Tidying the books

Observers say that when a foreign private equity firm is considering buying a Chinese company it’s amazing to witness the sheer numbers of men in grey suits that often descend upon the target. No, they say, this is not a deliberate attempt to intimidate managers unacquainted with the wiles of the LBO world into making a false move at the negotiating table. It is, in fact, a very necessary assembling of accounting talent.
“At the moment, private equity buyers will typically send in huge accounting teams,” says David Eich, head of the Hong Kong office at law firm Kirkland & Ellis. “And it’s not because of the labyrinthine demands of crossborder due diligence. It’s to create a whole new set of books when the existing ones can’t be relied on.”
All of which might be about to change, thanks to new accounting rules introduced by the Chinese Ministry of Finance in January 2007. The rules involve compliance with 39 standards structured to reveal the economic value of a firm, with the aim of using market prices wherever possible. “It doesn’t mean that Chinese companies will necessarily meet IFRS or GAAP standards, but it will take them a lot closer,” predicts Eich.
For the time being, the rules will apply only to listed companies.
However, where new accounting standards have been introduced in other countries, they have often been adopted by the largest and/or listed companies first before gradually becoming universal. Sources say this should also happen in China, whether by way of a natural trickle-down effect or through the lawmakers forcing the rules on everyone in due course.
In Eich’s view, such a development would be viewed as a “sea change” by private equity firms lured by China’s growth prospects but troubled by lax corporate governance. In the years ahead, expect to see more deal executives checking in for Beijing-bound flights and rather fewer number crunchers.