THE accounting firm PricewaterhouseCoopers has warned about compliance and reputational risks of doing business in China.
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.