US President George W. Bush should recognize by now that the biggest threat to his country is neither Osama bin Laden nor Iraqi President Saddam Hussein. Rather, it is corporate fraud. The threat of terrorism may scare Americans for a while, but it will not shake the foundations of their country. The recent scandals at major US corporations, however, have eroded the foundation of capitalism's credibility -- the spirit of market transparency. This is a lethal blow to the US.
In the wake of the scandals at Enron, Xerox and WorldCom, the second-largest pharmaceutical company in the US, Merck, has admitted that one of its subsidiaries claimed US$12.4 billion in revenues over the past three years that it had never collected. The news sent both the Dow Jones index and the US dollar nosediving and strengthened the New Taiwan dollar and Japanese yen.
On Tuesday, Bush announced the establishment of a task force to tackle corporate fraud and proposed heavy penalties for corporate crime. He vowed that "my administration will do everything in our power to end the days of cooking the books, shading the truth and breaking the laws.'' While Bush deserves kudos for his determination, whether his proposals will actually put an end to long-running corporate irregularities and salvage investor confidence is a concern in capital markets around the world.
The US has always been viewed as a country with a healthy accounting system, a high level of transparency for financial reports, good corporate management and sound external-monitoring mechan-isms. But this image has been demolished by the recent scandals that were the result of a corporate culture that stresses short-term gains and stock-market performance over long-term interests. Corporate executives have not hesitated to inflate performance figures to meet market expectations and to curry favor with Wall Street analysts. Corporate financial departments have assumed a leading role in corporate strategic planning, mergers and the maintenance of good relations with institutional investors. By overlooking the basic principles of accounting, several of these companies have misled investors to a frightening extent.
While US corporate scandals have dominated headlines around the world, many countries could be facing similar threats to their economies. Here in Taiwan, Macronix International Co (
Taiwan's listed companies also have a serious problem with the cross-holding of shares. It is a common practice for subsidiary companies to buy shares in their parent company to boost stock prices, maintain management rights or siphon off corporate assets. Such activities are no less a problem for the growth of Taiwan's economy than the irregularities at American corporations are for the US economy.
The crisis in corporate America should be a wake-up call for Taiwan, where corporate and accounting systems are far inferior to those in the US. It should therefore learn from Washington's efforts to clean up and regulate its corporate world. Taiwan still has a long way to go in terms of realizing solid corporate management, external monitoring and a sound capital market.
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