summary of doctoral thesis research on factors affecting audit quality of financial statements of listed companies in the vietnamese stock market

- Survey method survey, interview & observation Basing on the system of factors determined in the theoretical framework, the author designs the Questionnaire for auditors working for ind

INTRODUCTION

1 The necessity of the thesis

Auditing plays an important role in maintaining and issuing financial

reports with high quality However, the bankruptcy of Enron Corporation, one

of the leading energy corporations in the US in 2001, resulting in the downfall

of Arthur Andersen, a world-class prestigious auditing firm in 2002, raised the

concerns about audit quality A series of scandals about audit quality of

independent auditing firms was disclosed after that has involved incorrect

opinions about financial reports like in the bankruptcy cases of Worldcom or

Kmart corporations In Vietnam, the incident of Bach Tuyet Cotton

Corporation in 2008 became a focal point for Vietnamese stock market when

disputes arose concerning audited business results in its 2005 and 2006

financial reports Other cases relating to the reliability of information in

audited financial statements also caused financial loss to investors

Financial reports of listed companies in the Vietnamese stock market

receive much attention from different groups Among which, the most

popular and sensitive group is the group of investors Financial statements

can be distorted for the sake of companies managers and financial report

preparers, not for the sake of investors Auditors are responsible for ensuring

the reliability of financial reports, which displays audit quality

However, it is not easy to evaluate or recognize audit quality

Evaluation criteria for audit quality can show audit quality but they do not

demonstrate which factors resulting in such quality and, more importantly,

basing on what basic can audit quality be improved Therefore, the thesis’s

topic, namely “Research on factors affecting audit quality of financial

statements of listed companies in the Vietnamese Stock Market”, reflects

the necessity of this issue and aims to clarify the issue of interest

2 Literature review Review of Literature that have been conducted in oversea and Vietnam

Applied research methodologies Research questions and findings

Research questions and findings focus on the main point, which is evaluating perception of survey objects about the impact level of factors affecting audit quality; identifying important factors affecting audit quality by using a scale of evaluation as from 1 to 5 or 7, from “very low” to “very high”

Representative researches are from Schroeder et al (1986); Carcello et al (1992), Aldhizer et al (1995); Warming-Rasmussen & Jensen (1998); Chen et

al (2001); Augus Duff (2004); Kym Boon (2007), Kym Boon et al (2008)

3 Research objectives and questions

The overall objective is to identify factors affecting audit quality and evaluate the influence of each factor to audit quality of financial statements

of listed companies in the Vietnamese stock market at present, which serves

as the basis for proposing solutions

Research questions: In order to achieve the research objective, research

questions are given accordingly and suitable in research framework

4 Research objects and dimension

The topic’s focus is to identify factors affecting audit quality of financial reports of listed companies in the Vietnamese stock market by independent auditing firms The research objects are joint stock firms with securities (stocks and bonds) listing on the Ho Chi Minh City and Hanoi Stock Exchanges

5 Research methodology

- Analytical and statistical methods: Basing on secondary of

domestic and international resources available and analysis of real situation

in Vietnam to identify factors/criteria for factors affecting audit quality of financial statements

- Survey method (survey, interview & observation)

Basing on the system of factors determined in the theoretical

framework, the author designs the Questionnaire for auditors working for

independent auditing firms which are approved to audit financial reports of

listed companies about the influence of factors affecting audit quality of

financial reports of listed companies in the Vietnamese stock market (via

evaluation criteria for factors)

The author carries out direct interviews with a number of specialists as

representatives of managers and leaders in auditing firms, institutional

investors to discuss about survey results and relies on observation of

secondary data to further clarify survey results, which serves as the basis for

proposing solutions

- Data processing method: After getting survey results, the author

processes the data on SPSS 18 software to analyze the reliability of factors

and evaluation criteria for factors The author also applies descriptive

statistics for summing up and comparison with a view to quantifying the

impact level of factors affecting audit quality of financial reports of listed

companies in the Vietnamese stock market

Data resources are collected including primary and secondary data

6 New contribution of the thesis

In a theoretical view, the topic sums up theories with a deep view into

systemizing factors (evaluation criteria of factors) affecting audit quality of

financial reports of listed companies

In a practical view, the topic evaluates influence of factors to audit

quality of financial reports of listed companies in the Vietnamese stock

market from auditors’ viewpoint and proposes key solutions in line with

Vietnam’s real situation

7 Research framework and structure

In addition to Introduction and Conclusion, the thesis is designed scientifically with 4 chapters as illustrated in the framework diagram below:

