The report must emphasize the responsibility of management for the establishment and maintenance of an adequate internal control structure and procedures for financial reporting including an assessment of the effectiveness of the internal control structure and procedures of the registrant for financial reporting. Section 404 requires management to publish an “internal control report” as part of each annual financial report required by the SEC. As such arrangements are not unusual with Chinese operations managers of U.S.-China businesses must be aware of the reporting requirements and communicate such transactions in a timely manner to senior executives. These financial statements must reflect all material off-balance sheet liabilities, obligations or transactions. Section 401 requires that financial statements be truthful and presented in a manner that does not contain inaccuracies.

Managers of U.S.-China businesses have the responsibility of reporting internal control weaknesses to senior executives in an immediate and timely manner. Section 302 requires senior executives, usually the Chief Executive Officer or the Chief Financial Officer, to take individual responsibility in the form of financial statement certifications as to the accuracy and completeness of financial reporting in connection with the periodic reporting requirements of the Securities and Exchange Commission. Of these sections, section 404 has the most relevance to U.S.-China businesses and the largest impact on corporate financial reporting and internal control implementation, maintenance and assessment. From a corporate compliance perspective there are five sections with the most relevance: sections 302, 401, 404, 409, and 802. Sarbanes-Oxley is arranged into eleven titles each with their respective sections. Early internal control design and implementation in tandem with proper organization under Chinese laws will contribute to a smoother transition and earlier success. Despite these challenges, when contemplating an entry into the China market, SOX compliance should be considered with equal importance as the location and legal structure of the proposed China operations. Many Chinese accountants and local Chinese CPA firms lack the expertise and experience to establish, maintain and review internal control systems. business operating in China must remain compliant, challenging them to design and maintain their internal control structure in an accounting and reporting environment that is early in its development and is rapidly changing. Sarbanes-Oxley includes some of the most far-reaching reforms of American business practices since the Depression Era and it not only apples to U.S.-based parent companies, but subsidiaries organized outside the borders of the United States. May 19 – The Public Company Accounting Reform and Investor Protection Act of 2002 commonly known as Sarbanes-Oxley or SOX after the two authors of the bill, was enacted on Jin response to several major corporate and accounting scandals, the most infamous being the meltdown of energy giant Enron.

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