VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS FINANCIAL STATEMENT FRAUDS AT LISTED REAL ESTATE COMPANIES ON VIETNAM’S STOCK MARKET The Nu Tran*, Hai Trang Duong Thi, Phuong Anh Vu Thi, Kim Chi Nguyen Thi University of Economics and Business - VNU ABSTRACT In the recent context, Vietnam gradually integrates into the global economy Also, enterprises face new challenges with more opportunities and difficulties Businesses are competing fiercely with each other to expand their market share, increase sales Therefore, they tend to cheat more for the personal gain of businesses and managers and somehow have effects on community benefits This research examines the risks of Financial Statement Fraud, based on the assessment of the adjustments of Financial Statements before and after being audited of Listed Real Estate Companies on Vietnam’s Stock Market, then bring out some petitions and solutions to reduce Financial Statement Frauds Keywords: Financial Statement Fraud, Real Estate, Listed Company, The risks of Financial Statement Fraud INTRODUCTION Financial fraud caused losses of approximately USD 3.7 trillion to the world gross output (ACFE, 2010; ACFE, 2012 and ACFE, 2014) and led the stock market and economic faced serious consequences of financial statement fraud The importance of financial transparency has been alarmed for many years By the end of March 25, 2015, 330 enterprises published their full 2014 audited financial statements, of which 196 companies had to restate their financial statement, accounting for 59%.1 Up to April 16, the auditor of financial report figured out that there were material differences in profit announcement of 540 out of 709 financial statements in 2017.2 Similarity, a considerable number of cases related to financial statement frauds (especially fraud in profit figure) had been recorded in 2018 https://vietstock.vn/2015/03/chenh-lech-sau-kiem-toan-2014-van-con-nhuc-nhoi-737-411488.htm https://vietstock.vn/2018/04/lech-pha-lai-lo-sau-kiem-toan-co-phai-la-ve-sao-cho-dep-737-597304.htm https://tinnhanhchungkhoan.vn/chung-khoan/tai-dien-chenh-lech-lon-giua-loi-nhuan-truoc-va-saukiem-toan-262858.html *Corresponding author Email address: tranthenu@gmail.com 581 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 The possible causes of differences in financial statements of listed companies before and after auditing may be due to errors, and may also result fromfraudulent acts of financial statements Information errors in the financial statements, whether accidentally or intentionally, will affect the benefits of shareholders and investors The most worrying thing is the belief in the financial statements of listed companies on Vietnam's stock market, even the audited financial statements also cause suspicions for shareholders, investors, customers Therefore, financial information provided by the businesses increasingly demanding quality, transparency, honesty and objectivity Especially for the real estate industry, the accuracy of the information on the financial statements is even more important in making the decision of investors The fact that has existed for many years is that very few transactions in real estate market have accurate and clear information, and the false information leading to damage to customers are even more The real estate consists of many factors such as: legal status (documents, papers on ownership, the right to use real estate and papers related to the creation of real estate ); characteristics, properties, utilities, quality, limitations of real estate, planning, the status of infrastructure works, technical and social services related to real estate However, when making real estate transactions, these information has not been provided completely to customers Many investors also not have specific and clear provisions on payment methods, installment payment period, delivery deadlines, compensation obligations of buyers and sellers if they not follow the terms of the contract In addition, many real estate buyers and sellers also lack legal knowledge and not know what documents and procedures are required when making a transaction Real estate prices are also not grasped, based on rumors Overall, the transparency of Vietnam's real estate market is very low This market is "sensitive" to information flows, including unverified information Many localities have not done a good job of information on real estate market, are still in a hurry or have not handled urbanization well Moreover, there has not been a sufficiently strong and deterrent measure to those who cause false rumors These are loopholes that many investors take advantage of, "inflate" the information to make a profit, then the damage will be poured into secondary investors and people, affecting the development of real estate market LITERATURE REVIEW Many pieces of research often use financial statistics to forecast financial statements fraud For example, Prof Beneish’s research about building a model to predict financial statement frauds is considered