Chapter I General Principles
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| Article 1 | These Regulations are promulgated in accordance with Article 14-1, paragraph 2 of the Securities and Exchange Act (the "Act"). |
| Article 2 | A public company shall establish internal control systems in accordance with these Regulations and with internal control system rules adopted hereunder; provided, where another act or regulation provides otherwise, the provisions of such act or regulation shall govern. |
| Article 3 | The internal control systems of a public company are designed by its board of directors and managers, for purpose of promoting sound operations of the company and reasonably ensuring that the following objectives are achieved:
1. Effectiveness and efficiency of operations;
2. Reliability of financial reporting; and
3. Compliance with applicable laws and regulations.
The objective of effectiveness and efficiency of operations referred to in sub-paragraph 1 of the preceding paragraph include objectives such as profits, performance, and safeguard of asset security. |
| Article 4 | A public company shall set out its internal control systems, including internal audit implementation rules, in writing, and have them passed by the board of directors. If any director expresses dissent, where stated in minutes or in a written statement, the public company shall submit the dissenting opinions to each supervisor together with the internal control systems approved by the board of directors; the same shall apply to any amendment thereto.
Where a public company has established the position of independent director, when it submits its internal control systems for discussion by the board of directors pursuant to the preceding paragraph, the board of directors shall take into full consideration each independent director's opinions; the independent directors' specific opinions of assent or dissent and the reasons for dissent shall be included in the minutes of the board of directors' meeting. |
Chapter II Design and Operation of Internal Control Systems
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| Article 5 | A public company shall consider the overall operational activities of its head office and subsidiaries to establish effective internal control systems, and review such systems from time to time, to adapt to changes in its internal and external environment and to ensure sustained design and operating effectiveness of the systems.
The subsidiaries referred to in the preceding paragraph are those as determined under the Statement of Financial Accounting Standards Nos. 5 and 7 issued by the Accounting Research and Development Foundation (ARDF) of the Republic of China. |
| Article 6 | A public company's internal control systems shall comprise the following constituent elements:
1. Control environment. Control environment is a composite factor that shapes an organizational culture and affects employees' awareness of control. Factors affecting control environment include the integrity, values, and ability of employees; the management philosophy and operating style of the board of directors and managers; the hiring, training, and organizing of employees and assignment of powers and duties; and attention and guidance of the board of directors and the supervisors. The control
environment is the foundation for the other constituent elements.
2. Risk assessment. Risk assessment refers to the processes by which the company identifies internal and external factors that keep it from achieving its objectives and assesses their impact and probability. Assessment results can assist the company in designing, correcting, and operating necessary control activities in a timely manner.
3. Control activities. Control activities refers to establishing a complete and sound control framework and adopting control procedures for all levels to help the board of directors and managers ensure that their instructions have been carried out. Control activities include policies and procedures such as those for approval, authorization, inspection, regulation, review, periodic stocktaking, record reviews, division of function and powers, safeguard of physical security of assets, comparison with plans,
budgets, or performance in previous periods, and oversight of subsidiaries.
4. Information and communications. Information is the subject matter identified, measured, processed, and reported by information systems. It includes information, financial or non-financial, pertaining to the objectives of operational or financial reporting and compliance with applicable laws and regulations. Communications is the disclosure of information to relevant personnel, including internal and external communications of the company. Internal control systems must have mechanisms for generating
information necessary for planning and monitoring and providing timely information to those who need it.
5. Monitoring. Monitoring is the process of self-inspecting the quality of internal control systems. It includes assessing the soundness of the control environment; whether risk assessment is timely and accurate; whether control activities are appropriate and accurate; and whether information and communication systems are functioning properly. Monitoring may be divided into continuous monitoring and individual assessments. The former refers to routine supervision during operations, while the latter refers
to assessments conducted by different personnel such as internal auditors, supervisors, or the board of directors.
A public company designing and operating its internal control systems or carrying out self-inspection, or a certified public accountant (CPA) retained to conduct a special audit of the company's internal control systems, shall fully consider the constituent elements enumerated in the preceding paragraph, and, in addition to the criteria prescribed by the Securities and Futures Commission (SFC), Ministry of Finance, shall add additional items as dictated by actual needs. |
| Article 7 | The internal control systems of a public company shall cover all its operational activities, and may be divided into the following control activities by types of transaction cycles:
1. Sale and receipt cycle. This cycle includes policies and procedures such as for processing customer orders, credit management, goods delivery, issuance of sales invoices, issuance of bills, recording of revenues and accounts receivable, execution and recording of cash receipts.
2. Purchase and payment cycle. This cycle includes policies and procedures such as for requisitioning, purchasing, and procuring goods, materials, supplies, assets, and services; processing purchase lists; accepting goods; quality inspection; preparing inspection reports or returning goods; recording suppliers' liabilities; approving payment; and executing and recording cash payments.
