Circular of Shanghai Stock Exchange concerning Issuing the Guidelines of Shanghai Stock Exchange for the Internal Control of Listed
Companies
All listed companies,
In order to push forward and direct the listed companies to set up a sound internal control system, enhance the risk management level
of companies and protect the legitimate rights and interests of investors, the Guidelines of Shanghai Stock Exchange for the Internal
Control of Listed Companies are instituted by this Stock Exchange according to the Company Law, Securities Law, Circular of the State
Council on Approving and Forwarding the Opinions of China Securities Regulatory Commission concerning Promoting the Quality of Listed
Companies, other laws, regulations and regulatory documents, and the Rules of Shanghai Stock Exchange concerning the Listing of Stocks,
and hereby are promulgated for implementation.
Shanghai Stock Exchange
June 5, 2006
Guidelines of Shanghai Stock Exchange for the Internal Control of Listed Companies
Chapter I General Provisions
Article 1
In order to push forward and direct the listed companies to set up a sound internal control system, enhance the security management
level of the companies and protect the legitimate rights and interests of investors, the Guidelines of Shanghai Stock Exchange for
the Internal Control of Listed Companies are formulated by this Stock Exchange according to the Company Law, Securities Law, Circular
of the State Council concerning Approving and Forwarding the Opinions of China Securities Regulatory Commission concerning Promoting
the Quality of Listed Companies, other laws, regulations and regulatory documents, and the Rules of Shanghai Stock Exchange concerning
the Listing of Stocks.
Article 2
The term “internal control” refers to the related rules and arrangements which are made for the management of the risks underlying
the strategies making and business operating of a listed company to ensure the realization of the strategic aims of the company.
It is an activity in which the board of directors, the management level and the staff jointly take part.
Article 3
According to the laws, administrative regulations, departmental rules and regulations, and the provisions of this Stock Exchange
concerning the listing of stocks, any company listed in this Stock Change shall set up and perfect a sound internal control system,
shall ensure the completeness, reasonableness and effectiveness in practicing of the internal control system to enhance the effectiveness
and effect in company operations ,promote the reliability of the information disclosed by the company to ensure the lawfulness and
regulation compliance of the acts of the company.
Article 4
The establishment, the effective implementation, and the inspection and supervision of a sound internal control system of the company
shall be in the charge of the board of directors of a company. The board of directors and all its members shall ensure that the contents
of the information disclosure concerning the internal control are genuine, exact and complete.
Chapter II Framework of Internal Control
Article 5
A company shall try best to make the internal control system comprehensive and complete, and make arrangements at least in the aspects
as follows:
(1)
The aspect of the company;
(2)
The aspect of the departments and the affiliated companies of the company; and
(3)
The aspect of the business links of the company.
Article 6
When setting up and carrying out the internal control system, a company shall take into consideration of the basic elements as follows:
(1)
The expression “to set a goal” means that the board of directors and the management level set a strategic aim in the light of the
security preferences of the company.
(2)
The term “internal environment” refers to the organizational culture and other comprehensive factors affecting the staffs awareness
of the securities, such as the perspectives of the staff on the securities, the security management concept and security preferences
of the management level, the occupational and professional ethic norms and working environment, the attention paid to the securities
and the directions on the securities given by the board of directors and the board of supervisors.
(3)
The term “confirmation of securities” means that the board of directors and the management level makes confirmation on the internal
and external security factors causing affect on the realization of the aim of the company.
(4)
The term “security evaluation” means that the board of directors and the management level make sure the security management methods
according to the likeliness and consequences of the security factors.
(5)
The expression “selection of security management strategies” means that the board of directors and the management level make choices
on the security management strategies according to the security bearing ability and the security preferences.
(6)
The term “control activities” refers to the system and procedures to ensure the effective implementation of the security management
strategies, consisting of the approval, authorization, verification, adjustment, review, periodic check, recording and checking up,
functional division, asset preservation, performance evaluation, etc.
