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FAQ on SAIC financial statements

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Following my article on CMFO, I have been asked a variety of questions about SAIC financial statements and their pertinence to CMFO. Here is a FAQ to address some of these questions:

What is the SAIC?

The SAIC is the State Administration for Industry and Commerce. It is the Chinese government agency responsible for drafting and implementing legislation concerning the administration of industry and commerce in China. SAIC regulations are implemented by local AIC branches.

What’s the relationship between the SAIC and Foreign Invested Enterprises?

All Foreign Invested Enterprises (“FIEs”) are subject to an Annual Inspection by the local branch of the AIC. The inspection examines the investment paid by different parties, whether the FIE is undertaking normal business within the registered scope of business, whether there is any investment withdrawal, transfer of property, or evasion of debts, whether it has opened business, change or cancel registration as stipulated by regulations. The inspections also require companies to file audited financial statements.

Are SAIC financial statements audited?

Yes. You can verify that by speaking with lawyers, accountants and chief financial officers of legitimate Chinese companies. But there is also ample and indisputable evidence from the internet that Foreign Invested Enterprises must file audited financial statements with their local branch of the Administration for Industry and Commerce. Below I provide 7 links. You can see a discussion of the required audits for FIEs by searching for the word “audit” in each link.

1. LehmanBrown Explanation

This article, written by the accounting firm LehmanBrown, is self-explanatory and addresses the issue directly. It very clearly outlines that FIEs must file audited financial statements with their local AICs. I encourage you to call or email LehmanBrown with any questions on whether SAIC financial statements must be audited.

2. Dezan Shira Explanation

This is an article by the president of Dezan Shira & Associates, a consulting firm focusing on Asian accounting, tax and investment practices. It also addresses the issue of SAIC audits by FIEs directly.

3. “Annual Inspection of Enterprises and Privately Owned Businesses” by the Guangzhou AIC branch

This is a 2007 notice discussing the annual inspection of businesses for the Guangzhou AIC. The guide says: “An Audit Report is required for the following:… (b) Foreign-invested enterprises… The report shall conform to the requirements set forth in the Audit Code of China Certified Public Accountants promulgated by the Ministry of Finance.”

4. “A Guide of 2009 Joint Annual Inspection for Foreign-invested Enterprises” by the Zhejiang AIC branch

This is a 2009 guide for the Zhejiang AIC branch discussion the Annual Inspection for FIEs in Jhejiang. Under Documents to be Submitted, the guide lists “the 2008 Annual Balance Sheet and the Income Statement audited by the accounting firm”. These audit reports are also submitted to the Finance Bureau, State Taxation Bureau and Foreign Exchange Administration

5. “Circular on Implementing Joint Annual Inspection of Foreign-Funded Enterprises” for Huizhou AIC branch

Under the heading “Filling in and submission of an annual inspection report and other documents” this circular writes: “An enterprise shall conscientiously, truthfully and completely fill in the annual inspection report. Data entered must be consistent with the financial report audited by an accounting firm.” Later, it writes “An enterprise shall submit the following documents respectively to the various departments conducting the joint annual inspection… (2) the annual balance sheet and statements of profits and losses audited and verified by an accounting firm”

6. Another article from Dezen Shira – another article from Dezen Shira

7. A third article from Dezen Shira – a third article from Dezan Shira

Are SAIC financial statements filed electronically?

No. But they are available to the Chinese public. Foreigners can access them by hiring third-party firms in China to access them. Such third-party firms include local counsel or credit agencies.

Are SAIC financial statements filed only by Foreign Invested Enterprises?

No. But Foreign Invested Enterprises must undergo the Annual Inspection, which requires disclosure above and beyond the disclosure required by non-FIE companies.

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FAQ about SAIC Financial Statements

Following my article on CMFO, I have been asked a variety of questions about SAIC financial statements and their pertinence to CMFO. Here is a FAQ to address some of these questions in a common forum:

What is the SAIC?

The SAIC is the State Administration for Industry and Commerce. It is the Chinese government agency responsible for drafting and implementing legislation concerning the administration of industry and commerce in the People’s Republic. SAIC regulations are executed by local AIC branches.

