accounting ethics and its important role for reduction of accounting fraud an empirical study in hanoi

ACCOUNTING ETHICS AND ITS IMPORTANT ROLE FOR REDUCTION OF ACCOUNTING FRAUD: AN EMPIRICAL STUDY IN HANOI... We have to consider the code of ethics for profession accountant and some facto

Declaration of Originality and Word Count

DECLARATION

I here by declare that the graduation project is based on my original work except for quotations and citations, which have been duly acknowledged I also want to declare that it has not been previously or concurrently submitted for any other courses/degrees at HELP University College or other institutions The word counts is

9932 words

HOANG VAN THU

DATE: 17/10/2011

ACCOUNTING ETHICS AND ITS IMPORTANT ROLE FOR REDUCTION

OF ACCOUNTING FRAUD: AN EMPIRICAL STUDY IN HANOI

show that sample of survey on accounting fraud in Hanoi This survey carried out

100 accountants who are work in accounting fields In additional, they are separate into two groups The first group include people who less experience in accounting than other The second group includes people who have experience and less possibility to break the rule in accounting standard Moreover, ethic also relate to other factor as suppliers, customer, investor and other relation in business So to keep the ethical for the accountant, who depend on individual or group of accountant who have responsibilities in this field To reduce the fraud in accounting field, we need to apply the GAAP (General Accepted Accounting Principal) in the system effectively

ACKNOWLEDGEMENT

With the position as a student I always consider that learn and collect information from the teacher or supervisor Basing on this factor, we can expand knowledge or other significance problems There are still having any people, who help me to complete this project However, I would like to thank to guiding me the right way to for this part and motivate me to complete its

Firstly, I would like to say thank you to my supervisor Mr Nguyen Hong Quan for his support, guidance, and vision for all my study

Secondly, I would like to say thanks you to Ms Sumathi from Help University College, for instruction and support for my project

Thirdly, sincere thanks to Mr Hoang Van Nam for helping me to perform the survey effectively

TABLE OF CONTENT PAGE

DECLARATION 1

ABSTRACT 2

ACKNOWLEDGEMENT 4

TABLE OF CONTENT 5

CHAPTER 1: INTRODUCTION 7

1.1 Research and background 7

1.2 Problem and statement 9

1.3 The objective and sphere of research 11

1.3.1 Objective of research 11

1.3.2 The sphere of research 11

1.4 Research method 11

1.5 Structure of research 12

CHAPTER 2: LITERATURE REVIEW 13

2.1 Definition of Ethics 13

2.2 Code of Ethics for Professional Accountant 14

2.3 The Factors that Contribute to Accounting Fraud 16

2.3.1 Conflict of interest 16

2.2.2 Driven by profit management 17

2.3.3 Corporate transparency 18

2.3.4 Money Culture 19

2.4 The role of Accounting ethic that help to reduce Accounting Fraud 20

3.1 Research Objectives 23

3.2 Research Method 24

3.3 Sources of Data and Sample Selection 25

3.3.1 Collecting Data 25

3.3.2 Sample Selection 25

3.4 Scope of study 26

3.5 Hypothesis Statement 26

CHAPTER 4: ANALYSIS AND FINDING 28

4.1 Collection of Questionnaires 28

4.2 Description of Result 29

4.2.1 Part 1 29

4.2.2 Part 2 33

4.3 Result Analysis 34

4.3.1 Hypothesis 1 34

4.3.2 Hypothesis 2 35

4.3.3 Hypothesis 3 35

4.3.4 Hypothesis 4 36

CHAPTER 5: CONCLUSIONAND RECOMMENDATION 37

5.1 Conclusion 37

5.2 Recommendation 38

5.3 The limitation of study 39

5.4 The ideal or suggestion for research in the future 40

REFERENCE 41

APPENDICES 43

CHAPTER 1: INTRODUCTION

1.1 Research and background

As we know that, ethics refers to the sensitive concept with any field in business in

society, in particular link to the accounting Besides that it refers to “the critical,

structured examination of how we should behave — in particular, how we should

constrain the pursuit of self-interest when our actions affect others” Moreover, ethic

also reflects a personal set of value and used by individual to guide their actions and

to recognize any obligation, it is not a objective, but a subjective for individual”

