Danwei is just out with a fascinating post by Jeremy Goldkorn, entitled, “Business Travel magazine cheats on audit.” The post is on a letter sent out by BPA, “the global organization that audits the circulation of print publications.”

The BPA letter discusses how “Business Travel magazine (商务旅行) has been kicked off BPA’s list of audited publications” for the following:

While conducting an on-site print run of the April 2010 issue, BPA audit staff was presented with taped boxes allegedly filled with over 210,000 printed copies of BUSINESS TRAVEL, which upon further inspection, were empty. BPA Worldwide confirmed that 13,360 copies were printed. The average print claim for the twelve month period ending December 31, 2009 was 210,347. The publisher refused access to complete the twelve month ended December 2009 audit.

Danwei describes “[t]his type of trickery” as “all too common in China’s media business.” I am no expert in China’s media business (Jeremy Goldkorn is) but my firm has come across some similar doozies while performing due diligence for our clients, including the following:

  1. Our client was looking to purchase three factories from a Chinese company but in the end, we concluded that the Chinese company really only owned one factory.
  2. Our client was looking to lease a large amount of warehouse space from a company that did not own it.
  3. Our client was looking to buy a Chinese company but finally decided not to move forward after being unsatisfied that the fourth (yes you read that right) set of books had no more connection with reality than the first three versions we were provided.

It goes on and on. I am not saying China is the only place where this sort of thing happens as it most certainly is not. But I am saying that anyone who just takes things at face value in China (or anywhere else for that matter) is greatly increasing the odds of finding themselves on the short end of the pile (pun intended). China due diligence simply isn’t optional.

Trust yet verify.

  • Interesting about them only owning one factory. I run into this situation all the time in my line of business (most of the businesses I deal with are in the US & Canada). Doesn’t really matter where you do business, money can turn people into liars in a second.

  • This debate also rages in the online media scene too. Many advertisiers are skeptical of server logs provided by web sites. And sure enough none of these mobs will pay for a PWC style audit either.
    Even the “Trusted Third Parties” are on shakey ground if you look at the crap that CommScore has been caught out with. Then the old favourites like alexa and hitwise exist. They all play games.
    Even with a trusted third party stats company (click tracks? Google Analytics?) you still have the problem of people trying to fudge the numbers via the “correct channels”.
    Servers and clusters we have put up for clients have intricate systems to detect abnormal connections from single IP’s, macros at work and other dodgy stuff as people hire “gold farmers” so to speak, to click up their ad or post to a higher ranking. Or click through a competitors ads to cost them money for no added exposure. And the list goes on and on and on…. I shan’t bore the luddites with the geekery.
    If there is a way to game a system – any system. It will be done. And yes – it happens all over. Though in my experience it has been more widespread and less subtle here in China – which makes it easier to catch and kind of insulting…. “Is that the best ya got?”

  • Don

    I once conducted due diligence on a small collectively-owned chemical plant that was being bought by a Fortune 500 company. Reduced to its essentials, our conversation went (in part) along the following lines:
    Q: “Have you ever had any environmental problems?
    A: “Oh, no.”
    Q: “What about litigation?”
    A: “Oh, yes, we’re involved in some right now.”
    Q: “May I see the documents?”
    A: “Here you are.”
    Q: “Hmm … seems like you’re suing an environmental equipment supply company. Says here in the complaint that because of the failure of their equipment, you were fined on several occasions by the environmental protection agency. Didn’t you just tell me you hadn’t had any environmental problems?”
    A: “Oh, we were telling you the truth – we just made up that stuff in the complaint about being fined.”
    Q: “Well, it just took me one minute to discover that you were making stuff up in the complaint. Aren’t you worried that the court will discover it just as easily?”
    A: “Oh, no, the court is our buddy!” (法院是我们的哥们儿)

  • Matt Bartoloni

    I work for a Chinese based Due Diligence company. We discover unbelievably corupt companies on a daily basis. It is often a matter of homework. There are good companies out there, but there are also crooks.

  • H. Grossman

    Google does work and I use it all the time. I suspect the people on here that are claiming it does not work are consultants who want to make money.

  • Lawrence

    I too use Google for an initial review of the Chinese companies that I am thinking about doing business with and I find it very helpful. There have definitely been times where my Google search alone told me not to do business with a Chinese company. Google is not always going to be sufficient due diligence, of course, but nobody has said it would. But it is the best way I know to in five minutes get information on a company and as the other commenter said, I have found out information on Chinese companies just from Google that have allowed me to decide not to do business with a Chinese company.