Chapter 4:

Recommendations and proposals to improve audit quality of financial reports of listed companies in the Vietnamese stock markets

Chapter 1:

Theoretical framework on factors affecting audit quality

of financial statements of listed companies in the Vietnamese stock market

Chapter 2:

Analyzing reality and identifying factors affecting audit quality of financial statements of listed companies

in the Vietnamese stock market

Answering research question 1:

Which factors and evaluation criteria for factors are identified as having important impact on audit quality of financial reports of listed companies

in the Vietnamese stock market?

Answering research question 2:

Factors with the most important impact as well as the order of impact level of each factor to the audit quality of financial reports of listed companies in the Vietnamese stock market at present?

Chapter 3:

Research results about factors affecting audit quality

of financial reports of listed companies in the Vietnamese stock markets

Answering research question 3:

Key solutions to improve audit quality of financial reports of listed companies in the Vietnamese

stock market?

CHAPTER 1: THEORETICAL FRAMEWORK FOR RESEARCH ON

FACTORS AFFECTING AUDIT QUALITY OF FINANCIAL

STATEMENTS OF LISTED COMPANIES ON THE VIETNAMESE

STOCK MARKET

1.1 Stock market and listed companies on the stock market

Characteristics of stock markets and listed companies influence

characteristics of their financial reports From that, we can see the

necessity and important role of independent auditors with the reliability

of information in financial reports, which contribute to stock market’s

transparency and to investor’s protection Contents presented below aim

at clarifying theoretical framework about the stock market, listed

companies and financial statements of listed companies from the

auditors’ viewpoint

1.1.1 Stock market

1.1.1.1 Establishment history of the stock market

The history of stock market has a close connection with the

commodity economy In Europe, the stock market appeared in the

beginning of sixteenth century Up to now, the stock market has become

a high form of financial market with strong development and high

attractiveness for investors in developing and developed countries

1.1.1.2 Definition of stock market

Stock market is viewed as an organized market where securities of

listed companies in the market are traded It is a high form of financial

market where investors always need transparent financial information to

make their economic decisions and they can suffer heavy losses if

financial information upon which they rely for decision making do not

ensure reliability

1.1.1.3 Functions of the stock market Functions of the stock markets display its role in the economy, specifically: Capital mobilization; encouragement of savings and investment; investment transferring tool; encouragement of competition; reflection of economic health; and integration tool into global economy 1.1.1.4 Classification of stock market

The stock market is classified differently basing on different criteria: stock circulation process, transaction method and transaction period

1.1.1.5 Characteristic of the stock market Three basic characteristics of the stock market help to create its attractiveness and draw interest of individual and institutional investors

However, the transparency of information in the stock market, which requires the role of auditors to ensure information reliability, is a matter

of crucial concern to protect investors

1.1.1.6 Participants in the stock market

The most popular participants that create the excitement for the stock market are joint stock companies and investors Joint stock companies issue

and list securities- the important source of commodity with overwhelming trading volume while investors carry out trading transaction in the stock

market

1.1.2 Listed companies in the stock market

1.1.2.1 Definition of listed companies

A listed companies is a listed entity in the stock market, a joint stock firms eligible in terms of capital, business operation, financial capability, number of shareholders or owners to list shares in the stock market (on the stock exchange or securities trading center)

