Corporates promptly strengthen risk management and internal control measures, while Reporting to the Board and Internal Audit functions have room for improvement

PwC announces its annual study of listed companies’ performance in relation to internal control and risk management

Hong Kong, 14 Aug 2017 - According to the latest study by PwC, most of the listed companies reviewed have complied with the amended Hong Kong Corporate Governance Code issued by the Hong Kong Stock Exchange. The amended Code aims to enhance the level of disclosure of internal control and risk management systems, as well as the handling and disseminating of inside information. However, companies need to put greater effort into improving reporting to the board of directors and the effectiveness of their internal audit functions.

The study, conducted by PwC Hong Kong’s Risk Assurance division, covers all published Corporate Governance reports of 223 listed companies in the Hang Seng Index (HSI) and Hang Seng Chinese Enterprise Index (HSCEI), as well as the top companies by market capitalisation in the financial services, real estate, retail and technology sectors.

The amended Corporate Governance Code became effective for accounting periods from 1 January 2016. The amendments were designed to give greater emphasis to risk management and to further define the roles and responsibilities of the board and management. They also emphasise the board of directors’ ongoing responsibility to oversee risk management and internal control systems.

The study reveals that 92 percentage points of companies performed the annual review of both the internal control and risk management systems, representing an increase of 23 percentage points year-on-year. 93 percentage points of HSI constituents and 85 percentage points of HSCEI constituents have also made appropriate disclosures, which represents a 7 percentage points and 25 percentage points increase over the prior year respectively. In terms of Industry, the Retail sector (97 percentage points) outperformed Real estate (93 percentage points), Technology (93 percentage points) and Financial Services (90 percentage points).

At the same time, 78 percentage points of the companies in the study disclosed their process to identify, evaluate and manage risks, which represents a 33 percentage points increase year-on-year. 80 percentage points of HSCEI constituents have made such disclosures, a 57 percentage points increase which significantly narrows the gap with HSI constituents. On an industry basis, Financial Services (90 percentage points) outperformed the other sectors.

Moreover, 87 percentage points of the companies disclosed their procedures and internal controls for the handling and dissemination of inside information, which is an improvement of 44 percentage pointsyear-or-year. 91 percentage points of HSI constituents made the disclosures, slightly outperforming the HSCEI constituents (88 percentage points). On an industry basis, only 77 percentage points of Technology companies have made such disclosure, lagging behind all other sectors (around 90 percentage points).

“Since the amended Corporate Governance Code became effective, many of the large-cap listed companies have enhanced their level of disclosure on internal control and risk management. We are particularly happy to see a significant improvement in the HSCEI constituents. The results reflect that companies recognise the positive effect of enhancing Corporate Governance,” says PwC Hong Kong Risk Assurance Partner Eric Yeung.

The study also found that 97 percentage points of companies claimed to have an internal audit function. However, only 36 percentage points of them disclosed that they had sufficient resources, qualifications and experienced internal audit staff, which represents a 16 percentage points increase on the previous year. Only 10 percentage points of HSCEI constituents and 44 percentage points of HSI constituents had covered the internal audit function in their annual review to ensure the adequacy of resources, qualifications and experience, training programmes and budget for their IA function. On an industry basis, Real estate companies (58 percentage points) outperformed the other sectors.

Similarly, only one-third of companies in the study disclosed that their Board of Directors had received management confirmation on both risk management and internal control systems. These results clearly indicate plenty of room for improvement.

PwC’s Hong Kong and China South Internal Audit Service Leader Cimi Leung says, “We are grateful that listed companies are being proactive in accordance with tightened risk management and internal control requirements. We strongly encourage companies to continuously improve their level of disclosure, and allocate adequate resources for internal audit and training programmes. Management of listed companies and the Board should strengthen the channel of communications, particularly on the reporting of substantial risk information. We believe that enhancing corporate governance could bring value to all organisations, which improves investor relations and protects shareholders. It is a performance issue instead of a compliance issue.”

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