Los avoidance earnings management in an emerging market evidence from vietnam,graduation théis

BANKING ACADEMY FACULTY OF ACCOUNTING – AUDITING ADVANCED PROGRAM    GRADUATION THESIS TOPIC: LOSS AVOIDANCE EARNINGS MANAGEMENT IN AN EMERGING MARKET – EVIDENCE FROM VIETNAM Student : PHUNG THI THU HUONG Class : K19CLC-KTA Cohort : 2016 - 2020 Student’s ID : 19A4020381 Supervisor : Ph.D Dao Nam Giang Hanoi, June 2020 Graduation Thesis Supervisor: Ph.D Dao Nam Giang DECLARATION I herewith formally declare that I myself have written the submitted Graduation Thesis independently I did not use any outside support except for the quoted literature and other sources mentioned at the end of this paper Hanoi, June 2020 Signature Phung Thi Thu Huong Student: Phung Thi Thu Huong i Class: K19CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang ACKNOWLEDGEMENTS First and foremost, I wish to express my sincere appreciation to my supervisor, Ph.D Dao Nam Giang, who giving me the opportunity to this wonderful study and providing invaluable guidance throughout the thesis process Without her extraordinary support, the goal of this study would not have been realized In addition to expressing my gratitude to my supervisor, I also would like to show my appreciation to all teachers who have taught me for years in Banking Academy I wish to thank my colleagues, Phuong Loan and Ha Phuong, for their assistance with the statistics used in this graduation thesis They supported me greatly and were always willing to help me I also would acknowledge the support of my family and friends who helped me a lot in finalizing this thesis within the limited time frame Gratefully yours Student: Phung Thi Thu Huong ii Class: K19CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang TABLE OF CONTENTS DECLARATION i ACKNOWLEDGEMENTS ii TABLE OF CONTENTS iii ABBREVIATIONS v LIST OF TABLES AND FIGURES vi INTRODUCTION 1 Rationale Objectives Scope of study Research methodology .3 Research structure CHAPTER 1: BACKGROUND AND LITERATURE REVIEW 1.1 IFRS harmonization in Vietnam 1.2 Loss avoidance earnings management and Earnings distribution approach 1.2.1 What is loss avoidance earnings management? 1.2.2 Earnings distribution approach (EDA) in searching for evidence on loss avoidance earnings management 11 1.3 Logistics regression model and factors affecting loss avoidance .13 1.4 Research gaps and research questions 15 CHAPTER 2: METHODOLOGY 17 2.1 Hypothesis development .17 2.2 Proposed research model 18 2.2.1 Earnings distribution approach (EDA) in searching for evidence on loss avoidance earnings management and the effect of changes in accounting regime in the prevalence of loss avoidance 18 2.2.2 The binary logistics regression model and factors affecting loss avoidance earnings management .19 2.3 Data and sample 21 Student: Phung Thi Thu Huong iii Class: K19CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang CHAPTER 3: RESEARCH FINDINGS .27 3.1 Descriptive statistics and correlation between variables 27 3.2 The existence of loss avoidance earnings management among Vietnamese listed companies- evidence from earnings distribution approach .29 3.3 The effect of changes in accounting regime in loss avoidance among Vietnamese listed firms – evidence from earnings distribution approach 30 3.4 Factors affecting loss avoidance earnings management – results from the logistics regression model 33 CHAPTER 4: SUMMARY AND DISCUSSION 38 4.1 Discussion research findings .38 4.1.1 Conclusion on research hypotheses 38 4.1.2 Discussion research findings 39 4.2 Limitations and future research directions 40 4.3 Recommendations from research findings 42 4.3.1 The pervasiveness of loss avoidance earnings management and recommendations to investors when using earnings information 42 4.3.2 The ineffective changes of accounting regime in reducing the prevalence of loss avoidance and recommendations to enhance the accounting regime towards IFRS 43 4.3.3 The role of big auditors in constraining loss avoidance and recommendations to strengthen audit quality 46 4.3.4 The positive relationship between financial leverage and the prevalence of loss avoidance and recommendations to investors when looking at a company’s capital structure .47 CONCLUSION .48 REFERENCES 49 Student: Phung Thi Thu Huong iv Class: K19CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang ABBREVIATIONS Abbreviations Definitions EDA Earnings distribution approach EU Europe Union FSs Financial statements HNX Hanoi Stock Exchange HOSE Ho Chi Minh Stock Exchange IFRS International Financial Reporting Standards MOF Ministry of Finance ROA Return on assets ROE Return on equity UpCOM Unlisted Public Company Market VFRS Vietnamese financial reporting standards Student: Phung Thi Thu Huong v Class: K19CLC-KTA Graduation Thesis Supervisor: Ph.D Dao Nam Giang LIST OF TABLES AND FIGURES LIST OF TABLES Table 2.1: Logistics regression model for identifying factors affecting loss avoidance earnings management 21 Table 2.2: The sample structure categorized by industry and audit firm 22 Table 2.3: The sample structure categorized by audit firm and stock exchange 23 Table 2.4: Total assets of selected Vietnamese