And it relate to the code of conduct dependence upon circumstance and the life

experience of the individual “The ethic also relates to accounting and it has

difference way to define ethics We can understand that it is one of the first field

applied ethic in systems There are several factor that have been applied in

accounting as moral value, judgments”

We know that accounting has their own definition of ethics, which is primarily a field

of applied ethics, the study of moral values and judgments as they apply to accountancy

It can be considered as an example of professional ethics We have to consider the code of ethics for profession accountant and some factor that relate to the accounting fraud According to the recent survey about 150 accountants in Vietnam All of them divided into two types They are both from public and private companies This result

of the survey shows that, accountants who have more experience also less objectivity rather than accountant with less experience However, there is no doubt that they are more possible to break the rule in accounting or culture rather than the one who have

more experiences There are many ways that raise the risk in accounting ethics such

as customers, suppliers, and other individual who have relationship with the organization within ethical problems Next, I would like to introduce some problem that link to accounting ethic, specialty in Vietnam

In 2005, the Ministry of Finance of Vietnam makes the decision for auditing and accounting through professional ethical standard There are some standard that getting from the basis of “integrity, objectivity, confidentiality, expertise and prudence, occupational status, compliance with professional standards.”

All of these standards give us above are the reach and character of accounting activities should be provided in an ethical However, we cannot exist accountant do the right way as the standards above We know that Vietnam’s economy is increasingly and integrated with worldwide For instance, Vietnam was joined in WTO in 2006, becoming a 150th member of WTO When Vietnam take part in this organization, there are many enterprise may have opportunities as well as face with difficulties and challenges to compete with other rival com from other countries Moreover, World Trade Organization will be taking to effort of Viet Nam to reach the global trading market, enhancing the position of Vietnam in the international trade market, creating a premise integration and economic development

With the member of WTO the Vietnam’s economy, particular some industries as banks, finances, services, which need to be more develops than other industries As a result, when the demand rising, that means the quality of accountants are need to improve and upgrade to suitable with the quality of accounting in the world To conclude, I am going to analyze the accounting ethic and its role for reduction of accounting fraud in this project

1.2 Problem and statement

Nowadays, the ethics has been played a vital role in accounting major as well as

other industries in the business Recent year, accounting fraud is increasing more and more and it means that the important of accounting ethic is rising As we know that,

to reduce the accounting fraud in Vietnam likewise other countries in the world, which very difficult to solve its This research about accounting ethics in Hanoi is less than this one in Vietnam, so the project will contribute to reduce the accounting fraud in Vietnam The purpose of this research that analyze accounting ethics and its role to reduce accounting fraud in Vietnam

So the first problem that I want to mention: What does the important role of ethic in accounting?

To answer this question, we need to understand that professional accountant must follow the guideline of judgments and moral values in practicing accounting Professional accounting also need to consider ethic as the first thing to be strictly as well as the professional in the field of medicine and law With respect of customer,

“they also want to receive the service of accounting professional not only rely on his

skill and ability, but also on his professional integrity” It leads to customers, who

used the service of professional accounting also need to follow the ethic followed them So the code of ethic for professional accounting needs to be developed under these above reasons Beside that the professional accountant must be followed them, that mean they respect customers They have high degree responsibility of code of ethic So accounting ethic assurance that the objectivity and integrity in this major Now, I would like to mention that the role of ethic in accounting It can be considered as the way for accountant to follow certain rule, when they perform their works at the right ways Furthermore, the ethic help professional accountant have

confidence while they are doing in the public or in their own fields According to the recent big trouble happen in business, which relate to the role of ethic in accounting, for instance, Enron, WorldCom and Global Crossing in the USA Almost these companies also have problem with ethic in accountant In the case of Enron Corporation, they are concentrating on preparing for the good finance practices Since, investors and other stakeholders rely heavily on the financial statements of a company And they need the information of the financial statement, in order to make good decision in business So the ethic has been played a vital role for profession accountant

Next, the second problems: How does accounting ethic help to reduce the accounting

fraud As we know, accounting fraud can be defined as “deliberate and improper

manipulation of the recording of sales revenue and/or expenses (with a purpose of making a company’s profit performance look better than it actually is) is qualified as accounting fraud.”

