Moderate reviews, companies urged
SOME large companies taking part in joint ventures in China are going too far in applying due diligence, says David Eastlake, senior manager of Price Waterhouse's audit services.
'I think some foreign companies are too cautious,' Mr Eastlake said. 'They want us to literally go in and sign off on everything.' Due diligence was an in-depth review of the business that took from one to four weeks, he said.
He said shifting policies and China's unique way of doing deals complicated matters.
As a result, the Chinese were tired of companies scouting out their businesses and not signing deals.
Mr Eastlake recommended that foreign companies plan a list of five 'deal breakers' or factors that must be included in the venture.
Most of his clients insist on guarantees of land-use rights and tax deals, recoverable debt up to a certain amount and limited liabilities.
He said small, less educated companies were more likely to leap into a joint venture without due diligence research.
'We looked at a factory in Shanghai, a manufacturing place. It wasn't complying to Chinese standards let alone US standards,' he said, adding the factory was giving money to the Chinese inspector to allow it to operate.
The American company that bought into the factory with this knowledge, is breaking a United States law under the Foreign Corruption Practices Act.
Mr Eastlake has travelled to China about 10 times this year to assess Chinese companies on matters such as contingent liabilities and whether the value of loans include interest charges and changes in foreign exchange.
He said some state companies did not file tax returns with their accounts so foreign partners had no figure from which to offset tax losses against future profits.
Others had misleading profit records because increased inflation and depreciation of capital were not assessed.