listed firms form 2010-2019 .24 Table 3.1: Descriptive statistics by year for ROA .27 Table 3.2: Descriptive statistics for loss avoidance test 28 Table 3.3: Measurement: small profits/small losses ratio .32 Table 3.4: Regression results for the loss avoidance test 33 LIST OF FIGURES Figure 2.1: Debt-to-asset of selected Vietnamese listed firms from 2010 to 2019 .25 Figure 3.1: Correlations for loss avoidance test 29 Figure 3.2: Empirical Distribution of ROA for the period 2010-2019 30 Figure 3.3: Distribution of ROA for two the periods 2010–2014 and 2015–2019 .31 Figure 3.4: Probability plot 36 Student: Phung Thi Thu Huong vi Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang INTRODUCTION Rationale During the recent years in Vietnam, a number of “accounting scandals" were discovered such as Truong Thanh Furniture Corporation, Vien Dong Pharmaceutical Joint Stock Company, Bach Tuyet Cotton Joint Stock Company, etc, highlighting the important role of financial reporting quality and the issues surrounding earnings management In regard to Truong Thanh Furniture Corporation, in financial statements for the second quarter of 2016, the value of non-existent inventory reached VND 980 billion As a result, the cost of goods sold went up dramatically and Truong Thanh company reported a loss of VND 1,100 billion After these issues were announced, Truong Thanh’s share price fell approximately 80% of value make investors suffering a huge loss Significantly, an unqualified audit report for the year ended 2015 was issued by audit firm DFK However, the problem of Truong Thanh Furniture Corporation was identified not in the inventory as announced, but the company pushed the revenue too many times during nearly 10 years, then "processing" into inventories worth up to VND 2,200 billion (Tap chi tai chinh, 2018) When the incident broke down, not VND 980 billion of inventory disappeared, but the point was the existence of fictitious revenue during the whole time The above case also leads to the question of whether earnings quality faithfully reflects the performance of the entity and is helpful for decision-making since the objective of financial reporting is “to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity” (IASB, 2010) As we know, earnings are usually considered as a key performance indicator of business success in an accounting period In Vietnamese stock market, listed firms shall be delisted if they report losses for three consecutive years Hence, avoidance earnings losses seems like the most important goals of managers when adjusting accounting figures for the purpose of convincing investors, lenders, creditors about the stability of business operations and profitability of the entity The question here Student: Phung Thi Thu Huong Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang is whether there is an existence of loss avoidance earnings management among Vietnamese listed firms Moreover, to prepare for IFRS roadmap in Vietnam with the purpose of improving the transparency and enhancing the comparability of financial information, from the year 2014, the Ministry of Finance issued Circular No 200/2014/TT-BTC -“Guidance for enterprise accounting regime” and Circular 202/2014/TT-BTC- “Guiding on preparation and presentation of consolidated financial statements”, which are the results of amendments to accounting regime to be more appropriate, closer with IFRS Meanwhile, many prior studies in different countries point out the existence of managing towards positive earnings and the effect of IFRS adoption in reducing the prevalence of loss avoidance Thus, if there is an existence of loss avoidance earnings management in the stock market of Vietnam, what the factors influencing this behavior and the effect of the implementation of new accounting regime in reducing the prevalence of loss avoidance remain an issue Therefore, the research topic “Loss avoidance earnings management in an emerging market – evidence from Vietnam” is chosen for discussion Objectives Firstly, the study will focus on examining whether there is an existence of loss avoidance earnings management in Vietnamese listed firms for the period 2010-2019 Secondly, some changes to the accounting and financial reporting rules in two Circulars issuing by the MOF from 2014 are discussed After that, this paper will find evidence for the effect of the implementation of new accounting regimes in reducing managing towards positive profits behavior Lastly, identifying and analyzing the factors (the enforcement of Big auditors and leverage ratio) influencing loss avoidance earnings management of Vietnamese listed companies Scope of study - Scope of content: This study focuses on earnings management to avoid reporting losses, assess the effect of change in accounting regime in reducing the Student: Phung Thi Thu Huong Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang prevalence of loss avoidance, as well as identify factors influencing managers managing towards positive profits in Vietnamese listed companies Regarding effect factors, prior studies find that loss avoidance is affected by some factors such as audit type, auditor industry specialization, leverage