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The Globe and Mail

Canadian companies must apply proper auditing standards in China

Timber Plantations owned by Sino-Forest are seen in Tang Kong Village, near Gaoyao, Southern China on June 28, 2011.

Adam Dean/The Globe and Mail

There is a serious potential for numerous Sino-Forests; a report released this week by the Canadian Public Accountability Board invites a conclusion that other Canadian companies in China could melt down for lack of transparency.

Good though it is that Canada and China have now reached a bilateral investment-protection agreement, Canadian companies also need to protect their own investments abroad, by applying proper auditing standards when they carry on business in China – and in other countries with commercial cultures that are markedly different from Canada's.

The CPAB – which has certain disciplinary powers – examined 24 Canadian public companies that have their main operations in China. Twelve out of 24 audits required revisions; of these, nine audits had largely relied on Chinese firms. Sino-Forest Corp. itself may have been part of the review; the reports names no companies (or auditing firms).

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The board says that "the primary root cause" of these problems "is a failure to understand the business customs and practices" of China and other foreign countries, and that "the barriers to effective communications extend beyond language to include business etiquette, social expectations and personal relationships."

Some Canadian professionals may be tempted to regard Asian commerce as so mysterious and so opaque that they throw up their hands and slacken their standards. That would be a grave mistake.

Canadian firms need to deepen their relationships in China. But if they fail to comply with normal Canadian accounting practices, they will doom themselves to disappointment.

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