How Do We Identify Corporate Misconduct?

June 7, 2022

In its latest Enforcement Report, The Monetary Authority of Singapore (MAS) shows that a robust system of checks and balances is crucial for corporate governance in companies. The report shows instances in the corporate world where a poorly managed situation turned worse and eventually led to the collapse of companies. One example is a global payments processor. The CEO and two senior managers were accused of financial fraud, with about S$2.8 billion missing cash in their accounts years ago.

In Singapore, MAS is investigating some companies for potential breaches of financial industry laws and regulations, ranging from suspected disclosure-related issues and non-compliance with accounting standards.

What are the issues surrounding financial mismanagement at companies, what constitutes fraud, and the impact on stakeholders?

Who tends to commit corporate fraud?

Corporate fraud refers to deceptive or illegal activities that an individual or a company commits, including breach of directors’ duties, petty theft, misappropriation of funds or falsifying financial statements.

Anyone can commit fraud at any time. It can be a CEO, a third-party vendor, a customer or partner, or even a junior employee in the company. Everyone in the company, from the board of directors, founder, CEO and significant shareholders, play a crucial role in setting the corporate culture. If a senior employee has been negligent in their duties, it creates opportunities for errant behaviour to take root. It’s essential to have independent directors on the board who will provide oversight of management practices.

In Singapore, an individual or a company who commits serious fraud could be fined or even jailed. Some companies have also closed down due to severe fraud. One example is the 1Malaysia Development Berhad (1MDB) scandal. Some banks had their licences revoked in Singapore for their involvement in the alleged looting of billions of dollars from Malaysia’s sovereign wealth fund came under investigation in 2015.

Signs that a company may run into governance problems

An example of corporate failure due to bad governance practices is a local social media company investigated in 2018 for possible breaches of the Securities and Futures Act. The police investigation has not yet concluded.

Early signs of distress or tension can be detected when critical management team members resign for personal reasons. The sudden departure of independent directors, audit committee chairs or senior finance employees is a typical red flag. Poor economic performance is another red flag, especially if the company consistently performs poorly compared with its peers. It should trigger the company management to ask if they are losing money to fraud.

Another common warning sign is when a company files a late reporting of financial results, when material information is announced late or when lapses occur.

Whistle-blowers are another source of information about corporate wrongdoing.

Costs of corporate misconduct

There is a cost to corporate misconduct. It comes in both monetary and non-monetary costs. And often, at a high price. Especially when the organisation loses its reputation, which could affect its business prospects in the future. Or the company could even shut down.

Serious fraud could have a widespread impact beyond the company, such as an oil trade company collapse in 2020 after a crash in oil prices exposed years of hidden losses and alleged fraud by its founder. It was revealed that the company had hidden years of losses. The oil trader was wound up after it failed to restructure US$4 billion worth of debts. The bank loans amounted to a total of US$2.77 billion to the collapsed oil trader.

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