders are becoming more and more paternalistic, dogmatic and centralized, and some spend their own money, sign their own names and reimburse themselves, which runs counter to the principles and requirements of internal control and should be reformed to prevent corruption.

4.2.3? Strengthen internal supervision of enterprises

First, standardize the corporate governance structure and improve the corporate governance mechanism with the board of directors as the core. The company has set up a shareholders' meeting, a board of directors, a board of supervisors and a manager, established a perfect corporate governance mechanism, and formed a clear and mutually restrictive relationship among various institutions. An enterprise shall set up an internal audit institution or establish a self-evaluation system for internal control, strengthen the supervision and evaluation of the internal accounting control of the enterprise, find loopholes and hidden dangers in time to correct or improve the new problems, new situations and weak links in the implementation of internal control, and make sure that there are rules to follow, investigate and punish, and promote reform with punishment. To establish an effective incentive and restraint mechanism, enterprises must regularly check and evaluate the implementation of the internal accounting control system, and understand what achievements and problems have been made in the implementation. Strictly implement the internal accounting control system and give moral encouragement and material rewards to those who abide by the rules; Violators shall be resolutely given administrative sanctions and economic penalties, which shall be linked to the promotion and demotion of their posts.

4.2.4? Using external supervision to promote enterprises to improve internal control system

Family small and medium-sized enterprises can learn about the shortcomings of their internal control through the work results produced by the compliance test of their internal control in the practice of accounting firms as intermediaries, and take this opportunity to obtain opportunities to improve their internal control. Finance, taxation, auditing and other departments should give full play to their authority and supervisory role, form an effective supervisory force, inspect, supervise and evaluate the internal control of enterprises regularly or irregularly, strengthen law enforcement, and prevent the internal control system of enterprises from being ineffective. The state should encourage and support the news media to expose enterprises' violations of laws and regulations and give full play to the role of public opinion supervision.

4.3? Effective control of accounting information, assets and business activities.

4.3. 1? "Don't make false accounts" is the fundamental way to solve the distortion of accounting information

In view of the increasingly common phenomenon of false accounting and accounting information distortion in China, Zhu Rongji pointed out during his inspection in Shanghai National Accounting Institute on April 6, 2004 that to implement the socialist market economy, it is necessary to formulate "rules of the game" and train a large number of high-quality accounting talents, and "not making false accounting" is the most basic professional ethics and code of conduct for every accountant.

While strengthening the education of accountants' professional technical level and internal control knowledge, we should also strengthen the ideological and moral education of accountants and gradually improve the moral level of the whole accounting team, which is the fundamental guarantee for realizing the true and effective goal of "not making false accounts" and also an important guarantee for implementing the internal control system of enterprises.

4.3.2? Establish a sound asset security and integrity maintenance system.

In view of the shortcomings of family business in asset management, effective control measures should be taken. (1) Strive to improve the efficiency of fund use. Grasp the ins and outs of funds, rationally allocate and use funds, and strictly control the allocation of funds, thus reducing the loss of funds. Special attention should be paid to the control of cash on hand: the cash limit on hand should be approved, and cash should not be withdrawn, so as to achieve daily settlement and prevent IOUs from reaching the warehouse. ② Strengthen the management of accounts receivable. Enterprises should grade the credit of customers who sell on credit, regularly check accounts receivable, formulate corresponding accounts receivable collection system, that is, analyze the aging of accounts receivable, and establish a series of dunning measures linked to wages and bonuses according to the contract, so as to shorten the time to recover accounts as soon as possible and prevent bad debts. For dormant accounts and bad debts confirmed after obtaining conclusive evidence, appropriate and stable accounting should be carried out. ③ Strengthen inventory management. As far as possible, we should compress expired inventory materials, avoid a large amount of inventory backlog and capital stagnation in the warehouse, and ensure the optimal structure of inventory funds by scientific methods. (4) Put an end to the misconception that money is more important than weight, and strengthen the management of all kinds of property and materials. Establish and improve the internal control system of property and material management, establish standardized operating procedures in material procurement, requisition, sales and sample management, plug loopholes and maintain safety. The material manager should check with the accountant regularly to ensure that the accounts, cards and materials are consistent, so as to deal with errors in time and correctly. Property management and recording must follow the principle of incompatible separation of duties, so as to form a strong internal inspection, and never leave asset management, recording, inspection and verification to one person. Check the property regularly, and urge the management and recording personnel to be vigilant and not to be negligent.

4.3.3? Strengthen the compliance, legality and effectiveness control of enterprise business activities.

Strengthening compliance and legality control is to ensure that enterprises should comply with the requirements of relevant national financial laws and regulations, and ensure that every economic business activity can be carried out in a compliant and legal state [7]. As one of the main forces to promote social and economic development, family business has strong vitality and development potential. With China's entry into WTO and the deepening of reform and opening up, enterprises will face unprecedented challenges. As the lifeline of enterprise's development and progress, internal control system is the cornerstone to ensure enterprises to gain a firm foothold in today's competitive economic tide. Small and medium-sized enterprises must realize the indispensability of internal control system, and constantly establish and improve the internal control system of enterprises, so that the internal control system can escort the more healthy and orderly development of the socialist market economy.

5? Concluding remarks

The internal control of family business still needs to be improved. China's family business can adopt a series of "standardized" reform measures, so that family management can absorb orderly and stable management elements from standardized company management on the basis of maintaining its high efficiency, realize the real high efficiency of family business management, explore a set of suitable and effective comprehensive internal control framework, and make China's family business truly move towards modernization, socialization and diversification.