basics of internal controls. it is worth stating that many of the problems at the heart of those headline cases stemmed from violations of the fundamental tenets of internal control, particularly those pertaining to operational risks. based on the headlines, it seems that boards of directors, management, auditors, and counsel need a remedial course in internal controls 101. as corporations grow larger and more diverse, internal controls become more, not less, important to the ability of management and the board to monitor activity across the company. the basics of internal controls for directors and managers are simple. directors do not serve full time, so it is important that they establish an annual agenda to focus their attention on the high - risk and emerging - risk areas while ensuring that there are effective preventive or detective controls over the low - risk areas. a board of directors has the responsibility to understand the legal, reputational, and compliance risks facing an organization ; legal professionals can assist in identifying those risks, quantifying them, and providing expertise in managing them. before a company moves into new and higher - risk areas, the boards of directors and management need assurances that the organization's governance practices are sound and effective. many of the organizations that have seen their reputations tarnished in the past few years have neglected to consider emerging conflicts of interest when the organization adds new products and lines of business. for example, if a customer service or control function must be done in an independent, fiduciary, or unbiased manner relative to other activities, appropriate firewalls must be in place before the product or activity begins. internal controls and compliance are the responsibility of line managers, who must determine the acceptable level of risk in their line of business and assure themselves that the combination of earnings, capital, and internal controls is sufficient to compensate for the risk exposures. however, supporting functions such as legal, accounting, internal audit, and risk management should independently monitor the control processes to ensure that they are effective and that risks are measured appropriately. the results of these independent reviews should be routinely reported to executive management and boards of directors. directors should be sufficiently engaged in the process to determine whether these reviews are in fact independent of the operating areas and whether the officers conducting the reviews can speak freely. where it appears that supporting functions have not been sufficiently involved, directors must demand that management adjust the processes as necessary. if the in - house legal, accounting, or audit staff believes that a supporting function has not been given adequate

in order to create a certain kind of tenancy and leasing market for the housing industry, and in order to ensure the housing mortgage loans be backed by indisputable securities, the real estate developers must utilize equity financing as the main form. as the real estate industry is a high - risk as well as a high - return industry, the problem of matching risks and returns shall only be better resolved with equity financing mode taking the dominant position. according to information provided by the report on china ’ s real estate market 2003 ~ 2004, the leverage ratios of china ’ s real estate enterprises are relatively high. the leverage ratios of the top five listed companies in hong kong are basically kept at a level between 30 % to 40 %, while those of domestic real estate companies stand at around 75 %. the report also shows that among the 24. 6 % of the self - raised capital 13. 3 % belongs to self - owned capital. such a high leverage ratio could bring huge loss to debtors once the market risks arise. according to the report, the return on self - owned capital is 21. 17 %, which does not match the risk borne by debtors when compared to the cost of financing. with the maturing of financial markets, the principle of matching risks with returns shall be absorbed into the financing mode for real estate industry, and it is an inevitable trend that the ratio of developers ’ equity financing will be increased. china ’ s economy is now in a transition period when many reforms are not compatible with each other perfectly. when we put forward the reform of housing commercialization and monetarization, the state reduced or halted direct input into the housing industry but failed to open the equity - financing channel to real estate developers. a multi - level capital market has not developed not only to real estate developers but also to all the enterprises, leading to the result that many enterprise flocked to get listed in the stock market. if they did not succeed in the direct financing market but have to develop, the financing burden thus completely falls on banks. in order to support the housing monetarization reform and promote the development of the real estate industry, the people ’ s bank of china has issued a series of credit policies to contribute to the development of real estate credit since 1998. the rapid development of the real estate industry should be a benefactor of the housing credit policy formulated by the pbc, otherwise the real estate industry shall not be so sensitive to the adjustment of the pbc ’ credit policy.