There are some several actions that consider as accounting/bookkeeping fraud: -“Not listing prepaid expense or other type of assets”

- “Collapsing short-term and long-term debt into one amount”

- “Not showing certain classification of current assets or liabilities”

So, it is not easy to reduce the accounting fraud in Vietnam likewise other countries

in the world For example, “

According to Nguyen Phuong Mai, chief of the representative office of the UK-based Association of Chartered Certified Accountants (ACCA) in Vietnam, it is difficult for training ethic for accountant In order to reduce the accounting fraud, we need to apply the rule of General Accepted Accounting Principal (GAAP) Under this rule,

we can prevent the accounting fraud effectively Since any professional accountants

also must follow the rule of its We can assume that if they fail to report financial statement, they have responsibility with its Moreover, if they do not follow the rule

of GAAP, they will respond to the sanctions of accountant Next, we can prevent accounting fraud by disclosure on all reporting And all the transaction must be reviewed and properly documented through accounting staffs Furthermore, any companies must disclose the policy to inform their employees of consequence relate

 To describe some factors that add to accounting fraud in Vietnam

 To give an important role of ethics inside company or group to control accounting fraud for stakeholder or enterprise

1.3.2 The sphere of research

 Place of performing this research: Hanoi National University, International School, Hanoi capital, Vietnam

 Purpose of research: accountants, students who are learning accounting major

at other Universities in Hanoi

 Companies in process of research: public companies and private companies

There are several methods for me to choose But, I will choose the qualitative and secondary data to use As we know, qualitative method show that attitudes, behavior and experiences through such methods as interviews or focus groups

This research aim at people, who are accountants and work for public or private company Besides that students who are study at university as well as student studying master degree in Hanoi, Vietnam In this research, I will be used questionnaires, in order to measure through the process We also know that this research used knowledge and information in the past There are two part, which be used in this research as questionnaire and qualititative method With the qualititative method, I will choose the sample size as n=100 Besides several aspect as follow

“ages, gender, and experiences or the accountant” are significance factor to answer the questionnaire Next, student or researcher need to be based on some other factor

to gather information or data Moreover, they have to see how accountants receive about ethical problems In the process of research, the researcher will be used chi-square test This helps them to analysis as well as estimating after gathering information Basing on the historical data in the past research, which help new researchers have significance information to analysis

Chapter 2: Literature Review

Chapter 3: Research Methodology

Chapter 4: Result Analysis

The result will be reflect through information and data collected

Chapter 5: Conclusion and Recommendation

CHAPTER 2: LITERATURE REVIEW

2.1 Definition of Ethics

Accounting has been played a vital role and its part of our businesses and financial words However, the accounting ethic needs to be kept in mind through all transaction The terminology “Ethics” is sourced from the Ancient Greek “ethikos” that means the background and habits Besides that it consider as a major component

of philosophy, which is the study of values and customs of a person or group and covers the analysis and employment of concepts such as right and wrong, good and evil and do's and don'ts (Ghazala Saeed) Furthermore, accounting ethic relate to primarily a field of applied ethics, the study of moral values and judgments as they apply to accountancy It consider as an example of specialized ethics Besides that Luca Pacioli was introduce ethic in earlier pass And it has been expanded by the government, professional organizations, and independent companies in the world

We can define ethic by difference ways For instance, “it refer to the human duty, or body of rule drawn from science, particular system of principle and rules concerning duty, whether true or false, rule of practice in respect to a single class of human actions”

