Discussion On The Problems Of Hareon Solar's Internal Control Over Financial Reporting

Entering the 21 st century,the reliability of financial reporting of listed companies appears to be weakened as frequent financial fraud cases have exposed problems in internal control over financial reporting.Hence,various rules and regulations have been issued by many countries and related academic organizations.The Sarbanes-Oxley Act,which was introduced by the United States in 2002,requires listed companies to evaluate the effectiveness of their internal control,making the act a milestone in the development history of internal control.In China,Ministry of Finance and four other departments had jointly issued a series of regulations in 2008,aiming to strengthen the construction of internal control in listed companies.However,as there has not been a universal understanding of internal control over financial reporting,and also the practice of internal control in China has not been carried out for a long time,problems such as weak awareness,lack of experience and poor execution still exist,which have also been exposed by cases such as the financial fraud of Wanfu Biotechnology in recent years.Hareon Solar Technology Co.,Ltd.(hereinafter referred to as “Hareon Solar”)is a listed company with problems in internal control over financial reporting.During the audit of the effectiveness of Hareon Solar's internal control over financial reporting on December 31,2016,Dahua CPA discovered a series of major defects,and issued an audit report with negative opinions.This paper is based on the theory of internal control over financial reporting,and evaluates the effectiveness of Hareon Solar's Internal Control over Financial Reporting for the year 2016.According to the evaluation,the paper then analyzes the causes of the major defects of Hareon Solar's internal control,and puts forward suggestions for improvement.The main contents of this paper are as follows.Firstly,the paper introduces the background and significance of this research,and brings out the literature review from three aspects: financial reporting,internal control,and internal control over financial reporting.On this basis,the paper follows the steps of discovering,analyzing and solving problems,using study methods of theoretical research and case study combined,as well as quantity and quality analyses.Secondly,the paper gives a theory overview of internal control over financial reporting,including its concept,its role as an inseparable component of internal control,its characteristics such as tendentiousness and limitations,as well as its internal logical relations with the five elements of internal control.Then,the paper proposes to evaluate the effectiveness of internal control over financial reporting quantitatively and qualitatively by using risk-based evaluation method.In addition,internal control over financial reporting is analyzed from the perspectives of principal agent theory,risk management theory and institutional change theory,providing theoretical basis for the analysis and resolution of Hareon Solar's problems of internal control over financial reporting.Thirdly,the paper explores the main problems of Hareon Solar's internal control over financial reporting.On the basis of understanding the current status of Hareon Solar's internal control over financial reporting,the evaluation index system of internal control over financial reporting is constructed to evaluate the effectiveness of Hareon Solar's internal control over financial reporting quantitatively and qualitatively.According to the results of the evaluation and the 2016 annual audit report of Hareon Solar's internal control,five defects of Hareon Solar's internal control over financial reporting are pointed out.Firstly,invalid approval process for procurement payment causes illegal prepayment.Secondly,sales collection risks are not recognized effectively,resulting in a large number of accounts receivable and bad debts.Thirdly,the approval process for investment is not implemented effectively.Fourthly,the associated parties are not recognized effectively,and the identification and approval of associated transactions are not standard.Fifthly,the approval process for external guarantee is incomplete.Then the paper analyzes the causes of the problems mentioned above from four aspects including deterioration of internal control environment,immature risk assessment mechanism,inefficient control,and ineffective internal supervision.Firstly,due to the frequent departures of senior executives,the weak awareness of internal control and the damage of corporate governance structure,Hareon Solar's internal control environment has deteriorated.Secondly,as a result of the lack of professional risk management team,the failure to identify the risk points effectively and the lack of quantifiable risk assessment indicators,Hareon Solar's risk assessment mechanism is immature.Thirdly,inefficient control is caused by the failure to implement the authorization examination and approval system,the unclear division of investment business authority,the imperfect approval process of external guarantee business and the lack of timely information disclosure.Fourthly,because of the failure of the internal supervisory bodies to perform their duties,the weak supervision of risk points,the incomplete liquidation and disclosure mechanism of associated transactions and the weak supervision of risk points,internal supervision is ineffective.Finally,suggestions are put forward to improve Hareon Solar's internal control over financial reporting.Firstly,establish a good internal control environment in Hareon Solar by stabilizing the senior executives,solidifying the foundation of the internal control culture and consolidating the corporate governance structure.Secondly,improve the risk assessment mechanism of Hareon Solar by the establishment of the risk committee,the implementation of risk assessment mechanism and the introduction of quantifiable risk assessment indicators.Thirdly,strengthen the execution capability of internal control of Hareon Solar by implementing the authorization and approval system,standardizing the responsibility and authority of investment,and improving the information disclosure mechanism.Fourthly,improve the internal supervision mechanism of Hareon Solar by enhancing the ability of internal supervisory bodies to perform their duties,improving the cleaning and disclosure of associated transactions and strengthening the supervision and inspection over the points of risks.