Overlapping Status of the Supervisory Functions Implementing Audit Committee and Supervisory Board Simultaneously in China

Imposing the mechanism of a single Audit Committee (AC) on the dual supervisory mechanism of a Board of Directors alongside a Supervisory Board (SB) has raised questions regarding the overlapping status in implementing effective monitoring functions. A functionality checklist of these different governance mechanisms is documented in this article by interviewing five listed companies in China. Both comparisons of regulation and the issues raised in the interview point out the redundancies and gaps in implementing effective supervision through these distinct governance mechanisms. The evidence presented provides useful guidelines of how key operational items of effectiveness and co-ordination can be improved to make supervisory functions in China more effective.

firms with effective ACs are associated with less earnings management and less audit fees, and are less likely to have modified opinions and delayed filings. Chien, Mayer, and Sennetti (2010) find that the presence of a committee and the committee's specific qualities of independence, financial expertise, and increased activity positively correlate with reduced frequencies of internal control problems. Ika and Ghazali (2012) suggest that AC effects are likely to reduce financial reporting lead times. In addition, Iyer, Bamber, and Griffin (2013) find that professional accounting certification and AC experience are valued positively by the BoD when designating an AC member as a financial expert. In summary, the characteristics of independence, expertise, and diligence of the SB and the AC are a prerequisite for the effective exercise of monitoring functions. More Expectations to the ACs have evolved as a corporate governance structure (Lin, Xiao, & Tang, 2008;Narayanaswamy, Raghunandan, & Rama, 2015).
China has entered a period of unprecedented transformation, within which business operations have become more complex. It is a period of rapid innovation as well as that of trial and error in the evolution of businesses and business processes. The relevant studies of Li, Du, and Tang (2006), Li and Chen (2006), Li and Liu (2005), Li (2007), and Chang (2001) all suggest that China must enhance governance mechanisms in its listed companies and the development of the capital market by refining the basic principles of "Corporate Law", "Securities Law", and "Rules for Listed Companies Governance" as well as by learning from the best reform practices of domestic and overseas CG. Block and Gerstner (2016) stressed that another important monitoring task is the supervision of executive actions. For future research, Stuart and Zaman (2014) suggest: (1) greater consideration of the organizational and institutional contexts in which audit committees operate; (2) explicit theorization of the processes associated with audit committee operation; (3) complementing extant research methods with field studies; and (4) investigation of unintended as well as expected consequences of audit committees.

Regulation
First, in 2006, China's National People's Congress (NPC) specified the SB as the special institution for financial inspection and supervision, whereas in 2002 the Chinese Security Regulatory Commission (CSRC) mandated that both the SB and the ACs were responsible for financial supervision, and both have the same financial supervisory function of overseeing the authenticity and reasonableness of the disclosure of the company's accounting information. Second, both are responsible for safeguarding against questionable conduct of the Directors, and related transactions of senior managers. Therefore, both try to operate within their functions on the same issue, identified as including financial reporting, auditing, internal control and compliance.

