In order to understand and appreciate the difficulties and problems international businesses face when hiring, managing, or acquiring financial reporting personnel in their China operations, it is important to be able to understand the differing backgrounds and circumstances in operating financial management systems between international reporting standards and those of China.

Although the finger of suspicion may fall upon an errant manager in terms of what may to the inexperienced observer be an obvious case of fraud, it is not always as clear cut as this. Corrupt staff do of course exist ? we will point out how and why the Chinese system produces this tendency. However, due to inefficiencies within China?s own financial reporting infrastructure, errant staff may also have been trying to legitimately assist the foreign investor by treading around some of China?s ineffective ? and in some cases entirely unhelpful ? tax and reporting regulations and laws that actively promote non-compliance. You need to understand the differences between the two.

Then there is incompetence, or the assumption that ?Chinese staff know their way around the China system?. They may well do. But if that system itself is out of compliance, what chance does your staff have of being able to protect your business from fraud, poor management, financial and audit problems ?

In this article we explore the intangible aspects of financial management, risk control and compliance issues, pertinent to both foreign invested enterprises, the due diligence assessments of Chinese operated companies, and deal with compliance issues.

Chinese Management Personnel

China is a developing country, and that impacts on many aspects of business, including the standards of staff. Although financial personnel may hold Chinese qualifications, this is not necessarily an indicator of awareness or experience in handling compliance issues for international companies. Financial managers in China, if qualified, (and they should be as a minimum) also need assistance, understanding, guidance and management from the foreign investor ? you ? if they are to be able to learn to appreciate their job function fully and to be able to report to the standards you expect. If this support is not forthcoming, you are exposing yourself to two major risks:

1. Fraudulent behavior
2. Erosion of your financial compliance standards

This is not to say that Chinese staff are bad. They are not. However they do require guidance and management controls to set them ? and your business ? on the right path towards financial and operational transparency. Why does this knowledge gap ? which can also be termed a cultural divide – exist ?

To know more, the whole issue is available (after a free subscription) on China Briefing website with others archives
For more information on China’s legal and tax issues or to ask for professional advices in related matters, please write to info@dezshira.com