Due Diligence In China You Can Conduct Yourself – The A-Z

September 23, 2013 Posted by China Briefing Reading Time: 4 minutes

Sept. 23 – In light of the recent scandals in China involving not just domestic but also foreign investors, Dezan Shira & Associates has been receiving an increased number of inquiries about how to kick a Chinese (or foreign invested) company’s tires in China to ascertain their credentials and ensure they are who they say they are. Simple instructions such as “conducting a full-on internet search” are next to worthless, mainly because much of the data needed is not available online. Chinese companies, for example, do not provide PDF copies of their business licenses for everyone to see, and these are a key part of collecting data on a target company.

China Briefing produced a four-part series on conducting due diligence in China a while ago, and a quick overview reveals much of the content is still fully valid.

The series was broken down as follows and includes these specific subjects:

China Due Diligence You Can Conduct Yourself
This article explains the reasons why due diligence is needed in China, and why it is often ignored. It then goes on to highlight the various elements of a Chinese business license – what they mean, what they tell you, and how to verify the contents. This article concentrates on intelligence that can be collected for free and is a useful resource for SMEs looking to minimize risk – either from trading with Chinese companies or buying and selling with China.

China Operational Due Diligence
In which we explain how to assess a Chinese company’s production facilities, either from the contract manufacturing prespective or as a potential M&A target. It includes advise concerning verifying the functional operations of the target and the processes and systems supporting it, the interconnectedness of these operations, and the likely impact of operations on the future financial value of the company. It also includes a section on verifying land use rights and what the differing rights granted to companies in China actually mean.

Analyzing Chinese Financial Reporting
This piece explains how internal accountants in China behave and may book expenses in a manner not conducive to transparent operations due to their following a different set of processes than acknowledged Western systems. It also points out common areas of deliberate deceptions, from the inserting of related suppliers, to inventory control problems, false invoicing and expenses, and related financial fraud – and how to spot them.

Kicking a China Business’s Tires – The Checklist
In which we provide a complete list of useful boxes to tick off when assessing the credibility of a company in China, and tips on checking their credentials. We also look at the HR function and how to prevent fraud within your own payroll.

These articles are essential reading for all companies doing business with China, either in terms of striking up a trade relationship, or in terms of establishing more concentrated relationships such as a potential joint venture or even an acquisition. As can be seen, relying on the Internet for answers is simply not enough – and potentially dangerous. Yet with just a small amount of time and some knowledgeable insights into where to look, a surprising amount of information about companies in China can be obtained – legally.

Dezan Shira & Associates is 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 as well as liaison offices in Italy and the United States.

For further details or to contact the firm, please email china@dezshira.com, visit www.dezshira.com, or download the company brochure.

You can stay up to date with the latest business and investment trends across China by subscribing to Asia Briefing’s complimentary update service featuring news, commentary, guides, and multimedia resources.

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