There are many ways to define ethics such as the science of human duty; the body of rules of duty drawn from this science; a particular system of principles and rules concerning duty, whether true or false; rules of practice in respect to a single class of human actions

Business ethics is the subset of overall ethics term It is related to the conduct of ethics and moral conducts when managing and controlling the business It is vital to

the companies and its stakeholders And the most important aspect of business ethics

is accounting ethics Wikipedia defines accounting ethics as “the primarily a field of applied ethics, the study of moral values and judgments as they apply to accountancy It is an example of professional ethics.” These are the strict rules, which people in the accounting and business-handling department of a company must comply to Since the diverse range of accounting services and recent corporate scandals, ethics issues are paid more attention within the accounting profession Stakeholders make investment decisions based mainly on the accounting information and financial statements Therefore it is the responsibility of the accounting professionals to stick to the code of ethics, i.e this is the role of ethics in accounting,

so that nobody loses confidence given information The essence of accounting ethics

is in the maintenance of professional objectivity and integrity

2.2 Code of Ethics for Professional Accountant

When I mention about the rule for Professional Accountant, I always consider the code of ethic, GAAP (General Accepted Principal) for professional accountant Both

of them are essentials part for this research According to my research, the International Ethics Standards Board for Accountant (IESBA) was created the Code

of Ethic for Professional Accountant This organization also depend on the IFAC Out of these aspect, its include ethical requirement and present a conceptual framework for professional accountant Moreover, it contain five principle of professional ethics such as “integrity, objectivity, professional competence and due care, confidentiality and professional behaviors” Next, I will state these five principles following part

 Integrity: A professional accountant must be simple in any situations, be

honest through every professional and business relationship

 Objectivity: There are some factor that need to be consider as bias, conflict

of interest, inserted through other person or overriding are not accepted for

professional accountant

 Professional Competence & Due Care: To maintain professional

knowledge, skill, in order to solve or ensure every trouble when customer needs them That is the obligation of professional accountant And they need to be diligently in any easy or difficult situation to provide professional service

 Confidentiality:

The confidentiality often requires respect of professional accountant Beside that they cannot provide or disclose any information to the outside when they do not have proper and specific authority Unless there is still have the right or legal, duty to disclose its to other And professional cannot use information for personal advantage

 Professional Behavior: A professional accountant should follow the

relevant laws and regulations and should avoid any action that discredits the profession

With these all principles, professional accountant can apply in practice at any field of business There is no doubt that this framework, which effective for professionals’ accountant Five principles as I mention earlier, help them to limit the risk or fraud in accounting Basing on them, they can make better decision for any accounting transactions Besides, they can determine the threats to these fundamental principles and, if there are threats, apply safeguards to ensure that the principles are not

comprised

2.3 The Factors that Contribute to Accounting Fraud

Nowadays, we are often hearing information about accounting fraud through the media as television, newspaper, and the Internet However, we do no know how its still alive in business does today Besides that a major part of businesses also want to know why increasing cheating and committing fraud According to many experts in the world, they realize that it derived from misleading auditors, auditors looking the other way, disguising transactions, withholding information, providing unbalanced advice, and misusing insider information We also know that the accounting fraud lead to diminish the integrity and reliability of accounting and financial information And accounting fraud originally from these factors as follow: conflict of interest, driven by profit management, corporate transparency, money culture

2.3.1 Conflict of interest

According to may research, conflict of interest occur when an individual or group involved in multiple interest between them Another way to define its as follow a situation in which a person has private or personal interest sufficient to appear influence objective exercise of his or her official duties The conflict of interest is

becoming one of major part of global concerning today In business, it refer to a

situation that when employees personal financial interest or fiduciary duties owed to third parties Next I would like to mention about conflict of interest in manner of business as it is “a major cause behind recent corporate governance shortcomings” (Bertok, 2003) likewise it is able to cause the serious damages to the integrity of organizations In my research, there are some reasons that lead to conflict of interest

