Research aims This research is aimed to explore elements of internal control system and evaluate their impact on effectiveness and efficiency of EVN’s operation, with the following goal
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VÕ THU PHỤNG
THE IMPACT OF CONSTITUENT FACTORS OF THE INTERNAL CONTROL SYSTEM ON THE BUSINESS PERFORMANCE IN VIETNAM ELECTRICITY
Major: Accounting Code: 62.34.03.01
SUMMARY OF ECONOMIC THESIS
Hồ Chí Minh City- 2016
Trang 2LIST OF THE DISCLOSURE
1 Vo Phung Thu (2013), Interest groups and its negative effecting
on the economy and corrective solutions, Journal of Economics- Technology, Binh Duong University, No 04, pp 110-119, December 2013
2 Vo Phung Thu (2014), The impact of control environment on the effectiveness and efficiency of the operations of Vietnam Electricity, Journal of Economics- Technology, Binh Duong
University, No 06, pp 77-95, June 2014
3 Nguyen Dat Tien, Vo Phung Thu (2016), Factors of Internal Control affecting performance by business group Vietnam Electricity, Journal of Economics- Technology, Binh Duong
University;
4 Vo Nhi Van, Vo Phung Thu (2016), Internal Control System at Southern Power Corporation_ current state and improving solution, Proceedings of the International Conference on Science and Technology of Electric Power University.
Trang 3PREFACE
1 Study’s reason
In recent years, many state-owned enterprises (SOEs) have not fulfilled their most important political role, due to their inefficient operation, as a tool supporting the government to regulate the nation’s macro-economy
Extant literature found that internal control affects operational efficiency However, in the context of Vietnam, there is lack of evidence showing that operational inefficiency, specifically of SOEs,
is caused by weakness existed in internal control system Therefore, this study focuses on the impact of internal control on operational efficiency, empirically at Vietnam Electricity Group (EVN)
2 Research aims
This research is aimed to explore elements of internal control system and evaluate their impact on effectiveness and efficiency of EVN’s operation, with the following goals:
Finding factors of Internal Control System which effect EVN’s performance
Evaluate those impact on EVN’s performance
3 Research questions
Question 1: How is the current performance of EVN?
Question 2: Which factor of Internal Control System impacts on EVN’s operation?
Question 3: What is the level of impact that each factor has on EVN’s performance?
Trang 44 Research Subjects and Research Scope
Research subjects: Factors of Internal Control System which impacts
on EVN’s performance
Research scope: focus on the impact on EVN’s performance, but not other goals such as: the truth and fair of financial reporting or regulation compliance
5 Research Method
This work employs mixed methodology, combining qualitative and quantitative paradigm All factors discovered in qualitative step by using Exploratory Factor Analysis (EFA) model will be assessed in quantitative step for hypothesis test
Questionaire is filled via either face-to-face interviews or emails, by non-probability sampling method Survey process is conducted through two stages:
Preliminary stage: is to evaluate the reliability of the scale (using Cronbach's alpha) and discover factors (using EFA) Any flaw in questionnaire found will be fixed before official questionnaire are sent (in stage 2) This research optimally employs least-squares index
in STEPWISE model to define and evaluate the impact of internal control factors on EVN’s performance The suitability of the model is tested by the R2 coefficient
Trang 5Building up a new measuring scales, which may be used by future research in the field
In practice
Discovering 20 new observed variables affecting the business performance of EVN, this research mitigates weaknesses of internal control at EVN which makes the entity’s operation inefficient These twenty variables together with the 29 variables identified in COSO Report 2013 constitute measuring scales of factors in internal control system which has an influence on the operational efficiency of EVN Via quantitative research this dissetation has discovered 49 measured variables correlated with the 10 elements that affect the performance
of EVN In this light, the work has developed a model comprising of specific factors in the internal control system that affects efficiency
of EVN’s operation
CHAPTER 1 OVERVIEW OF FORMER RESEACHES ABOUT FACTORS OF INTERNAL CONTROL SYSTEM AFFECTING THE EFFECTIVENESS OF BUSINESS
1.1 Studies on factors of Internal Control System affecting the business performance of the enterprise
1.1.1 International studies
Main streams include:
Impact of Internal Control on efficiency of business operations: Reviewed studies have shown that there is close relationship between Internal Control and efficient business operations of firms And the performance of the business to be considered by profits, revenues, liquidity, ROI, ROA [Beeler and colleagues (1999), Jensen (2003), Ittner (2003), Fadzil and colleagues (2005), Kenyon and Tilton
