The Sarbanes-Oxley Act of 2002 ("the Act"), the United States' response to a number of high profile corporate scandals, is having a significant impact on the way US companies are run, and Mergers and Acquisitions ("M&A") have not escaped its effect. While M&A does not get a specific mention in the Act, the implications for deals are far reaching.
 
If management or the auditors become aware of a material weakness in a newly acquired entity, they have a responsibility to disclose that weakness. There is no option of hiding behind the one year exemption of the Act once a problem becomes known. In an acquisition scenario, this means that a significant amount of focus needs to be placed on internal controls and documentation thereof, in order to assess the financial and other implications of ensuring compliance with the Act.
 
Methods of avoiding tax, such as keeping two sets of books, and a lack of reliable historic financial information, are often encountered. There can often be a lack of transparency caused by related party relationships and transactions not being fully disclosed, and a mixture of corporate and personal assets being reflected in company accounts. Typically many companies rely on a far greater proportion of manual controls due to the relative lack of sophisticated IT systems, and traditionally many Chinese companies have been controlled through the close involvement of the owner in day to day business matters, rather than a code of formal and documented (and testable) controls.
 
Issues faced by the large State Owned Enterprises, in particular, can include poor corporate governance, caused by the lack of an independent management board, an ineffective audit committee, the lack of a formal risk management process and ineffective financial reporting.

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