as typical research in this term He created the M-score model to evaluate the risk potential in a single company’s financial statements This model had eight variables divided into two groups The first one contained the variables to identify frauds: DSRI (Days Sales Receivable Index), AQI (Asset Quality Index), DEPI (Depreciation Index), and TATA (Total Accrual on Total Assets) The four remaining indexes were used to reflect fraud causes: GMI (Gross Margin Index), SGI (Sales Growth Index), SGAI (Sales, General and Administration Expense Index), and LVGI (Leverage Index) The probability about which auditors, investors…could identify frauds was 76% This model had helped Cornell University’s 582 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS students to identify Enron’s frauds one year before this company bankrupted, while the auditor could not figure out Nowadays, Beneish’s method is still applied and developed globally The empirical analysis “Can financial ratios explain the occurrence of fraudulent financial statements?” has used a sample of 122 fraud and non-fraud companies in Malaysia from 2003-2010 This study tests eleven financial ratios based on Spathis (2002) and other studies that examined financial ratios indicative capabilities This study also includes the classical Beneish (1991) ratios and control for distress factor using the Altman Z-Score (1968) model The results show that all the financial ratios have significant relationships with FFS except for Gross Profit-to-Assets ratio, percentage of Inventory-to-Total Assets, Gross Margin Index, and Z-Scores This concludes that financial ratios can explain the occurrence of fraudulent financial statements Nia (Iran-2015), in her paper “Financial ratios between fraudulent and non-fraudulent firms: Evidence from Tehran Stock Exchange”, has used samples from 134 companies in the stage of 2009-2014, with the hypothesis independent sample t-test exerted, to compare the financial ratios between fraudulent and non-fraudulent firms The results show that there is a significant difference between the means of current assets to total assets, inventory to total assets, and revenue to total assets ratios This also means that the management of fraud firms may be less competitive than the management of non-fraud firms in using assets to generate revenue In Vietnam, the master thesis of Nguyen Tran (2014) has summarized the current situation in terms of financial statement frauds of listed companies, as well as using Beneish’s M-score model to identify frauds According to provided statistics, the percentage of the fraudulent company was 53,33% (16/30 companies) Khanh Hoang and Thi Thu Hien Tran’s research (2015) has used the results from researches by DeAngelo (1986), Friedlan (1994), and Beneish (1999) to identify the fraudulent financial statements potential of the listed company in the field of construction Based on those previous models, two authors have developed two new models with ratios: SGI (Sales Growth Index), AQI (Asset Quality Index), DEPI (Depreciation Index), Adjusted Accrual-Basis Accounting Variable, and the accuracy of acquired results was 63,41% and 68,29% respectively METHODOLOGY 3.1 Research questions - What is the theoretical basis used in researching factors impacting to financial statement fraud? - The overview of real estate market in Vietnam? - How does financial statement fraud impact to real estate market? - How is financial statement adjustment of listed real estate companies from 2013 to 2018? - What are the recommendations to better control fraudulent financial statements of Vietnamese listed real estate companies? 583 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 3.2 Approaching method It is difficult to evaluate financial statement frauds by directly taking survey towards listed companies and their audit service company Thus our research team decided to approach this issue by measuring fraud potential in financial statements before and after auditing 3.3 Data collection method This research examines the risks of Financial Statement Fraud, based on the assessment of the adjustments of Financial Statements before and after being audited of Listed Real Estate Companies on Vietnam’s Stock Market, then bring out some petitions and solutions to reduce Financial Statement Frauds In terms of space: This research selects 30 real estate listed companies on Vietnam's stock market In terms of time: The data source used in the research is the financial statements of real estate listed companies on Vietnam's stock market in the period of 2013-2018 RESEARCH RESULTS 4.1 In terms of quantity Table Difference between items in Financial statements before and after the audit Item TOTAL ASSETS NET REVENUE REVENUES YEAR 2013 2014 2015 2016 2017 2018 No difference 10 Difference increases 11 10 11 Difference decreases 18 17 13 13 14 No difference 20 24 24 21 16 19 Difference increases Difference decreases 3 4 No difference 10 10 10 11 Difference increases 8 11 Difference decreases 12 13 12 18 13 