The Wall Street Journal has a DIY Guide to Exposing Dodgy Companies that reminded me of a due diligence trip I took in China a couple years ago. I was leading a group of European investors through deepest Zhejiang province. They were interested in acquiring a Chinese company in the home decoration industry. We had identified three potential targets. All it took, though, was a visit to the first company for the group of straight-laced Westerners to understand how businesses operate in China – and just what sort of business model many Chinese companies are attempting to export to the world.

Two brothers in their early thirties owned that first company. The factory was actually in the middle of the city, in a compound that had once been the site of a State-Owned Enterprise. The brothers were soft-spoken, courteous even, and solicitous. Settled in the spare conference room, the parties talked about the business and prospects for growth. The Europeans asked to see the accounting records for the company. One of the brothers and an assistant, a young woman in a factory smock, brought out two great ledgers, hand-written. Two books? the Europeans queried.

“Oh, one book is for us and the other for the tax authorities,” one of the brothers answered blithely. “They don’t want us to report too much income, so we have to keep the records elsewhere.,” he explained. Apparently, the difference in actual vs. reported was negotiated and channeled to tax patrons. Neither of the brothers considered maintaining at least two sets of books or tax negotiations or contorted shareholding structures at all improper. It was just the way things ran in China. Visits to the remaining two targets revealed the same modus operandi.

It’s no wonder, then, that Chinese businesses seem genuinely aggrieved that Western shareholders and stock exchanges consider their business dealings improper at best, down-right illegal at their most dramatic. After all, what’s worked for a society for thousands of years must be good for the rest of the world.

Mustn’t it?

image credit: factsanddetails.com