When China Offices Go Wrong - How to Implement Effective Financial Controls
- Jay Boyle & Julie Yang, Expat CFO Services
The Need for Financial Controls
Many Chinese employees have worked for a State run company or SOE. In the old SOE model, the company was entirely owned by the state. Its primary function was to employ workers. Generating a profit was a much lower priority. The indifference toward profitability corrupted the company culture. Controls were weak, and company assets were often diverted to personal use or for personal gain. Although China’s private sector has undergone substantial development over the past two decades, the corrupt corporate culture is still prevalent.
When foreign corporations set up in China, many of their new employees bring this mentality with them from their previous companies. It is therefore imperative to take steps to change this outlook. Unfortunately in the chaos of a start-up, controls are often overlooked. Many companies in China do not even consider their controls until a significant loss occurs.
Implementing Financial Controls in China
Team effort
The most effective way to implement controls in China is to create a sense of ownership. We have learned that a top-down control by decree solution is not effective. Employees will spend a lot of energy trying to circumvent or undermine the controls. A more effective methodology is to seek group involvement. Younger employees are motivated to learn, and involving them in a control development project such as this creates ownership of the finished product. An effective way to get a group involved is to ask management for a volunteer from each department for the project. It is a good idea to involve people from different departments because often departments do not communicate clearly with each other, and thus often do not clearly understand the function of the second department. If no volunteer is forthcoming, a person should be assigned by each department head.
Process mapping
Process mapping is an excellent tool to review what each department does and a great learning experience for a company. Often it is found that there is a misconception between departments on what function each one performs. The Mapping exercise clears the communication issues and creates more of a team mentality within the company. Typically processes that should be mapped are: manufacturing, inventory receiving and shipping; cash handling and disbursement, PO to payment process; sales order to cash receipt process; financial closing process; and petty cash handling process. When we work on a controls implementation project, we begin by thoroughly mapping all processes and procedures.
Risk Identification and Control Implementation
After the process mapping is complete, use the team to review and indentify all risks. It is important to get the team to identify the risks as a group. Once identified, a control should be discussed on how to address the risk or weakness.
Different companies tend to have controls depending on the company culture. Some develop intricate policy and procedure manuals, while other others utilize more flow charts and visuals.
When possible, the best practice is to use visual controls. An example is Kanban management in the lean environment. This type of system enables a company to visually control inventory on the shop floor. When visual controls are used correctly, work time is saved as the normal flow of work does not stop to verify or check something. Efficiency therefore improves.
“Trade off” Between Risk and Controls
When a team is tasked with developing financial controls, they tend to become overzealous – often making systems so robust that they actually hurt the business. It is important to balance controls and risks. Risk mapping is a very useful tool to prevent this. Risks are mapped in terms of likelihood and financial impact, and then the team can determine what risks should be focused on.
Manage Risk Holistically
Care should be taken to look at the risks in a holistic manner, as some risks cancel each other out, and some risks are magnified by a second risk. Risks managed individually can be detrimental to the health of your company as Bear Stearns and others have learned.
Identify the Change Agents and Sell the Concept
Properly implemented controls are a team effort. The use of process mapping, risk identification, risk mapping with holistically managed risks are best practice establishment and maintenance controls in China.
The art of selling the concept, involving the staff, and getting “buy in” from key individuals in the company creates ownership instead of controlling by decree from above. As a result, controls become effective because of the involvement of the employees.
The Challenge Ahead
There are a great deal of challenges to working in the Chinese business environment. If controls are overlooked, management runs the risk of recreating an SOE corporate culture and destroying value. However, younger Chinese people are eager to learn best practices. If approached correctly, this creates an opportunity to implement the controls needed to run a business. This can be a refreshing change to dealing with a Union shop in the west.
James “Jay” Boyle has lived and worked for 12 years in China in numerous financial roles for industry, and is the Managing Partner of Expat-CFO Services. Expat-CFO Services is a boutique financial consultancy providing transaction advisory for pre and post acquisition phases. Additional services include: accounting outsourcing, internal audits and financial personnel vetting and placement.
Julie Yang, ACCA, JD is a Chartered accountant a member of the Shanghai bar and an Assistant Manager at Expat-CFO Services. www.expat-cfo.com
Related Articles:
5 Legal Tactics to Prevent Employee Disputes
Navigation:
Business Functions Section Page
