To implement the Party Central Committee and the State Council’s requirements on “stabilizing growth, promoting reform, adjusting structure, benefiting people’s livelihoods, and preventing risks,” and to guide and encourage small enterprises to strengthen their internal control systems, enhance their operational management levels and risk-prevention capabilities, and promote the healthy and sustainable development of small enterprises, the Ministry of Finance recently issued the “Internal Control Standards for Small Enterprises (Trial)” (Cai Hui [2017] No. 21, hereinafter referred to as the “Standards”) in accordance with relevant laws and regulations such as the Accounting Law of the People’s Republic of China and the Company Law of the People’s Republic of China, as well as the Basic Norms for Enterprise Internal Control. A responsible official from the Accounting Department of the Ministry of Finance answered reporters’ questions regarding the “Standards.”

　　Q: Could you please provide some background information on the issuance of the “Regulations” by the Ministry of Finance?

　　Answer: Vigorously developing small enterprises is a long-term strategic task for our country. Small enterprises are the primary employers in society, significant contributors to national tax revenues, and the main driving force behind entrepreneurship and innovation. They serve as a new engine for “mass entrepreneurship and innovation,” and are increasingly becoming an important pillar of the national economy and a solid foundation for sustained and stable economic growth. In 2014, the State Council issued the "Opinions on Supporting the Healthy Development of Small and Micro Enterprises," calling on relevant departments to strengthen management guidance for small and micro enterprises and provide effective support for their healthy development. In 2015, the State Council released the "Opinions on Vigorously Promoting Several Policy Measures for Mass Entrepreneurship and Innovation," further clarifying the policy direction for fostering innovation and development among small and micro enterprises in China. Promoting social entrepreneurship and encouraging the development of small and micro enterprises have become strategic initiatives for deepening economic system reform and facilitating the transformation and upgrading of China’s economy in the coming period.

　　The “Basic Standards for Enterprise Internal Control” (2008) jointly issued by the Ministry of Finance and four other departments, along with its accompanying guidelines (2010), have played a significant role in promoting the strengthening of internal control systems among large and medium-sized enterprises in China, particularly listed companies and central enterprises. However, China has a large number of small enterprises, which vary widely in type and exhibit substantial differences among themselves. As a result, when small enterprises attempt to implement internal control systems in accordance with the relevant requirements of the enterprise internal control standards framework, they often face challenges such as poor applicability and high implementation costs. Therefore, the formulation and issuance of the “Internal Control Standards for Small Enterprises (Trial)” are of great significance in guiding and assisting small enterprises to strengthen their internal control systems, enhance their operational and management capabilities, reduce business risks, and minimize various economic losses. This will not only promote the healthy growth of China’s small enterprises but also contribute to the healthy and sustainable development of China’s economy.

　　Q: What was the process behind drafting and issuing the “Standards”?

　　Answer: From drafting to publication, the “Standard” has roughly gone through the following six stages:

　　(1) The Preliminary Research Phase (January to March 2015). In early 2015, the Accounting Department of the Ministry of Finance organized relevant internal control consulting experts to establish a drafting group and initiated the research and development of the “Guidelines.” The drafting group collected and compiled domestic and international regulatory authorities’ and internal control standards-setting bodies’ regulations and literature on internal controls for small enterprises. It also conducted an in-depth study on the characteristics of small enterprises, their classification criteria, specific internal control needs, as well as the key challenges, critical issues, and major risks faced by small enterprises in China’s business management.

　　(2) Research and Symposium Phase (April to June 2015): The Accounting Department of the Ministry of Finance, together with the SME Bureau of the Ministry of Industry and Information Technology, the Shenzhen Stock Exchange, and several other organizations, conducted a survey and research on the status of internal control development among small enterprises in China. Using a combination of symposiums and on-site visits, they interviewed 31 small enterprises in four provinces and cities—Shenzhen, Guangzhou, Shanghai, and Jiangsu—and listened carefully to their views and suggestions on establishing and implementing internal controls.

　　(3) Expert Workshop Phase (July to December 2015). Based on feedback from relevant parties and the results of the survey questionnaire, and drawing on domestic and international research findings on internal controls for small enterprises, the drafting group prepared a draft of the “Internal Control Standards for Small Enterprises.” At the same time, a series of expert symposiums were organized, inviting representatives from the Ministry of Industry and Information Technology, the China Securities Regulatory Commission, small enterprise representatives, and internal control consulting experts to conduct multiple internal discussions on the draft.

　　(4) The Stage of Soliciting Comments (January to August 2016). From January to May 2016, based on expert symposiums and seminars, the drafting group revised the initial draft and produced a draft for public comment on the “Standard.” At the same time, the draft was made publicly available to members of the Corporate Internal Control Standards Committee, consulting experts, and all sectors of society for their input. From June to August 2016, a total of 477 pieces of feedback were received from various sectors of society. The comments primarily focused on the positioning and scope of application of the “Standard,” the terminology and characteristics of small enterprises, the alignment with the “Basic Standard for Enterprise Internal Control,” the reflection of small enterprises’ specific features, and other technical issues.

