PwC warns on operating in China

ACCOUNTING firm Pricewater-houseCoopers has warned about compliance and reputational risks of doing business in China.

It comes as construction equipment maker Caterpillar announced it has written off $US580 million ($557 million) because of an accounting fraud in China.

The auditor highlights many 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 the example of Apple's public relations disaster as a result of its sub-contractor Foxconn's poor labour record. "Apple didn't adequately monitor its key supplier's compliance practices. 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.

"Legitimate guanxi building may lead to corruption, such as the the awarding of a contract to someone in a guanxi network instead of the bidder with the best qualification," says PwC report.

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 in the past. A former Rio executive in China, Stern Hu, was convicted and imprisoned on corruption charges in 2008 amid tense negotiations over iron ore prices.

Ironically, Chinese affiliates of international auditors including PwC are under fire from the US regulators for their alleged involvements in collapses of Chinese companies listed on the US stock exchange.