ratio, business sector and investor protection, etc However, in the context of Vietnam, two factors include the enforcement of audit firm and leverage ratio are considered to have a relatively special impact Hence, this study will focus on the effect of these two factors on loss avoidance earnings management - Sample used: Data used for this thesis is collected in the period from 2010 to 2019 It includes available data from financial statements of more than 100 Vietnamese listed companies Research methodology This study uses a combination of quantitative and qualitative research methods, in which the focus is on quantitative research Specifically, qualitative research is used in the literature review of previous studies to identify research gaps and develop research hypotheses Hypotheses are tested and proved by quantitative methods Data analysis is performed through using table data analysis, histogram analysis and the binary logistic regression model The specific content of proposing research models, identifying variables, as well as how to collect data will be discussed in detail in chapter 2- Methodology Research structure Apart from the introduction, conclusion and reference, this paper is divided into four chapters as follows: Chapter 1: Background and literature review Chapter 2: Methodology Chapter 3: Research findings Chapter 4: Summary and discussion Student: Phung Thi Thu Huong Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang CHAPTER 4: SUMMARY AND DISCUSSION Based on the research findings in chapter 3, this chapter will conclude the research hypothesis, analyzes the factors influencing loss avoidance earnings management and compares these conclusions with expectations and results of some prior studies In addition, future research directions will be suggested based on the limitations of this study Besides, this chapter also provides some main recommendations making from research results 4.1 Discussion research findings 4.1.1 Conclusion on research hypotheses The findings from topic “Loss avoidance earnings management in an emerging market – evidence from Vietnam” with the sample of 108 listed companies are exploratory examinations on the existence of earnings management practices by companies listed in the Vietnamese stock market Based on empirical evidence, results show four main findings Firstly, consistent with the expectations, the empirical distribution of ROA for the period 2010-2019 affirms the existence of loss avoidance earnings management among Vietnamese listed companies The histogram illustrates a single-peak distribution with an abnormality at with fewer observations just below and a high concentration of observations in the interval immediately above zero, providing evidence of the existence of managing towards positive earnings Hence, the hypothesis H1 has been accepted, Vietnamese listed companies manage accounting number to avoid reporting a loss Secondly, by assessing the impact of changes in accounting regime through the comparison of distributions of ROA for two periods 2010–2014 and 2015–2019 and using the small profits/small losses ratio to make comparisons between frequencies of small profits with the frequency of small losses, results not suggest any reduction in the prevalence of loss avoidance among Vietnamese listed companies with the changes in accounting regime In addition, the regression result reveals that the variable “period” has no statistical significance, in other words, Student: Phung Thi Thu Huong 38 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang changes in the accounting regime have no impact on loss avoidance earnings management Therefore, there is not enough evidence to confirm the hypothesis H2 that “Stricter and detailed accounting regulations help to restrain loss avoidance earnings management among Vietnamese listed companies” Thirdly, the results of the binary logistics regression model reveal that independent audit affect significantly the loss avoidance earnings management of listed companies in Vietnam, confirming hypothesis H3 In which, loss avoidance is constrained by the enforcement of Big audit firms (Deloitte, EY, KPMG and PWC) with a negative coefficient in regression results Lastly, according the regression results, the leverage ratio (total liabilities scaled by total equity) has a positive correlation with the probability Vietnamese listed firms reporting small profits Hypothesis H4 is confirmed In addition, the logistic regression results also suggest that large-scale enterprises may have more incentive for managing earnings towards positive profits 4.1.2 Discussion research findings The empirical distribution of ROA for the period from 2010 to 2019 affirms the existence of loss avoidance earnings management in Vietnamese listed firms This finding is consistent with prior studies, such as Burgstahler and Dichev (1997) for U.S listed firms and Pham et al (2019) for firms listed on the Vietnamese stock market Although this study is not the first one to focus on loss avoidance earnings management in Vietnamese listed companies distributed across all industries, it has strengthened and supplemented previous study, especially