1.1.2.2 Characteristics of listed companies

Five basic characteristics of listed companies are analyzed from the

viewpoint of auditors and investors, which influence the characteristics

on financial statements of listed companies with distinctive features of

joint stock companies, owners/shareholders, business scope and fields

under strict legal regulations

1.1.3 Characteristics of financial reports of listed companies

Firstly, financial reports require high level of reliability and

sensitivity

Secondly, financial reports monitor and reflect many distinctive

features

Thirdly, financial reports demonstrate a large volume of complicated

transactions

Lastly, financial reports of listed companies comply strict

requirements of the stock market, one of which is audit requirement

1.2 Audit of financial reports of listed companies

1.2.1 Concept and classification of auditing

1.2.1.1 Definition of audit

An independent audit of the financial report of a listed companies is

where auditors from independent firms (eligible for auditing reports of

listed companies) attest and give their opinions about the true and fair

view, in all material aspect, of the financial statements of the listed

companies

1.2.1.2 Classification of audit

Audit is classified according to functions, objects and obligation with

both pros and cons for each type Independent audit for financial reports

of listed companies in the stock market is compulsory and is carried out

by independent auditors

1.2.2 The role of independent audit of financial reports of listed companies

Independent audit of financial reports of listed companies helps to enhance reliability of information in financial reports and transparency in the stock market This aims at protecting investors and other beneficiaries

of audit results, helping listed companies to improve their management capability and reputation as well as assisting authorized agencies in issuing appropriate legal documents

1.2.3 Types of audit reports for financial reports of listed companies

1.2.3.1 Audit process for financial reports of listed companies in the stock market

Audit process for financial reports of listed companies in the stock market ensure compliance to standard audit procedures

1.2.3.2 Types of audit reports for financial reports of listed companies Audit reports include the following types of opinions: unqualified opinion & not unqualified opinion (qualified opinion, adverse opinion, and disclaimer of opinion)

Of all these opinions, unqualified opinion is the best result that listed companies and investors in the stock market expect

1.3 Factors affecting audit quality of financial reports of listed companies

1.3.1 Users of audit quality of financial statements of listed companies

Researches about audit quality show that audit quality attracts attention of many users, especially institutional investors (securities companies, investment funds & others) and individual investors (from

different classes) This group of interest in audit quality displays the most

distinctive features in the stock market This group usually faces risks

from unreliable financial reports Therefore, these users always want to

receive high quality financial statements from auditors, which serve as the

basis for their investment decision They are entitled to sue auditors if

audited financial reports still contain material misstatements that cause

financial losses to their investment decisions

1.3.2 Viewpoints about audit quality of financial reports of listed

companies

Until now from literature review, two main viewpoints from

researches about independent audit quality of financial reports, with

practical viewpoint about satisfying users of audit service and scientific

viewpoint about the ability to discover and report major

misinterpretations in audited financial statements

Evaluating audit quality according to satisfaction level of users is not

simple at all because users of audit results can not directly observe audit

activities Therefore, in evaluating audit quality, researchers normally

assess the ability to discover and report material misstatements of

auditors via identifying and measuring influencing factors

1.3.3 Factors affecting audit quality of financial reports of listed

companies

According to the diagram, research results show differences in

impact levels of factors They are categorized into three groups of factors

with the highest influence on audit quality of financial reports of listed

companies Details of factors/groups of factors are presented as follows: Diagram: Groups of factor affecting audit quality of financial report of

listed companies

Filed work conduct

Group of external factors

Legal environment Auditees

Other external factors

Group of factors related

to auditing firms

Audit fee Firm’s size Audit approach Quality control system Other factors

Group of factors related

to auditors/auditor councils

Industry expertise Experience Technical competence Independence Perception of standard compliance Due care

Other factors

1.3.3.1 Groups of factors relating to auditors

The first factor of Level of an industry expertise: With the

distinctive role of audit in the stock market, the required level of industry

expertise is often higher Industry expertise also have more important impact

on the audit quality of financial reports of listed companies because the

complicated nature of these reports as well as the quantity and capability of

objects of interest in audited financial reports will increase the risks of audit

The second factor of Auditor/Council experience: Due to distinctive

characteristics of financial reports of listed companies in the stock market,

audit risks for these reports are often higher than those of non-listed

companies Therefore, similar to industry expertise, experience factors also

have high influence in audit quality Consequently, complicated and risky

audit cases should be given to auditors/auditor councils with a lot of industry

experience

The third factor of Technical competence: It is considered the

minimum requirement for auditors/auditor councils for an audit case of

financial report for any customer in general and for listed companies in

particular

The fourth factor of Independence: Researches all point out that

auditors’ independence from their customers means the possibility of an

audit case with better quality Especially for the assurance of audit quality

of financial reports of public firms (including listed companies in the stock

market), independence becomes more and more important Otherwise, even

if major misinterpretations are discovered by auditors, they may not be

reported because auditors may join hands with customers or serve the

interest of certain groups of shareholders/individuals

The fifth factor of Compliance of ethical standards: High level of

compliance of ethical standards from auditors/auditor councils means high audit quality because they are able to discover and report errors and unusual problem with little possibility of compromise during the audit process

