Published June 24, 2009

S-chips: More clarity and greater enforcement needed

By R SIVANITHY

	Email this article
	Print article
	Feedback

THE problem with the local corporate regulatory regime is that it has plenty of rules in some places but not enough action or clarity in others. For instance, much has been written in the past few months about the need to tighten disclosure/ governance rules because of various lapses by mainly S-chips (or companies listed here with predominantly China operations) and the Singapore Exchange (SGX) has duly responded with various consultation/ discussion papers aimed at tightening the rules.

On Monday, SGX announced that after working with external auditors, it was able to verify the existence of bank balances reported by 80 per cent of listed companies with China operations, an announcement which should provide some reassurance to S-chip investors who have had to endure months of price collapses, profit warnings and accounting scandals.

Yet little has been said about how the rules - new or old - are to be enforced, who is to do the enforcing and how errant companies or their senior personnel are to be punished in the event of outright fraud.

This is no trivial issue given that many S-chips are Central Provident Fund-approved stocks. It would certainly be interesting if the authorities could reveal just how much CPF money has been poured into S-chips since these companies started making their appearance here several years ago, especially those which are currently under investigation for accounting irregularities; however, for now it should be enough to note that with some of the investing public's retirement money at risk in a sector tainted by scandal and fraud, a full-scale review of the relevant issues would not go amiss.

Before discussing enforcement, a note about responsibility and accountability. Speak to industry players and they'll tell you that a huge outstanding legal issue is that no one seems to know precisely how to deal with an S-chip incorporated overseas (usually Bermuda or the British Virgin Islands or China) which has its assets and operations in China and is found to have suffered from fraudulent activity in China. If senior management is responsible for perpetuating that fraud, can those officers be tried in a Singapore court? Or do the authorities here have to rely on their China counterparts? How easy is this to arrange? Do S-chip shareholders enjoy the same legal rights as investors in Singapore-domiciled companies with Singapore assets? Some clarity on these issues would surely be welcome since none currently exists.

Speaking of legalities, it's important to note that a regulatory framework that relies on disclosure complementing the maxim of caveat emptor - which is what the authorities here have been striving to achieve over the past decade - can only work if lapses are dealt with swiftly and decisively.

Self-regulation can only be attained if errant companies are punished by a regulator that comes down hard on lapses, thus sending strong messages to the rest of the corporate sector to tighten its act.

This has not been the case in Singapore where the preference - at least until now - has been to avoid a hardline stance and instead to rely on moral suasion and market-friendly arrangements for discipline.

There's a lot to be said for this approach as it takes into consideration commercial sensitivities; equally valid, however, is to study how other developed markets handle regulatory issues in the wake of accounting scandals.

One possibility - featured in this column before - is to study whether the United States' Sarbanes-Oxley Act (SOX) that was passed in 2002 after the Enron and WorldCom accounting frauds has any place here.

The SOX seeks to strike right at the heart of companies by targeting the personnel who are in a position to know better than anyone else what is actually going on and who are best situated to ensure that an honest view of a company's affairs is presented to the public.

As we noted before ('Tighten the screws to deter corporate fraud, BT Hock Lock Siew, March 11, 2005) if the chief executive office (CEO) has signed off on the accounts and if those accounts were later found to be false or fraudulent, then there's no need for endless debates, consultation, feedback and hand-wringing - simply prosecute the CEO, end of story.

Presently, CEOs here have to sign off on the accounts but it's not clear what the liabilities are if the accounts are subsequently found to be fake. Again, more clarity would be welcome, especially if the CEO is domiciled overseas, say in China.

Critics of an SOX-type, harsher approach might argue that if people want to commit fraud and cheat, then they will always find ways to do so, and no amount of regulation can completely prevent fraud.

While this is true, it is wholly illogical to argue that because people will cheat, there's no point in having rules and punishment to deter cheating from occurring in the first place. This is because when it comes to protecting the public's interest, the attitude should be one of no compromise - especially since CPF money is involved.