Luận văn impact of internal audit on firm performance in vietnam

The remaining factors, CEO — Chair separation DUAL, Stock ownership of board members BOS and especially intemal audit, have no significant impact on firm performance Practical implicati

| take full responsibility for the fidelity of the mumber and data and other contents

of my graduation project

Hanoi, 31/10/2019

Student

Hoang Nhat Ha

ACKNOWLEDGEMENT

‘This Barchelor thesis contained huge amount of work, research and dedication Still, implementation would not have been possible if I did not have a support of many individuals and organizations Therefore, T would like lo extend my sinecre gratilude

to all of them, Foremost, I would like to express my sincere gratitude to my instructor MBA, Le Quang, Dung for the continuous support of my research, for his patience, motivation, enthusiasm, and immense knowledge, His guidance has helped me in all the timc of research and writing of this thesis Without his superior knowledge and experience, the Barchelor thesis would not like in this quality of outcomes, and thus his support has been essential, My sincere thanks also goes to lectures at Intemational School, Vietnam National University (IS-VNU), who not only hetps me gel a clear mnderstanding on fundamental knowledge about finance, accounting and auditing but also nurture essential soft skills such as analyzing and the decision-making capability Nevertheless, I express ty gratitude toward our fannities and friends for their kiud co- operation and encouragement which help me in completion of this Barchelor thesis Because my knowledge is limited, in the process of finishing this bachelor thesis, 1 inevitably make mistakes, so 1 respectfully receive comments from my teachers and experts

Contents

TABLE OF NOTATIONS AND ABBREVIATION8 sec Ì

LIST OF TABLE 4 i“£oĐ4gu0Ad0030243005000 ttộSgkftSSv48S1148985:10115001181194210815100/ã0081510m150 5 LIST OF CHARTS AND FIGURE

1.1 Thenecessity ofthesis s 22-2-22ce2 onsets 5

143 Research questions XjS@593/36049480285g01360đ580g080G36640.40g—eqgceor l7

14 Methodology and scope of research 2 2222202010010 7

2.13 Functions and responsibilities of Internal Audit e ng „12

2.1.4 §eope ofimplementation fintemal audit -.s sec 18 2.1.5 Legal documents oninternal auditin Vietnam 5522

2.1.6 The necessity of internal audit in each enterprise

2.2 Fimm performanee -

2.3 The association between internal audit and ñrm performanee 17

2.4 The other factors the author uses in the thesis affect the firm performance 19

2.4.1 Slock ownership of board members

2.4.2, CRO - Chair separation

2.4.3, Mirm’s size

2.4.4, Leverage

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Scope of the study

3.2, Design of research and methods

3.2.1, Methods of analyzing and synfhesizing informafion

3

Survey method 3.2.3, Data processing method sserweeseenene

3,3, Data and data collection — —

CHAPTER IV; ANALYSIS RESULTS

5.2, Discussion about result of intemal audit factor

3.3, Limitations of the study

APPENDIX,

Appendix 1 Questionnaire

1.1 English

TABLE OF NOTATIONS AND ABBREVIATIONS

LIST OF TABLE

Table 1 The research factors code

Table 2 Data descriptive statistics results for all variables (2016-2018)

Table 3 The correlation between the independent variables - :: :-:2

Table 4 Model Summary

Table 5 ANOVA Testing,

Table 6 Coefficients

“

LIST OF CHARTS AND FIGURE

Figure 1 Conceptual framework of the study

ABSTRACT Purpose: The purpose of this paper is to investigate whether internal audit factors along with some other elements (firm’s size, leverage, CEO -Chair separation, stock ownership of board members) affect firm performance in Vietnam as well as how these

factors impact firm performance

Design/methodology/approach: This research collected the data by quantitative

research and tested the model by Statistical Package for the Social Sciences (SPSS)

Findings: Survey results with 150 samples during 2016 -2018 period from enterprises

listed on Vietnam’s stock market, HOSE and HNX in particular The author found that the firm’s size as measured by the log of total assets (LTA) and the leverage as

measured by debt ratio (DR) have a positive and negative impact on the firm performance respectively The remaining factors, CEO — Chair separation (DUAL),

Stock ownership of board members (BOS) and especially intemal audit, have no significant impact on firm performance

Practical implications: The research may assist businesses and organizations,

especially enterprises in Vietnam in order to determine whether the internal audit department should be established

Originality/value: The thesis met the university criteria in examining whether the

internal audit has an influence on firm performance in Vietnam

Keywords: Intemal audit, Firm performance, Firm’s size, CEO — Chair separation,

Stock ownership of board members, Leverage.

