Preparing For Your China Annual Audit Inspection: Legal Compliance

October 21, 2015 Posted by China Briefing Reading Time: 5 minutes

China’s fiscal year runs from January 1 – December 31, with 2015 audits needing to be filed within the first few months of next year. This means that now is a good time to be examining your business and not only preparing it for the rigors of the annual audit, but also ascertaining that it is in sound health and able to maximize its profitability.

An internal review evaluates internal controls within your business and, in providing an analysis of the degree that the company is reaching its objectives, can be a useful precursor to the full audit. This is especially relevant during changes in the overall economic environment.

There are a number of initial issues that can be examined at little or no trouble in order to prepare for this. As these also include mandatory annual China license renewals, it is important to make sure everything is up to date.

China Business License

This license lists the particulars of your business, and regardless of whether you are operating a Representative Office, FICE, WFOE or JV, it must be up to date. Fines can be levied if your business circumstances have changed over the year without the license being updated. This may also include details of the parent company if changes have been made at the corporate level, which need to be updated at the China subsidiary according to local requirements.

Particular attention needs to be paid to ensure that the name of the Legally Responsible Person, Address, and Registered Capital are all accurate.

Operational Business Licenses and Certificates

These of course vary from company to company, and may be issued by different government departments. All need to be up to date and valid. Not keeping licenses issued by, for example, the Customs & Excise Bureau can have immediate consequences for your operations if involved in import-export. Other product specific licenses unique to your business may also be due for renewal. Check to ensure that all operational licenses are correct.

Bank Account Signatory

It is also prudent to ensure that the current signatories and approval mechanism are up-to-date and identified on all accounts, have been approved to sign off funds, and are being monitored properly when doing so.

Possession of Company Chops

The company chops are transactional seals, with different versions being required for different purposes – including operating the bank accounts. Where are these, and is the accompanying signatory still incumbent? Are they used under supervision and safely and securely under managerial control?

FCPA Compliance

How secure is your company trading style? Are staff engaged in unscrupulous practices? Running a spot check to ascertain whether or not your sales team is corrupt or not is a matter of internal control. FCPA regulations dictate that if they are, the foreign manager can be implicated. This can be a very serious matter. Ensuring your business is FCPA compliant is a crucial issue.

HR & Payroll

Are your staff all correctly employed and have all their mandatory welfare payments and salaries been updated? Just a single case of someone being out of sync with China’s labor laws can have far reaching consequences. Be very firm with HR and ensure all employees are in place and above board.

IT

Have you met all software license agreement requirements and are these all up to date? How secure is your IT platform? Who has controlling access?

Data

If operating marketing, sales and financial data, who is in control of this? Is data stored in China or externally? Who has access and at what levels? Database theft or manipulation is common in China. Is yours secured?

IP

Have you protected domain names, website domains and derivatives of them? How about trademarks and patents? Are they inclusive or would it be better you added some?

There are other issues that also require checking, such as the relationship between China Legal Compliance and Financial Due Diligence, which we cover in the second of this two-part article. As this also includes measures that can be taken to reduce operational costs as well as enhance profitability, getting your China business into shape prior to annual audit is not just an issue of compliance; it can also be turned into the positive experience of getting more bang for your buck. As all businesses in China are facing a trading squeeze, now is the time to be looking at how you obtain more money from your existing operations.

Dezan Shira & Associates have over 23 years operational experience in China and can assist with internal checks and balances. Please contact the firm at china@dezshira.com or visit the practice website at www.dezshira.com

Chris Devonshire-Ellis is the Founding Partner of Dezan Shira & Associates – a specialist foreign direct investment practice providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in emerging Asia. Since its establishment in 1992, the firm has grown into one of Asia’s most versatile full-service consultancies with operational offices across China, Hong Kong, India, Singapore and Vietnam, in addition to alliances in Indonesia, Malaysia, Philippines and Thailand, as well as liaison offices in Italy, Germany and the United States. For further information, please email china@dezshira.com or visit www.dezshira.com.

Chris can be followed on Twitter at @CDE_Asia.

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