Ever since the Covid-19 crisis erupted in our lives, countless international companies doing business in China have been forced to manage their China operation remotely. Pre-Covid, the foreign manager would travel to China several times a year to check up on employees or review the company’s business activity. But today, such visits are almost impossible due to the increased restrictions on entry into China. These circumstances have sparked a situation where Chinese teams are disconnected from their Western counterparts and are isolated, unsupervised, and lack proper guidance and support.
On top of this, in order to allow smooth ongoing operations in China, companies are often tempted or compelled, to entrust their company’s chops and bank codes with the local employees, and in the worst cases, they appoint one of these local employees as the company’s legal representative in China. Many such companies feel compelled to do so in the face of China’s tightened regulatory environment, conceding to the fact that they may have no other choice.
Supervision-wise, the majority of international companies doing business in China rely on the annual report that local accountants submit to the tax office. However, even if conducted by a big and reputable firm, the annual report is not enough to paint a true picture of the real financial/business situation of the company in China. Financial reports usually sum up the information provided by the local employees (tax invoices, payment confirmations, etc.), and the accountant then generates an immaculate report following the tax office’s requirements. But such reports fail to indicate information hidden from the accountant and only focus on accounting checks without examining the financial plausibility of the data presented in the report.
For these reasons, it’s vital to carry out an operational audit of the business, which adds value to the annual financial audit. The operational audit in China is designed to inspect the entire business operation, and is necessary for each company doing business in China, much like a routine health check at the doctor.
An operational audit in China can be performed as a periodic, monthly, quarterly, or annual audit, depending on the nature of the company’s activities in China. The comprehensive audit helps management to assess the business’s ongoing performance, reveal potential risks, identify compliance issues, analyze management effectiveness, and cross-department synchronization. In China’s 2022 business landscape, this tool is no less than necessary. Keep reading to learn why.
Much More than a Financial Audit
As the operational audit in China inspects every business department, the financial department is not omitted from this equation. It’s necessary to understand that the financial inspection conducted as part of the operational audit is different from a regular financial audit, in the sense that it complements the latter. While the annual financial report records the financial activity as declared by the company to the tax office in a given year, the operational audit we execute is not confined solely to financial reporting.
An operational audit in China examines both the bookkeeping and accounting processes, as well as contracts signed on behalf of the company, and commitments taken with or without the HQ’s knowledge. Not out of sight are unexplained excessive expenses and a physical inventory count in the company’s warehouse to locate “borrowed goods.”
The audit teams also review income vs. expenses, the degree of compliance with the tax office’s legal requirements, the company’s tax level, and its impact on the company’s allowed business scope in China. The team ensures to check the tax benefits and any refunds the company is entitled to receive, whilst examining taxes the company must pay and any time-sensitive fines they would want to avoid through timely payment.
In addition, and of no less importance – the operational audit in China attaches great impetus to key working procedures that have financial implications. Therefore, the audit team will check who holds the company’s chops, what is the procedure for using them, who supervises their usage, and so on.
HR and Labor Management
Do you sign your local employees on an up-to-date Employee Handbook? When was the last time you reviewed your labor contracts in China and made sure they comply with any recently changed regulations, for instance, the latest Personal Information Protection Law that affects recruitment and hiring of employees in China?
An operational audit in China includes an in-depth analysis of the company’s HR management protocols. It is conducted by local HR experts, who review all your recruitment processes in China, examine employment and HR management systems, inspect relationships between staff members, ensure compliance with local employment laws, and suggest tools to enhance and optimize internal procedures.
Digital Risk and Data Compliance
China has set a goal of becoming a fully digitalized society by 2030. Acknowledging the risks this move could impose on individuals’ welfare and national security, the central government introduced the Cybersecurity Law (2017) and the more recent Data Security Law and Personal Information Protection Law (2021). As these laws restrain company usage and handling of data, they pose new challenges for companies that are “information processors.” Needless to say, in 2022, almost any company inside or outside of China meets this definition.
So if it all goes back to your digital systems, why not start by reviewing them? Not only from the data processing standpoint but also to ensure you avoid potential risks and comply with the latest regulations. You can be sure that an operational audit in China covers you in that aspect too.
With 20+ years of experience in China operation management, PTL Group’s operational audit service brings our team’s combined administrative know-how to the core of your company. Our experts in finance, HR, business management, supply chain, and logistics in China, will join forces to evaluate your business day-to-day operation in China, and provide you with a detailed report of your company’s situation.
Feel free to contact us for more details at any time.