as the financial and pecuniary interest Basing on the view of government and law, it often cannot consider as wrong and fraud, in some circumstance Since, it also depend on the estimate of regulation likewise laws For example, “first seeking or

accepting gift Acceptance of a valuable gift or service from an organization with which the University is has or will be negotiating an agreement or conducting business, would be a conflict of interest Gift does not include a breakfast, luncheon, dinner, or other refreshments consisting of food and beverage provided for immediate consumption.” However, in general situation, conflict of interest consider

as a matter of legal when an individual intentionally (successful or not) in affecting the outcome of a decision, for personal gain Beside that someone accused of a conflict of interest may deny that a conflict did not happen whereas he does not do any harmful actions In fact, conflicts of interest may exist even if there is no harm behavior In additional, the conflict of interest also contains agency problems and insider trading in business In real business, such as big organization or enterprise the owners always authorize the activities for the manger and they do not involve in managing the daily operation activities But the owner always wants to maximize the shareholder wealth With the position of managers, they often consider their own benefit such as bonus, salary, as well as promotion to new position These benefits above, that is not easy for them to achieve However, they used their own way to perform business by not maximize the shareholders wealth And they argue with the owner that they always do the right thing together with there is not still have conflict

of interest here Therefore, this is not true whereas managers ignore the most important objective is to maximize overall wealth rather than the ability to maximize profit

2.2.2 Driven by profit management

As I stated in earlier chapter that the manager sometimes do not make decisions based on the best interest of shareholders or for the enterprise but his own Some circumstance that happen in the past, manager often give their own benefit first

before they do anything for other or especially for enterprise Also, the managers or employees can also make personal decisions that result an increase in salaries and commissions With this aspect both of them always find the shot way, in order to promote or increase salaries Moreover, they are in the daily operations and therefore have a competitive advantage to access the internal and confidential information to get the benefits Insider trading is one of these frauds can be realized in this factors Since, insider trading can help them to get their own benefit effectively through negative way, but their co-worker or the owners do not know how to get its

2.3.3 Corporate transparency

We know that if we have weakness in corporate governance and lack of transparency

in our system This reason can be considered causes of the financial crisis, and the subsequent events of corporate collapses and accounting fraud

An organization lacks of transparency in their financial report leading to stakeholder

"especially investors" unsure decisions about an organization's real fundamentals Besides, they will be worried about risk likewise reduces the decision usefulness of organization’s reports I would like to give an example as follow, a firm's growth prospects will be related to how it invests It depends on the way that manager apply

in the system It's difficult if not impossible to evaluate a company's investment performance if its investments are funneled through holding companies, hiding from view Another issues, which I want to mention that lack of its Corporate transparency may also obscure the company's level of debt If a company hides its debt, investors may face challenge as difficult to estimate their exposure to bankruptcy risk Thus, if the organization wants to maintain and develop their economic activity, they must restore the confidence of investors in the financial report In the United State, after the bankruptcy of Enron and Worldcom, the

requirement of transparency was concerned more These companies and some organizations have secret books of accounts repairs It is a reason leads to bankrupt

of Enron and WorldCom As a result, workers lose their jobs as well as lose all pensions and savings Therefore, the government stated: "If companies do not voluntarily disclosure information in a transparent manner, the government will set out the rules to force companies to implement"

2.3.4 Money Culture

Nowadays, money has played a vital role in the world Since we cannot assurance our life, if we are run out of money as well as shortage its Following my research money can be defined as a medium of exchange and standard of value in the modern economy today In additional, it is easily to know that the important role of money in business It can be estimated from several ways, but in this part I just want to mention some factor that affect on its as follow Volume of production; the Direction

of production; Pattern of consumption; Method of distribution; Direction and volume

of exchange; and last but not least the Rate of saving and investment in the country Besides that if there is shortage of money, we may face with problem to have any resources for upgrade and grow as well as cannot have a comfortable life