CHAPTER 1: INTRODUCTION

1.1 The necessity of thesis

Internal audit has been mentioned very early in the world with existence and

development history over 60 years and recognized in over 165 countries (according to

VACPA) as a professional career, an inevitable trend, an important element of management in the state economic sector, private economic sector and non-profit organizations as well

In 2001, the miracle of the financial figures under the audit giant’s hand — Arthur

Anderson brought Enron Group to the peak to become the leading energy company in

the 90s but also quickly went bankrupt (Boon & McKinnon, 2007) Then, in 2002,

WorldCom Group — the second largest long-distance telecommunications company in the United States ~ filed for bankruptcy because of accounting frauds, concealing weak

financial conditions and forging growth in order to raise stock prices From the

collapse of big corporations (Enron, WorldCom .) to the global financial crisis in

2008 — 2009, there is a connection between the existence and operation of a business

management mechanism in order to manage and control risk (COSO, 2004)

Companies are under high pressure to identify all the risks that they are facing and must explain how to handle them at an acceptable level Along with the development

of the risk management framework, intemal audit is gradually being seen as an

effective tool for a company to control its risks through both the assurance and

advisory functions for board of directors and shareholders The role of internal audit

has changed from the traditional role in management evaluation activities to consulting

activities and providing objective guarantee for managers Internal auditors are directly

involved in the corporate governance cycle, including the operational cycle, intemal control procedures, risk management and financial statements as well

In the process of transforming itself into a market economy and world economic

integration, Vietnam has had really strong changes Because enterprises are facing many new opportunities as well as great challenges, the competition for survival is

becoming fiercer than ever, Hence, companies need to actively re-evaluation their

operating model, review risks and determine an effective approach to internal audit to ensure their long-term development, Internal audit is known as an independent

monitoring function and the third line of defense of the business This function

provides independent, objective assessments of control activities, risk management and governance within the organization From that, it contributes to improve firm

performance and transparency of organization

Furthermore, according to Decree No 05/2019/ND-CP on internal audit issued by the

Government on 22/01/2019 and applied from 01/04/2019, many state organizations and enterprises will have to perform internal audit

Despite playing an important role, internal audit has not been paid much attention by

Vietnamese companies This is a problem not only in Vietnam but also in many

developing countries The reason is that organizations are not aware of the roles, duties

and functions of internal audit in their business activities In addition, Vietnam has not

still had many empirical researches about internal audit (Nguyen Thi Khanh Van,

2018; Nguyen Minh Trang, 2017)

For all of these reasons, studying impacts of internal audit on firm performance is quite

necessary and really suitable to contribute to further improvement of relevant

theoretical issues In this research, the author focuses on companies in Vietnam

1.2 Research objectives

Overall targets of the project are to identify influences of Internal Audit on Firm

Performance in Vietnam Accordingly, the specific objectives of the study are’

- Key ratios of corporate performance

- Annual financial and operating data of key ratios from companies collected

from questionnaires and interviews

- Analysis of correlation between internal audit and key ratios of these companies,

- Multiple regression model

Secondly, finding out a linear multiple regression model between Internal Audit along

with four other elements and firm performance when considering each survey result as

a sample

Thirdly, how does the Intemal Audit have important influences on firm performance of companies in Vietnam?

1.4 Methodology and scope of research

This study relies on primary data collected via online survey research and interview to examine the effects of intemal audit on business performance in Vietnam

Questionnaire research method and direct calls were used to collect information from

participants concerning their opinions on internal audit in Vietnam This study plan

was considered reasonably because it facilitates a comprehensive and detailed view of the major questions raised in the research

1.5 Structure of research

The Bachelor Thesis Report consists of five chapters In Chapter I, the current chapter, the author introduces the necessity of topic, research objectives, research questions, expected methods and structure of the study about the impacts of Internal Audit on Firm Performance in Vietnam, Chapter II provides theoretical framework of the thesis, summarizes the review of prior studies and identifies key metric affecting the operating performance The content of Chapter II is the research methodology of this study The following chapter — Chapter IV — presents findings from current situation analysis and interpretations Finally, conclusion, discussion and limitations of the study are included

in Chapter VÌ

CHAPTER 2: THEORETICAL FRAMEWOEK

2.1 Overview of internal audit

2.1.1 Defi

ion of audit

The term “audit” has been derived from the Latin word “audire”, which means “to

hear” Hence, an auditor is a person who hears or listens There are currently many

different definitions of audit

According to the definition given by the Intemational Federation of Accountants

(IFAC), auditing is the independent auditors’ examination and presentation of their opinions on financial statements Auditing involves searching and verifying the accounting records and examining other evidence supporting the financial statements

(Whittington, 2004)

According to the Amencan Accounting Association (AAA) “auditing is a systematic

process of objectively obtaining and evaluating evidence regarding assertions about

economic actions and events to ascertain the degree of correspondence between those

assertions and established criteria and communicating the results to interested users”

According to Denigi (2004) “auditing is described as the independent examination of and expression of an opinion on, the financial statements of and enterprise by an

appointed auditor in pursuance of their appointment and in compliance with any relevant statutory obligation.”