3. Production cycle. This cycle includes policies and procedures such as for production scheduling, creating bills of materials, storing materials and supplies, putting them into production, calculating inventory and production costs, and calculating sales costs.
4. Labor and wage cycle. This cycle includes policies and procedures such as for hiring, leave-taking, overtime work, dismissal, training, retirement, determining wage rates, calculating working time, calculating salaries and benefits, calculating payroll taxes and withholdings, creating payroll records, salary payment, and review of attendance and performance.
5. Finance cycle. This cycle includes policies and procedures such as for authorization, execution, and record-keeping with regard to finance and financing matters such as borrowing of funds, granting of guarantees, acceptance of checks, renting/leasing, and issuance of corporate bonds and/or other securities.
6. Fixed asset cycle: This cycle includes policies and procedures such as for acquisition, disposition, maintenance, safeguarding, and recording of fixed assets.
7. Investment cycle: This cycle includes policies and procedures such as for decision-making, trading, safekeeping, and recording with respect to securities, real estate, derivatives, and other long-term and short-term investments.
8. Research and development (R&D) cycle. This cycle includes policies and procedures such as for fundamental research, product design, technology development, prototype manufacturing and product testing, recording of R&D operations, and safekeeping of documents.
A public company may tailor its control activities to meet the needs of its actual business activities according to the nature of the industry. |
| Article 8 | In addition to those for different types of transaction cycles, a public company shall include control activities in its internal control systems such as for use and management of seals, management of receipt and use of negotiable instruments, budget management, asset management, management of endorsements, guarantees, liabilities/commitments, and contingencies, authorization and deputy systems, management of loans to others, management of financial and non-financial information, and control of
subsidiaries. |
| Article 9 | A public company that uses a computerized information processing system shall, in addition to clearly differentiating the functions and duties of information and user departments, include at least the following control procedures:
1. A clear division of the functions and duties of the information-processing department;
2. Control of system development and program modification;
3. Control of preparing system documentation;
4. Program and data access control;
5. Data input/output control;
6. Data processing control;
7. File and equipment security control;
8. Control of purchase, usage, and maintenance of software and hardware;
9. Control of system recovery plan and testing procedures;
10. Control of information flow security inspection;
11. Control of relevant procedures for disclosing and reporting information on websites designated by the SFC. |
Chapter III Inspection of Internal Control Systems
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Section I Internal Audits
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| Article 10 | A public company shall carry out internal audits to assist the board of directors and mangers in inspecting and reviewing defects in the internal control systems as well as measuring operational effectiveness and efficiency, and shall make timely recommendations for improvements to ensure the sustained operating effectiveness of the systems and to provide a basis for review and correction. |
| Article 11 | A public company shall establish an internal audit unit under the board of directors or under the direct guidance of the general manager, and shall appoint qualified persons in an appropriate number as full-time internal auditors according to size, business condition, management needs, and other applicable laws and regulations.
A public company shall report any appointment or discharge of internal audit executives for passage by the board of directors, and shall report such information to the SFC for recordation via the Internet-based information system by the 10th day of the month next following passage by the board of directors.
The requirements for the qualified full-time internal auditors referred to in paragraph 1 shall be as prescribed separately by the SFC. |
| Article 12 | A public company shall include at least the following in its implementation rules for internal audits:
1. Inspection of internal control systems to measure the effectiveness of, and compliance with, existing policies and procedures, and their effects on operational activities.
2. A detailed listing of audit items, times, procedures, and methods. |
| Article 13 | A public company's internal audit unit shall formulate annual audit plans, including matters to be audited monthly, by which to check its internal control systems, and prepare audit reports, annexing working papers and relevant materials.
A public company shall include as audit items in its annual audit plan the control activities for major financial or business activities, such as for acquiring or disposing of assets, engaging in derivatives transactions, extending loans to others, and granting endorsements/guarantees for others.
The audit report, working papers, and relevant information referred to in paragraph 1 shall be preserved for no less than three years. |
| Article 14 | The internal auditors of a public company shall faithfully disclose in audit reports any defects and irregularities of the internal control systems discovered in inspection and, after having presented the reports, follow up on the matters and prepare follow-up reports on a regular basis to ensure that the relevant departments have taken appropriate corrective measures in a timely manner.
A public company shall include any defects and irregularities of the internal control systems as referred to in the preceding paragraph as major items of performance evaluation for each department.
The correction of defects and irregularities of internal control systems referred to in paragraph 1 shall include all defects found in the course of internal audit operations, those listed in Internal Control System Statements, and those discovered in the course of self-inspection or by CPAs in special audits. |
| Article 15 | After having presented the audit and follow-up reports, a public company shall submit the same for review by the supervisors by the end of the month next following the completion of the audit items.