What’s the relationship between the SAIC and Foreign Invested Enterprises?

All Foreign Invested Enterprises (“FIEs”) are subject to an Annual Inspection by the local branch of the AIC. The inspection examines the investment paid by different parties, whether the FIE is undertaking normal business within the registered scope of business, whether there is any investment withdrawal, transfer of property, or evasion of debts, whether it has opened business, change or cancel registration as stipulated by regulations. The inspections also require companies to file audited financial statements.

Are SAIC financial statements audited?

Yes. You can verify that by speaking with lawyers, accountants and chief financial officers of legitimate Chinese companies. But there is also ample and indisputable evidence from the internet that Foreign Invested Enterprises must file audited financial statements with their local branch of the Administration for Industry and Commerce. Below I provide 7 links. Search for the word “audit” in each of the URLs. I have provided a brief discussion of each link for the first four URLs in the list:

1. tinyurl.com/24wg6n5

This article, written by the accounting firm LehmanBrown, is self-explanatory and addresses the issue directly. It very clearly outlines that FIEs must file audited financial statements with their local AICs. I encourage you to call or email LehmanBrown with any questions on whether SAIC financial statements must be audited.

2. tinyurl.com/2wzlr9b

This is an article by the president of Dezan Shira & Associates, a consulting firm focusing on Asian accounting, tax and investment practices. It also addresses the issue of SAIC audits by FIEs directly.

3. tinyurl.com/28jqe9a

This is a 2007 notice titled “Annual Inspection of Enterprises and Privately Owned Businesses” for the Guangzhou AIC. It says “An Audit Report is required for the following:… (b) Foreign-invested enterprises… The report shall conform to the requirements set forth in the Audit Code of China Certified Public Accountants promulgated by the Ministry of Finance.”

4. tinyurl.com/38y4h8f

This is a 2009 notice for the Zhejiang AIC entitled “A Guide of 2009 Joint Annual Inspection for Foreign-invested Enterprises in Zhejiang”. Under Documents to be Submitted, they list “the 2008 Annual Balance Sheet and the Income Statement audited by the accounting firm”. These audit reports are also submitted to the Finance Bureau, State Taxation Bureau and Foreign Exchange Administration

More on the topic

tinyurl.com/3xvqzzo – Circular on Implementing Joint Annual Inspection of Foreign-Funded Enterprises for Huizhou province

tinyurl.com/36ph6vw – another article from Dezen Shira

tinyurl.com/37mx3wl – a third article from Dezan Shira

Are SAIC financial statements filed eletronically?

No. But they are available to the Chinese public. Foreigners can access them by hiring third-party firms in China to access them.

Are SAIC financial statements filed only by Foreign Invested Enterprises?

No. But Foreign Invested Enterprises must undergo the Annual Inspection, which requires disclosure above and beyond the disclosure required by non-FIE companies.

Why do SAIC financial statements match for some companies and not match for other companies?

If a legal entity in China is a Foreign Invested Enterprise, it must file audited annual financial statements with the SAIC. If that legal entity owns substantially all of the Company’s operating assets, those audited financial statements should accurately reflect the underlying operations. If the SAIC and SEC financial statements do not match, the company is falsifying one set of its financial statements. It’s my opinion that in the cases where the SAIC and SEC numbers don’t match, the Company is falsifying its SEC financial statements. There are severe repercussions for defrauding one’s own government. There are no, or few, repercussions for a Chinese company defrauding foreign investors or American regulators. From a Chinese company’s perspective, the downside to falsifying SEC financial statements is minimal. The upside is that the Company can raise upwards of $100m+ from U.S. and foreign investors, even if the actual underlying business is worth a small fraction of its U.S. market capitalization.

Written by chinesecompanyanalyst

June 2, 2010 at 4:47 pm

2 Responses

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  1. > Foreigners can access them by hiring third-party firms in China to access them.

    Can you teach us how to do that and how much does it cost?

    AhYap

    June 15, 2010 at 2:57 am


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