The Supervisory Board
The duties of the SB. According to the German regulations on CG, the SB (Aufsichtsrat) oversees and advises the BoD (Executive Board, Vorstand), and also has control over fundamental and important decisions. According to Paragraph 1 of Article 111 of the German Company Act (Aktiengesetz; AktG), www.scholink.org/ojs/index.php/rem Research in Economics and Management Vol. 3, No. 3, 2018 267 Published by SCHOLINK INC. the SB has the right and responsibility to oversee (uberwachen) the operations of the company (Chen, 2007, p. 154). The supervisory board reviews the management by inspecting the books (Note 1), reviewing the annual report (Note 2), issuing and overseeing the work of an external auditor (Note 3), analyzing the information provided by the management board (Note 4) and reporting to the general meeting (Note 5). In addition, the supervisory board also has standing for court actions against the management (Note 6). The characteristic of the existing German system of CG indicates that the SB plays the role of overseeing the operations, compliance, auditing and finance of the company. In addition to the appointment and removal of directors, the most important right and responsibility of the SB is to oversee the operations of the directors (Yang, 2004, p. 102). In the Chinese system of CG, there are two institutions participating in the Shareholders Assembly Meeting: the BoD which is responsible for making important day-to-day managerial decisions, the removal of managers, and the execution of day-to-day operations, whereas the SB is responsible for the supervision of the company's finance, the violation of laws, regulations, or company constitution by the directors and managers in their execution of their duties to the company (Yang, 2004). According to Article 126 in China's Corporate Law, the SB in a Chinese company is the internal supervisory unit responsible for supervising the directors and managers' behaviour. Corporate Law also stipulates the system of the SB and guides it on behalf of the shareholders to supervise the organisation of internal power, exercised by the BoD and the layers of management of the company. In both the German and the Chinese systems, it is the right and responsibility of the SB to oversee the conduct of the BoD. In the German system, the SB has a rank position above the BoD, whereas in the Chinese system, the SB has the equal rank position as the BoD.
This structural difference might have some impact on the supervisory effectiveness, the powers, and roles of the SB in both systems. Now, with the addition of the AC, there are two institutions in the Chinese system that both have the functions and responsibilities to supervise the compliance, auditing, finance and operations of the company. To understand this seemingly redundant arrangement between two institutions is investigated by comparing its duties in their operations.
It is the duty of the Supervisory Board to exercise supervision over the policies adopted by the BoD and over the general conduct of the business. Furthermore, the Supervisory Board shall provide the BoD with advice. The general duties of the Supervisory Board include supervising, monitoring, and advising the BoD on three key aspects:  Klein (2002a), Collier (1996), andBraiotta (1999). These definitions state that the AC is a sub-committee of the BoD, and they confine the definition primarily to the composition and the key responsibilities of ACs: The term "AC" means-a committee (or equivalent body) established by and among the BoD of an These definitions state that the AC is a sub-committee of the BoD and confine the definition mainly to the composition and the key responsibilities of ACs. They also discuss the composition of the AC, particularly with regard to the participation of independent directors with professional abilities to perform the key responsibilities of financial reporting, audit, and internal control. In a nutshell, all the above-quoted definitions of the AC tend to emphasize the two attributes of its composition, namely independence and financial expertise, as well as its responsibility over operations. It is contrasted with the SB with regard to their service scopes, their functional positions and responsibilities, as well as their operations.
The duties of the AC. According to Section 52 of the Code of CG for Listed Companies in China, the BoD of a listed company may establish an AC. China's "Rules for Listed Companies Governance" set out five main duties of CG for the AC: 1) Provide suggestions for engaging or changing the external audit firm (CPA); 2) Supervising the Internal Audit system and its implementation; 3) Be responsible for the internal and external auditing communication; 4) Verify and reveal the financial information of the company; 5) Check the internal control system.
It is the duty of the Audit Committee to ascertain that the Company maintains adequate procedures and control systems to manage the financial, operational and risks to which the company are exposed, to prevent fraud and to oversee the integrity of the Company's financial reporting (FRC-UK, 2016 is lack of clarification or co-ordination, and it may appear that many institutions are supervising but no unit actually performing that function. Clarification or co-ordination includes defining the duties, functions and position of the AC in the organisation, and establishing a legal standard for the AC, but such clarification measures are still outstanding.
The investigation on operational aspects of these two institutions-the overlapping items and percentages between them-was therefore performed through an interview of five listed companies with experience of having implemented ACs.

Design
This article aims to answer the research question by in-depth interviews with five listed companies in Shanghai, China and referring to the work of Gendron, Be ´dard, Turley and Zaman, Spira, and others.
As these researchers performed only limited research on internal processes, they have called for more research to be carried out. Thus, the interviews with five companies will help identify overlapping and gaps of the two institutions caused by their co-existence in the same supervisory mechanism for the realization of effective supervision, rooted in their practical experiences, in response to calls by the relevant researchers to unravel the black box of the monitoring system, as this cannot be achieved through quantitative methods. Generally, the qualitative method will analyze the responses from five interviewees of five listed companies to identify operational items both on the understanding of the SB/AC concrete practices and on comparing the practical level of implementation by revealing the contexts of supervisory functions in five sampled interviewees. Hence, this study uses interviews intended to highlight the ways to improve the effectiveness of supervisory functions in practice, by completing the checklist of operation items of supervisory functions implemented due to the co-existence of SBs and ACs in China.

