Why did the directors of Sino-Forest not prevent this fraud from occurring? What should they have ...

The directors should have been more familiar with the risks in doing business in China. If they had been, they would probably have: (1) visited company operations and offices in China, (2) would have insisted on internal audit reviews of company records, systems and policies, (3) would have insisted on a risk assessment of the operation and background checks on senior and middle management, (4) would have insisted that several members of the board be able to speak Chinese, and be familiar with the local customs and legal systems, and (5) would have directed the external auditors to check questionable practices and would have questioned the audit partner on these investigations. Instead, the board (several of whom were retired North American audit partners) and the auditors presumed senior management and operations were ethical, and either they didn't go deep enough to discover and act on problems, or they failed to recognize the red flags that appeared (such as the large number of bank accounts, absence of records, use of personal credit cards, lack of legal documentation, and so on).

Makes a ton more sense now