Unit Company The statistical results on the financial statements of 30 companies in years showed the difference of increase/decrease in items (total assets, net revenue, revenues) of real estate listed companies on Vietnam stock market From 2013 to 2018, 67% -80% of the companies adjusted their total assets after auditing; 20%-47% of the company adjusted net revenue; 67% -83% of the company adjusted revenues 4.2 About adjustment scale Each difference in the adjusted data before and after the audit is different because it depends on the scale of the company Therefore, in order to objectively assess the situation of the difference of financial statements before and after the audit, the research team evaluated based on the difference between the items Difference ratio of Total assets = 584 Total assets increase/decrease year t Total assets before audit year t VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS Difference ratio of Net revenue = Net revenue increase/decrease year t Net revenue before audit year t Revenues increase/decrease year t Revenues before audit year t The research team divided into two cases: difference ratio INCREASE, difference ratio DECREASE The levels of difference are: Level 1: Differences in the range of 0% to 3% (≤ 3%) Level 2: Differences in the range of 3% to 5% (> 3% and ≤ 5%) Level 3: Differences in the range of 5% to 10% (> 5% and ≤10%) Level 4: Difference greater than 10% Difference ratio of Revenues = Table Different situation of real estate listed companies on Vietnam's stock market at different rates Year Difference ratio (%) 2013 2014 2015 2016 2017 2018 2013 TOTAL ASSETS increase Level Level Level Level - - 10 - 11 - 1 1 - 1 - - 17 5 1 2 4 2016 2017 2018 15 - - 10 - 11 - 13 NET REVENUE decrease - REVENUES increase Level Level Level Level 2015 TOTAL ASSETS decrease NET REVENUE increase Level Level Level Level 2014 3 REVENUES decrease 1 5 2 Unit Company In years, the total assets, net revenue and revenues of the companies had the main increase/decrease ratio, at 0-3% Only about to companies adjusted total assets and net revenue on the financial statements after auditing at rates greater than 3% but the size of assets and revenue difference is quite large (related to billion) As in 2013, the difference rate of IDI increased 5.84% of total assets compared to the total assets before auditing (about 101.9 billion VND); In 2018, DLR decreased by 17.52% of total assets compared to the total assets before auditing (about VND 19.8 billion); FLC's net revenue increased by 13.74% (about VND 505.9 billion) in 585 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 2016; IDI decreased by 12.19% (660.3 billion VND) of net revenue in 2018 The difference in revenues was more volatile at the rates Especially the Revenues ratio reduction rate after auditing 4.3 Possibilities of financial statements fraud Below, the research team gives a table of assessment of the possibility of financial statements fraud based on each level of difference rate The higher the degree of difference, the more important the difference in each item and the greater the doubt about the transparency of the author's financial statements Table Assess the likelihood of financial statements fraud at each level Difference ratio Level Level Level Level Evaluate Not important Important Very important Very important The possibility of fraud risk Least possibility Possibility High possibility Very possibility The evaluation results show that, in years on the financial statements after auditing: - Level 1: About 10-37% of companies increase their total assets; 27-57% of companies reduce total assets; 3-17% of companies increase net revenue; 0-10% of the company reduces net revenue; 10-23% companies increase revenues; 13-30% of companies reduce revenues - Level 2: There is no company increasing the total assets; companies decreased Total Assets in 2016 (HQC and LCG) and 2017 (DLR and LCG); no company increased net revenue; company reduced net revenue in 2013 (LGL); The company increased its revenues was in 2014 (1 company: TKC) and in 2015 (2 companies: DRH & VCR); The company reduced its revenues in 2013 (SHN), 2014 (DIG), 2017 (DLR, FLC & IDI) and 2018 (VIC) - Level 3: Increase Total assets: 2013 (IDI), 2014 (HDG) and 2016 (IDJ); to companies reduce TTS (2014 to 2015); increase net revenue: in 2013 (IJC), 2014 (HQC), 2016 (SHN); reducing net revenue: 2014 (DLR) and 2017 (DLR & HQC); There are companies increasing revenues in 2015 (DIG & IJC), 2017 (DRH & DTA) and 2018 (LGL & LHG); companies reduce revenues each year there are to companies - Level 4: This level Total assets and net revenue appear each year very little But the revenues difference is much higher at this rate (about 3-17% of the company adjusts revenues per year 4.4 General evaluation After analyzing and processing data of 30 real estate listed companies on Vietnam's stock market from 2013 to 2018, the research team found that the quality of the financial statements in general still has many differences between