The 2001 US corporate accounting scandal involving several major blue-chip companies and a world-famous accounting conglomerate came as a rude shock not only to the Americans, but also to those foreigners who admired the much acclaimed American management system.
This scandal is all the more alarming because the companies implicated were mostly trusted household names and the perpetrators were their highest level executives. Starting with Enron, the largest US energy-trading company, the contagion spread quickly to other heavy weight enterprises like Global Crossing, Tyco, Qwest, WorldCom, Xerox, Merck, Bristol-Myers and Arthur Anderson.
These rogue executives’ alleged lapses or criminal acts included fraudulent accounting, tampering with financial records, destroying incriminating documents and other serious breaches of sound accounting and regulatory practices.
Their main motives were to mislead their company’s shareholders and the investing public by dishonestly inflating its equity value in order to protect their own shareholdings in the company stocks in a falling stock market. Never in American corporate history has so few employees inflicted so much irreparable damage to the nation’s economy and its international image.
Their actions have wiped off billions of dollars in their companies’ market capitalisation. They led to the disintegration of three companies, threatening the survival of some of the others and caused tens of thousands of employees to lose their jobs and retirement pension funds.
To compound this catastrophe, the stock prices in the US and other bourses plunged significantly. This would delay the recovery of the fragile American economy, which was still in recession.
Many knowledgeable observers of the US business scene believed that what had happened there was merely scratching the surface and that more corporate black sheep would emerge, with ramifications of global dimensions.
The US President, George Bush, then vowed that no efforts would be spared to prosecute those executives responsible and that rules would be tightened to prevent similar occurrences in future.
It is a well-known fact that Americans generally adopt a we-are-holier-than-thou mentality towards corporate fraud and corruption in the developing world and the former Soviet bloc countries. It must have been extremely painful for them to discover that such blatant corporate frauds and corruptions exist also in their own front yards.
A worldly African statesman commented gleefully: “The amounts taken in our graft cases certainly pale compared to the mind-boggling sums involved in the most powerful economy on earth. We now have one back on them”.
In Singapore, a senior Asian executive asked his American colleague half in jest whether Asians or Americans were more prone to frauds and corruptions? Somewhat taken aback, he replied “I think we are mow about the same”.
No one can dispute that corporate fraud and corruption is a universal disease that transcends racial, cultural and national barriers. However,with determination, every nation can make it more difficult for the guilty ones to profit from their ill-gotten gains and to get away from legal punishment with impunity.
Be that as it may, one cannot but admire the US for the resolute and fearless way in which its government and the courts tackled this wave of accounting frauds and corruptions and other fiscal violations and not sweeping them under the carpet. Moreover, as an established democracy, its powerful mass media and strong pressure groups will ensure that justice would, more often than not, be seen to be done.
This is in sharp contrast with abuse of powers which are widespread in many parts of the emerging world especially, where protective umbrellas have often enabled some public figures to exploit their positions for personal gains, instead of working for the common good of the people under their care.
This happens when the pillars of democracy, namely the rule of law, a fair and effective government and an incorruptible civil service are absent. As a result, rampant frauds and corruptions have become a way of life and the country will suffer.
Take a glaring example closer home. The whole world now knows that it was an uphill task to prosecute a former head of state of a Southeast Asian country for his graft and that of some of his family members. We have also seen how comically bizarre that government’s failed attempts to capture a notorious fugitive of law with powerful family connections while at large and the titbits of his life while under hot pursuit by the country’s police force.
We in Singapore have every reason to be proud and thankful that our country’s has repeatedly been rated one of the top ten least corrupt countries in the world and corporate frauds are much fewer than in the other developed countries due to strict and well-enforced law on good corporate governance. Instead of resting on our own laurels, we must strive to ensure that it will always stay that way.
As predicted by knowledgeable international business observers earlier, the above American corporate scandals were later followed by its devastating Sub-Prime Mortgage crisis of 2007 involving major banks and financial houses which led to the full-blown US financial crisis of 2008, resulting in the near collapse of a number of its most reputable banks and other financial power houses. Several of these had to be bailed out by the US government with substantial tax payers’ money as the authorities deemed them “too big to fail” and hence it would be in the nation’s interest to help them survive. On the other hand, a well established merchant bank, Lehman Brothers, had to declare bankruptcy and two of its top-ranking officials were charged but the charges were later withdrawn due to insufficient concrete evidence. In short, only one top banker was convicted and went to jail. Several other financial institutions, perforce, had to merge with the biggies for self survival, while others were let off without being indicted for lack of evidence. Believe it or not, a few top bankers were even given “golden handshakes” by their boards of directors for their past contributions! In the midst of this financial carnage, another gigantic corporate fraud conceived and executed by Bernie Madoff, founder of Bernie Madoff Securities, in order to cheat those who took the bait by offering them guarantee generous returns through his well-concealed Ponzi scheme. This enterprise finally collapsed in 2009 and the gullible and greedy investors who had invested billions of dollars in this financial scam suffered severe losses. Madoff was convicted and sentenced to 150 years in prison and ordered to pay a penalty of 170 billion dollars.
The contagion effect of the US financial meltdown of 2008 later spread to Europe, Asia, Latin America and some other parts of the world resulting in a severe world recession for a lengthy period of time. It was the worst financial crisis since the Great Depression of the 1920s and 1930s.
After the world economy finally recovered from this financial disaster, corporate frauds and corruptions raised their ugly head once again with a vengeance not only in the US but also gathering momentum throughout the world. For the purpose of this article I will refer to three leading European economies, namely Germany, France and Britain and two Asian economic giants, China and Japan, who are the second and third largest economies respectively in the world. Today, the United States still leads the developed nations in having the highest number of corporate fraud and corruption cases.
Germany, the largest economy in Europe ranks number 12 in the world’s least corrupt country index in its home operations ahead of UK in number 14 and France in number 26, but its overseas operations is a different story. The same is also true of the world’s top-ranking least corrupt nations namely Norway, Denmark and Sweden. Germany has an unedifying record of offering substantial bribes to foreign firms and politicians so as to gain business advantages in large contracts over the rival bidders. The latest high-profile corporate scandal in this country is that of its iconic Volkswagen Motor Company. Its fraudulent emission-control device was finally exposed in the huge US market, and later elsewhere, aimed at deceiving the authorities and customers into buying its product. In all, more than 11 million of its vehicles equipped with such cheating software had been shipped all over the world. Its corporate reputation is now in ruins and its immediate future is very challenging. Both France and Britain have a relatively cleaner overseas corruption record than Germany but are still tainted compared with their corruption standards in their home turf.
In the case of China and Japan, corporate frauds and corruptions have also increased substantially as these commercial crimes are not easy to detect, especially in the case of multinational companies operating there, because of lack of stricter law enforcement which has led to these corporate misdeeds and an increasing number of them, both domestic and foreign, have been flouting the laws. Fortunately, more of these corporate wrongdoings have now been detected and the guilty ones have been prosecuted and convicted and have to pay very stiff fines and also imprisonment of its senior officers in some instances. With more vigilance, many latest corporate accounting fraud and other violations in Japan came to light in 2014 and 2015 and the most prominent culprit was Toshiba Electric, one of the most trusted Japanese brands with extensive local and foreign networks. This has caused it trading losses of US$740 MM and a record fine of US$60 MM. Its long-established, well-earned reputation at home and overseas has suffered irreparable damage and this company now faces difficult years ahead to redeem its tarnished reputation and might be a takeover target.
Lam Pin Foo