Scouring accounting footnotes to prevent tunnelling

IMAGINE that the S-chip (Singapore-listed China stocks) fraud with its "missing cash phenomenon" and the penny stock scandal never happened - because there was a way to prevent them.

While accounting information and disclosures may be abused to deceive, instead of being used to inform, there is a countermeasure if one only looks for it. For fraud perpetrators actually, if inadvertently, leave behind a trace of their accounting transgressions in the footnotes of annual reports.

In their paper "Tunnelling Through Intercorporate Loans: The China Experience", published in the Journal of Financial Economics, professors Charles Lee, Jiang Guohua and Yue Heng said that controlling shareholders use intercorporate loans (or related-party loans), typically reported as Other Receivables (ORec), to siphon billions from listed companies.