A public company's internal auditors discovering any material violation or any likelihood of material damage to the company shall promptly prepare and present a report and notify the supervisors. |
| Article 16 | The internal auditors of a public company shall be detached, independent, objective, and impartial, in faithfully performing their duties, and report their audit operations to the board of directors and the supervisors on a periodic basis.
The internal auditors shall perform their duties in good faith and shall not do any of the following:
1. Conceal or make false or inappropriate disclosure of any the company's business activities, financial reports, or compliance with applicable laws or regulations, knowing that they have caused direct damage to an interested party;
2. Damage any right or interest of the company or any interested party through improper motive or neglect of duty.
3. Fail to audit any matter as instructed by a competent authority or provide relevant information; or
4. Any other activity in violation of any act or regulation or prohibited by any rule of the SFC. |
| Article 17 | The internal auditors of a public company shall pursue continuing education as well as attend internal audit training held by institutions designated by the SFC, to improve their auditing quality and competence.
The internal audit training referred to in the preceding paragraph shall include the various professional courses, computerized auditing, and basic legal knowledge.
The hours required for the continuing education under paragraph 1 shall be as prescribed separately by the SFC. |
| Article 18 | A public company shall report to the SFC for recordation the names, ages, educational background, experience, seniority, and training of its internal auditors by the end of January each year via the Internet-based information system. |
| Article 19 | A public company shall submit to the SFC for recordation its next year's audit plan by the end of each fiscal year and a report on the execution of its previous year's annual audit plan within two months from the end of each fiscal year in the prescribed format via the internet-based information system. |
| Article 20 | A public company shall report to the SFC for recordation its corrections of any defects and irregularities of the internal control system discovered during the past year's internal auditing within five months from the end of each fiscal year in the prescribed format and via the internet-based information system. |
Section II Self-Inspection and Internal Control System Statement
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| Article 21 | The purpose of self-inspection by a company of its internal control systems is to implement the company's self-monitoring mechanisms and adapt to changes in the environment in a timely manner, so as to adjust the design and operation of the internal control systems and to enhance the internal audit department's inspection quality and efficiency. The inspection scope shall include the design and operation of all of the company's internal control systems.
Before carrying out the inspection under the preceding paragraph, a public company shall set out in its internal control systems the procedures and methods for self-inspection operations. |
| Article 22 | When conducting self-inspections of its internal control systems, a public company shall first see to periodic self-inspections by its all internal departments and subsidiaries, have its internal audit departments review the self-inspection reports prepared by all departments and subsidiaries, and submit the self-inspection reports, together with the reports on the correction of defects and irregularities of internal control systems discovered by its internal audit departments, as a basis for the board of
directors and general manager to evaluate the overall efficacy of all internal control systems and to produce Internal Control System Statements.
The self-inspections under the preceding paragraph shall be recorded in working papers that shall be preserved, together with the self-inspection reports and relevant materials, for no less than three years. |
| Article 23 | A public company's findings in its self-inspection of its internal control systems shall classify the systems as either “effective internal control systems” or “materially defective internal control systems” based on whether or not they can reasonably ensure the following:
1. That the board of directors and the general manager know the degree of achievement of operational effectiveness and efficiency objectives;
2. That the financial reports of the company are reliable; and
3. That applicable laws and regulations have been complied with. |
| Article 24 | A company conducting initial public issuance of its stock, or a public company, shall conduct annual self-inspection of the design and operating effectiveness of its internal control systems, and publicly announce and report the Internal Control System Statement on the websites designated by the SFC within four months from the end of each fiscal year in the prescribed format.
The Internal Control System Statement referred to in the preceding paragraph shall be published in the company's annual report, public offering and issuance prospectus, and other prospectuses in compliance with relevant regulations. |
Section III Special Audits by Certified Public Accountants
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| Article 25 | The engagement of a CPA by a public company, or the appointment thereof by the SFC pursuant to Article 38-1 of the Act, to conduct a special audit of the company's internal control systems shall be governed by these Regulations and other applicable laws and regulations; matters not provided for therein shall be handled in accordance with the generally accepted audit principles announced by the ARDF. |
| Article 26 | The purpose for a CPA to conduct a special audit of a public company's internal control systems is to inform the company's interested persons of whether the company's internal control systems are effectively designed and operating. |
| Article 27 | Special audits of internal control systems of a public company shall be jointly carried out and attested by two ore more CPAs qualified under the Criteria Governing Approval for Auditing and Certification of Financial Reports of Public Companies prescribed by the SFC. |
Chapter IV Supervision Over Subsidiaries
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| Article 38 | A public company shall specify in its internal control systems necessary control activities with respect to its subsidiaries and, with consideration to the statutory requirements of the government where a given subsidiary is located and the nature of the subsidiary's business, see that a subsidiary establishes its own internal control systems. |
| Article 39 | A public company shall execute at least the following control activities when supervising its subsidiaries' business management:
1. Establish an adequate organizational control structure between it and each subsidiary, including the methods to elect, and to appoint power and duties to, the subsidiary's directors, supervisors, and high-level managers.
