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Investigator: Our colleague is sent to visit and pretend to be a buyer
by showing interests in the products and ask about the style, quantity, and sales.
The environment can tell us the size of the store isn't very big, not many shop keepers to help,
and its sales and revenue doesn't seem to match what was reported.
They can exaggerate quite a bit, sometimes 3 to 4 times more than what they reported.
Reporter: This type of investigative actions are common to learn if a company reports false information.
Kelvin Ko: We conduct site visits to the factories or to the suppliers.
We had a case where a factory claimed they operate 12 hours per day.
When we sent investigators for a site visit, we discovered electricity was stopped at scheduled times every week,
which doesn't support their claim of production schedule.
Aside from searching for red flags from accounting books and records,
it is also important to conduct field investigation to verify facts.
Reporter: According to Andy, reports from Muddy Waters Research about accounting problems on Chinese companies
caused an increase to businesses seeking for accounting forensic assistance.
Many US and European investors seek assistance from them to investigate on potential companies they want to invest.
Andy Cheung: It can be private equity or fund companies, and other companies from different industries.
Some companies can be of different industries and interested to acquire or invest in Chinese companies that does similar business.
Reporter: To learn more about a business operation and status, it's common to use a third party to gather and verify information.
Kelvin Ko: The study of a company's surrounding parties is needed,
such as their competitors, service providers, suppliers, staff, and even customers and industry reputation.
A lot of times, information can be gathered from these sources.
For example, a supplier may tell us a factory has a lot of credit terms and they may have cash problems.
Reporter: Accounting provdies general information on the numbers and accounts
and forensic accounting provides information for each account and transaction in a more thorough manner.
To fully investigate a company normally takes about 2 months.
Andy Cheung: Forensic accounting is like being at a crime scene looking for blood stains and DNA evidence.
Obviously, for accounting we're looking at accounts and records.
When we arrive at a company we look at their accounts and records
to check if the surface information they provided is what they claim to be.
Reporter: According to Andy, when records show problems, connected transaction is a common cause.
There are also local companies that seeks forensic accountants for advice and assistance
to raise internal standards and to avoid potential accounting problems working with Chinese companies.
Reporter: Reported by Iris Wong from iCable