Diagnosing Unhealthy Accounting
In an effort to simplify and consolidate existing accounting regulations, the Chinese government has recently implemented a number of changes and upgrades, which will affect all companies operating in China: for one, the new Five-in-One permit system will come into effect on 1 October 2016, merging the business license, tax-, statistics- and social insurance registration certificates, and the certificate of organization code into one permit under one number. In addition, China’s top legislature adopted a new asset appraisal law – the first in nearly 30 years – which will go live in December 2016 to provide more in depth regulation of the industry. Lastly, and most importantly, China is constantly upgrading its accounting regulations to be in line with international accounting best practices, most notably manifested in the BEPS implementation. These are just the most recent samples of accounting changes that the country has undergone since its first major overhaul ten years ago.
The positive result of this is that China’s business system is deeply reforming, promoting investment, innovation, and even entrepreneurship. It also gives many existing companies in China the chance to review their accounting, reporting, and compliance practices, which may now be out of date. With a number of new regulations in the pipeline, many Fiducia clients have seized the opportunity to launch a company Health Check to review their procedures, optimise costs, and minimise risk for their business. Below we highlight a few cases where a Fiducia Health Check successfully revealed accounting shortcomings and discrepancies that posed potential compliance risk and even led to substantial future cost savings for the clients.
Case 1: VAT Loss
A client noticed irregularities in their VAT declaration and hired Fiducia to perform a Health Check on their current tax reporting processes. During the investigation, we found that the company had not been declaring its VAT correctly. More importantly, they had missed the deadline for declaring their VAT-input fapiaos! Even though there was a hefty fee of over RMB 50,000 associated with this, our experienced accountants were able to salvage the situation: because the company had paid excess VAT, the lost VAT-input could be offset and the client did not lose any money in the end. In addition, our experienced accountants put mechanisms in place to ensure that no further deadlines would be missed by the accounting team.
Case 2: Stock Taking
After an auditor in this client’s HQ noticed some discrepancies in the company’s China stock taking and reporting, Fiducia performed an inventory and fixed asset health check at a client’s warehouse in South China. We discovered a large amount of obsolete inventory and generally poor stock taking habits by the local team. After a thorough clean-up, the client divided its assets, separated the outdated stock and as a result, was able to report the real value of the inventory back to HQ. In addition, Fiducia conducted an on-site training for the warehouse team to avoid this situation in the future.
Case 3: Internal Control
The CFO of this German company hired Fiducia to perform a Health Check on their China WFOE to ensure international alignment and local compliance. We structured the project in three phases, with close communication along every step. Phase 1 entailed detailed interviews with all key personnel to gain an understanding of the client’s internal control practices, including reporting lines and business structure, and identify red flags and risks. Based on this, as well as independent research on best practices, our team made strategic recommendations for fraud precautions and improvements in phase 2. In the final phase, Fiducia assisted the client to realise these structural changes and setup the new internal control policy. As a result, the German HQ was able to adjust the company strategy in China to avoid compliance risk.
If you are interested in the Fiducia Health Check, please email us at email@example.com to speak to one of our consultants.