Employees and Market for Corporate Control

Employees and the market for corporate control have not contributed to any improvement in Thai corporate governance since the crisis.  Because of the worsening condition of the job market and the lack of legal protection, employees have become even more hesitant to speak up and participate in corporate governance for fear of losing their jobs.  Additionally, stock options have become less desirable means to compensate employees due to the poor performance of Thai stock market.  Although Thai companies have become less family-oriented and more government- and foreigner-dominated, the concentration of share ownership among these major shareholders still inhibits a hostile takeover which is an important market discipline on a company with weak corporate governance.

Financial Transparency and Disclosures

The new law concerning accounting practices called, “Accounting Profession Act”, became effective in the fourth quarter of 2004.  The law reflects a giant leap forward in the efforts to enhance the quality of financial reports of Thai listed companies (Chantanayingyong, 2005).  The law introduces a new regulatory framework under which all accounting professionals, i.e. auditing, financial accounting, managerial accounting, tax-planning, and other accounting services, are supervised.  The newly established Federation of Accounting Profession and the Accounting Profession Oversight Board are the offspring of this new legislation.  The Federation is designed to act as a governing body with responsibilities such as licensing, registration, and drafting of conduct principles, while the Oversight board supervises the Federation’s businesses and endorses Thai accounting standards.  This new law is in addition to the new Accounting Act, effective since August 2000, which requires all listed companies to register the names of their accounting officers with the SEC for accountability purposes.

Thailand has also made much progress in improving its accounting and auditing standards.  During the eight-year period from the crisis year 1997 thru 2005, the Institute of Certified Accountants and Auditors of Thailand (ICAAT) has issued 27 additional accounting standards which are consistent with the international accounting standards (IAS).³  The ICAAT has also revised the 31 standards issued during its 49

years prior to the crisis to be in line with the IAS.⁴  The SEC, with the coordination of the ICAAT, has regularly issued accounting guidelines, which clarify the interpretation of various Thai accounting standards, in order to lower the possibility of creative accounting.  These guidelines are related to a number of accounting issues including investment in and consolidation of subsidiaries, property foreclosure, loan guarantee, and revenue recognition of real estate businesses.  To keep up with the new accounting standards and reporting requirements, chief financial officers of listed companies can participate in the ICAAT’s training courses which have been offered since 2003.

Although the Thai standards on auditing issued by the ICAAT before the crisis are mostly consistent with the international standards on auditing, the implementation and the enforcement of these standards were relatively weak.  To strengthen the enforcement, the SEC and the Federation of Accounting Professions have since closely monitor auditors of listed companies to ensure auditor independence and proper compliance with the standards (Chantanayingyong, 2005).  In particular, the SEC has been examining auditors’ working papers in some suspicious cases to ensure that the auditors have complied with the Thai auditing standards.   To cope with the ambiguity in an auditor report issued before the crisis, the SEC has prohibited auditors from issuing an unqualified opinion with an additional paragraph remarking possible creative accounting.  In such circumstance the auditors must issue a qualified opinion.   A listed company and its auditor may also seek advice from the SEC staff if they disagree on certain accounting issues.

Footnotes

3. The only inconsistency between Thai accounting standard (TAS) and the IAS is IAS 39 regarding debt restructuring which requires the use of original contract interest rate as the discount rate for valuation of the restructured loans.  Because the economic conditions before vs. after the crisis differ substantially, i.e., the interest rate fell from 15%-16% before the crisis to below 10% after the crisis, it would not be economically sensible to follow IAS 39 and discounting the loans at such high original contract rate.  Instead, TAS requires restructured loans to be discounted at the prevailing market rate. 

4. A Thai company is allowed to use the standards set by IASB, AICPA and FASB (in this order) if Thai accounting standards do not cover such accounting issues.