According to Montgomery “auditing is a systematic examination of the books and

records of a business or the organization to ascertain or verify and to report upon the

facts regarding the financial operation and the result thereof”

The most common definition is mentioned in auditing book — An integrated approach

of Arens and Loebbecke (2012), as follows: Auditing was the process of independent

experts gathering and evaluating evidence on the quantifiable information of a specific

entity Purposes were verification and reporting the concordance of the information

with the established standards

Based on the audit function, it has three types, including:

- Auditing financial statements: The auditor gives opinions on honesty and

reasonableness on the important aspects of the financial statements of the

audited units,

- Auditing activities: Auditors inspect and give opinions on the economy,

effectiveness and efficiency of the audited parts or units

- Compliance audit: Auditors inspect, give opinions on compliance with laws,

regulations and regulations that the audited units must perform

Nowadays in Vietnam, when it comes to auditing, people usually think of independent

auditors In the Vietnamese legal documents, there is no general definition of auditing but there is a concept of independent audit, It is issued in the Law of Independent Auditing No 67/2011/QH12 (29/03/2011) and the most important type of independent

audit is the financial statements auditing,

2.1.2 Concept of internal audit

The development history of auditing activities in the countries which owns market

economy show that internal audit is still a new career Although the internal audit was

originally non-professional career, did not exist in the enterprises or was considered as

part of an independent audit, but later it became a professional career

Related to professional organization of internal audit, the most typical professional organization of the internal audit is the Institute of Internal Auditors (IIA), which was

established in 1941 in Lake Mary, Florida, USA IIA is the global voice of experts

about internal audit recognized by enterprises and managers around the world

Certified Internal Auditor (CIA), which is issues by the Institute of Internal Auditors ,

is a reliable certificate in the evaluation of professional competence in Internal Audit

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fidld, risk inanagement, governance, internal control, information teclmology auditing,

education and security

The IIA (the Institute of Internal Auditors) defines internal audit as “an independent, objective assurance and consulting activity designed to add value end imprave an organization’s operations it helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness

of risk management, control and governance processes” (IIA 1999)

The definition of Intemal Andit is defined by the International Federation of Accountants — IFAC as "Intemal Audit is an evaluation activity set up in the enterprise

as a service for thal enterprise im order lo inspect, evaluale and supervise the appropriateness and effectiveness of the accounting system and internal contre.”

In Vietnamese Standards on Auditing No 610, which was issued along with the Cireular No 214/2012/TT-BTC (06/12/2012) of the Ministry of Finance, stated that infernal audit is an activily performed by the aulited entity or provided by an external organization Its main functions are inspecting, evaluating and monitoring the adequacy, appropriateness and effectiveness of internal control system

Because of the development of auditing in general and internal audil in particular as well as the continous changes of the business environment, each organization will have its own concept about intemal audit and coustantly complement it Although the voncepls have different exprossions, basically it is possible to understand that, the internal audit is 2 department created within a company performing the function of inspection and supervision to help the senior managers in that company to increase their power as well as manage activities that have been going on in the company, including: Do employees comply with organization’s mules? Is the property integrity? Are officials and employees working effectively? Are current regulations suitable

when conditions change? Evaluating the accuracy of financial statements

Thus, the internal audit formed and developed from the management needs of the

enterprise itself, Intemal audit performs an independent and objective evaluation function related to internal control structure of the enterprise The scope of intemal

audit includes all aspects of business activities and at all levels of different

management Internal audit reviews, evaluates and reports on the status of the internal

control system, provides professional analysis, recommendations and advice for managers to lead the business activities successfully

2.13 Functions and responsibilities of Internal Audit

According to Article 6, Chapter I of the Internal Audit Regulation issued together with

Decision No, 832 TC/QD/CDKT (28/10/1997) of the Minister of Finance, the internal

audit has three functions: inspect, identify and evaluate The tasks of internal audit are

the following:

- Checking the reasonability, effectiveness and efficiency of the internal control

system

- Checking and certifying the quality and reliability of economic information

including financial statements, managerial accounting reports before submitting

them for approval

- Checking the compliance with operational principles, business management,

especially laws, policies, financial regimes, accounting, resolutions and

decisions of the Board of Directors

- Detecting loopholes, weaknesses, frauds in managing and protecting the

enterprise’s assets

- Proposing solutions to improve and complete business administration system of

the enterprise

2.1.4 Scope of implementation of internal audit

According to Article 6, Chapter I of the Intemal Audit Regulation issued together with

Decision No, 832 TC/QD/CDKT (28/10/1997), the Minister of Finance defined that the

scope of internal audit is auditing financial statements, managerial accounting reports

of enterprise and subsidianes; compliance audit, operational audit

An audit of financial statements is an audit aimed at examining and commenting on the

honest and fair presentation of the financial statements of an entity in accordance with applicable principles and regulations

Compliance audit is a test to assess the level of compliance with regulations and laws

that the audited unit has implemented

Operational audit is examining and evaluating the effectiveness, efficiency and economic characteristics of an organization’s operation to propose innovation as well

as improvement measures

2.1.5 Legal documents on internal audit in Vietnam

On the basis of Decree 59/1996 ND-CP, the Ministry of Finance issued Decision No

832 / TC-QD-CDKT of October 28, 1997, promulgating the "Intemal Audit

Regulation" for state organizations This decision marks the official appearance of

Internal Audit in Vietnam It requires all state enterprises to establish the Internal Audit Department After that, the Ministry of Finance continuously issued a number of

Circulars related to Intemal Audit such as Circular No 52/1998 / TT-BTC on

"Guidelines for organizing intemal audit activities" and was later replaced by the

Circular No 171/1998 / TT-BTC of "Guidance on implementation of internal audit"

For the State Bank, besides Decision 832 / TC-QD-CDKT, in 2011 the Governor of the State Bank of Vietnam issued Circular No 16/2011 / ‘I'!-SHNN “Regulations on

internal control and intemal audit of the State Bank of Vietnam "

During 2016, wilh the support of the Wortd Bank, the Goverment had drafed a Decree on Internal Audit in state agencies, public service agencies and enterprises The draft decree requires some enterprises to perform intemal audit, to develop the internal audit regulations and provedures in accordance with the operational characteristics of

its

And recently, Decree No 05/2019/ND-CP was bom on 22/01/2019 and applied from

01/04/2019 1 specifies the internal audit work; dutics, responsibilitios and powers of Ihe Tntemal Audit, Department, the person in charge of the Internal Audit; responsibilities of the parties to intemal Audit; state management on intemal Andit This is considered the first comprehensive legal framework for Intemal Audit activities

in public units, fisted companies, and state-owned enterprises which are operating under the parent-subsidiary model

2.L6 The necessity of internal audit in each enterprise

The development history of the world economy shows that intemal audit is an indispensable function and an obligatory activity to be performed in the operation of cniorprises In essence, the nature of infernal audi is nol cutirely new in every business ‘The self-review, examination and evaluation of the effectiveness and efficiency of its activities is an objective element that exists in every organization, even though the simplest form When the business size is small, the operation is stilt simple and there are enough conditions for direct control, this work is done directly by the managers However, it also takes managers a lot of to control, which affects other

executives And if a mistake is discovered, it is oflen too late Therefore, when the

business size grows to a large enough level as well as the operation of the business and

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environment become increasingly complex, managers are not able lo take charge of this work themselves, they should assign professional individuals to perform with the effective assistance role, Those individuals are intemal auditors specialized in assessing and evaluating every business activity From thal, internal audit has become a professional management tool with objects, techniques, methods and operations into the specific way Intemal auditors play an important role in supporting the managers in the most efficient and effective manner

In Vietnam, due to the period of central planning activities that have led to bureaucracy, the companies operate passively and usually rely on supervisors, which result in low efficiency und tow income distribution So, the developmen! of every enterprise in the economy is constrained, In thal situation, checking and assessing the operations was previously misunderstood as state affairs and also extremely formal

Gradually, when shifting to a market mechanism, each firm must be self-innovating,

antonomous and self-respensible for iis aotivilics International coonomic integration requires practical steps of the economy as well as each business ‘Ihe firm will face high requirements, fierce competition in all areas: information, technology, quality

That fact makes businesses unable ta chant the slogan aintain a weak exislence by

one way or another

Nowadays, weak enterprises must quickly dissolve to make room for well-motivated

and capabte onlerprises lo develop in the real markel mechanism For these businesses,

the only answer to survival and development is the company's performance For thal

reason, internal audit, whose functions are to evaluate, measure the effectiveness and

effectiveness of all activities in an enterprise, necessazily is used as a management tool,

a independent activity with a system of own professional methods and techniques

undertaken by internal auditors

2.2 Firm performance

According to Benjalux (2006) performance measures are the life blood of economic

units, since without them no decisions can be made Financial performance Measure is one of the important performance measures for economic units Financial performance

measures are used as the indicators to evaluate the success of economic units in

achieving stated strategies, objectives and critical success factors (Katja, 2009)

