Cross-Border Accounting Done Right!
As China is becoming increasingly stringent in their accounting regulations, many foreign companies must invest time and effort into upgrading their reporting practices. China Focus interviews Jürgen Hund, CFO of MEIKO Group, on how the company bridges the gap in their accounting between the headquarters in Germany and their organisation in China.
What is MEIKO’s current accounting set-up in China?
MEIKO has been active in China for over 15 years. We have a complete production set-up in Zhongshan and almost 200 people, with an own finance department that works closely with our HQ in Offenburg but is still quite independent. Our controlling activities originate mostly from our HQ, by scheduling regular meetings with the local teams to identify any problems or special cases. Here, all teams from sales to service are represented and we address any unresolved questions or red flag.
What are typical accounting mistakes you have come across in China?
The biggest mistake you can make is ignoring local accounting practices and regulations. Even if you require a unified, global accounting reporting format for HQ at the end of the day, it may not be relevant to your company abroad. For example, if you apply German accounting practices in China, you probably won’t receive accurate or even relevant results. The first step is to consider what you need to show legally and on a local level; then you can take this information and adapt it for your HQ – not the other way around.
A second mistake many make is jumping the gun and entering the market before fully understanding what the local requirements are. In our case, MEIKO’s operations in China are much more comprehensive than in other countries: from production to sales and after-sales, the entire spectrum of activities is represented. Only in the USA and in Offenburg do we have the same kind of set-up, making China a challenging market for us. We made sure we thoroughly understood what was required before we opened our doors, or else this can lead to big problems later on. It pays to hire a consultant, such as Fiducia, with experience in the market, to help you with your strategy.
How do you manage the different accounting standards in China vs HQ?
In this day and age, technology can help you substantially in making your operations more efficient, especially across borders. At MEIKO, we are currently in the process of implementing a unified ERP software on a global basis in order to have the same standards everywhere. Due to the size of our operations in China and the fast pace of the market, it is critical that we have easy access to our production activities there. Most importantly, this minimises the amount of manual input required from us, making our processes much smoother and better integrated. Our technological procedures must be identical regardless of location, from consecutive project numbers to consistent labeling.
What role can technology play to put proper operational procedures in place?
MEIKO is fully owned by a foundation and we are not publicly listed, therefore we do not have accounting obligations that we must follow. Nonetheless, we enforce the same accounting standards across all of our subsidiaries. Our general rule of thumb is “local before global”, meaning that reporting must first and foremost be in line with home-country requirements. The next step is an aggregated report for the HQ in Offenburg, which we can then easily feed into our system once a month. This allows us to easily keep track of all global activities and immediately raise any red flags. For a global company such as MEIKO, it is always advisable to deal with shorter time frames to avoid any surprises. And since China’s regulations change very fast, this helps keep an eye on things.
Do you have best practice suggestions?
Training is key when it comes to bridging cultural and business gaps. Take the example of fapiao management in China: this concept is completely foreign in Germany! This is why our expats receive thorough training on the subject when they first arrive, from chop management to proper documentation. Even with short placements, we require trainings so that we can achieve the best possible work style and avoid compliance problems. Conversely, since the MEIKO team in China is primarily Chinese with very few Germans, there is also a big language barrier. This, coupled with our unique ERP system make trainings an essential part of our business to ensure congruence across borders.
How do RMB fluctuations impact you?
Since MEIKO has full production capabilities in China, we enjoy a natural hedge as everything is contained within the country. We sell locally in RMB and source in RMB. In addition, we even purchase components there for other global production sites, if the quality and logistics are in line with our expectations. Due to the fact that MEIKO has been cash flow positive in China for the past years, we now reinvest our RMB in buying new machines and equipment or even raw materials. For us, the country is a big growth market and there is still room for more. We will continue to build up our operations there by investing in our people and our set-up. Therefore, all of our activities within China are handled in RMB and we are not really exposed when it comes to currency fluctuations. We produce in China for China so we don’t have to worry much about this topic at the moment.
Recently transfer pricing regulations have been getting stricter. Has this affected you?
This is a huge topic for us at the moment – not only in China but globally. Our expertise originates in Germany and we are sharing it within our company, but to other countries. As it was in our case, I recommend working with a tax advisor, such as Fiducia, in devising an internal model to best manage this and avoid any discrepancies. All of our subsidiaries are treated equally with the same rules. This is critical these days and a topic we will look at every single year to make sure it is still compliant with local and international rules.
What tips do you have for risk management and fraud detection?
Risk and fraud are hot topics in Asia and also for China. Since our business is also projectbased, we are confronted with these matters on a regular basis. Our company slogan is “the clean solution” – and with this we don’t only mean our superior cleaning technology. It is also our work style, which we enforce on an international level. To achieve this, we have thorough trainings and presentations and make it clear that there are immediate consequences for anyone involved in illicit activities, regardless of level.
What future regulatory trends do you anticipate?
For one, I foresee that China will ease up quite substantially. We can already see this happening now, especially compared to 5 – 10 years ago. It will be easier for foreign companies to operate in China though, of course, the hand of the government will always be there. In addition, the RMB will become a world currency along with the USD and EUR and will be fully convertible. There have been big steps in this direction already. Due to these factors it will be more straightforward for foreign companies to do business in China.