In the wake of last Tuesday's audit report by the government's top accounting watchdog, many Chinese firms have been busy hammering out better internal auditing systems to plug management loopholes and curb operating risks.

And this will bring the country's 230,000 sharp-penciled internal auditors into full swing, according to Wang Daocheng, chairman of the China Institute of Internal Auditors (CIIA).

"They can impose supervision at any moment and prevent corruption at its source," Wang told China Daily. "That is more efficient than disclosing irregularities after they have already taken place."

More important, internal auditors are no longer pure "economic policemen" who mainly check the authenticity of enterprises' income and expenditure. Instead, more of their focus has shifted to building a stricter internal control system and putting forward constructive suggestions to management teams.

Auditor-in-Chief Li Jinhua said the goal of internal auditing is "management plus efficiency."

He told a recent internal auditing meeting that internal auditors should strive to "propel enterprises and institutions to improve management and to enhance construction of internal control systems."

Statistics from the CIIA indicate that between 2000 and 2004, internal auditors across the country finished a total of 1.98 million auditing projects, discovering misused funds of 42.09 billion yuan (US$5.07 billion) in the process. They proposed over 1 million suggestions for improvement. Their suggestions were subsequently adopted by the enterprises and institutions.

Enhancing internal control has become a priority for many domestic enterprises following recent revelations of a string of scandals in major state-owned banks and the huge losses incurred by China Aviation Oil in derivatives trading.

After Li released his auditing report last Tuesday, unveiling violations on the part of ministries, institutions and enterprises, top executives from the organizations concerned, such as the four asset management companies and China Construction Bank, all vowed to intensify their internal auditing procedures.

"Most large and medium-sized enterprises are aware of the importance of internal auditing and have established internal auditing departments," said Wang. The Agricultural Bank of China, for example, set up an 8,000-member auditing team.

However, Wang admitted there are still some obstacles to further development of internal auditing. The biggest is the lack of a legal framework. China's current Accounting Law, Corporate Law and Securities Law all fail to define the position of internal auditing in companies, while the ongoing revision of corporate and securities laws do not cover this topic.

Another hindrance is the lack of sufficient numbers of qualified internal auditors. Only about 6,000 Chinese internal auditors meet the internationally recognized Certified Internal Auditors standard, while little over 200,000 hold the domestic qualification issued by the CIIA.

(China Daily July 5, 2005)