(7)
The term “information communication” refers to the course during which the information resulting from the planning, implementation,
supervision and other management activities is provided to the users timely. and
(8)
The term “inspection and supervision” refers to the course during which the company exams itself and supervise the running of internal
control.
Article 7
Based on satisfying the overall strategic aims, a company shall set up related internal control systems for its subordinate departments
and affiliated companies, as well as its business links.
Article 8
In general, the internal control of a company shall cover all business links in the business operation activities, which shall include
but not be limited to:
(1)
The link of sale of goods and receipt of payments for goods, consisting of the conducting of orders, credit management, transport
and delivery of goods, issuance of invoices for the goods sold, confirmation of income and receivables, received cash payments and
the records thereof, etc.
(2)
The link of purchase and payment, consisting of the procurement application, conducting of procurement orders, check and acceptance
of goods, filling out check and acceptance report or dealing with the goods returned, the record on accounts payable, check and approval
of payments, cash payments andrecords theirof, etc.
(3)
The link of production, consisting of the production plan to be made, issuance of checklist of materials to be used, storage of raw
materials, bringing into operation, calculation of production costs of inventories, calculation of costs of goods sold, quality control,
etc.
(4)
The link of management on fixed assets, consisting of the self-construction, purchase, disposal, maintenance, preservation and record
of the fixed assets, etc.
(5)
The link of management on monetary fund, consisting of the entries, transfer out, recording, reporting of the monetary fund, authorization
to the cashier and financial accountants, etc.
(6)
The link of relevant transactions, consisting of the definition of the related parties, the pricing, authorization, implementation,
reporting and record of relevant transactions.
(7)
The link of guaranty and financing, consisting of the authorization, enforcement ,recording ,etc concerning the borrowing, guaranty,
acceptance, leasing, issuance of new stocks and issuance of bonds.
(8)
The link of investment, consisting of the resolutions, enforcement preservation ,recording ,etc concerning the investments in the
negotiable securities, stock right, real property, operating assets, financial derivatives, and other long term and short term investments,
entrusted financing, and the use of funds raised,
(9)
The link of research and development, consisting of the basic research, design of products, development of technology, test of products,
record of research and development, as well as preservation of documents. and
(10)
The link of personnel management, consisting of the employment and conclusion of employment contracts, training, leave, overtime work,
leaving post, dismissal, retirement, time calculation, calculation of salaries and wages, calculation of individual income tax and
all withholding items, records of wages and salaries, payments for salaries and wages, check on work attendance records, evaluation,
etc.
When formulating internal control system, a company may modulate the business links in accordance with the sector in which the company
founds itself and its production and business operation features.
Article 9
The internal control system of a company shall not only consist of the control of all links of the business activities, but also
the management rules concerning the business activities of each link, which consist of but not be limited to: the management of use
of seals, receipt and use of instruments, budget management, asset management, quality management, guaranty management, post authorization
and agent rules, regular communication rules, information disclosure management rules, as well as rules concerning the management
of affiliated companies.
Article 10
If using the computer-aided information system, a company shall also institute internal control rules concerning the information
management. The internal control rules concerning the information management shall at least cover the contents as follows:
(1)
The division of functions between the information processing department and information using departments;
(2)
The division of the functions and duties of information processing department;
(3)
The control of development of the system and modification of procedures;
(4)
The control of procedures, access of materials, and data processing;
(5)
The safety control of archives, equipment and information; and
(6)
The control of the public information disclosure activities to be implemented through the website of this Stock Exchange or through
the website of the company.
Article 11
In the light of the relevant provisions of the finance administrative department of the state, a company shall set up internal accounting
control rules .
Article 12
A company in the finance sector or in any other special sector shall set up an internal control system, but also be governed by the
provisions of the related competent departments.
Article 13
According to its own business features, a company shall set up an internal control system. This Stock Exchange encourages it to employ
an intermediary institution to help it set up an internal control system.