Trang 6(2006), Brown and colleagues (2008), Mawanda (2008), Nyakundi and colleagues (2014) Zipporah (2015)] Weakness or shortcomings
of Internal Control systems are negatively affecting the performance
of the enterprises’ business General weaknesses of Internal Control such as: firms don’t build preventing risk system when operations; lack of risk analysis; lack of appropriate information, and mandate problems within the organization [Kakicha (2009), França same et al (2010), Muraleetharan (2011), Dechow and colleagues (2011)]
Research about the impact of each factor on the effectiveness of operations such as: Hooks (1994), Ezzamel (1997), Lannoye (1999), Cohen (2002), Springer (2004), Rittenberg (2005), Hevesi (2005), Steihoff (2001) and Hevesi (2005) demonstrated that control environment is the most important component affecting the effectiveness of Internal control, in which ethic factor and operating style factor impacts staff’s motivation and behavior, and organization's culture Remaining components have complementary relationship with each other closely, each department are essential for achieving all three target groups: Operations, financial reporting and corporate compliance
Common features of enterprises which have weak Internal Control System: Liu Xinmin (2005), Ge and McVay (2005), Ashbaugh-Skaife (2006), Lin and Wu (2006), Shenkir and Walker (2006), Doyle (2007b) showed that the general characteristics of weak internal control, such as: often large scale enterprises but in the midst
of restructuring or just established, or with high level of ownership concentration These companies are lack of policies in revenue recognition, clearly duty allocation, many changes in firms’s structure, lack of investment in human resources for Internal Control
Trang 7 Impact of Internal Control to firms’ value: Ohlson (2001), Doyle (2005), De Franco (2005), Beneish (2006), Cheh (2006), Doyle (2007) Ogneva (2007), and Hammersley (2007) shows that weaknessed in internal control negatively affect enterprises’ market value, profitability, financial condition, quality of financial reporting, revenue’s growth rate, and business investment
How to evaluate Internal Control:
Emby (1994): audit approach is to rely on weaknesses of Internal Control through specific processes, such as the inventory cycle, sales Louwers (2002): most appropriate assessment method based on the five components of the COSO report This view is included in current auditing standards
O'Leary, Conor (2004): built ICE model based on 7 factors of 3 components: control environment, information systems and control procedures
1.1.2 Studies in Vietnam related to Internal Control
Ngo Tri Tue et al (2004) with the nation-level thesis named
"Building Internal Control with the strengthening financial management at the Vietnam Post and Telecommunication Corporation "
Pham Binh Ngo (2011), Ph.D thesis titled "Organizing Internal Control in accounting units of the Defense Ministry."
Nguyen Thu Hoai, Ph.D thesis entitled "Improving the system of internal control in the cement manufacturing factories of the Vietnam Cement Industry Corporation ";
Bui Thi Minh Hai, Ph.D with the theme "Improving the system of internal control in garment enterprises in Vietnam."
Trang 8In addition, there are many Master theses with the theme of improving the system of Internal Control in specific businesses Overall, dissertations and theses outlined above are based on the elements of the COSO report, then conduct surveys seeking recommendations for improvement Internal Control System Therefore, the research objectives of above work are not in the same direction with the objective of this dissertation
1.2 National Internal Control Reports
1.2.1 COSO Report and COSO Report in the public sector
COSO is a committee of the National Council of the United States established to be against fraud in financial reporting The COSO Report issued in 1992 by COSO is the first document in the world providing a definition and factors attributing to internal control adequately and systematically This report established a general framework supporting entities improve effectiveness and efficiency
in their operations Internal Control System consists of 5 integrated parts, namely: Control environment; Risk assessment; Control activities; Information and Communication; and Monitoring The Report is superseded by its new version in 2013
COSO Report in the public sector
To maintain effective Internal Control System in Public Sector, INTOSAI (International Organization of Supreme Audit Institutions) issued a report of internal control in the public sector in 2001 This document integrated COSO Report 1992 into INTOSAI standards with some changes in which ethics is a part the Internal control and Risk target This is considered a prerequisite to strengthen public confidence and to build effective governance
Trang 91.2.2 Turnbull Report 1999
The Turnbull Report was issued in 1999 in the UK by the Cadbury Committee As COSO's Internal Control Report, The Turnbull Report included definitions, objectives and factors in an internal control systems An internal control system has operations in controling, communicating and monitoring the effectiveness of the Internal Control
