| Since the reform and opening up,China’s capital market has gone through five stages of development: budding,partial exploration,full-scale roll-out,consolidation and deepening of reform,achieving a historic leap from nothing to something and from local to national.From1990,when the SSE and SZSE started their business one after another,to 2010,when China became the second largest economy in the world,the rapid development of China’s capital market is evident to all.However,there are various problems that come with it that cannot be ignored,and their hindering effect on the development of the capital market is becoming more and more obvious.Financial fraud is one of the "persistent problems" that have constrained the development of the capital market.Most of the existing studies on financial fraud are based on the more mature two-factor,three-factor and four-factor theories from abroad,and do not take into account the special relationship between government and enterprises,the "cronyism" culture and the unique external reform context in the Chinese context.In addition,financial fraud is not a "point-intime" episodic behavior,rather a "continuous" process of events,and there are certain differences at different stages.The existing studies have mostly focused on the period of fraud,ignoring the earlier and later stages,and thus have certain limitations.In view of the lack of distinctive features and insufficient explanatory power caused by the institutional and cultural differences between the Chinese and Western contexts,as well as the black box problems that may exist at different stages of fraud,this paper intends to build on the existing fraud theories and take the internal governance of the company as the core perspective,focusing on the main event of financial fraud of state-owned enterprise Fushun Special Steel.The case study method is used to investigate the triggering factors of the fraud in the early stage,the causes of the fraud in the middle stage and the governance of the fraud in the late stage.The author attempts to construct a dynamic framework for the analysis of fraud in a time series,i.e.’ex-ante-ex-post’,of ’triggering-formation-governance’.The pre-period triggering studies showed that there were loopholes in Fushun Special Steel’s internal governance structure,creating opportunities for fraudulent behavior.This was reflected in the following: a formal Board of Directors,i.e.lack of professionalism,excessively long terms of office,serious crossover of professional committees and sole directors deliberately avoiding term limits;a limited Supervisory Board,i.e.oversized,unbalanced gender ratio and lack of independence;a Shareholders’ Meeting with no internal checks and balances and a highly concentrated shareholding structure;and weak managerial governance,i.e.serious top-down concurrent appointments and a single and insufficient incentive mechanism.The mid-term causal studies showed that the internal governance structure of Fushun Special Steel deteriorated to the point of forming deficiencies that led to the outbreak of fraud.This was evidenced by the inadequate functioning of the Board of Directors,i.e.ineffective supervision by independent directors and lack of professional functions of committees;the ineffectiveness of the Supervisory Board,i.e.lack of economic independence of the supervisors and reduced efficiency due to the excessive size of the supervisory board;the unbalanced allocation of power to the Shareholders’ Meeting,i.e."one share dominates" the state-owned shares;the imperfect governance system of the management,i.e.The governance system of the management was inadequate,i.e.the appointment system was not standardized and the incentive mechanism was not in place.Subsequent governance studies showed that Fushun Special Steel made self-improvements to optimize its internal governance structure and to achieve governance of fraudulent practices.This was demonstrated by: overall,increasing the number of female management and balancing the ratio of men to women;lowering the average age and making the team younger;introducing highly educated management to enhance overall professionalism;and broadening the sources of management and diversifying the internal staffing.In addition,the Board of Directors introduced independent directors with diversified professional backgrounds and streamlined the committee structure;the Supervisory Board strengthened remuneration incentives,introduced external supervisors and optimized the size of supervisors;the Shareholders’ Meeting leveraged on the hybrid reform to accelerate the outbreak of fraud and form checks and balances in the shareholding structure;the managerial level implemented a hybrid incentive mechanism,strengthened the construction of reputation incentives and improved the level of remuneration incentives.Based on the above findings,this paper makes further recommendations in the following four areas on the premise that enterprises should engage in self-governance.(1)Strengthening the functions of the Board of Directors,specifically: regulating the duration of the term of office of independent directors,balancing the proportion of local and foreign independent directors,strengthening the "specialization" of the division of functions,and enhancing the "professionalism" of the governance capacity.(2)Improving the effectiveness of the Supervisory Board in performing its duties,specifically by enhancing the economic independence of the Supervisory Board and rationalizing the size of the Supervisory Board.(3)Optimizing the allocation of powers to the Shareholders’ Meeting,specifically: implementing mixed ownership reforms and creating checks and balances in the shareholding structure.(4)Improve the managerial governance system,specifically: standardize the managerial management system and broaden the managerial incentive channels.It is intended to provide new reference ideas for listed companies and external regulators in the prevention as well as supervision of financial fraud. |
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