The sixth factor of Due-care attitude: Due to widespread impact of

audit quality of financial statements of listed companies, due-care attitude

of auditors is considered an important factor, especially for audits of financial reports with many provisional items or when there are doubts about the continuous operational activities of listed companies Due to higher level of risk for audit of financial reports of listed companies, due care is even more required when determining material misstatements

The seventh factor of field work conduct: Even though field work

conduct is not considered the most important factor in researches, attention

is required on this factor for audit of financial reports of listed companies due to high pressure and industry expertise requirements

Other factors related to auditors

1.3.3.2 Group of factors related to auditing firms

The first factor of Audit fee: The stock market requires higher audit

quality TTCK, which goes in line with higher audit risks Therefore, audit fee is an important factor affecting audit quality, especially for financial reports of listed companies

The second factor of Auditor’s size: Most researches show that size

of auditing firms is an factor affecting audit quality Listed companies in the stock market normally accept high audit fee for auditors in big auditing firms to increase their own reputation

The third factor of Audit Approach: For audit of financial reports for

listed companies, due to its higher risk, an effective audit approach is

required to assist auditors in carrying out their audit practices in a more

professional way and to better evaluate risks of listed companies Therefore,

it is considered as an important factor affecting audit quality of financial

reports in general and financial reports of listed companies in particular

The fourth factor of Internal quality control system: Highly

appreciated in most countries, this factor is considered compulsory according to

audit standards and is treated as one of criteria to evaluate whether an auditing

firm is eligible for auditing listed companies in the stock market

Other factors related to auditing firms

1.3.3.3 Group of external factors

External factors have distinctive characteristics for each country, including:

legal environment, listed companies, external control and other factors

Conclusion of chapter 1

Chapter 1 provides an overview of theoretical framework about the

stock market, listed companies, characteristics of financial statements of

listed companies affecting audit quality of financial reports The outstanding

results of chapter 1 is deeply systemizing factors affecting audit quality of

financial report of listed companies in the stock market According to this,

there are three groups of factors affecting audit quality of financial reports,

including group of factors relating to auditors, auditing firms and groups of

external factors

Theoretical framework and overview about these groups of factors will

serve as an important premise for empirical surveys to identify influencing

factors and evaluate their level of impact on audit quality of financial

statements of listed companies in the Vietnamese stock market

CHAPTER 2: ANALYSIS OF REAL SITUATION IN RELATION WITH IDENTIFYING FACTORS EFFECTING AUDIT QUALITY OF FINANCIAL STATEMENTS OF LISTED COMPANIES IN VIETNAMESE

STOCK MARKET 2.1 Overview of Vietnamese stock market and listed companies

The real situation of the Vietnamese stock market and listed companies’ characteristics are clarified in relation with identifying factors affecting audit quality of financial statements of listed companies

2.1.1 The development of Vietnamese stock market and listed companies

It is divided into two main periods: from 2000 to 2005 and from 2006

to now

2.1.2 Listing requirements for companies in the Vietnamese stock market

As stipulated in Decree No.58//2012/Nð-CP dated Sept 15, 2012 on guiding the implementation of the Law on Securities

2.1.3 Characteristics of listed companies in the Vietnamese stock market affecting audit

From the audit viewpoint, besides general characteristics, listed companies in the Vietnamese stock market also have distinctive features of a fledging stock market, which have an impact on the roles and factors affecting

audit quality of financial reports in the following points: Firstly, listed companies are joint stock companies eligible for listing according to regulations; Secondly, listed companies have diversified business scopes with many complicated transactions arising; Thirdly, listed companies normally have big companies size and dispersed organization structure; Fourthly, a lot

of shortcomings still exit in the internal control systems of listed companies; Fifthly, listed companies must comply with requirements about disclosing financial report information

