The FMCG Insider: 5 Minutes with Tim Klatte from Grant Thornton China

Interviewed by Kourosh Asghari 柯罗诗, VP Consumer Industry, Cornerstone Global Partners (CGP Group)

The FMCG Insider is a look inside “The Great Wall of China’s Consumer Industry” through the eyes of local and foreign experts* as interviewed and summarized by Kourosh Asghari, VP of Executive Search firm Cornerstone Global Partners (CGP Group).

This is our September 2024 issue of "The FMCG Insider" featuring a conversation with Dr. Tim Klatte, the Partner of Grant Thornton Shanghai and the Head of Shanghai Forensic Advisory Services. View the previous issues with GN ReSound, Blackmores and Ferrero.

Meet Dr. Tim Klatte - DBA, CFE, CFI, PMP, GRI , the Partner of Grant Thornton China（致同） and Head of Forensic Advisory Services

• Tim leads a team of around 40 forensic professionals, focused on Forensic Accounting, Forensic Technology, and Integrity Due Diligence Services.
• Tim studied in Henan, Kaifeng, in 1994 while in college and has been focusing his career on China for more than 30 years and is also an Adjunct Professor at two Shanghai-based universities at the Masters’ Level.

Kourosh: Could you tell us about some of the work that you have completed for companies?

Tim: At Grant Thornton’s Forensic Advisory Services, we focus on three areas when serving clients.

First would be what we would call Forensic Accounting services. Forensic accounting services include fraud investigations, event monitoring, anti-corruption and anti-bribery advisory, whistleblowing activities, compliance training, expert witness support, and other litigation service support. The Forensic Accounting area is very wide and covers many areas because we are looking at all types of compliance and risk management services.

The second would be our Forensic Technology services. These services assist clients in collecting, processing, hosting, and structuring unstructured data to detect fraud, support litigation, and resolve litigation-related matters. With Forensic Technology, we are looking at areas like eDiscovery and fraud risk in terms of cybersecurity, as well as data analytics, network penetration, prevention, and incident responses.

The third part is called Integrity Due Diligence services. Integrity Due Diligence involves advising clients on the reputation of their business partners and third parties, focused on issues surrounding it to understand their track record and history. It also helps with the integrity of the individuals or companies involved.

So, with those three areas, and ideally with all three working together in an investigation, we can provide clients with forensic advisory support.

Kourosh: You have been doing this work in China for over a decade - what changes have you seen over this period? What is different in China vs other countries?

Tim: The landscape in China has significantly improved in professionals’ awareness and focus on compliance matters. These improvements have allowed professionals like myself to redefine my career and be more innovative in terms of career options.

1. First, not only can I serve clients and advise on corporate compliance challenges, but I can also teach university courses on Ethics and prepare tomorrow’s leaders in China.
2. Second, we can open new service lines, responding to our clients’ needs to create new opportunities that we did not have before. During covid, when travel restrictions were in place, we conducted many Risk Assessment projects for clients to support compliance strategies with the subsidiaries.

So, working in a dynamic place and in a dynamic environment like China, we were able to expand our services and be innovative.

There are numerous professional perspectives on the differences between China and my country. Working in China, helping clients with fraud risk management issues, we have to be aware of not only the local laws here in China but also the laws in their headquarters country. One of the differences is that we certainly have to have that knowledge and understanding of the local environment. The maturity model is often higher in the other overseas offices. For example, in the United States, the forensic discipline is more focused on expert witness support, and other types of accounting fraud support are at a more mature stage.

Here in China, there is still much development taking place, and there are also many improving and upgraded laws that are happening. The model is different when serving clients here, and we need to know (and follow) the laws in both jurisdictions.

Kourosh: There have been several high-profile scandals recently – are things getting worse? Is there any relationship between different economic cycles or geopolitics to the likelihood for causes to occur?

Tim: I have indeed noticed several high-profile scandals recently, such as an anonymous whistleblower accusing one European company of bribing third parties to boost sales and another European company reporting workplace bullying and accepting kickbacks by Chinese district managers. In my opinion, these exposed scandals do not mean that things are getting worse but that companies are becoming more compliance-focused, encouraging more people to speak up about misconduct.

I do believe there is a relationship between economic cycles and the likelihood for causes to occur. There is a well-known theory about the causes of fraud - the fraud triangle. This theory explains that three interrelated elements enable someone to commit fraud: the motive or pressure that drives a person to want to commit the fraud, the opportunity that enables him to commit the fraud, and the ability to rationalize the fraudulent behavior.

During periods of economic growth, businesses may invest heavily in expansion, innovation, and new technologies. This can lead to increased opportunities but also higher risks if investments are poorly managed. Recessions often result in financial strain for businesses and consumers. This can lead to cost-cutting measures that might compromise compliance and internal controls.

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Kourosh: In the consumer and retail industry, what are the major risks for compliance breaches and fraud cases?