Chapter III Internal Control of Special Risks
Section 1 Management and Control of Affiliated Companies
Article 14
A company shall manage and control its controlling subsidiaries mainly in the aspects as follows:
(1)
To set up a control structure for its controlling subsidiaries according to the law, to determine the main clauses of the articles
of association of the controlling subsidiaries, as well as to select directors, supervisors, managers and financial principal;
(2)
To coordinate the business strategies and security management strategies of its controlling subsidiaries and security management strategies
in accordance with the strategic plan of the company, and to urge its controlling subsidiaries to make related business operation
plan and security management procedures;
(3)
To institute rules concerning the evaluation, incentives and restraints of the business performances of its controlling subsidiaries;
(4)
To institute policies and procedures concerning the business competition and relevant transactions among the parent company and the
subsidiaries;
(5)
To institute an internal reporting system of the important matters of its controlling subsidiaries. The important matters shall consist
of, but not be limited to, development plans and budgets, important investments, purchase and sale of assets, provision of financial
aids, provision of guaranties to others, investments into the securities and financial derivatives, conclusion of important contracts,
as well as foreign exchange security management of its overseas controlling subsidiaries. and
(6)
To regularly get monthly financial reports and management reports of its controlling subsidiaries, and entrust an accounting firm
to audit the financial reports of its controlling subsidiaries in accordance with the related provisions.
Article 15
A company shall make evaluation on implementing, and inspecting and supervising the internal control system of its controlling subsidiaries.
Article 16
With reference to the above-mentioned requirements, a company shall arrange the internal control system of its branch companies,
and the joint stock companies which is with an important affect.
Section 2 Internal Control of Transactions of Financial Derivatives
Article 17
A company which takes part in transactions of financial derivatives shall first make evaluation on its own security control capability
and set up a related internal control system. The transactions of financial derivatives shall consist of, but not be limited to,
futures transactions, options transactions, forward transactions and swap transactions on the basis of commodities or securities.
Article 18
The board of directors of a company shall have the full realization about the nature and security of the transactions of financial
derivatives and shall make a reasonable determination about the security limits and related transaction parameters of the financial
derivatives based on the security bearing capability of the company.
Article 19
According to the requirements as follows, a company shall carry out internal control over the transactions of financial derivatives:
(1)
To reasonably set up an aim for transactions of financial derivatives, and hedging strategies;
(2)
To set up rules concerning the implementation of transactions of financial derivatives, consisting of policies and procedures for
the qualifications, evaluation, security remoteness, implementation, stop-loss, record and reports of the traders;
(3)
To set up a security reporting system for the transactions of financial derivatives, consisting of the authorization, implementation,
contingent assets, potential security, hedging strategies and other details of transactions; and
(4)
To set up a security management system for transactions of financial derivatives, consisting of the policies and procedures for the
organizational setup, duties, records and reports.
Section 3 Internal Control of Other Risks
Article 20
According to the industrial characteristics, strategic aims and different security management strategies, a company shall make related
internal control arrangements for the particular securities.
Article 21
A company shall set up a crisis management and control system.
Chapter IV Inspection and Supervision of Internal Control
Article 22
A company shall inspect the implementation of its internal control system regularly or irregularly. Upon the inspection and supervision
over the internal control system, the board of directors and management level shall find whether there are any defects in the internal
control system and whether there are any problems in the implementation thereof, and improve it in time in order to ensure the effective
implementation thereof.
Article 23
A company shall make a determination about a special functional department to take charge of the routine inspection and supervision
of internal control and shall, in accordance with the related provisions and the actual circumstances of the company, arrange full-time
personnel for the inspection and supervision of internal control. A company may arrange the organizational setup of this functional
department according to its own organizational structure and the industrial characteristics.
The “special functional department” mentioned in the preceding paragraph (hereinafter referred to as the “inspection and supervision
department”) may make a direct report to the board of directors. The board of directors may determine the appointment and dismissal
of the person-in-charge of this department.
