HONG KONG: Investment in China continues to grow and over the past five years, US companies and investment groups have announced or completed about $25 billion of whole or partial acquisitions in China, according to Thomson Reuters data. In China, where large US corporations are making some very big bets, a new frontier of accounting risk is opening up.
Lured by an economy growing much more quickly than the United States, US companies have directly invested $54 billion in Chinese businesses, factories and property, most of it in the past decade, according to US Department of Commerce data.
Despite a cooling off of China’s growth last year, demand from its massive consumer class is still lifting revenues at companies that range from coffee seller Starbucks Corp to casino operator Wynn Resorts.
Tales of shady business practices abound in China - fake revenues, phony invoices, sham factories - but until recently, the problem seemed confined mostly to Chinese companies.
No longer. Concern is growing about risks to US-based multinationals in a country where American audit regulators are locked out by the Chinese government and bribery and fraud are routine.
Questions about transparency and integrity weigh heavily on China, the world’s second-largest economy, as it assumes greater economic leadership and responsibility. These doubts test its ability to adhere to international standards.
Stories of business deception - confirmed by corporate sleuths, former business executives, court filings and experts on accounting in China - are commonplace.
There was the Chinese company that billed itself as a high-tech television screen manufacturer, but had a factory that turned out to be a man selling fireworks from a shack.
Or there was the Chinese biodiesel plant that sat idle for months, then sprang to life one day - when investors showed up for a tour - only to fall silent again.
Last month, there was the scandal at a Chinese unit of Caterpillar Inc, the world’s largest construction equipment manufacturer, based in Peoria, Illinois.
On Jan. 18, Caterpillar disclosed “deliberate, multi-year, coordinated accounting misconduct” at the Siwei unit of ERA Mining Machinery. Caterpillar said it would write off most of the $654 million it had paid to acquire ERA only months earlier.
Caterpillar’s Siwei stumble was not the first for a US multinational in China, but the scope of the problem stood out. Caterpillar has provided few details, but it has disclosed inventory discrepancies, inflated profits and improperly recorded costs and revenue at Siwei.