[May 2015]




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Financial Reporting Council issues Guidance on
Risk Management, Internal Control and
Related Financial and Business Reporting

Written by: Ms. Lucy Mai - Risk Consultant



Financial Reporting Council (“FRC”), the UK’s and the Republic of Ireland’s independent regulator, has issued Guidance on Risk Management, Internal Control and Related Financial and Business Reporting (“Guidance”) in September 2014, which combined and consolidated the current editions of Internal Control. It aims to provide direction to companies which are subject to the Code. In this newsletter, we are going to summarize the Guidance as follows:


Board Responsibilities for Risk Management and Internal Control – Going Concern Basis
According to the Guidance, the board is responsible for the company’s overall approach to risk management and internal control including measures like ensuring the design and implementation of appropriate risk management internal control system, determining the nature and extent of the principal risks faced, monitoring the risk management and internal control systems, etc. The Guidance further emphasizes that the board is responsible for determining whether the company should adopt the going concern basis of accounting and related disclosures of any material uncertainties in the financial statements. It is also the board’s responsibility to ensure that the management has understood the operation of the risk management and internal control system. Policies and appropriate controls should be established, implemented and monitored with timely information provided by the management, which is essential for the Board to discharge its responsibilities.


Exercising Responsibilities
Since the board is responsible for establishing the direction for risk management and internal control system, the Guidance suggests that the board could take the six factors listed below for reference:


1)     The culture it would like to embed in the company
Individual who operates systems is essential who would affect the effectiveness of the risk management and internal controls. Leadership style, management structures, policies and procedure as well as reward systems are tools to guide the personnel within the organization who ultimately affect the effectiveness of the risk management and internal control systems.


2)     The adequate discussion at the board
The strategy and business model of the company, the risk assessments and related factors, impacts related to changes in strategic planning are important to the operation of the organization. The board should agree on the frequency and scope of its discussion of the aforesaid issues and ensure sufficient enquiries are made and reviewed throughout the decision making process.


3) The level of skills, knowledge and experience of the board and management
The board should consider delegating its responsibilities to respective management leader who has the necessary skills, knowledge, and experience to exercise its responsibility. The board should also consider regularly evaluating the sufficiency.


4) The flow of information to and from the Board
Risks can be crystallized rapidly where rapid actions should be made based on the extent of information received. Nature, source, format, frequency and quality of information should be specified and monitored in order to achieve effective decision making.


5) The extent of delegation
The board should consider delegating some activities to the committees or management for them to discharge appropriate responsibilities and accountability. The board should ensure the extent of delegation including arrangement of the work, related coordination and reporting while it retains ultimate responsibility for the risk management and internal control systems.


6) The assurance the board requires
Reports on compliance matters, risk management and internal control, internal audit functions within the company, and external audit are the sources of assurance the company requires beyond the monitoring activities within the company. The board should identify its required assurance level and ensure whether the above-mentioned sources provide sufficient assurance and objective advice to the board.


In the upcoming newsletter, we will continue to summarize the remaining parts of the Guidance, that is establishment of risk management and internal control system, monitoring and review of these systems and the board’s related financial and business reporting responsibilities.

If there are any aspects which we may assist, please do not hesitate to contact our partner in charge Mr. Roy Lo at 3583 8048 (roy.lo@shinewing.hk) or our Risk Manager Ms. Gloria So at 3583 8517 (gloria.so@shinewing.hk).


SHINEWING Risk Services Limited

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SHINEWING Risk Services Limited
43/F., Lee Garden One, 33 Hysan Avenue Causeway Bay, Hong Kong,

T. (852) 3583 8000

F. (852) 3583 8532

W. www.shinewing.hk

E. risk@shinewing.hk


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