Article 24
A company shall set up measures to inspect and supervise the internal control, which shall at least cover:
(1)
The authorization granted by the board of directors or related institution concerning the inspection and supervision of internal control;
(2)
The cooperative obligations of the departments and subordinate institutions of the company in the inspection and supervision of internal
control;
(3)
The items, time, procedures and methods for the inspection and supervision of internal control;
(4)
The means of reporting of the work of inspection and supervision of internal control;
(5)
The division of the responsibilities concerning the work of inspection and supervision of internal control; and
(6)
The incentive system for the inspection and supervision of internal control.
Article 25
In accordance with its own business operation features, a company shall set up an annual plan concerning the inspection and supervision
of internal control and make it serve as the basis for evaluating the running of internal control.
The important matters, such as the purchase and sale of assets, relevant transactions, transactions of derivatives, financial aids
offered, guaranties given to others, use of fund raised, entrusted financing, shall be considered as indispensable items in the plan
concerning the inspection and supervision of internal control by a company.
Article 26
A report on the work of inspection and supervision of internal control shall be handed in to the board of directors by an inspection
and supervision department at the end of a year and half a year.
In accordance with the business operation features of the company, the board of directors of a company shall make requirements for
the contents and formats of a report concerning the work of inspection and supervision of internal control.
Article 27
The board of directors of a company shall guide the work of inspection and supervision of internal control, and review the report
concerning the work of inspection and supervision of internal control handed in by the inspection and supervision department. If
there is an audit committee under the board of directors of the company, the aforesaid work may be conducted by the audit committee.
Article 28
In the report concerning the work of inspection and supervision of internal control, the inspection and supervision personnel shall
reflect the defects of internal control and the problems occurring in the implementation thereof according to the facts, and track
them after reporting them to the board of directors in order to make sure that the related department has taken appropriate improvement
measures in time.
The defects of internal control and the problems occurring in the exercise thereof referred to in the preceding paragraph shall be
listed by the company as important items for the performance evaluation of all departments.
Article 29
The working materials of inspection and supervision department, consisting of the reports concerning the work of inspection and supervision
of internal control, working papers and related materials, shall be preserved for 10 years or more.
Chapter V Information Disclosure of Internal Control
Article 30
During the inspection and supervision of internal control, if a company finds that there is any serious defect or severe security
in the internal control, it shall report it to the board of directors in time. The board of directors of the company shall report
it to this Stock Exchange in time and shall make an announcement in time upon confirmation of this Stock Exchange.
In the public announcement the company shall explain the links wherein defects may appear in the internal control, the aftermaths
and related liabilities and the remedial measures therefore.
Article 31
According to the report on the work of inspection and supervision of internal control and related information, the board of directors
shall make evaluation on the establishment and implementation of internal control system of the company and make a report concerning
the self-evaluation of internal control. The board of directors of the company shall make a resolution about the report concerning
the self-evaluation of internal control when it deliberates the annual financial report.
There is an audit committee under the board of directors of a company, the audit committee may make a draft report concerning the
self-evaluation of internal control and hand in it to the board of directors for deliberation.
Article 32
When disclosing the annual report, the board of directors of a company shall, at the same time, disclose the annual report concerning
the self-evaluation of internal control and the verification and evaluation opinions of the accounting firm on the report concerning
the self-evaluation of internal control.
Article 33
The report concerning the self-evaluation of internal control of a company shall at least cover the following contents:
(1)
Whether or not a internal control system has been set up and perfect;
(2)
Whether or not the internal control system is carried out effectively;
(3)
The circumstances concerning the work of inspection and supervision of internal control;
(4)
the serious securities occurred in the internal control system and during the period of implementation thereof, and how to conduct
the serious securities;
(5)
The evaluation of completion of the plan concerning the work of inspection and supervision of internal control for this year;
(6)
Related measures on improving internal control system; and
(7)
The plan concerning the internal control of the related work for the next year.
An accounting firm shall make verification and evaluation on the reports concerning the self-evaluation of internal control of companies
according to the related provisions of the competent organ,.
Chapter VI Supplementary Provisions
Article 34
This Stock Exchange shall be responsible for the interpretation of these Guidelines.
Article 35
These Guidelines shall go into effect as of July 1, 2006.
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