Sun, Jul 04, 2004 - Page 8 News List

Procomp case shows reforms are needed soon

By Lu Shih-xiang 盧世祥

Procomp Informatics Ltd, a listed company, has filed a restructuring plan with the local district court as a result of the company's defaulting on its corporate bond payments. The financial repercussions of this action have reverberated for several days. The case is fraught with suspicions of wrongdoings, and a preliminary look at the case reveals similarities to the Enron scandal in the US.

Enron was once the seventh biggest corporation in the US. Established in 1987, it was called the "most innovative company" and the "company with biggest growth potential" by Fortune Magazine for several years in a row. After its share price reached a high of US$81 per share in 2001, fraudulent accounting practices caused prices to fall to US$0.26. In December that year, the company filed for bankruptcy and restructuring. Legal handling of the Enron scandal is continuing to this day, and it is having a political and economic impact in both the US and internationally.

Enron's highest annual return exceeded US$100 billion. The following three factors are generally considered to be the reasons why the company ended with bankruptcy and delisting from the stock market: Untruthful accounting that did not match facts, in particular false reporting of profits and debt; systemic shortcomings, ineffective internal controls and nominal external auditing; and reliance on untruthful performance reports to attract funds, hurting investors.

The Procomp Informatics case, which already has been out in the open for several days, still awaits clarification. Although the company's founder has provided a public explanation, the situation is still mired in doubt, which shows that there are major problems. Most fundamental are the problems of Procomp itself, including questions concerning whether funds have been temporarily appropriated for private use or taken out of the company, the abnormal trading in the company's shares before and after the restructuring announcement, the transfers on the day restructuring took place, and even whether financial reports are deceptive or false.

This is not only reflects on the founder's honesty and credibility, but it also highlights major shortcomings in the company's corporate governance. The suspected false financial reports also bring up the issue of dividing responsibility between Procomp and its certified accountants.

In addition, Procomp planned to issue global depository receipts to make up for financial deficits, but a conflict over insider trading arose between the company and the underwriting bank, CitiBank. Company funds deposited overseas also involved questions regarding whether the bank had provided false information. It still remains to be seen whether any illegalities have occurred.

Because Procomp is a listed company that finds its funding among the general public, the concerned authorities should ascertain that the company's corporate governance procedures are in place and provide the public with details.

The Procomp case reflects problems with the securities markets' early warning mechanisms, and also that there are several shortcomings in related commercial accounting and banking operations. Systemic, legislative and administrative steps must be taken to prevent such matters from occurring again.

Thus, sound and comprehensive systems and laws must be put in place. These systems and laws must be used to block and eliminate situations conducive to greed or fraud and provide effective warning and supervision when problems in financial markets first appear.

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