Corporate Governance

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Internal audit

Under the internal control system, a company must establish an internal audit department. Internal audit is an independent body set up to appraise the various activities in the organization, from operation, finance and compliance with the laws. It identifies weaknesses and proposes remedies for such weaknesses.

(b) Problems with internal control system in company

(i) Lack of appropriate action

Board may have identified problem of retaining production in UK, but apparently there is no indication that it has considered other option of, perhaps, reducing cost of production rather than opt to move to Far East.

(ii) Lack of appropriate management experience

Board seems to option for an easy way out of the problem by relocating production in the Far East. The quick decision may have been made by the board with little experience of taking a holistic approach to the problem, for instance, the effects on the company locally and possible difficulties it will encounter in relocating to the Far East., local employment and environmental problems it may face in the Far East.

(iii) Effect on local employees

When it moves to the Far East many of its local employees will be retrenched. The company is likely to face redundancy payment, legal cost in defending its action in court.

iv). Effect from Far East

When the company set up its production in the Far East it will encounter employment, set up of factory, accounting and tax, and environment problems which are likely to be different from the local condition. The board may have little knowledge on these. They may have to seek local expertise advices on these.

v). Risks from new operation

The company, when it sets up a new operation in the Far East, is likely to face the risk of initial difficulties of setting up new production line and its operation which they may have little experience in. It can result in the loss of its reputation in that country,

vi). Communication risks

The company having its management in two countries will give rise to communication problem.

The communication may not be fast and protected because interruption and interception may occur. It may to introduce encryption measures. All these may result in increase expenses.

vii). Board control

The board, because of the distance of the two managements may encounter problem in control, e.g. to monitor and provide speedy remedial measures to problems which arise in its Far East operation/

viii). Reduction in size of local operation.

The company, when it moves its operation to the Far East, is likely to create adverse publicity and reaction in the local community. Local consumers may boycott its products resulting in loss in sales and profit.

ix). Effect on local community

Closure of part of the company may adversely affect the local community because many employees would have lost their employment and have a knock on effect on the socio-economic situation in the community.