China Deals Can Pose Accounting Conflicts
Monday, August 22, 2005
SHANGHAI -- It began as a joint venture aimed at capturing customers in China, the world's largest potential market for pretty much everything.
Radvision Ltd., an Israeli company whose stock trades on the Nasdaq Stock Market, had the products -- sophisticated videoconferencing equipment. Beijing Control Tech had the relationships with purchasing agents at government ministries and state-owned companies, which make up more than three-fourths of the market for such goods in the People's Republic of China.
But as Control Tech tells the story, the relationship soon devolved into a crude arrangement that could bring Radvision into conflict with the accounting rules that govern in the United States, where its stock rises and falls with its earnings. Nearly every quarter, Radvision pressured Control Tech to buy more gear even as unsold inventories mounted. Twice, these end-of-quarter sales allowed Radvision to meet its earnings targets, Control Tech executives said.
Radvision's general counsel, Arnold Taragin, issued a blanket denial, characterizing the company's dispute with Control Tech as simply a commercial relationship gone awry. "We do not negotiate commercial disputes in public," Taragin said by phone from Israel. "If Control Tech wants to do something, they can call me or they can sue us."
As China continues its relentless development, attracting more than $100 billion in foreign investment in the past two years alone, business is becoming a larger slice of overall revenue for many multinational firms. But as the Radvision case illustrates, the appeal of China profits may be compelling some managers for American and U.S.-listed companies to test the limits of acceptable bookkeeping, risking conflict with the Securities and Exchange Commission.
Two years ago, Radvision -- which has offices in Israel, New Jersey, the United Kingdom and Hong Kong -- gave Control Tech the exclusive rights to sell its high-end videoconferencing system in China.
According to Control Tech's general manager, this mutually beneficial arrangement changed late last year when Radvision brought in a new Asia-Pacific general manager, Eitan Livne.
Lean, fit and in his thirties, Livne was known to wear casual attire at business meetings, once showing up to negotiate a purchase in blue jeans and a black T-shirt, recalled Carrie Hartwick, president of Hartcourt Cos., which purchased Control Tech in February. The first time she met him, she was struck by what she termed Livne's "wheeler dealer" style.
"He told me that he had lived in China for six or seven years and he knew how to play the China game," Hartwick recalled. "He said 'In China, a contract means nothing. I can sign any contract you want, but at the end of the day we can do what we want.' I was shocked that an executive at a U.S.-listed company could so totally deviate from the expected level of corporate practice."
Reached by telephone in Hong Kong, Livne denied that account. "Nothing like this ever happened," he said, before asking for a list of written questions to which he did not respond.
According to Ren Qi, general manager of Beijing Control Tech, in December Livne flew to Beijing to press Control Tech for an end-of-year order. They met in a conference room at Radvision's China headquarters.
Ren says he demurred, because Control Tech was already sitting on more than $2 million in unsold equipment. Ren told Livne that he could only buy another $500,000, he said.