China a unique challenge, PwC warns
It comes as construction equipment maker Caterpillar says it has written off $US580 million due to an accounting fraud in China.
The auditor highlights myriad operational and regulatory risks in China, one of the most important markets for Australian companies, in its new guidebook Doing Business and Investing in China.
PwC has identified risks ranging from falling foul of foreign anti-corruption laws to understanding local labour laws. It warns that China presents a unique challenge to multinationals operating there.
"The experience of many multinationals clearly demonstrates that global compliance policies, training and procedures have proven largely inadequate to the task of identifying red flags and assessing risk in China," warns PwC.
The report highlights the risk of reputational damage for companies operating in China, citing Apple's public relations disaster as a result of its subcontractor Foxconn's poor labour record.
"Apple didn't adequately monitor its key supplier's compliance practices," it said.
"Foxconn's labour malpractices therefore caused Apple reputational and financial loss," says the report. "The resulting backlash against Apple was severe."
China's corrupt business environment also posed challenges for companies and PwC said the much touted "guanxi" concept, which means connection, can be a double-edged sword exposing companies to corruption dangers.
"Legitimate guanxi-building may lead to corruption, such as the awarding of a contract to someone in the guanxi network instead of the bidder with the best qualification," the report says. It advises companies to "increase awareness of the impact of Chinese business culture/practices conflicting with overseas laws to prevent fines and reputational damage".
Australian companies including Rio Tinto have been caught in corruption scandals.
A former Rio executive in China, Stern Hu, was convicted and imprisoned on corruption charges in 2008 amid tense negotiations over iron ore prices.
Frequently Asked Questions about this Article…
PwC warned that China presents unique compliance and reputational risks for multinationals. In its guidebook Doing Business and Investing in China, the auditor highlights operational and regulatory risks that can affect companies and, by extension, investors who have exposure to those firms.
Accounting fraud in China can lead to large write-offs and financial losses. The article notes Caterpillar wrote off US$580 million because of an accounting fraud in China, showing how such issues can directly hit a company's balance sheet and investor returns.
PwC identifies a range of risks including falling foul of foreign anti‑corruption laws, difficulties understanding and complying with local labour laws, and other operational and regulatory challenges that can create legal, financial and reputational exposure for companies operating in China.
PwC says many multinationals' global compliance policies, training and procedures have proven largely inadequate to identify red flags and assess risk in China. Local complexities and different business practices can make standard global programs less effective.
Supplier issues can quickly become public relations crises. PwC cites Apple’s backlash after its subcontractor Foxconn’s poor labour record — saying Apple didn’t adequately monitor the supplier’s compliance, and Foxconn’s labour malpractices caused Apple reputational and financial loss.
Guanxi refers to personal connections or networks. PwC warns it can be a double‑edged sword: legitimate guanxi‑building may cross into corruption, such as awarding contracts to someone in a network instead of the most qualified bidder, creating legal and reputational risk.
PwC advises companies to increase awareness of how Chinese business culture and practices can conflict with overseas laws, so they can better prevent fines and reputational damage. Building that awareness is a key step for companies and investors monitoring risk exposure.
Yes. The article notes Australian firms such as Rio Tinto have been caught in corruption scandals. It specifically references former Rio executive Stern Hu, who was convicted and imprisoned on corruption charges in 2008 amid tense iron‑ore price negotiations.
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