In reality, money and standard of value also go together and help out have anything, which is needed Moreover, two factor money and standard of value prove our to become active rather than in the past such as take part in active environmental business in the world There exists a question that how does behavior of people change their attitude when the value of money changes over time For example,

Embezzlement at Thanh Pho Ho Chi Minh Water Draining Supplying Joint Stock

Company The fact of this is that: on 14th August 2003, Nguyen Duc Toan (treasurer

of Thanh Pho Ho Chi Minh Water Draining Supplying Joint Stock Company) took

over 6 billion the funds of company Before, Nguyen Duc Toan confessed Mrs Suong (Chief Accountant of the company) is taking 3.5 billion of company to buy land in District 2 Mrs Suong check the funds again and she found that Toan take more than 2 billion and use these amounts for personal purpose Since, Mrs Suong fears of responsibility, she did not report for board of directors

2.4 The role of Accounting ethic that help to reduce Accounting Fraud

First of all we need to understand the ethic in accounting As I mentioned in earlier part, ethics likewise set of principles that guide person or groups behaviors Moreover, it also includes the value as fairness, honesty, and responsibility that is the standard form for basis of ethic in business likewise accounting Nowadays, there are many companies are face with accounting fraud from their staffs For examples, the case of Enron Corporation is It is a multinational enterprise that not reported a true and fair view of financial statement for all stakeholders in several years The reason that relate to Enron Corporation, which is investor and other stakeholders rely heavily on financial statement of this firm Furthermore, their decisions also have impact on the financial statement Although investor used their money with the wrong purpose, in order to use for their own purposes This example brings a good implication for other companies in business We see that accounting ethic cannot bring all benefits, in order to prevent fraud or briber However, it can play vital role to help reduce accounting fraud in accounting environmental today There are several scandal related to accounting fraud as Nugan Hand Bank, Worldcom, AIG All of these scandals relate to creating new accounting, misleading financial analysis likewise bribery

Now, I want to mention some factors that can help reduce accounting fraud as follow: First, it can be called as “Forensic accounting” it helps to deal with financial

facts of legal problems Moreover, forensic accountant, who have both side as proactive and reactive one However, the main function of it’s to prevent fraud and corruption in the areas of accounting and finance and reduce the losses resulting from fraud and corruption In additional, there are some professional accounting requires certification and degree in accounting matter, each member is supposed to abide by a code of ethics as specified by such organizations Another ways to help reduce accounting fraud as most companies also make it mandatory for its employees to abide by the code of ethics for professional accounting put down by the company Some factor that inside the code of ethic for professional for accountant as integrity, objectivity, professional and due care, professional behaviors With these factor, company can apply into their system as the tool to prevent accounting fraud effectively Basing on these factors, company can give the sanction, if their staff break the rule as well as do the wrong in the code of ethic Moreover, the ethics in accounting, which help accountant, learn more about behavior in any situation of business through the code of ethics The last but not least important, which help ethic to reduce fraud as used corporate governance in accounting system According to my research corporate governance can be defined

as the framework of rule and practice by which a board of directors ensure accountability and fairness, transparency in any enterprises or company’s relationship with its all stakeholder as investors, customer, manager, government and community In order to have good accounting standard, we also need to have good corporate governance It need to be assurance that in a corporate set up leads to maximize the value of the shareholders legally, ethically and on sustainable basis, while ensuring equity and transparency to every stakeholders as the company’s customer, investor, employees, vendor-partners, the government of the land and the

community ( Murthy, 2006) With good corporate governance, the accounting fraud can be reduced The last but not least important, I would like to recommend that with the new major of accounting scandal that mean new regulation or together with higher education must be introduced in order to combat the danger of unethical behavior in accounting With the role of ethics in this part, we need to training or open program for new accountants before they are in workplace For instance, through require higher education, or initial training at company This action can help

to improve the credibility of the accounting profession together with reduce accountant who break the rule of accounting standard All of these above-mentioned that reflect the role of ethic help to reduce accounting fraud Although not there is not enough factors, but it can help to diminish accounting fraud environment accounting