Politics of Corporate Fraud and Corporate Governance: Need of an Early Warning System

6th International Business and Social Sciences Research Conference, Dubai, UAE, 2013, Forthcoming

Posted: 26 Nov 2012

See all articles by Tabrez Ahmad

Tabrez Ahmad

Maulana Azad National Urdu University (MANUU)

Date Written: November 14, 2012

Abstract

Today the term “corporate governance” is familiar to almost everyone — however; this is mostly due to the emergence of so many shocking corporate scandals, and the economic crisis. Corporate frauds are the most sophisticated and adversely affect the society. They are the crimes which are committed by the so called high profile and sophisticated humans of the society. They reduce the interest and trust in corporate investments and in turn reduce the confidence on the government as well as society.

The reason for enormous increase in corporate frauds in recent decades is to be found in the fast developing economy and industrial growth. The motives of committing fraud by a company may be many, but the main motive is making money and creating a false soundness for the company in order to save its image in the market and to misguide the government departments to avoid the heavy tax burdens.

A threshold question is whether law should play any role at all in regulating what is essentially a private relationship. Legal scholars tend to adopt either a “contractarian” or “public interest” approach to this question. Due to the impact of large corporations on society, there is a little faith in market solutions and it can be argued that government must force firms to behave in a manner that advances the public interest. The crashes and frauds of Enron, WorldCom, Satyam, Sahara and other companies have reinvigorated the debate over regulating corporate governance.

Strict adherence to high standard of ethical behavior is necessary for the even and honest functioning of the new social, political and economic processes. The inability of all sections of society to appreciate this need in full results in the emergence and growth of corporate fraud renders enforcement of the laws, themselves not sufficiently deterrent, more difficult.

Many scholars have called for corporate regulation to restore confidence in the securities markets. These recommendations appear to be supported by the fact that neither the contracting devices that were supposed to control managers, nor efficient securities markets, worked to prevent or spot the problems.

An early warning system involves active participation of capital markets regulator and will keep round-the-clock watch on activities of companies. The aim is to crack the whip on any suspicious corporate activity as and when it is found, thus reducing the extent of damage it may cause if it is allowed to reach an uncontrollable level. Once it tracks any suspected malfunctioning, the government will attempt to rectify the malaise through regulatory action.

The paper sheds light on the scandals through a detailed explanation of corporate governance mechanism, a thorough explanation of the recent problems and scandals, and offers potential solutions in context.

Keywords: fraud, corporate, governance, early warning, public interest, investor protection

Suggested Citation

Ahmad, Tabrez, Politics of Corporate Fraud and Corporate Governance: Need of an Early Warning System (November 14, 2012). 6th International Business and Social Sciences Research Conference, Dubai, UAE, 2013, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2180717

Tabrez Ahmad (Contact Author)

Maulana Azad National Urdu University (MANUU) ( email )

Gachibowli
Hyderabad, IN Telangana 500032
India
+918755929751 (Phone)

HOME PAGE: http://www.manuu.ac.in

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