Mr Rozario explained that the Code on Corporate Governance Practices was incorporated into the listing rules of the Hong Kong stock exchange in January last year. The details were made public well before implementation, and feedback was sought from a wide range of industries and professions.

In general, the code has followed the approach adopted in Britain. It is based on the application of values and principles rather than the idea of enforcement, which tended to guide regulations in the United States. It required that by the end of December this year (at the latest), all Hong Kong-listed companies must disclose information about their internal controls.

'Companies now have to prepare a report on corporate governance as part of the annual report,' Mr Rozario said. 'If not in compliance with the code's provisions, they must give reasons or say what they are doing to get the necessary systems and processes in place.'

Good internal controls were all about checks and balances, accountability, transparency and ethics, he said.

Essentially, there are five main areas to consider. These relate to the selection of directors, their remuneration, accountability and audit, delegation by the board to various sub-committees and communications with shareholders.

There are key code provisions in each area. A listed company must comply with these provisions or give reasons for not doing so. Failure to explain would be regarded as a breach of the listing rules. For example, directors must hold meetings at least quarterly, the roles of chairman and chief executive should be separate, and independent non-executive directors should be clearly identified in all corporate communications.

There are recommended best practices in each area. These suggest, for example, that independent directors should make up one-third of the board and that details of senior management remuneration be on a named basis.

'The recommendations are purposely left open to interpretation and are not necessarily specific,' Mr Rozario said. 'This puts the onus on the audit committee to decide exactly what to do. It means there can be variations between companies, industries and large- or small-scale enterprises.'

In terms of accountability, directors were encouraged to review the effectiveness of internal control systems and report their findings at least once a year. In theory, this would cover all financial and operational controls, compliance with tax and labour regulations and an assessment of risk management procedures.

There have been complaints that such provisions were tougher than necessary, especially for small companies with limited resources. No one has as yet proposed making exceptions to the code, but Mr Rozario noted that 'to some extent the market will drive things'.

He pointed out that many local companies other than those in the top tier still had no clearly defined internal control systems. In many cases they had not acted quickly enough to appoint a strong audit committee and independent directors authorised to push for change.

'It seems that some of the smaller listed companies are not yet doing anything, even with the final deadline for compliance fast approaching,' Mr Rozario said.

'It remains to be seen how the Hong Kong stock exchange will actually enforce the regulations and how tough they will be.

'If a company just puts down 'we comply' in their report, there is currently no provision for the authorities to audit them,' he said.

'However, we can be encouraged by the results of the similar values-based approach in Britain. Since its adoption four to five years ago, companies there have made substantial improvements in the standard of corporate governance.'

A lingering concern was the relatively small pool of candidates qualified to act as independent directors. Under the new regulations, they must take on greater responsibilities, contribute expertise and play a full role in managing risk.

An audit committee must now have at least three independent directors, and it was important to choose carefully, especially in the case of small companies. This would prevent the perception that appointees were chosen because of close contacts with the dominant shareholders.

'It's becoming a critical issue,' he said. 'A lot of local professionals can't do it because of possible conflicts of interest and, with so many companies listing, the pool is probably getting smaller.'

Mr Rozario reminded auditors that checking corporate governance procedures was not like the typical financial audit. It related to what management needed to do and, more specifically, to improve.

'The positive thing is that a lot of people now understand the issues,' he said.

'Enterprises will become better run and as a result more competitive. The concept is to get the right balance to prevent error and fraud, but you still have to rely on the honesty of the leading role players.'