Traditional investigative approaches in China can lead a company into a sinkhole

Guest columnists Howard Wang and Kent Kedl posit that traditional investigations don't work well in China because of ingrained features of China's business and legal environment. They suggest changes that will help foreigners in their fraud examinations. — Tim Harvey

Multinational companies in China aren't strangers to internal investigations into employee and third-party malfeasance — using significant compliance, legal, audit and forensic resources in the process. However, rather than helping solve the problem, traditional investigative approaches are increasingly going wrong, which is leading to financial and reputational damage.

Poorly executed investigations in China fail to contain potential compliance, regulatory and business continuity problems, and can often increase the risk of scrutiny from government investigators, disruption to supply or distribution chains, and disgruntled employees venting on social media.

Here are some recent examples:

When the solution is the problem

Such situations are, understandably, frustrating for a foreign company's management: It's being defrauded, so it initiates appropriate investigations, finds credible evidence and then takes action.

Figure 1: Traditional "linear investigative approach"