Sample Target
In order to clarify overlapping and gaps in the functions of the two institutions caused by their co-existence in the same system for the realization of effective supervision, the survey of five listed companies in Shanghai, China, was designed to discover the practice of the supervisory functions in each individual company. The scarce resources of firms implementing SB and AC simultaneously with experience are willing to reveal their practices. Yet five qualified firms were selected as the research samples and all were willing to cope with filling and answering the questions designed in this paper.
Furthermore, the functions of the SB and the AC at the practical level were compared. The purpose of conducting this survey by face-to-face interview is to complete the checklist of operation items of supervisory functions, which is defined by the study of archival study of related regulations and charters presented in the empirical study. The research participants were selected according to their ability to provide information about the phenomena being studied (Saldaña, 2011). Five interviews were conducted with the General Secretary of the BoD identified as the interviewee, as he is in charge and the co-ordinator of the BoD and SB, including ACs and its related parties, who was questioned about the process of typical supervisory functions, and the extent to which the company's AC/SB fulfilled its mandate in practice in China, to make data collection more systematic for each interviewee, it was intended to keep the interview fairly conversational and situational. The data were then analyzed and consolidated to generate conclusions.

Technique
Prior to fieldwork, questionnaires were specified as checklists based on the research objective, literature review and experience of three themes of financial reporting, auditing and internal control related to key functions of ACs/SBs; while being flexible enough to explore new approaches during the interview. Semi-structured interviews allowed the interviewee to express their point of view for mutual understanding related to the ACs' co-ordination by function with SBs (Rubin & Rubin, 1995).
Therefore, semi-structured questions were designed for in-depth interview based on the checklist for each sample company, to arrive at the general understanding of the co-ordination between ACs and SBs.
Questions were prepared in order to design a checklist of supervisory functions including three aspects: (1) Financial reporting; (2) Auditing including internal audit and external audit; (3) Internal control, including compliance. The questions were made known to each category of interviewees before the fieldwork commenced.
All in depth field study interviews were recorded by the checklist and partially video-recorded. The interview was processed through rigorous theoretical procedures in four steps as follows: 1) To develop a functionality checklist of supervisory functions as the main theme for each interview; 2) To mark on the functionality checklist through the interview and modify it when a new function emerges from an interview; 3) To consolidate the checklists from five in-depth interviews of five listed companies as a consolidated matrix of five checklists to summarise the main themes by matching and integrating the function items after completing the interview; 4) To arrive at statistics on overlapping, missing items and percentages among the five sampled companies.

Data Consolidation
The interviewees were asked to describe their actual practices; the interviewees were encouraged to express their opinions when explaining their practices, especially on the items that were not listed on the functionality checklist, and the items on the functionality checklist that they did not practice.
During the interview, they were also encouraged to share their opinions freely on the interaction between ACs and SBs regarding the functions practised. Each company's functionality checklist was then consolidated into a matrix in order to check for overlapping and missing functions between ACs and SBs. A consolidated matrix of five checklists was prepared, in order to summarise the main themes discussed by the interviewees, then re-examine the interview material to gain a better understanding of the meanings surrounding the functions' overlapping and omissions of ACs and SBs in the internal supervisory mechanism. Each interviewee's answers were checked for consistency to ensure the validity of the interview. The data was then analysed through combining and consolidating the checklist results from all interviewees. After analyzing the interview data, the samples from the five companies were co-ordinated and the statistics calculated to assess the degree of overlapping and omitted items.
The items were re-examined and re-classified to fit into the key aspects of financial reporting, auditing and internal control. Finally, the percentages and totals of the function overlaps and gaps were calculated from the total number of functions for each key aspect which are the indicators for evaluating the overall impact across the three key aspects, to reveal the status of function overlapping of co-ordination between ACs and SBs coexisting in China.

