Economic Review:
Corporate governance, frauds and control measures
by Sunil KARUNANAYAKE
"The ten commandments or the Dhammapada alone cannot make a human
being complete. It is the true practise of the tenets by that individual
that would make him succeed.
It is thus the ethical behaviour of companies that can make the
difference. At the end of the day, the company, the stakeholders and the
society at large should be happy that the company is a clean house and
not a dirty one. In a nutshell these are golden rules to be followed by
any board, listed or otherwise"
(Duties of company Directors and corporate governance in Sri Lanka-
Dr Harsha Cabraal)
Corporate scandals in the developed world and its consequent effects
on investors and public have seen the emergence of new laws and
tightening of the regulatory regimes and formalising corporate
governance.
Insider dealing or the "white collar crime" is one of the commonest
crimes committed in the stock market activities. In Sri Lanka
prohibition on insider dealing was first introduced by the companies Act
No 17 of 1982 but now it is imposed by the Securities Exchange
commission(SEC) Act. Insider dealing comprise a process of obtaining
price sensitive information by people who have access to such
information from the organisations. Those who possess such information
will be in an advantageous position in the ultimate situation in trading
in securities that is considered an offence.
It was not long ago, that Sri Lankan born Raj Rajaratnam, former head
of the multi billion dollar Galleon group hedge fund was sentenced to a
prison term of 11 years by the US High Court after having been found
guilty of " Insider dealing". Prosecutors has pushed for 25 year
sentence after convicting Rajartnam in the biggest insider trading
investigation ever conducted by US authorities.
Legal experts said that while prosecutors may have been disappointed
with the decision, the sentence was still the highest ever given for
insider dealing.
Prosecutors found that Rajaratnam had used a network of insiders to
gain illegal tips on some of the world's biggest companies including
Goldman Sachs,Google, and Hilton.The scandal also dragged a former
Director of Goldman Sachs, a Director and a former head of Mckinsey
management consultant group who are now said to be facing criminal
investigations.
One of the key signs in the post war scenario was a booming a stock
market with many IPO's and new players entering the fray. In Sri Lanka,
recently there was much concern on stock market activities that prompted
the state agency Securities exchange commission (SEC) to move in for
punitive action. Consequently two eminent former- public servants were
among those who had to face charges for disclosure lapses and pay hefty
fines.
The SEC also had to warn some members of the broker fraternity for
misdemeanors.. But to date no prison sentences have been delivered. The
SEC was also forced to take action to ensure that just and equitable
schemes to ensure are in place and all applicants in public share issues
are given a fair deal depriving total dominance by few big players.
Risks
"Under the influence of delusion and greed, greater and greater risks
are taken by financial institutions and investors and investors to bring
in greater and greater profits in shorter and shorter time spans.
Thus, a financial institution or business which only functions for
the benefit of its Directors or shareholders, desiring to grant them
ever greater bonuses and dividends, and shirk responsibility to wider
society and the environment can turn out to be parasites". (Protest
against greed)
Corporate governance has been defined in many ways, it's recognised
as a set of mechanisms through which firms operate when ownership is
distinct from management.
Corporate governance is also identified as the manner in which
companies are directed, controlled and managed. It is the responsibility
of the board of directors to ensure that governance principles are
observed. It is also being reported that if a country's overall
governance systems are weak voluntary governance mechanisms could fail.
Corporate governance once confined to board rooms, academics and policy
forums has now become a buzz word in the corporate circles.
Forerunner to the priority for corporate governance were the
financial crisis in Asia, Russia and Brazil in the late nineties that
was threatening the global financial stability equilibrium, then the
corporate scandals in USA and Europe in the new millennium further
aggravated the situation. This did create awareness for formalizing good
governance principles to minimise corporate scandals.
Recent global financial crisis too was attributed to poor governance
particularly in the financial sector. With the deregulation, growing
free trade, collapse of totalitarian regimes global integration has been
strengthened providing for investment and fund flows freely across the
barriers. This fact too was another reason for the emergence of
corporate governance
While in UK a committee headed by Sir Adrian Cadbury on financial
aspects of corporate governance proceeded to set up corporate governance
process, in the early nineties, in Sri Lanka Institute of Chartered
Accountants of Sri Lanka played the pioneering role in introducing the
first ever code in 1997. Later in 2005 together with the Securities
Exchange Commission (SEC) ICASL set up a process to revise the code.
Thereafter SEC and ICASL worked together in drafting the corporate
governance listing rules applicable to listed companies through the
Colombo stock exchange that became mandatory from 2008. ICASL has gone
further to give priority to compliance on corporate governance through
the Best annual report competition that that is being eagerly awaited by
the corporate sector.
It has been proved that companies practising good governance
principles benefit from access to financing. Low cost capital, more
favourable treatment to all stakeholders and public acceptability.
Historical evidence also proves that when a country's overall corporate
governance systems are weak voluntary corporate governance mechanisms
too deteriorate. It could also be argued that poverty and suffering is
less in countries that practise good governance principles Sri Lanka
came up with a new company legislation in 2007 that provided for
shareholder safeguard by ensuring adequate representation of non-
executive directors are appointed thus maintaining a proper board room
balance.
The corporate governance code defined the necessity for audit
committees and its composition. In addition provision was also made for
director's responsibility on duties of directors in insolvency and
serious loss of capital. To date, probably only one court case invoking
this section has been reported. Perhaps this reflects that directors
have not contravened the section 219; 220 of the Companies Act.
Developed countries have been moving swiftly on fraudsters with
appropriate legislation and have been able to prosecute them.
Investigators tasks are made difficult with the new breed storming in to
the IT areas.
Bribery
While white-collar crimes are in the increase organized crimes in
terrorism, bribery and corruption have not slowed down providing
enormous economic gains to criminals. Legal and prosecution machinery in
the third world are still behind times and the cost to the citizens of
these could be significant.
Sri Lanka in 2006 formalized legislation on terrorist financing and
Money laundering two areas where fraudulently earned money is channeled.
It is most common for criminals who engage in fraud to slip out of the
home country to escape prosecution.
It was not long ago that a VAT scam involving over RS 3 billion of
public funds hit the headlines and some of the suspects are said to have
escaped from the country.
Accord to research based information UK frauds cost the country over
14 billion pounds annually with the majority of the losses borne by the
public.
The UK government is taking a serious view of the alarming increase
in crime and particularly the IT related cases prompting the government
to introduce a Fraud Bill in the Parliament. A few years back there was
some euphoria when there was some speculation that Sri Lanka Government
was going to appoint an anti Corruption commission but this thought
never saw the light of the day.
The Permanent Commission for Bribery and Corruption, declaration of
Assets by Public officers and Parliamentary select committees for
Parliamentarians, Ombudsman are some of the existing checks in the Sri
Lankan system, unfortunately these instruments to date have failed to
meet the growing civil society demand and confidence for corrupt free
society.
In the developed west and the industrialised East Asia, corruption is
treated with all seriousness with prosecutions and punishment to the
guilty.
Countries in the region such as India (Central Vigilance Commission),
Hong Kong (Independent Commission against Corruption), Bangladesh
(Bureau of anti Corruption) and Singapore and other countries like
Australia (ICAC), UK, USA and even some of the African countries have
already enacted legislations to give strength to " Fight against
Corruption", a priority need.
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