China SOX – When Does it Come Into Effect?

Nancy B. Alston

The Basic Standard for Enterprise Internal Control (“China SOX” or “C-SOX”) was announced in China with great fanfare in the summer of 2008. However, more than a year after the announcement of this new risk management and internal control regulation, there is still confusion in the market over when it goes into effect. This confusion has an impact on the planning and execution of compliance projects for the many companies in China who will be required to adopt China SOX.

There are currently three dates that are considered possible timelines for China SOX adoption. I will list each of them and give the background and drivers for why they might be the actual implementation deadline. Of course, we are still waiting for official confirmation from China’s Ministry of Finance, but it’s worth reviewing what we are hearing from the market. The potential start dates are:

1) 1 July 2009. This was the intended start date when the Basic Standard for Enterprise Internal Control was originally published. And yes, it’s in the past, so we should already know if this was the date by which Chinese companies were supposed to start their C-SOX compliance work. It would make sense for the government to want to stick with their existing schedule to show that they are serious about implementing corporate governance and risk management reforms in the Chinese market.

2) 1 January 2010. Many companies complained when the China SOX regulation was first announced that the regulation was too vague and that the financial crisis required them to focus on other aspects of their business to stay afloat. This put pressure on the regulator to delay the required start date to give companies more breathing room during the economic crisis. It also gave the government additional time to refine the details of the rule and make sure they were clearly articulated to the market.

3) 1 January 2011. Recently, some market analysts have been saying that full implementation of China SOX will not begin until early 2011. They propose that this will give the market enough time to recover from the financial crisis and give the government the time required to publish the C-SOX implementation guidelines (which were promised in late 2008).

My guess? I believe that the Chinese government sees the value in implementing real reforms to the way its companies are governed and manage risks. Most analysts think that China has ridden out the financial crisis well (or at least not been as impacted as many Western countries) and wants to make sure that future crises are averted. This leads me to think that enforcement of the Basic Standard for Enterprise Internal Control will start in January 2010, with companies expected file detailed internal control reports by the end of 2010. Any further delay risks diluting the value and message of this new regulation.

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