Accounting Fraud Detection in China
Performing an accurate and efficient accounting in China can be an acrobatic exercise. On the one hand, you have the Chinese standards introduced by GAAP, which companies can understand in different ways. On the other hand, you have local traditional practices, which habits may not be very transparent-friendly. Thing is, frauds are harmful for the company at many different levels, among which its finances, strategic decisions and marketing. If convicted, heavy fines will apply and, even if you are not, legal procedures will force you to devote resources that could have otherwise been used elsewhere in your business activities. Accounting fraud can also lead you to take wrong decisions, as accounting is the surest and safest base on which you can design your strategy. Lastly, it has the potential to harm your company image in the long run.
The main source of accounting fraud in China lays in the revenue recognition. Managers are likely to inflate or deflate their revenue depending on what is the most interesting: first one is often used to please investors – especially true for listed companies – while second one aims at reducing the company tax burden. One shouldn’t underestimate the power of the Chinese guanxi in these make-up processes: bank officials are often found guilty of assistance. At the same time, Chinese accounting laws are known for their ambiguity, letting companies develop their own interpretation of official standards.
Therefore, companies need an active anti-fraud policy so as to sensitize its employees upon any questionable practices. Here are some advices we use in our daily business:
- Monitor, check and control: Keep a constant eye on your business and the way accountants do their job. Accounting’s fundamental objective is to provide an accurate picture of your company’s health: check any of its unusual variations. Use the annual compulsory auditing process as a mean to have deeper overview of your accounting, but make sure auditors fully understand your business particularities so they won’t miss any weird money transfers. Proper segregation of duties and periodic job rotations, particularly in the areas susceptible to fraud, such as cash management and accounting division, could be used as other preventive and detective tools to ensure fraud prevention. Pre-employment screening can avoid the risk of hiring potential fraudsters.
- Detect fraud opportunities: Look for information asymmetries within your company, especially in your management teams recording sales and expenses. Have a deeper look at the checking processes and their application. Beware of your managers’ languages: a mandarin non-speaker will be hardly effective at checking Chinese-written sales documents.
- Prevent devious attitudes: Work at building a corporate culture that emphasizes transparency and honesty. Even though performance is important, knowing what’s going on in your own company is the paramount. Fraud awareness trainings, work groups and incentives are ways to rapidly implement the right spirit. Many fraud cases can be prevented from shaping into a scandal by setting up fraud policies. Further, outlook towards whistleblowing has evolved over the past few decades. Create a culture that encourages employees to ask questions early in time to point out any issues, show courage in confronting misconducts, or reporting unethical practices.
- Check for pressures: Where pressure lies, employees’ honesty is put to a severe test. Check for over-emphasis on performance and objectives: so as to save face, which is incredibly important in the Asian culture, your Chinese employees may be ready to do many things. Don’t underestimate this and promote transparent communication on your teams’ results.