Compliance is to ensure that an enterprise’s operation complies with the relevant laws and regulations of the country. Its importance to the business is certain and obvious.

Here’s what a typical business organisation should do:

• Complete tax report on time
• Complete business annual report on time
• Pay social security for and provide salary to employees
• Issue invoices based on the substance of the business
• Proper use of company seal

Clear and complete accounting records are the foundation to the compliance. Without reasonable accounting records that reflect the real operation, compliance will be flawed. When an enterprise does not pay attention to daily accounting records, but only tries to “save the situation” by finding some so-called “Guanxi” after they were caught in investigation, such effort is usually useless.

In my consulting career, I have once encountered such a case:

The annual turnover of a domestic enterprise reached 30 million, and its net profit had exceeded 3 million. A full-time financial manager, recommended by the local investment office was recruited to run the accounting job. During his work, all the company seals and certificates were kept in his office. A few years later, when the local tax office raised questions on this company’s invoices, it was found after investigation that the invoices in question were issued by the full-time financial staff through his own company, and there were no real transactions.

As a result, the company was imposed to make tax adjustments and paid close to ten million for taxes.

First of all, below are some obvious compliance issues:

• All seals and certificates were kept by one person, lacking mutual supervision.
• Both the execution and the audit of online banking fell under control of the same person. No pre-approval process was applied for money transfer.
• Cashing out by issuing invoices through a sole proprietorship enterprise  itself does not comply with the law.

After taking over this case, my team made the following adjustment according to the company’s situation:

• Set up separate subsidiaries for different products of the enterprise. Through this separation of profit, those subsidiaries can enjoy a 5% discount on the corporate income tax rate when their annual net profit are less than 3 million.
• This corporate outsources accounting and tax services to my team. We use our cloud system to obtain corporate invoices in real time, effectively predict monthly VAT burdens, and optimize corporate cash flow.
• The official seal and financial seal are managed by the legal person of the enterprise, and the audit right of online transferring is also under his charge, so as to ensure that the legal representative can fully grasp the capital in and out of the enterprise.

After more than half a year of work, the corporate finally returned to the right track. The shareholders and legal representatives no longer had to worry about the safety of the corporate’s assets, and could finally fully focus on developing businesses.

In this case above, the service fee of the entire outsourcing team accounted for no more than 1% of the tax paid by the corporate at that time.

Had the management paid attention to the cooperates daily accounting operation, not only could they have avoided the storm of being scrutinized by the tax authorities, but also planned the tax earlier.

Lessons form this case?

Finding the right financial person or financial outsourcing team is a very important part of our business management. Spend some time beforehand to prevent the problem is much more effective than saving the situation afterward.