2. Set out overall business strategies, risk management policies, and guidelines applicable to it and its subsidiaries, as a basis for each subsidiary to map out business plan and risk management policies and procedures for relevant business operations.
3. Set forth policies and procedures applicable to it and each subsidiary in relation to business segmentation, liaison regarding order placement, materials preparation methods, inventory allocation, conditions for accounts receivable and accounts payable, and account processing.
4. Set forth policies and procedures for supervising each subsidiary's material financial and business matters such as business plan and budget, material investment and reinvestment in equipment, borrowings and debt, lending of funds to others, endorsement/guarantees, obligations and commitments, investment in securities and derivatives, important contracts, and major changes in assets. |
| Article 40 | A public company shall execute at least the following control activities when supervising its subsidiaries' financial and business information:
1. Supervise the establishment of independent financial and business information systems by its subsidiaries.
2. Establish effective financial and business communication systems between it and each subsidiary; in addition to the major financial and business matters referred to in the preceding article that shall be reported prior to their occurrence, the subsidiary shall also immediately report to the company the occurrence of any other material event that, under the Act or any applicable regulation, shall be announced or reported as likely to affect company rights and interests and securities prices.
3. Periodically acquire for analysis and review each subsidiary's monthly management reports, including business report, monthly statement of production and sales volumes, monthly balance sheet, monthly income statement, monthly cash flow statement, aging account receivable analysis and delinquent debt report, aging inventory analysis, monthly report on loaned funds, and monthly report on endorsements/guarantees.
4. Arrange for each subsidiary to provide necessary financial and business information or retain CPAs to audit or review each subsidiary's financial report in compliance with the requirements of laws and regulations regarding matters to be publicly announced or reported and the time limits therefor. |
| Article 41 | A public company shall execute at least the following control activities when supervising its subsidiaries' audit management:
1. Direct each subsidiary to establish an internal audit department and to adopt procedures and methods for self-inspection of its internal control systems, based upon the nature of its business, its operational scale, and number of employees, and monitor the subsidiary's execution of such matters.
2. Include all subsidiaries in the internal audit scope in the company's internal audit implementation rules, and periodically, or from time to time, conduct audits. Upon submission of the audit findings and recommendations in reports, the public company shall notify the audited subsidiary to make corrections and prepare follow-up reports on a periodic basis, to ensure that proper corrective measures have been taken in a timely manner.
3. All subsidiaries shall, with the least delay, report to the public company matters such as special audit plans, annual audit plans and the implementation thereof, and the correction of any defects and irregularities discovered in their internal control systems.
4. The public company's internal audit department shall review the audit reports or self-inspection reports submitted by each subsidiary, and shall follow up on the correction of any defects and irregularities in internal control systems. |
Chapter V Supplemental Provisions |
| Article 42 | A pubic company shall specify in its internal control systems the penalties for violations of these Regulations or its internal control system rules by managers and relevant personnel.
A public company shall from time to time check whether there is any violation of Article 16, paragraph 2 by its internal auditors; and shall, upon discovery of any violation, adjust the position of such auditor within one month from the date of discovery.
When reporting basic information of internal auditors pursuant to Article 18, a public company shall check whether or not the internal auditors have met the requirements under Article 17, paragraph 1. If not, the auditor shall take corrective measures within one month; otherwise, the public company shall promptly adjust the auditor's position. |
| Article 43 | Under any of the following circumstances, the SFC may order a public company to make improvements within a prescribed time limit, or, where necessary, to retain CPAs to conduct a special audit of its internal control system and submit an audit report to the SFC for recordation:
1. Failure to set out its internal control system in writing.
2. Failure to appoint an appropriate number of qualified personnel as full-time internal auditors.
3. Failure to file a report within a prescribed time limit or fail to faithfully execute its annual audit plan.
4. Failure to file a report on the implementation of its annual audit plan within the prescribed time limit.
5. Failure to file a report on the correction of any defect or irregularity of the internal control systems discovered in an audit.
6. Failure to conduct self-inspection of its control systems as required or to prepare an Internal Control System Statement.
7. Serious instance of failure to correct a defect of the internal control system in accordance with the internal control recommendations issued by the CPAs.
8. Serious instance of false financial reporting or violation of law or regulation.
9. Any material malpractice or suspicion of malpractice.
10. Other condition where the SFC deems a special audit to be necessary. |
| Article 44 | The SFC shall separately prescribe the formats under these Regulations. |
| Article 45 | These Regulations shall take force on the date of promulgation. |