　　(5) Revision and Improvement Phase (September to December 2016): Based on the compilation and detailed analysis of the collected comments, the Accounting Department of the Ministry of Finance invited the SME Bureau of the Ministry of Industry and Information Technology, the Listing Department and the Accounting Department of the China Securities Regulatory Commission, representatives of small enterprises, and internal control consulting experts to hold multiple seminars. During these seminars, the feedback was thoroughly discussed, and the draft of the “Standards” was revised and improved in light of the suggestions provided by the participating representatives and experts.

　　(6) Final Draft Release Phase (January to June 2017). Based on the review comments from the Departmental Affairs Committee, the Accounting Department of the Ministry of Finance made further revisions and refinements to the “Standards.” After completing the relevant internal review procedures, the “Standards” were finalized and officially issued.

　　Q: What are the main contents of the “Standard”?

　　Answer: The “Standards” consist of four chapters—General Provisions, Establishment and Implementation of Internal Controls, Supervision of Internal Controls, and Supplementary Provisions—totaling forty articles.

　　(1) General Provisions. This section primarily clarifies the purpose, basis, and scope of application for the formulation of these “Standards,” as well as defines the internal control framework for small enterprises, including its objectives, principles, and general requirements, and outlines the responsibilities of the persons in charge of small enterprises.

　　(2) Establishment and Implementation of Internal Controls. This section primarily clarifies the overall requirements for establishing and implementing internal controls in small enterprises, including the objects, methods, content, approaches, and frequency of risk assessments. It specifically highlights common risk categories faced by small enterprises and commonly used risk response strategies. Additionally, it defines the key areas for establishing internal controls in small enterprises, typical internal control measures, basic requirements for implementing internal controls, the relationship between internal controls and existing enterprise management systems, internal and external information communication channels, personnel training, and the updating and optimization of control measures.

　　(3) Internal Control Oversight. This section primarily clarifies the oversight mechanisms for internal controls in small enterprises, including the methods for conducting oversight, requirements for oversight personnel, key areas of daily oversight, identification and rectification of issues in internal controls, frequency of periodic evaluations, internal control reports, and the use of oversight and evaluation results.

　　(4) Supplementary Provisions. These provisions primarily clarify matters such as the reference application by micro-enterprises, the option for small enterprises to refer to the “Basic Standards for Internal Control of Enterprises” and its accompanying guidelines, the attribution of interpretative authority for these “Standards,” and the effective date of the “Standards.”

　　Q: What is the relationship between the “Standards” and the “Basic Standards for Enterprise Internal Control” and their accompanying guidelines?

　　Answer: The “Basic Norms for Enterprise Internal Control” defines the concept, objectives, principles, elements, basic framework, and key contents of enterprise internal control, serving as the “mother law” in the field of enterprise internal control. The “Norms” were formulated based on the “Basic Norms for Enterprise Internal Control” and represent specific guidelines applicable to small enterprises within the scope of the latter. In accordance with the principle of “adopting the higher standard rather than the lower,” listed companies, large and medium-sized enterprises, and small enterprises that have already implemented the “Basic Norms for Enterprise Internal Control” and its accompanying guidance are not permitted to switch over to implementing these “Norms.” For other business activities not covered by these “Norms,” small enterprises may refer to the “Basic Norms for Enterprise Internal Control” and its accompanying guidance for establishing their internal controls. At the same time, small enterprises meeting the necessary conditions are encouraged to adopt the “Basic Norms for Enterprise Internal Control” and its accompanying guidance. In this way, we can effectively strike a balance between focusing on key areas and taking into account general requirements, while also providing small enterprises with a clear pathway for growth into larger or publicly listed companies, thereby reducing the costs associated with transitioning between the two sets of regulations.

　　Q: Is the “Standard” mandatory for small businesses?

　　Answer: The “Guidelines” are primarily aimed at small, non-listed enterprises that meet the criteria set forth in the “Regulations on the Classification Standards for Small and Medium-sized Enterprises,” issued jointly by the Ministry of Industry and Information Technology and three other ministries (MIIT Joint Enterprise [2011] No. 300). These Guidelines serve as a guide and reference standard for internal control development among the vast number of non-listed small enterprises. Their adoption is entirely voluntary; compliance is not mandatory. The fundamental purpose behind the Ministry of Finance’s formulation and issuance of these Guidelines is to encourage small enterprises to establish and effectively implement internal controls, thereby enhancing their operational management levels and risk-prevention capabilities and promoting the standardized and healthy development of China’s large number of small enterprises.