Information Asymmetry in Capital Market－The External Control and Criminal Liabilities against Fraudulent Financial Reporting
Date Issued
2007
Date
2007
Author(s)
Lai, Yen-Fu
DOI
zh-TW
Abstract
Attributing to the significant and noticeable Fraudulent Financial Reporting events during the past years all over the world, the corporate governance has become a burgeoning issue. Generally, the approaches to deal with this “epidemics sweeping the worldwide capital markets”, in addition to the method appealing to the concept of “Social Corporate Responsibility” (“CSR”), could be analyzed in two dimensions, the Internal Control and the External Control under the legal system.
First of all, the Internal Control approach mainly focuses on developing and designing an appropriate and institutional mechanism in the corporate legal systems such as the Company Law and the Security Exchange Act. In other words, the Internal Control is developed to prevent the related commitment of Security Fraud by requiring the companies to establish some institutional supervision mechanisms, e.g. the rights entitled to shareholders, the establishment of the postions such as the independent directors, the supervisors or the independent auditing staff.
On the other hand, the External Control contains both passive and constructive meanings and fuctions. In the constructive and positive sense, the administrative supervision is conducted by the competent authorities to prevent the related commitment of Security Fraud. On the contrary, the passive fuction means the approach which comprehensively acknowledging the rights and claims entitled to the investors and competent authorities for the losses of investors to be compensated and the wrongdoings of the managers to be fined and punished under civil laws and administrative laws respectively.
With respect to the criminal liabilities on the commitment of Fraudulent Financial Reporting, the criminal norms are also generally thought to have the passive function and the constructive meaning as well. That is, by imposting the criminal sanctions on people who prepared and provided the Fraudulent Financial Reports, including the financial statements which report historical financial information and the forward-looking financial statements, the criminal norms not only penalize people who committed the crime but also prevent the crimes in the future.
Actually, as a matter of fact, the essence of the Fraudulent Financial Reporting is derived from the structure of Information Asymmetry between the investors and the managers of the companies under the agency model. In accordance with the Agency Thoery, as an uninformed party, the investors will spend agent cost and transaction cost to avoid adverse selection or the moral hazard behaviors conducted by the managers of the companies (the “Agent”). However, excessive agent cost and transaction cost may probably result in Market Failure of the capital market. Thus, both the the Internal Control and the External Control are the mechanisms designed for the purpose of reducing the agent cost and transaction cost in nature.
Therefore, the related criminal liabilities on Fraudulent Financial Reporting set forth in the Security Exchange Act could be realized as the norms designed for the purpose of maintaining the basic confindence of the investors towards the fairness, reasonableness and dependability of the capital market. Under this premise, this thesis is proposed to analyze the current norms of the Security Exchange Act and other related laws and regulations to determine the application criteria between the norms in the first instance.
In addition, from the viewpoint of foreign legal systems, this thesis is proposed to further introduce the Sarbanes-Oxley Act 2002 and SUPPLEMENT TO THE 2002 GUIDELINES MANUAL of the United States to find out the current legislative trend around the world. Nonetheless, although the major efforts on fighting against the Fraudulent Financial Reporting were made in raising the criminal liabilities in the current legislative trend, since the risks in the capital market are arised from the essential structure and would be never completely eliminated, the only purpose of the criminal norms are developed to “control” the risks to a reasonable extent. Besides, just because the incentives of people who commit the crimes differ and the effectiveness of the crime-preventing function is doubtful, the function of the criminal norms shall be understood as merley a “behavior criterion” instead of an effective crime-preventing mechanism.
In conclusion, regarding the issue of Fraudulent Financial Reporting, by means of observing and analyzing the current laws and regulations under different legal systems, the viewpoints from Information Economics and the decisions and precedents made by the courts, this thesis is proposed to determine an effective and appropriate mechanisms to be adopted and make the suggetions for the legislators’ reference in the future.
Subjects
財報不實
財務預測
證券詐欺
經濟犯罪
刑事責任
沙式法案
Fraudulent Financial Reporting
Forward-Looking Statement
Security Fraud
Economic Crime
Criminal Liabilities
Information Asymmetry
Sarbanes-Oxley Act 2002
SDGs
Type
thesis
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