Tim: In the consumer and retail industry, compliance breaches and fraud cases can pose significant risks. Here are some examples of the major risks associated with these issues:

Data Privacy & Security

• Data Breaches: Unauthorized access to customer data can lead to identity theft and financial loss.
• Non-Compliance: Failure to comply with data protection regulations like GDPR or CCPA can result in hefty fines and legal consequences.

Supply Chain & Vendor Risks

• Supplier Non-Compliance: Suppliers failing to meet regulatory standards or ethical guidelines.
• Counterfeit Goods: Purchase of counterfeit or non-compliant products that can damage the brand’s reputation.

Online & E-Commerce Risks

• Phishing and Scam Websites: Fraudulent sites impersonating legitimate retailers.
• Third-Party Risks: Vulnerabilities in third-party e-commerce platforms or plugins.

Kourosh: What are some risk signs or signals that companies should be looking for?

Tim: We often call those risk signs or signals red flags. Red flags serve as crucial indicators of potential risks, which vary across different trading processes. Therefore, it is imperative to engage all company employees in identifying red flags to detect any fraudulent activities promptly.

A red flag is typically an unusual situation in the transaction process that violates company policies and does not conform to industry norms or common practices. We should also observe changes in individuals’ behaviors, as obvious changes in the perpetrator’s behavior are often also signals of fraudulent activities.

Here are some examples of the red flags to watch for:

• Revenue Fluctuations: Unexpected drops or spikes in revenue may indicate issues such as market manipulation, compliance breaches, or operational inefficiencies.
• Irregularities in Records: Discrepancies or anomalies in financial records, expense reports, or inventory can be red flags for internal fraud or mismanagement.
• Unusual Employee Behavior: Signs such as employees living beyond their means, reluctance to take vacations, or frequent changes in financial habits may indicate potential fraudulent activity.

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Kourosh: With compliance and risk management processes, there is a fine line between implementing textbook best practices and stifling the speed and flexibility of an organization in China. What are the key components of “Good Practice”?

Tim: Balancing compliance and risk management with organizational agility is indeed crucial, especially in a dynamic business environment like China. Implementing “good practice” in compliance and risk management involves several key components that help ensure effective oversight while maintaining flexibility.

The U.S. Corporate Sentencing Guidelines provide a benchmark and foundational guidance for organizations in all countries to develop an effective compliance program. These guidelines set forth the following seven factors that are minimally required for a corporate compliance program to be considered effective:

1. Established standards and procedures to prevent and detect criminal conduct
2. Proper assignment of responsibility and oversight for the compliance program
3. Due diligence in the hiring process to ensure the ethics of individuals who exercise a substantial measure of discretion in acting on behalf of an organization
4. Periodic and practical communication of the compliance policy through effective training programs and other means
5. Steps to ensure program compliance through monitoring, auditing, periodically evaluating the program’s effectiveness, and having a publicized reporting system
6. Promotion and consistent enforcement of the program through appropriate incentives for compliance and appropriate disciplinary measures for violations.
7. Reasonable response to any discovered criminal conduct in order to prevent further similar criminal conduct, including making any necessary modifications to the organization’s compliance and ethics program

Kourosh: What should a company do to avoid and be prepared for things if they do happen?

Tim: To effectively manage and mitigate risks, a company should adopt proactive measures and prepare for potential issues. Here are some approaches for both avoiding and being prepared for problems:

• Conduct Risk Assessments: Regularly identify and evaluate potential risks across all areas of the business, including operational, financial, regulatory, and reputational risks.
• Establish Risk Mitigation Strategies: Create detailed plans to address identified risks, including preventive measures and controls to minimize the likelihood of issues occurring.
• Invest in Training and Awareness: Provide regular training to employees on risk management, compliance requirements, and emergency procedures. Foster a culture of risk awareness through ongoing communication and reinforcement of key policies and procedures.
• Implement Monitoring and Detection Systems: Use monitoring tools and systems to track key risk indicators and compliance with policies. Develop systems to detect early signs of potential issues, such as financial anomalies, compliance breaches, or operational problems.
• Establish Effective Governance & Oversight: Set up a governance framework with clear roles and responsibilities for risk management and compliance. Ensure that senior management and the board of directors are actively involved in overseeing risk management efforts and addressing major risks.
• Ensure Effective Communication: Establish clear communication channels within the organization for reporting and addressing issues. Develop a communication strategy for interacting with external stakeholders, including customers, regulators, and the media, during a crisis.

Smaller biz: Large organizations are expected to devote more formal operations and greater resources to meeting the requirements than are small organizations. For example, smaller organizations may use available personnel rather than employ separate staff to carry out ethics and compliance.

In conclusion, I would like to leave you with the quote “If you think the cost of compliance is expensive – you should think of the cost of non-compliance.”

Get in touch with Kourosh Asghari 柯罗诗 at [email protected] to talk more about the FMCG industry, especially if you are looking to hire talent to grow your business.

*The above interview transcript features a conversation with an individual who is not representing their company. It is important to note that the views expressed during this interview are solely those of the individual and do not necessarily reflect the opinions, policies, or beliefs of their employer or any affiliated organization. The purpose of this interview is to provide insights and perspectives from a personal standpoint rather than as an official representative of a particular company.