China’s rapid economic rise has changed the global economy and has attracted businesses from all over. China is now the world largest importer of goods and the largest contributor to GPD growth, a trend which is expected to continue for many years. Naturally, many businesses are looking at China as the next possible step for their business. But as accountants, how can we strengthen our relationship with clients when they decide to expand overseas? Especially, what criteria you can assess when looking for an accounting service partner in China.
There’s no shortage of advice out there telling you to “Join a global network of accountants.” But for most accounting firms, the number of clients looking to expand into China is relatively small compared to the membership fees – usually a percentage of firm revenue – of joining one of these networks. So rather than giving up a portion of your revenue or accepting that a client might leave you one day, accountants are going out of their way to develop international contacts of their own.
Keeping clients within your orbit, whether the service they require abroad are provided by you or not, has many benefits. Having international contacts to which you can refer your clients helps to strengthen your relationship with them as someone who is capable of supporting their business. And, as their business grows, they are less likely to outgrow your firm and more likely to consume higher value-added services in their home country.
The obstacle to overcome however is finding the right professional accounting firms to work with who can help you strengthen your relationship with your client and will deliver maximum value. When searching for a partner, it’s important to understand the three types of accounting firms prevailing in China.
Bare-minimum fapiao accounting
Bare-minimum fapiao accounting firms are more like ‘compliance only’ firms. They only record transactions for which an official VAT invoice has been issued or unless otherwise instructed by their client. When bare-minimum fapiao accounting methods are used it’s not uncommon for transactions to be incorrectly recorded and left on the financial reports for an indefinite period of time. Financial reports get distorted and the business is exposed to significant tax risks.
Manual accrual methodology is what most would consider being the minimum acceptable level of accounting practice. Accountants will collect all transactions information, including those transactions where an official VAT invoice hasn’t been issued, and manually generate transaction records in an accounting system of their choice. This is fine, though it’s a very labor-intensive process for accountants due to the amount of back-and-forth communication with the client required to manual accrue transactions correctly.
Cloud-based accounting is still emerging in China but works very similarly as it does elsewhere with a few added features to comply with local accounting and tax requirements. Megi is the pioneer and predominant player of cloud accounting software in China. Megi has Chinese-English bilingual interface and is fully localized in Chinese business and taxation environment, with features of highest level of usability. Cloud systems synchronize business activities with the accounting system so that accountants do not need constant back-and-forth communication with clients about transaction details. They find themselves overseeing transactions recorded automatically and reconciling data such as official VAT invoices for an overall higher quality accounting for the same amount of time. The same benefits of cloud accounting such as real-time data and accessibility apply in China as they do elsewhere in the world.
While no one type of accounting firm in China is best. Fapiao accounting is by far the most prevalent due to the way the industry was allowed to progress during China’s rapid development. It’s important to select a partner which can help strengthen your relationship with your client and deliver maximum value. This often comes down to: finding someone who is capable of quality output, a mutual ability to collaborate, and someone with a compatible pricing structure.
Accountants in China are overwhelmingly bookkeepers. While the bare minimum fapiao accounting methods may seem outdated, it’s still the most prevalent method used in China. The financial reports they provide are of little to no value for management decision making or in many cases are outright misleading. These are the ones who don’t understand or don’t care about quality output and you should avoid sending your clients to as it will end up costing them in the long run. They won’t realize the cost to their business until it’s time to adjust their financial reports or they’re caught in a tax audit. Manual accrual accounting and cloud accounting are both viable options. Quality output then comes down to finding the right firm that shares the same values in terms of assurances, professional principles, and transparency. When judging the quality of output, make sure to also assess the firm’s ability to provide value-adding services. Not all firms display these elements clearly and many will claim to be of the highest standard and practice transparency. Our Business Management Playbook for China covers this in great detail. Make sure to ask for evidence of these values and assess the integrity of the business before proceeding.
China has many very business-friendly policies to encourage foreign investment. Helping your client take advantage of these policies and create value for the client, which consists of a group of companies, takes collaboration between accountants. Whether your client sells to China or has a registered legal entity here, having a complete view helps minimize the overall tax liability and maximize take-home profits.
It might sound simple, but mindset is the most important factor here. The complexity of china is often exaggerated in order to sell basic accounting and compliance services. However, value-added services are certainly in demand in China and finding a partner with a healthy mindset toward value-added service and when they should be upsold to clients is a key element of collaboration. Some firms are better at this than others, as some prevailing methodology and communication styles prevent some firms to provide services like tax planning, group reporting, internal control and transfer pricing, which requires a thorough understanding of the regulatory environment as well as strategies and processes of client’s business on all sides.
Finding a partner who can communicate clearly, and practices transparency also leads to better visibility over operations in China for accountants back home. Where collaboration is a very important element for clients – cloud accountants – will be the most likely choice of partners.
Then there’s pricing
Pricing models are important because they give the client an indication of the value of your services and the time required to provide them. While there are real differences in factors that contribute to pricing across countries – such as salaries and rent – you wouldn’t want your client’s perception of the value of your service to change because of what they are offered elsewhere. For example, if you bill a flat fee and your accounting partner charges by the hour, your client might conclude that your hourly fees are unreasonably high. The same goes for billing. You wouldn’t want your clients to question a billable service which a partner of yours bundles together with their core services. Thus, when choosing a partner, it’s important that there is consistency in pricing models and billing to avoid confusing clients and damaging client relationships.
Your clients have a lot to learn about the new market they are entering in to. With the right professional accounting partner, you can help you clients to get their business started on the right foot without having to join a global network of accounting. By large, the most common accounting mistake foreign businesses make in China is selecting a bare minimum fapiao accounting firm simply due to how prevalent they are. As your clients grow, the question becomes whether they will outgrow their accounting firm. One simple way to ensure that clients stay with you as they grow and expand their business is to help them avoid common mistakes and support them in their expansion overseas.