According to Hansen and Mowen (2005), firm performance is very essential to management as it is an outcome which has been achieved by an individual or a group

of individuals in an organization related to its authority and responsibility in achieving the goal legally, not against the law, and conforming to the morale and ethic

Performance is the function of the ability of an organization to gain and manage the

resources in several different ways to develop competitive advantage

Basically, the firm performance is measured in terms of efficiency of the firm’s

operations In fact, the more effective the firm’s operations are completed the more positive the organizational performance is and, on the contrary, the low efficiency of

firm’s operations and employees’ performance means the poor firm’s performance

In other empirical studies, for instance, M Xu, W Banchuenvijit (2014) used two

accounting-based indicators which were Return on Equity (ROE) and Return on Assets

(ROA) to measure organization’s performance Also, Lev et al (2005) measured firm's

performance by using ROA, ROE and Earnings Growth, Furthermore, Shu-Ching & Wenching (2006), measured firm’s performance by using four accounting-based

indicators which were; ROA, Earnings per Share (EPS), Net Profit Margin (NPM) and

ROE Similarly, Sher & Yang (2005), also used three accounting based indicators which were, ROA, Retum On Sales (ROS) and ROE to measure firm performance

Finally, Ayam (2012) measured firm's performance are as follows: ROA, Return on

Capital Employed (ROCE), Dividend Yield (DY), Dividend Cover (DC), EPS, Price

Earning Ration (PE) and Capital Gearing Ration (CGR)

In this study, firm performance is the dependent variable And for all of the above prior

researchers, the ROA is chosen to measure the effectiveness of the economic unity in

using its assets to generate profit especially manufacturing, the higher this ratio, the better the economic unity of the as it indicates the management's efficiency in using its

assets to generate profit (Mahdi and Kumars, 2009), ROA gives a manager, investor, or

analyst an idea as to how much a firm has eamed on its asset base Accordingly the net profit in relation to the selected firms asset base is a good way to measure the extent of

returns on investments made in the firms, ROA is displayed as a percentage:

Annual Net Income Total Assets

Return on Asset =

2.3 The association between internal audit and firm performance

In the world, there have been many studies of many authors based on different aspects and different fields on intemal audit Researches of Getie Mihret and Wondim Yismaw

(2007), GoodwinStewart and Kent (2006), Sarens (2009) conducted assessments from

the perspective of internal auditors to address the effectiveness of internal audit in both the private sector and the state area These studies are based on the definition of

Internal Audit Institute of Internal Audit Institute to conduct research The results all

show a positive link between the quality of internal audit function with the quality of

internal control and the quality of risk management From that, internal audit could

bring economic benefits to firms The drawback of these studies is that the overall research is limitet because some variables included in the model may not be well represented Besides that, studies are conducted with the specific context of each

17

wountry Tn particular, il is difficult to apply general research lo many different

countries

In addition, Ahmad et al (2009) conducted a study to explore the importance of Intemal Audit in Malaysia's public scclor through the self-assessment of the Internal Audit Heads and Internal Auditors The study concludes that Intemal Audit functions

in the public sector in Malaysia are constrained by a lack of labor and hampered by inadequate support from scnior management Furthermore, auditors rarcly oxpand cooperation ‘This expresses the urgent need and the essential value when researching

on the effectiveness of internal audit as well as the weaknesses to focus on promoting, impacting on those Tinritalions to cnhanew the efficiency of intemal audil, Lenz and Hain (2015), Badara end Saidin (2014) conducted empirical research based on evaluating the effectiveness of intemal audit from both sides One from the supply side (self-assessment of the intemal auditors) and the second is from the demand side Gudging from relaled parties of internal audil) It is larger and more general about subjective and objective assessment of the effectiveness of intemal audit as well as factors affecting the effectiveness of intemal audit

The sludy of Abbott et al (2016) helped expand previous tesearches and deepened the understanding of the impact of internal audit to the quality of financial statements and

the determinants of intemal audit quality Similarly, Soh and Martinoy - Bennie

(2011), D’Onza ot al (2015), Lenz and Hahn (2015) argued that effective internal audit activities add values to organizations The researches support for the opinion that internal audit is essential 10 achieving an organization’s goals This is also appropriate whether the organization is private ar state Companies should ensure effective internal

audit to improve the efficiency and effectivencss of the organization’s operations.