2.2 Audit of financial reports of listed companies in Vietnamese stock

market

2.2.1 Characteristics of independent auditors approved to audit listed

companies

The real situation of the audit is analyzed pertaining to identifying

factors affecting audit quality of financial statements of listed companies in

the Vietnamese stock market with the focus in the following aspects: The

establishment and development of independent audit in Vietnam; legal basis

for operation of independent audit of financial reports of listed companies

and characteristics of auditing firms for financial reports of listed companies

in the Vietnamese stock market

2.2.2 The role of auditing financial reports of listed companies

Analysis about discrepancies in data of annual financial reports before and

after audit, in data of semi annual financial reports and analysis about types of

auditors’ opinions concerning financial reports of listed companies in

Vietnamese stock market show the direct role of audit, which helps to make

information in financial reports of listed companies more true and transparent

and help investors to trust as well as take caution with data in financial reports

2.2.3 The real situation of evaluating audit quality of financial reports of

listed companies

In Vietnam, evaluation of audit quality of financial reports of listed

companies is carried out by auditors themselves (through their internal quality

control systems) and by authorized agencies ( mostly the Vietnam Association

of Certified Public Accountants - VACPA) via external quality control

activities Investors are unable to evaluate by themselves; they can only trust

auditors’ opinion until there are consequences arising

2.3 Identifying factors affecting audit quality of financial reports of

listed companies in the Vietnamese stock market

Through analyzing the real situation in Vietnam, 16 factors (under 3

groups) and 62 criteria have been identified as having important impact on

audit quality of financial statements of listed companies in the Vietnamese stock market

2.3.1 Group of external factors

2.3.1.1 Legal environment for audit activities of financial reports of listed

companies (Legal environment): three evaluation criteria for the legal

environment includes: (1) sufficiency; (2) conformity; (3) sanctions

2.3.1.2 Customer as listed companies: with 6 evaluation criteria for

customers as listed companies

2.3.1.3 Others external factors: including three evaluation criteria: (i)

Macroeconomic environment; (ii) Cultural environment, habits of audit service users; (iii) The role of external quality control of financial reports of listed companies

2.3.2 Group of factors relating to auditors

Eight factors and thirty two evaluation criteria related to auditors are identified as having impact on audit quality of financial reports of listed companies in the Vietnamese stock market as follows:

2.3.2.1 Ensuring independence: with 4 evaluation criteria

2.3.2.2 Technical competence of auditors/auditor council: with 3

evaluation criteria

2.3.2.3 Industry expertise of auditors/auditor council: with 3 evaluation

criteria

2.3.2.4 Audit experience of auditors/auditor council: with 2 evaluation

criteria

2.3.2.5 Work attitude (due care and skepticism) of auditors/auditor

council: with 6 evaluation criteria

2.3.2.6 Field work conduct of auditors/auditor council: with 6 evaluation

criteria

2.3.2.7 Compliance to ethical standards: with 3 evaluation criteria

2.3.2.8 Pressure of busy seasons on auditors/auditor council: with 4

evaluation criteria

2.3.3 Group of factors related to auditing firms

Five factors with eighteen evaluation criteria are identified as having

impact on audit quality of financial reports of listed companies in the

Vietnamese stock market as follows:

2.3.3.1 Size of auditing firms: with 4 evaluation criteria

2.3.3.2 Reputation of auditing firms: with 3 evaluation criteria

2.3.3.3 Working conditions of the firms for auditors/auditor council: with

5 evaluation criteria

2.3.3.4 Audit fee/ completion time of audit report: with 2 evaluation

criteria

2.3.3.5 Internal quality control system of auditing firms: with 5

evaluation criteria

Conclusion of chapter 2

Basing on the above-discussed domestic and international literature, 16

factors criteria under 3 groups are identified as having impact on audit

quality of financial reports of listed companies in the Vietnamese stock

market: groups of external factors; groups of factors relating to auditors and

group of factor related to auditing firm The research also clarifies the

detailed contents of 16 factors via 62 evaluation criteria These 62 criteria

are identified from international researches coupled with analysis of current

situation and they are considered to be in line with the real situation in

Vietnam

CHAPTER 3: RESEARCH RESULTS ABOUT FACTORS AFFECTING AUDIT QUALITY OF FINANCIAL STATEMENTS OF LISTED COMPANIES IN THE VIETNAMESE STOCK MARKET

