AS FOREIGN DIRECT investment continues to pour into China - roughly US$60 billion in 2005 - forensic accounting specialists have seen something of a boom in business. Today's potential foreign investors in China want financial due diligence, corporate due diligence and integrity due diligence, as well as thorough examinations of corruption risks, anti-money laundering risks and general fraud risk - all of which are grist to the mill of forensic accounting practices. According to Chris Fordham, principal of Forensic and Dispute Services for China at Deloitte Touche Tohmatsu, forensic accounting specialists can play a crucial role by examining potential risks before acquisition and by helping prospective investors put in place a post-acquisition methodology to overcome them. Working on this basis, many of them will at some point experience the machinations of the Foreign Corrupt Practices Act (FCPA). This United States legislation, which came into being in 1977, forbids US entities and citizens doing business to make corrupt payments or bribes to public officials in foreign jurisdictions for the purpose of obtaining or keeping business. The difficulty in the FCPA being applied in China is that by virtue of government interests being so wide, the definition of a public official is also very wide. Doctors, for example, work in state hospitals and are by definition public officials. Even a petty kickback or enticement payment to get a doctor to prescribe a particular company's drug could be considered a breach of the FCPA. From an accountant's point of view, involvement in the FCPA often focuses around the post-event or investigation side, where there has been an allegation or a transaction has come to light that may be in breach of the FCPA regulations. In this case, an accountant is instructed along with the solicitors (generally US counsel) to conduct discreet targeted specific inquiries into payments through the company that may have involved public officials or otherwise. According to Mr Fordham, the issues that a breach of the FCPA may bring to light can be difficult for an auditor to try to address. 'It is not an auditor's responsibility to draft people's accounts. An auditor looks at the accounts and tries to ascertain whether they represent a fair and true picture as to what they should be, and that they are put together according to generally accepted accounting policies. Audits are performed on a test basis looking at issues that could cause a material mistake or omission,' Mr Fordham said. A bribe may be a small payment that is not in itself material, but the ramifications of that bribe could be very material indeed. For example, a bribe of 1 million yuan sounds large, but in terms of its value to a multinational corporation it may not be a material benefit at all. The ramifications of the bribe, however, if it is made to an official whose job is to approve or deny a licence to do business in China, could be that all profits made from that business in China are forfeited. That is the risk. The other risk is the potential cultural clash, where new entrants into the country do not understand the culture and are vulnerable to being misled. 'There is a big desire on the part of foreign companies to invest in China and sometimes that desire overrides the normal safeguards that would be taken if an investment was being made in other parts of the world,' Mr Fordham said. 'Companies should not throw away the rule book that they have successfully used elsewhere. They should not rush into things, and they should make sure that they understand who they are dealing with.' This latter concern is perhaps most applicable in cases where fraud is suspected. Of the levels of fraud - employee, external and management fraud - it is management fraud that represents the biggest risk for the shareholders in a company. Perpetrated by the managers of a company, this kind of fraud may be for some ulterior motive such as keeping their job, helping them obtain their bonus or ensuring that their shares in the company stay high. 'Hidden liabilities and overstated assets are the major concerns, and they do bring companies down,' Mr Fordham said. 'These are what accountants are most concerned about in terms of trying to deal with these issues.' The equivalent of about 16 per cent of GDP is lost to fraud and embezzlement in the public sector, according to research done by Tsinghua University. It is no surprise that clients are starting to take the risks more seriously, and engaging professional services to protect shareholders by ensuring that a company is resistant to fraud. 'There has been a bit of a sea change in the last year-and-a-half,' Mr Fordham said. 'It's probably cyclical because people now have more money to spend and they see this as a good value-added part of the business where they can protect themselves and stop losing money. 'I've seen companies collapse as a result of a fraud, have to withdraw entirely from the business or even restart. It is basically when people take their finger off the pulse and leave it to local management who, unfortunately, are not always as trustworthy as might at first have been thought.'