Interviews with the Five General Secretaries of BoDs
This study is structured by presenting the interview responses of five general secretaries of five sampled companies in China. Each face-to-face interview lasted more than three hours and every company's interview was conducted on each functionality list, and marked on the checklist and partial conversation recorded on video. The data was then analysed through combining and consolidating the checklist results from all interviewees as the matrix with three aspects is given below. Three operational aspects of supervisory functions by SBs and ACs:  Previewing the interim and annual financial reports and the reports of the BoD;  Organizing special investigations on the company's financial activities.
The findings of overlapping and missing items and percentage (the items of findings divided by total items) are summarised individually in the table below: Company 1: Overlapping with 3 items, 14%; missing 7 items, 30%.
Companies 4 and 5 have no missing items, but every sampled company has overlapping items.    External Audit: presiding over the affairs of the external audit, selecting the independent accountants, discussing the scope, process and plan of external audit, evaluating the capabilities of the independent accountants; in order to give suggestions for the appointments and dismissal of the external auditing institutions, the AC should be confined to supporting sound suggestions made by the chartered accountants and actively co-ordinate with the latter on major auditing matters, as well as co-ordinating the relations between the latter and the management to ensure the smooth operation of the auditing tasks.
The results are presented individually in the Company 1: Overlapping with 7 items, 33%; missing 10 items, 48%.
Both the fourth and fifth companies show no overlapping and missing items in auditing.  The results are presented individually in the table below: Company 1: Overlapping with 6 items, 27%; missing 7 items, 32%.
The third, fourth and fifth companies show no missing items on internal control and compliance items of supervisory functions, yet every sampled company has overlapping items.    Overlapping items: it is defined that at least one of the sampled companies performed the identified supervisory functions by ACs and SBs at the same time.
Missing item: it is defined that at least one of the sampled companies did not perform the identified supervisory functions by ACs or SBs at the same time.

Summary
A summary of the overlapping and missing items and percentages on the integration of the financial reporting, auditing, and internal control and compliance reports from five sampled companies is presented in the table below: Company 1: overlapping with 16 items, 24%; missing 24 items, 36%.

Conclusion
Imposing the singular mechanism of AC on the dual supervisory mechanism of SB in China results in overlapping and omitting problems at three operation aspects. By interviewing five listed companies with practicing both AC/SB simultaneously, this experimental research was intended to point out what should be done in practice between SBs and ACs in China and has offered the operational checklist (Tables 1-3) at helping the internal supervisory mechanism work more effectively in China by providing a benchmark, gained from experience of the five sample companies. The findings show that the five sampled companies implemented the operation items with different distribution between SBs and ACs. No consistency exists among the listed companies as to the current status. The overlapping items reached 24 per cent in company 1 and 2, which may point towards redundant work in one organization; the missing outcome reached 36 per cent of items, which may pose a risk to the organization by omitting oversight of risky items. All sampled companies' interviewees said that "it remains to be seen how these institutions should work together". The further research calls to reveal the co-ordination between the two institutions in terms of organization. Inter-dynamic relationships in functions will influence the effectiveness of the internal supervisory mechanism. The present research which should be useful as a reference source for other emerging markets and corporations, for future and more in-depth research endeavor to enhance and improve both their research and evaluation of supervisory functions.
The findings from this study contribute to suggestions as to how the functions of the two institutions should be co-ordinated to avoid redundancies and gaps in internal supervision in the future. In addition, this research provides practical proposing how they can improve key operations between two institutions of SBs and ACs. Finally, the investigation and results reported in this article may offer a basis for continuing research on the effectiveness, operation, and co-ordination of supervisory governance after the introduction of an AC in China, and for studies of other monitoring functions such as audit and internal control. The research results of this article may also serve as a useful reference point for carrying out similar studies on this topic in the future.

Declaration of Conflicting Interests
The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding
The author(s) received no financial support for the research, authorship, and/or publication of this article.

Note
Recent studies on Audit Committee (AC) include those by Block, David and Gerstner, Anne-Marie  Krishnan (2005).