The Chinese market for entertainment has grown exponentially over the last several years. With U.S. entertainment companies forming “co-production joint ventures” with various Chinese film production companies, the need for accuracy and completeness of foreign distribution becomes more significant. Based on my experience with profit participation auditing in China, here are three things to keep in mind:
#1: Understand the Cultural Differences
Understanding the cultural differences in China and the way business is conducted is paramount when navigating a review of the books and records in that territory. Often business in China is based on relationships and a signed agreement becomes a starting point for negotiations — which is vastly different from the U.S. While hiring a local firm may seem to make sense given that they will culturally be a better fit, it may not be beneficial as they may take information provided with a stance of “business as usual” without the professional skepticism necessary to uncover systemic issues. It is important to ensure your auditors have such an understanding to effectively navigate the audit process.
#2: Define Contract Interpretation Terms
When dealing with a foreign entity that operates daily in a different language from your own, it is always best to have an official translated copy of the agreement. You should also have a clause in the agreement, be it for distribution of a movie, licensing an IP or anything else, defining where a certain translation will prevail. This will help in your interpretation of the agreement, should there be ambiguity. The Chinese language can have many ways of translating a sentence in an agreement, which may not capture the original intent of the English version. By having an official translation, as well as a prevailing translation, we have seen interpretive issues handled much more quickly and amicably.
#3: Review Local Controls and Laws
As is the case in most foreign territories, monitoring controls and specific laws vary and can potentially result in reporting errors or omissions of revenue. Performing a review of local controls and laws will ensure that the terms of the agreement are adhered to and are reflected accurately on your statement. Oftentimes, allowable business practices in that territory may not be aligned with the terms of the agreement — this would go undetected if performing just a cursory review of the books and records in a summarized form.
As an example, when we were performing an audit in China, local customs and practice in accounting allowed for treatment of expenses to be passed on and reported to the U.S. entity; however, the audit revealed an error that we were able to address. Without performing such a review, these expenses would have been allowed to continue being passed through incorrectly.
Conclusion
Although each audit is different, I hope that this information provides insight into working with clients from other countries and cultures. It is always important to be conscious how actions and words can be translated differently depending on language and culture and to research these impacts when engaging in business in another country.
Should you have additional questions, please contact GHJ at 310-873-2600 or email info@ghjadvisors.com.
