Managing the Risks of Corporate Fraud: The Evidence from Hong Kong and Singapore

Abstract

Since the Asian financial crisis of 1997, Hong Kong and Singapore have implemented reforms that promote independence and monitoring competency of the boards of directors of their listed companies. However, with the advent of the financial crisis of 2007/2008, a wave of fraud cases prompts the question as to the effectiveness of these reforms. Analysing a sample of 62 listed companies which are found to have committed fraud between 2007 and 2014, and comparing against a matched sample of no-fraud companies, we find that the fraud companies tend to either combine the roles of chairman and chief executive officer (or they are close family members) and have fewer non-accounting finance experts on their boards. They are also likely to be overseas mainland Chinese firms. Analysing the specific case studies of fraud, the reasons for the lack of effectiveness in the independent directors in preventing fraud are likely due to the difficulties in obtaining access to information in approving conflicted transactions, low threat of enforcement actions, their incentives to side with controlling shareholders and the challenges in regulating foreign listings.