Monday 12 January 2009
Corporate Fraud Scandals Can Happen Anywhere
The approach recognises that while in developed countries, outright bribery may be less prevalent, companies can sometimes benefit from ‘legal corruption’ by achieving undue influence over regulation and policymaking. In such an environment, lax oversight and corporate scandals can be expected.
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Corporate Fraud Scandals Can Happen Anywhere
12 January 2009
When it comes to corporate fraud scandals, nowhere is safe.
Revelations of a US$1 billion fraud at Indian information technology firm Satyam Computer Services do not point to a higher systemic risk of accounting scandals in India, or even in emerging markets versus the developed economies, governance experts said.
With a global financial crisis ruthlessly exposing wrongdoing that would be easier to hide in less stormy conditions, more major frauds are likely to come to light this year. To predict where, traditional analysis of governance offers little help.
Most attempts to measure and compare corporate governance and regulatory quality among countries show that standards are far higher in richer countries than the developing world.
The World Bank’s annual World Governance Indicators rate US regulatory quality at 90.8 out of 100. India is rated 46.1 - below South Korea (78.6), Malaysia (67.0) and Thailand (56.3) but above China (45.6), Indonesia (43.7) and Vietnam (35.9).
Assessing the integrity of accounting practices, the Economist Intelligence Unit gives India a rating of two on a scale of zero to four, where zero is the best. That puts it above China, the Philippines and Vietnam, rated three, and Indonesia, rated four.
The apparent message from these rankings is that a corporate scandal in India was hardly unexpected, but that other emerging Asian economies are even more vulnerable - and investors in China and Indonesia have plenty of reasons to be worried.
Yet this is only part of the story. If cooking the books is more common in countries with poor governance rankings, nobody told the world’s corrupt executives. Scandals have been just as likely to erupt in supposed havens of corporate probity. ‘Corporate governance in many emerging markets companies is actually better than in more developed markets. It has needed to be robust in order to attract capital,’ said Christoph Avenarius, an emerging markets specialist at Credit Suisse.
The Enron, WorldCom and now Madoff debacles have shown how vulnerable the US has been to corporate fraud. Germany has had a series of scandals too. South Korea, supposedly with among the best corporate governance in Asia, has a long history of murky behaviour by some of its chaebol conglomerates.
To explain why conventional measures of governance and corruption fail to reflect the risk of corporate malfeasance, economists have been researching the concept of ‘state capture’.
The approach recognises that while in developed countries, outright bribery may be less prevalent, companies can sometimes benefit from ‘legal corruption’ by achieving undue influence over regulation and policymaking. In such an environment, lax oversight and corporate scandals can be expected.
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