the previous financial information and after auditing in preparing, presenting and announcing the financial statements as higher revenue recognition (FLC, LHG ); evaluate the 586 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS value of assets higher, adjust losses into profits And based on the difference of data in items (Total assets / Capital; Net revenue; Net profit) to assess the importance of the adjustment thus leads to conclusions about the possibility that the company may occur fraud in the financial statements Moreover, the real estate market is an imperfect market, compared to all other markets such as consumer markets, commodity markets real estate is considered a complex commodity, if the demand is more than the supply, The State must intervene to stabilize the market, otherwise real estate fevers, etc will occur The real estate market must be under the management of the State and under the control of the Law A company that is found to have fraudulent financial statements will suffer serious consequences such as bankruptcy, company’s reputation will be seriously reduced Specifically, the Board of Directors and the people directly involved in preparing the Financial Statements of the Company must be directly and indirectly responsible for administrative and criminal matters (including compensation, trial and imprisonment) for frauds , even terminating professional activities related to accounting and finance In the modern economy, operating economic groups are closely linked in the national and global financial network Therefore, the collapse of an economic corporation can lead to the collapse of the entire national and world financial system The consequences of fraudulent financial statements can completely destroy the longterm development achievements of the allegedly fraudulent company, which has set up and slowed down the development of national and international financial systems For investors, the efficiency of using capital is most concerned When the financial statements are deliberately fraudulent, the investors' expectation will be too high or too low in the company, directly affecting the profitability of capital, even losing capital Fraudulent financial statements not only cause damage to investors 'assets but also lose investors' confidence in the capital market and the reliability of financial information Lenders, especially credit institutions such as banks, will be at risk when lending to businesses that commit financial fraud In the case of an insolvent enterprise, the bad debt status in banks, affecting the whole banking system in general, reduces the national economic growth For tax agencies and related agencies: Fraud, manipulation of financial statements reduces the amount of tax payable, causes tax losses and reduces budget revenues, adversely affects the nation's growth and prosperity At the same time cheating requires the state and laws to have new regulations with the level of intervention and control In general, in recent years, Vietnam's real estate market has made certain development steps to meet the needs of the economy However, after a period of development, the real estate market has revealed shortcomings and has not been really stable, with many shortcomings, namely: Transparency of the market, from investment activities, real estate creation to trading activities of buying, selling, transferring, leasing is still limited Speculation is also common in localities, especially in large urban areas, making the operation of the real estate market unsustainable and stable 587 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 PETITIONS AND SOLUTIONS In order to solve the problems of real estate market towards sustainable development, the Law on Real Estate Business was born, effective from January 1, 2007 In addition, a series of measures have been implemented: forming real estate trading floors, building a professional team of real estate brokers who are carefully trained and must have a practicing certificate The Ministry of Construction's Circular 13/2008/TTBXD dated May 25, 2008 specifies these guidelines, providing specific guidelines for the investor to announce projects and sell them via real estate trading floors real estate, guidelines for some information about real estate However, based on the research results, the research team proposes some solutions to limit the risk of financial statements fraud in listed real estate companies as follows: The State needs to consolidate and promulgate legal documents on regulations and information disclosure process Officers and organizations that make mistakes are problematic, through organizing the implementation of publicity and transparency of information related to Vietnam's real estate market, will limit many negative arising Improve the state management capacity to organize the implementation of specific processes, regulations, and regime of information disclosure and transparency The real estate market is "sensitive" to information flows, including information