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20th May, 2020

China Risk with Remote Teams and no Direct Oversight • Recap

The webinar hosted by the China Resource Network on May 20th, 2020, had an excellent attendance as Russell Brown OBE Managing Partner at LehmanBrown International Accountants and Kimberly Kirkendall, CPA, President of International Resource Development, Inc. presented the “China Risk with Remote Teams and no Direct Oversight”.

General Management Risk was the opening topic covered by Russell Brown to clarify who is responsible legally when a business face financial, legal or other troubles. Legal Representatives, Board of Directors, and the Supervisors would be those to be targeted first as they are registered with the Government. Russell Brown also shared that resigning or resigned Legal Representatives must always ask their employers and confirm that they are no longer registered with the Government, as they remain on file until replaced. Therefore it is recommended that those who are taking up such roles should incorporate clauses in their contracts whereby the company bears the responsibility to change the Government filings and bears all responsibility for the operations of the business.

General Managers and CFOs (except for an accountant and cashier who are registered with the tax bureau) are not registered with the Government however they may be liable and called to Government enquiries due to their access to all information and therefore knowledge of the business’s actions and situation.

Other risks which companies would need to make sure they are avoiding are connected to managements or the staff Individual Social Credit and the companies’ Corporate Social Credit which is currently being implemented but with guidelines still being clarified but can impact customs checks, loan accessibility and more. Finally, there are Economic Risks which may appear outside of a business’ control at a governmental level, for example, the trade tensions between Australian and China affecting the trade of barley, meat and other goods.

While always important, during a crisis it becomes even more important that management review their Policies, Process, and Procedures while implementing Controls and Systems carefully while striking a perfect balance between risk reduction and productivity. This is for a mixture of reasons; Firstly, management needs to be much more hands-on so that they are close to what is going on and able to make decisions more quickly, secondly, to reduce risks and opportunities for fraud to take place.

An example would be in the areas of customer contracts, to actively make sure that all documentation is in order from collecting, notarizing and chopping of all contracts and agreements, customer files are up to date with customer information, background checks are completed etc. If you have, for instance, a legal issue for collection of accounts receivable from a customer, having proper documentation allows fast expediting of the legal process for recovery.

Going further Russell Brown began dissecting different types of fraud from internal to external and how risks may appear if the proper internal and external controls were not applied. A business may start from creating flowcharts of every process to find potential weak points, and each flow would need to have a method of pinpointing where the problems may arise. Then the business would need to make sure that all levels of management understand the new controls. All staff should sign to say that they have read and understood the company policies and procedures. These should include a “Fraud No” policy. Customers and suppliers should also be made aware of such a policy, and contracts should include wording to this effect.

While the controls are being applied, management must be accessible to all staff to safely and anonymously receive any issues or cases of fraud.

Russell Brown went on to discuss how a business could do an External Audit to make sure that all requirement of local laws and regulations are being followed while making sure that financial statements meet the applicable accounting standards. Such Audits would provide business assurances that the business is not at compliance risk and also if there are any internal controls which may need improving surrounding the account and tax preparation.

Alternatively, a business could conduct an Internal Audit which will thoroughly evaluate the internal policies, processes, procedures, controls and systems to evaluate their completeness and effectiveness from a business’s risk management perspective, while also taking into account the balancing of this with efficiency and productivity. The scope of the Internal Audit can cover any perceived or suspected risks or give an understanding of a specific part of the business, and the scope can be as wide or narrow as needed to fulfil its purposes.

Russell Brown then shared an example of when LehmanBrown had discovered a ghost production in a factory while conducting an External Audit, where a walk along the factory floor to view the production line, but whilst quietly counting pallets, found that the accounts did not include all factory activity.

During Covid-19, it was concluded that all business need to review the policies, processes, procedures, controls and systems, and to be much more hands-on to know what the business is doing, to make quick decisions, and to understand risks. Russell Brown then shared a Business Survival Checklist which all businesses should do especially during the Covid-19 Pandemic.

Kimberly Kirkendall then shared her insights during the pandemic where many businesses are facing travel and logistics disruptions, suppliers are unable to deliver, and facing difficulties managing staff remotely. To avoid risks, Kimberly Kirkendall suggested getting to the truth of the situation, especially for the suppliers, and understanding what their true supply capabilities are, to then make better plans to mitigate the disruption.

For businesses who needed to manage staff in China remotely due to the travel restriction, Kimberly Kirkendall advised making professional relationships with the management, staff and clients in China to have a better picture of the business’s situation.

Lastly, Kimberly Kirkendall ended the webinar by advising all business to increase their inspections (AQL, random audits, etc.), collecting information indirectly to verify services are properly rendered, potentially support partners financially if they are at risk but not sinking, and finally do not repurpose productions to sell masks. Businesses need to keep to their core capabilities and strengths, ensure that supply chains can be maintained, and customer relationships kept, and to manage the costs and work with all stakeholders to survive.

Further Questions

If you were a participant and wanted to ask a specific question regarding your business or did not attend the webinar but have questions regarding was what discussed, you can send an email to enquiries@lehmanbrown.com.

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