1.2.3 CoCo Report (Criteria of Control committee) of Canada
Issued in 1995, in Canada by the Institute of Certified Public Accountant Canada (CICA - Canadian Institute of Chartered Accountants) The report is based on CoCo criteria which was similar COSO report, and combined with MBNQA standards
1.2.4 MBNQA standards (The Malcoln Baldrige National Quality Award)
MBNQA standards are issued in 1987 in the United States by the Institute of Standards and Technology National NIST (The National Institute of Standards and Technology)
MBNQA standards includes 7 criteria, which help enterprises reduce management risk, measure the operational efficiency indicators These criteria are also the basis for building enterprise systems in the Internal Control
1.3 The achieved results and research issues
1.3.1 Results from reviewing extant literature
Research in the effectiveness of Internal Control by factors in Internal Control
Study only the impact of Internal Control toward three overall goals of an organization: operational, compliance and financial reporting
Trang 10 Research about impact of Internal Control is only conducted in some specified industry such as schools, hospitals and certain types
of businesses
1.3.2 The continuing research
Previous studies only focused on constructing framework, then conveyed weaknesses of internal control and their impact on enterprise’ value and market value, the impact of internal control on operational effectiveness of some limited industries
No study is found, that is evaluate the impact of internal control on operational effectiveness of large-scale entities, in term of their social significant (Electricity, Water, Oil&gas, Aviation…) These entities are often state-owned group, having huge financial resources, therefore their risk management is complicated: their influence on natural environment, industry risk, annual planning uncompleted Therefore, the identification and measurement of factors in Internal Control which affects the performance of Vietnam state-owned enterprises are significant and meaningful in both theory and practice
AICPA established a Special Committee on Internal Control (1979) US Securities and Exchange Commission (SEC) launched
Trang 11regulations requiring firms report internal control system toward financial reporting in the enterprise (1979)
These requirements were the main motivation to the establishment of COSO, which was responsible for conveying research about internal control The COSO Report 1992 is the first systematic and sufficient conceptual framework in internal control
2.1.2 Terms
2.1.2.1 Internal Control
There are two main streams in Internal Control definition One considers Internal Control as a structure (Chaos Theory), while the other consider Internal Control as a process (COSO Report)
According to Chaos Theory, internal control is a combination of 'control' and 'internal' which have closely relationship Internal controls can be viewed as either acts which are done, or the results achieved by those acts
COSO Report defines "Internal control is a process driven by the manager, the board and the staff of the unit, it is set to provide a reasonable assurance to achieve operational, financial reporting, compliance objectives"
2.1.2.2 Performance
Prasser (1985); Yamamoto & Watanabe, (1989); Jones & Pendlebury, (1992); Glynn (1985, 1997); O'Leary (1996); McCrae & Vada, (1997); Grendon, Cooper & Townley (2001), Nath (2011, 67), said that efficiency is measured via the comparison between the inputs and outputs, the main purpose is to maximize the outputs with available resources
Trang 12 Yamamoto & Watanabe (1989) suggest that the efficiency is known as the responsibility of managers to use resources when they are assigned to control them
Whittington and Kurt (2001) said that the performance is often determined by indices, such as profit growth rate, revenue growth, return on equity
Reviewed foreign studies have shown that there is close relationship between Internal Control and efficient business operations of firms And the performance of the business to be considered by profits, revenues, liquidity, ROI, ROA [Beeler and colleagues (1999), Jensen (2003), Ittner (2003), Fadzil and colleagues (2005), Kenyon and Tilton (2006), Brown and colleagues (2008), Mawanda (2008), Nyakundi and colleagues (2014) Zipporah (2015)]
According to Decree 200/2015 / TT-BTC dated 12/15/2015 of the Ministry of Finance on financial supervision for SOE (Article 5, Section 1), efficiency of capital usage is measured by: margins after-tax profit/Equity (ROE), or profit margin after tax/total assets (ROA)
2.2 Fundamental theory of Internal Control and Internal Control system
2.2.1 Chaos Theory: factors in models are mutually interact, a
mistake in a unit or a division can cause serious consequences
2.2.2 Agency theory applied in this thesis context explains
establishment of Internal Control System could minimize the interested behavior of managers, monitor delegator’s behavior, establish and maintain a mechanism to ensure that delegators act