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1 post from April 2013

While institutional investors were still recovering from the shocks of some accounting scandals involving Chinese companies listed on U.S. exchanges through reverse merger, Caterpillar’s $580 million write-down due to fraudulent accounting practices of its Chinese subsidiary cast yet another chill on future transactions U.S. companies and/or investors are considering. In the reverse merger examples or Caterpillar’s fumbled acquisition, the ultimate problem lies in the lack of quality due diligence. Standard due diligence, including validation of documents, materials and interviews of the management team, has proven far from sufficient in a market like China’s. The biggest challenges come from prevailing business and transaction practices in China, which are dramatically different from those in the United States. We would like to point out the fundamental differences in these practices so that investors may understand not only the problems, but also the causes behind them. Cash Business One of the most common practices by Chinese companies is the conducting of their business in cash without providing VAT Fa Piao (which means official receipt used by Chinese tax authorities to calculate and collect VAT taxes) to purchasers of goods or services. There are three primary taxes a Chinese company pays to tax authorities, Corporate... Read more →