Overseas-listed private mainland firms have been involved in a lot of accounting scandals in recent months. But why is such fraud so rife?
The fact is there are many incentives for managers to break the law - such as bonuses and stock options linked to share-price performance - and the likelihood of getting caught is fairly remote.
That begs the question, whose job is it to detect fraud at public firms? The answer, of course, is the board, which holds a duty of care to protect shareholders from fraud perpetrated by management.
But many Asian companies combine the chairman and chief executive roles, or install the controlling shareholder occupying the chair position.
This puts the governance role in the hands of managers who control what can be the enormous wealth of a listed firm.
In such cases, fraud detection falls to a second tier of overseers, many of whom have shown themselves not to be up to the job. Ratings agencies, for example, routinely trail bond traders in assessing credit risk. But they were disastrously late in the game to downgrade fraudsters and defaulters such as Enron, WorldCom and Global Crossing.
The standard defence wheeled out by ratings agencies in the face of such embarrassments is that they can only rely on audited figures. If the accounts are false, well that is a matter for auditors.
