Internal Control and a safe working environment in developing economies

A month ago, Apple became the first technology company to join the Washington-based non-profit Fair Labor Association (FLA), a group of businesses and universities focused on improving working conditions around the world.

On February 13, 2012 Apple announced that auditors from FLA have started assessing the work environment at its final assembly suppliers, including Foxconn Technology Group (Foxconn) facilities in Shenzhen and Chengdu, China. A series of suicides at Foxconn plants in 2010 and two factory explosions in 2011, one at a Foxconn facility and one at a Pegatron facility, drew world-wide criticism for the working conditions at some of Apple’s partners’ plants. According to informationweek.com, in its September 2011 report, Students & Scholars Against Corporate Misbehaviour (SACOM) exposed various problems at those plants, including withheld wages, forced and unpaid overtime, exposure to harmful chemicals, and uncaring management.

Public responses to Apple’s decision to launch the investigation are mixed. Investors gave their thumbs up; Apple shares hit an all-time high as the company announced that it would investigate the alleged ‘sweat shop’ conditions in its supplier’s factories. However, the announcement has also prompted more outcries for Apple to find the solutions over the labor and environment problems at its products assembly facilities. ‘‘The reason why Apple is having this FLA inspection is not because they want to solve the problems; instead, it’s because Apple wants to get publicity and rebuild its positive image,” Li Qiang, executive director of China Labor Watch (CLW) said in a statement made after Apple’s decision. “What Apple should do now is to take action to solve the problems and improve the labor conditions in their supplier factories.”

Apple has made the right move as positive images, I believe the smart management of Apple understand, are not built on scandals. As a public company, Apple gets audited of its internal control over financial reporting and the effectiveness of its internal control system.  It may be time for Apple to apply the same internal control principles to its suppliers, balancing risks and controls.

The risks brought about by not tackling the dire working environments at its suppliers’ facilities are as follows:

*  Loss of public trust;

*  Loss of future investment funds;

*  Injury to the company’s reputation;

*  Increased legislation;

*  Violation of laws;

*  Default on a project;

*  Bad publicity;

*  Drop in the stock price.

Apple needs to create a control-conscious environment not only within Apple

but also at its suppliers’ facilities. The control environment is the control consciousness of an organization where people are committed to following an organization’s policies and procedures and its ethical and behavioral standards.

The followings are the action steps that would help Apple and its suppliers to encourage ethical behavior:

*  Set up policies and procedures, in this special case, labor standards at its suppliers’ factories;

*  Communicate up and down that the policies and procedures are important and should be followed;

*  Make suppliers fully aware of their responsibilities to enforce internal control measures;

*  Document key policies and procedures;

*  Send key employees of the suppliers to ethics and internal control training;

*  Evaluate suppliers not only on the quality of Apple’s products but also performance related to internal controls;

*  Take disciplinary or other actions for non-performance, discontinuance of contracts, for example;

*  Monitor the internal control system on an on-going basis, e.g., audits by Apple’s internal auditors or by external auditors like FLA;

*  Establish a whistle-blower system that provides a channel for disgruntled employees at Apple’s suppliers’ facilities to report violations of labor standards or vent their dissatisfaction or resentment on corporate unethical behaviors; and put control measures in place so that all misbehaviors are properly and promptly corrected.

Controls come with costs. To continue being successful, Apple needs to balance risks, controls and control-related cost. Fortunately, Apple’s suppliers like Foxconn also produce for other reputable technology companies like Sony, Nintendo and Hewlett Packard (HP). Apple is the only one who has been working with FLA, for which we should applaud. We ought to make sure that we do not punish the leader of righteousness (犯枪打出头鸟的错误.)

To conclude, to create a safe and healthy working environment in developing economies requires the work of a team of law makers, government regulators, organizations like FLA and CLW, and corporations from developed nations like Apple, Sony, and HP.

Huaqin Kim Chen, MBA

Financial Controller

CD International Enterprises, Inc. (NASDAQ: CDII)

431 Fairway Drive, Suite 200

Deerfield Beach, FL 33441

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