Practice Note 12B Adequacy of Internal Controls

Past version: Effective from 02 Apr 2013 to 31 Dec 2018

Cross-referenced from Rules 407(4)(b) and 1204(10)

1. Introduction

1.1 This Practice Note provides guidance on the application of Rules 407(4)(b) and 1204(10).
1.2 Issuers are required to disclose the following in their prospectuses and annual reports:

"Opinion of the Board with the concurrence of the audit committee on the adequacy of the internal controls, addressing financial, operational and compliance risks."

Rule 407(4)(b) requires the disclosure to be made in the offer document whereas Rule 1204(10) requires the disclosure to be in the annual reports.

2. Intent of Rules 407(4)(b) and 1204(10)

2.1 Internal controls, including financial, operational and compliance controls, serve to safeguard shareholders' investments and company's assets.
2.2 The audit committee is usually responsible for overseeing internal controls. The Board, which includes executive directors, is also responsible for assessing the adequacy of these internal controls.
2.3 The objective of Rules 407(4)(b) and 1204(10) is to increase transparency and accountability. In providing this opinion, the Board and the audit committee are required to demonstrate that they have rigorously assessed the internal controls in relation to all three areas of risk, namely financial, operational and compliance.

3. Compliance with Rules 407(4)(b) and 1204(10)

3.1 In satisfying Rules 407(4)(b) and 1204(10), the Board and the audit committee may ask for an independent audit on internal controls to assure themselves on the adequacy of the controls, or if they are not satisfied with the systems of internal controls.
3.2 The issuer should maintain proper record of the discussions and decisions of the Board and the audit committee.
3.3 Compliance with Rules 407(4)(b) and 1204(10) involve the following disclosures:-
(i) Where the Board and the audit committee are satisfied that the issuer has a robust and effective system of internal controls, the disclosure must include the basis for such an opinion.

To avoid doubt, under Rule 225(1)(e), a full sponsor, in preparing a listing applicant for admission or advising an issuer in a very substantial acquisition or reverse takeover, must satisfy itself that the listing applicant or enlarged group has sufficient systems, procedures, controls and resources to comply with the Rules and that its directors understand and intend to fulfil their obligations at all times for as long as the securities of the issuer remain listed on Catalist. This is in addition to Rule 407(4)(b) which requires the Board and audit committee to disclose their views on the robustness and effectiveness of the issuer's system of internal controls.
(ii) In relation to Rule 1204(10), where the Board and/or the audit committee is of the view that controls need to be strengthened or has concerns that controls are inadequate, the Board would have to disclose the issues and how it seeks to address and monitor the areas of concerns.

4. Format of Disclosure

4.1 The provision of this opinion has no prescribed format.
4.2 As the Board and audit committee are obliged by Rules 407(4)(b) and 1204(10) to provide the specific disclosures in Paragraph 3.3 above, the Exchange recommends the opinion be provided in the following ways:-
(i) Disclosure to be made in the section on "Audit Committee" or "Internal Controls" of the offer document for compliance with Rule 407(4)(b).
(ii) Disclosure to be made in the Directors' Report or Corporate Governance section of the annual report for compliance with Rule 1204(10).

5. General Principle

5.1 Good disclosures which comply with Rules 407(4)(b) and 1204(10) comprise the following:
(i) The Directors' opinion on the Group's internal controls addressing financial, operational and compliance risks; and
(ii) The basis for the Directors' opinion.
5.2 Should the Board with the concurrence of the audit committee disclose that in its opinion, the Group's internal controls has weaknesses, then clear disclosure of these weaknesses and the steps taken to address them is necessary for investors to make an informed decision about the Company.

Added on 2 April 20132 April 2013.