No fewer than three people have sent me an article, entitled, “The Simplicity of Chinese Accounting Scandals.” All three people raved about the article, one going so far as to use the term “revelatory” in describing it. Wrong, wrong, wrong. There is absolutely nothing revelatory about it and that is the heart of the problem.
The article consists mostly of a list of four methods commonly used by Chinese companies to perpetrate a fraud on their investors. Paul Gillis, who knows China accounting better than just about anyone, is the progenitor (I’ve been waiting years to use/mis-use that word) of the list. And it is a good list in that all of the methods are fairly common.
But here is the problem. These sort of accounting cheats are not by any means peculiar to China. They are cheats that have been employed again and again all around the world. Yes, Virginia, even in the United States. There is nothing new here because when it comes to fraud, there is rarely anything new under the sun. I doubt there is an auditor with even two months of experience at any big accounting firm who has not already been trained to look out for every single one of them. These methods are not even interesting because they are so routine.
No, the big deal here is not so much the methods of cheating, but the need to always be vigilant for cheating. In other words, the big deal here is the need for anyone who is buying a Chinese company (or any company for that matter) to look at every number/every line item with a very healthy skeptism. We talked about this in our post last year, entitled, Buying A Chinese Company? Why China Deals DON’T Get Done.
Yes, Chinese company fraud is no doubt far more common than in the United States and, in many instances, more blatent and bolder. But in the end, thorough due diligence is necessary everywhere and it works most of the time. Most of the frauds I have seen (and I have seen far too many) could easily have been spotted had the victim merely done the basics to try to uncover them. We have ended many of our posts on topics like this by saying “trust yet verify.” When it comes to investing in China, one word suffices: verify.
What do you think?