3.1 Data collection and methodologies

3.1.1 Design of questionnaires 3.1.2 Selection of survey objects 3.1.3 Research methods and collection of questionnaires 3.1.4 Description of questionnaires’ object

3.1.5 Data sources 3.1.6 Description of steps for producing research data

Step 1: Digitalizing and input data in SPSS

Step 2: Re-digitalizing measurement index into 3 levels: 1 From Very

low -> Low; 3 Normal; 5 High-> Very high

Step 3: Checking measurement index for suitable results of criteria Step 4: Checking measurement index for each group of factors;

handling data in SPSS with the end result of 14 factors and 60 evaluation criteria affecting audit quality of financial reports of listed companies in the Vietnamese stock market

Step 5: Statistical description (results are shown in 3.2) 3.2 Analyzing results of impact level of factors to audit quality of financial reports of listed companies

Table about impact level of 3 groups of factors affecting audit quality

affecting audit quality

No of obser-vation

Mean Standard

deviation

1 Nhóm B NhomKTV Group of auditors 138 4.2375 0.63702 2.Nhóm A Nhombenngoai Group of external factors 138 3.9710 0.70978 3.Nhóm C NhomCTKT Group of auditing firms 138 3.9504 0.70491

(Source: Research results on level of impact of factors affecting audit quality of

financial reports of listed companies in the Vietnamese stock market)

Below is detailed analysis of impact level of factors taken from research

results of 3 groups of factors (external, auditors, auditing firms) The following

tables are arranged with average value in decreasing order of impact level

3.2.1 Group of external factors

There are 3 factors in the group of external factors affecting audit

quality with 12 evaluation criteria

Table showing impact level of group of external factors to audit quality

of financial reports of listed companies in the Vietnamese stock market

No Code Symbol External factor No of

obser-vation Mean

Standard deviation

2 BC1 MoitruongPL

Legal environment for audit of financial report of listed companies

138 4.0628 0.96201

3 BC3 Ngoaikhac Other external factors 138 3.7101 1.00350

Group A Nhombenngoai Group of external factors 138 3.9710 0.70978

(Source: Research results on level of impact of factors affecting audit quality of

financial reports of listed companies

3.2.2 Groups of factors related to auditors

There are 6 factors in this group with 30 evaluation criteria

Table showing impact level of group of auditor factors to audit quality

of financial reports of listed companies in the Vietnamese stock market

No Code Symbol Factors in the group of auditor

No of obser-vation

Mean Standard

deviation

1 BC6 Chuyensau Expertise of auditors/auditor council 138 4.4551 0.74550

2 BC10 Ythuc Compliance and attitude of

auditors/auditor council 138 4.4251 0.79001

3 BC9 Chuyennghiep Conduct of auditors/auditor council 138 4.3768 0.86187

4 BC11 Apluc Pressure of busy seasons for

auditors/auditor council 138 4.2754 1.05863

5 BC4 Doclap Independence of auditors/auditor council 138 4.2065 0.88319

6 BC5 Trinhdo Competence of auditors/auditor council 138 3.6860 1.08948

(Source:Research results on level of impact of factors affecting audit quality of

financial reports of listed companies)

3.2.3 Group of factors related to auditing firms

There are 5 factors in this group with 18 evaluation criteria

Table showing the influence of group of factors relating to auditing firm on audit quality of financial reports of listed companies

No Code Symbol Group of factors related to

auditing firms

No of obser-vation

Mean Standard

deviation

1 BC16 KiemsoatCL Quality control system of

auditing firms 138 4.2870 0,89343

2 BC14 DKLV Working conditions of

auditors/auditor council 138 4.0145 0,85209

3 BC15 Phi Audit fee and completion

time for financial reports 138 3.9420 1,18240

4 BC13 Danhtieng Firm’s reputation 138 3.8309 1,10389

Group C NhomCTKT Group of factors related to

auditing firms 138 3,9504 0.70491

(Source: Research results on level of impact of factors affecting audit quality of

financial reports of listed companies

Conclusion of chapter 3

After survey and collection/handling of survey results, it is shown from survey results which factor and group of factors have the most impact as well as order of impact for each factor (including 3 external factors, 6 factors relating to auditors and 5 factors related to auditing firms) and 60 evaluation criteria to the audit quality of financial reports of listed companies in the Vietnamese stock market