that has not been verified In addition, there has not been a sufficiently strong handling mechanism and deterrence to those who cause false rumors These are loopholes that many investors take advantage of, "inflate" the information to make a profit, while the damage will be poured into secondary investors, people, affecting the development of real estate market Transparent real estate market information: Real estate brokerage service activities are formed and developed spontaneously In parallel with the organizations that have registered the real estate brokerage business, many households, groups of people and individuals hang up the real estate brokerage billboards The main function of real estate brokerage centers today is to connect buyers and sellers without providing and analyzing necessary information about real estate The information system on the real estate market is still thin, the provision of information is not transparent, not specific, not public and service organization for the market is still limited The purchase and sale are mainly conducted in the form of a turn-over, without registering with competent state agencies Currently, transactions on the market mainly carry heavy factors underground and non-market The increase and decrease of real estate prices are mainly judged from the public opinion, or the primary asking price of the primary market This creates a trend of investment psychology into the virtual fever, abnormal hot and cold of the market Therefore, it is necessary to quickly build a system of market assessment indicators in a synchronized manner to help managers, investors and related subjects to get the most accurate view of the market 588 VIETNAM NATIONAL UNIVERSITY - UNIVERSITY OF ECONOMICS AND BUSINESS REFERENCES [1] Nguyen Tran Nguyen Tran, master thesis, Da Nang University, 2014 [2] Thuc Oanh Vu Thi, Factors affecting the fraud of financial statements of listed companies on Vietnam's stock market , PhD thesis, National Economics University, 2018 [3] Thu Trang Ta, Auditing frauds in auditing financial statements of non-financial listed companies on Vietnam's stock market, PhD thesis, National Economics University, 2017 [4] https://en.wikipedia.org/wiki/Beneish_M-Score [5] http://mak.trunojoyo.ac.id/wp-content/uploads/2014/04/P32_Financial-RatiosExplain-Fraudulent-Financial-Statements_Radziah.pdf [6] http://ktpt.neu.edu.vn/tap-chi/so-218-ii/muc-luc-316/phat-hien-sai-pham-bao-cao-taichinh-cua-cac-doanh-nghiep-xay-dung-niem-yet.374163.aspx [7] cafef.vn [8] vietstock.vn 589 IN TERNATIONAL CONFERENCE ON - CIFBA 2020 APPENDIX 30 REAL ESTATE LISTED COMPANIES ON VIETNAM'S STOCK MARKET Ticker D2D Industrial Urban Development Joint - Stock Company No 2 HOSE DIG Construction Development Investment Joint Stock Corporation HOSE DLG Duc Long Gia Lai Group Joint Stock Company HOSE DLR Dalat Real Estate Joint Stock Company DRH DRH Holdings Joint Stock Company HOSE DTA De Tam Joint Stock Company HOSE DXG Dat Xanh Group Joint Stock Company HOSE FLC FLC Group Joint Stock Company HOSE HAG Hoang Anh Gia Lai Joint Stock Company HOSE 10 HDC Ba Ria-Vung Tau House Development Joint Stock Company HOSE 11 HDG Ha Do Group Joint Stock Company HOSE 12 HQC Hoang Quan Consulting Trading Service Real Estate Corporation HOSE 13 IDI International Development & Investment Corporation HOSE 14 IDJ IDJ International Financial Investment and Enterprise Development Joint Stock Company 15 IJC Becamex Infrastructure Development Joint Stock Company HOSE 16 ITC Investment and Trading of Real Estate Joint Stock Company HOSE 17 KBC Kinh Bac City Development Share Holding Corporation HOSE 18 KDH Khang Dien House Trading and Investment Joint Stock Company HOSE 19 LCG LICOGI 16 Joint Stock Company HOSE 20 LGL Long Giang Investment and Urban Development Joint-stock Company HOSE 21 LHG Long Hau Joint Stock Company HOSE 22 NDN Danang Housing Investment Development Joint Stock Company HNX 23 NHA Ha Noi South Housing and Urban Development Corporation HNX 24 PDR Phat Dat Real Estate Development Corporation 25 RCL Cho Lon Real Estate Joint Stock Company HNX 26 SHN Hanoi Investment General Corporation HNX 27 TIG ThangLong Investment Group Joint Stock Company HNX 28 TKC Tanky Construction Real Estate Trading Corporation HNX 29 VCR Vinaconex Investment and Tourism Development Joint Stock Company HNX 30 VIC VinGroup Joint Stock Company 590 Company Listing Bource No HNX HNX HOSE HOSE ... listed real estate companies from 2013 to 2018? - What are the recommendations to better control fraudulent financial statements of Vietnamese listed real estate companies? 583 IN TERNATIONAL CONFERENCE... selects 30 real estate listed companies on Vietnam's stock market In terms of time: The data source used in the research is the financial statements of real estate listed companies on Vietnam's stock. .. limit the risk of financial statements fraud in listed real estate companies as follows: The State needs to consolidate and promulgate legal documents on regulations and information disclosure process