The recent slew of corporate fraud and scandals is testing the integrity and reputation of the Singapore securities market.
Broadly, they can be placed in three categories.
The first is where audited numbers appear to have been simply cooked up, as in the case of Oriental Century. Then there are balance sheet irregularities, including missing cash and doubtful receivables (Fibrechem, China Printing & Dyeing and China Sun). Finally, there are cases of apparent poor risk management (FerroChina, Celestial NutriFoods, China Enersave, and Sino Environment).
These incidents have severely damaged the reputation of the Singapore Exchange (SGX) as a listing gateway for Chinese companies. More critically, investors have lost confidence in China stocks listed in Singapore.
This is a pity since these companies have often provided a much needed catalyst for interest in the broader market.
Drastic steps may be needed to restore investor confidence.
Recently, the SGX put independent directors (IDs) and audit committees on notice to be more vigilant. This is an irony, as this is what these people should be doing anyway.
But why have they not been able to prevent the scandals that have come to light?
Depending on who one speaks to, the answers vary. Some IDs claim that they are not paid to look after risk management. Others say they are not plugged into the inner workings of the company.
Such explanations don’t hold water. IDs have a fiduciary duty which embraces both the spirit and the code of corporate governance.
While internal controls are the responsibility of the management, all directors, including the IDs, should be held answerable for corporate misbehaviour. It’s one thing for businesses to fail because of changes in the operating environment. But business failure due to corporate misdeeds is something else.
The standard course of action has been to suspend trading of the company’s shares, appoint special auditors, and take some action against the wrongdoers.
Perhaps it is time to widen the web of accountability to the other parties and individuals who have a duty to provide a check against corporate misdeeds. These include not just IDs, but also auditors and financial advisers.
The Accounting and Corporate Regulatory Authority (Acra), which has urged auditors to look more closely at corporate numbers, should subject the work of auditors to greater scrutiny, and take a tougher line if they are found to be not up to scratch.
Financial advisers and issuer managers should also be put under the microscope, especially if fraud happens soon after the initial public offer. Apart from suspending them from managing new issues for a period, perhaps they should be asked to pay back their advisory fees as a penalty.
As for the directors, especially IDs, it is time for some serious quality control.
In recent years, there has been an emergence of a class of ‘professional IDs’ who sit on many boards and companies in different industries.
Many tend to be retired professionals or well-connected individuals. Many sit on half a dozen or more boards. This raises questions about their ability to discharge their duties properly.
Specific provisions should be made to ensure that IDs are qualified for the job. And if they are, they should be paid appropriately, to reflect the higher levels of accountability and responsibilities that now come with the job.
The question many in the market are now asking is whether, apart from being put on notice, IDs should also be subjected to investigation and punitive action if fraud happens right under their figurative noses.
And how can overseas based IDs (read: China) be brought here to face the music?
Addressing corporate fraud is not an exact science. There are no precise solutions.
The bottomline is to have an effective system of ‘carrots and sticks’ to ensure that parties who have oversight responsibilities carry them out properly.
1 comment:
Time to widen accountability
By VEN SREENIVASAN
31 March 2009
The recent slew of corporate fraud and scandals is testing the integrity and reputation of the Singapore securities market.
Broadly, they can be placed in three categories.
The first is where audited numbers appear to have been simply cooked up, as in the case of Oriental Century. Then there are balance sheet irregularities, including missing cash and doubtful receivables (Fibrechem, China Printing & Dyeing and China Sun). Finally, there are cases of apparent poor risk management (FerroChina, Celestial NutriFoods, China Enersave, and Sino Environment).
These incidents have severely damaged the reputation of the Singapore Exchange (SGX) as a listing gateway for Chinese companies. More critically, investors have lost confidence in China stocks listed in Singapore.
This is a pity since these companies have often provided a much needed catalyst for interest in the broader market.
Drastic steps may be needed to restore investor confidence.
Recently, the SGX put independent directors (IDs) and audit committees on notice to be more vigilant. This is an irony, as this is what these people should be doing anyway.
But why have they not been able to prevent the scandals that have come to light?
Depending on who one speaks to, the answers vary. Some IDs claim that they are not paid to look after risk management. Others say they are not plugged into the inner workings of the company.
Such explanations don’t hold water. IDs have a fiduciary duty which embraces both the spirit and the code of corporate governance.
While internal controls are the responsibility of the management, all directors, including the IDs, should be held answerable for corporate misbehaviour. It’s one thing for businesses to fail because of changes in the operating environment. But business failure due to corporate misdeeds is something else.
The standard course of action has been to suspend trading of the company’s shares, appoint special auditors, and take some action against the wrongdoers.
Perhaps it is time to widen the web of accountability to the other parties and individuals who have a duty to provide a check against corporate misdeeds. These include not just IDs, but also auditors and financial advisers.
The Accounting and Corporate Regulatory Authority (Acra), which has urged auditors to look more closely at corporate numbers, should subject the work of auditors to greater scrutiny, and take a tougher line if they are found to be not up to scratch.
Financial advisers and issuer managers should also be put under the microscope, especially if fraud happens soon after the initial public offer. Apart from suspending them from managing new issues for a period, perhaps they should be asked to pay back their advisory fees as a penalty.
As for the directors, especially IDs, it is time for some serious quality control.
In recent years, there has been an emergence of a class of ‘professional IDs’ who sit on many boards and companies in different industries.
Many tend to be retired professionals or well-connected individuals. Many sit on half a dozen or more boards. This raises questions about their ability to discharge their duties properly.
Specific provisions should be made to ensure that IDs are qualified for the job. And if they are, they should be paid appropriately, to reflect the higher levels of accountability and responsibilities that now come with the job.
The question many in the market are now asking is whether, apart from being put on notice, IDs should also be subjected to investigation and punitive action if fraud happens right under their figurative noses.
And how can overseas based IDs (read: China) be brought here to face the music?
Addressing corporate fraud is not an exact science. There are no precise solutions.
The bottomline is to have an effective system of ‘carrots and sticks’ to ensure that parties who have oversight responsibilities carry them out properly.
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