the findings of Pham et al (2019) The study of Pham et al (2019) assumes firms with net profit ratio mostly in the range 0-7% adjusting profit, so the range is considered to be large compared to previous studies Since large interval width easily confuses the inherent small profit of the company and the small profit due to managers managing the accounting figures, this study, using interval width consistent with prior studies in the world, finds evidence of the existence of loss avoidance earnings management in Vietnamese listed firms Student: Phung Thi Thu Huong 39 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang Noticeably, this study is one of the first studies that concentrate on the effect of implementing new accounting regimes in Vietnam The issuance of Circular No 200/2014/TT-BTC-“Guidance for enterprise accounting regime” and Circular No.202/2014/TT-BTC-“Guiding on preparation and presentation of consolidated financial statements” are the results of amendments to accounting regime to be more appropriate, closer with IFRS The amendment is considered as one step to prepare for the IFRS roadmap in Vietnam Although the empirical distribution of ROA and measures of asymmetry not suggest any reduction in the prevalence of loss avoidance among Vietnamese listed companies for the period 2015-2019 compared with the previous period, the results are consistent with the findings of Jeanjean and Stolowy (2008) that the prevalence of earnings management did not reduce after the introduction of IFRS in three IFRS first-time adopter countries (Australia, France, and the United Kingdom) over the period 2002-2006 and the switch to IFRS was not a major method of improving earnings quality (especially avoid reporting losses) In regard to factors influencing loss avoidance, this study find the evidence that independent audit and leverage ratio affect the loss avoidance earnings management of listed companies in Vietnam Consistent with previous studies (Kanagaretnam, Lim and Lobo (2010), Pham et al (2019), Francis and Wang (2008)) and expectations, enforcement of Big4 auditor (Deloitte, EY, KPMG and PWC) help to constrain loss avoidance earnings management In addition, leverage ratio has a significant effect on the probability of listed firm reporting a small profit, expressing that convincing investors, lenders, creditors and shareholders about the profitability of the entity is considered as one of the incentives for managers to manage accounting figures for the purpose of attracting more resources 4.2 Limitations and future research directions Based on empirical evidence, the issues stated in the above chapters have been solved However, this study exists some limitations Future studies can further develop this topic with some following directions Regarding to sample, one of the assumptions of the logistic regression model is it requires quite large sample sizes since maximum likelihood estimates are less Student: Phung Thi Thu Huong 40 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang powerful than ordinary least squares In this study, due to time constraints, only more than 108 companies during 10-year period were selected, so the research sample in future studies can be widened Besides, according to Decree 14/2007/NĐ-CP of the Government dated 19/1/2007 “Providing detailed regulations for implementation of a number of articles of the law on securities”, the condition for listing on the Stock Exchange requires the listing company must have made a profit in the two years prior to year of listing and must not have accumulated losses as at the year of registration for listing Hence, the requirement for listing may be considered as one of the incentives for managers to manage accounting figures, avoid reporting losses So besides listed firms, future researches can focus on firms preparing for IPO (Initial Public Offering) to find the evidence for earnings management behavior In addition, besides avoidance reporting losses, managers may have other goals Degeorge, Patel and Zeckhauser (1999) point out that earnings management is driven by thresholds and managers try to achieve report positive profits firstly and sustain recent performance, and meet analysts’ expectations respectively Thus, future studies may concentrate on determining other goals of managers besides managing towards positive profits On the other aspect, some prior researchers (e.g Dechow, Richardson and Tuna (2003); Saleh, Iskandar and Rahmat (2005); etc) find that if loss avoidance exists, it is expected that discretionary accruals of small profits firms are unusually higher than for other firms and small losses firms Hence, besides using EDA approach, future studies can find evidence on whether small profit companies manage earnings or not by using abnormal accrual In regard to factors affecting loss avoidance earnings management, prior studies find that loss avoidance is affected by some different factors In particular, Kanagaretnam, Lim and Lobo (2010) find that auditor type (Big auditors) and auditor industry specialization (auditors who are specialists in the banking industry) help to constrain benchmark-beating Meanwhile, Francis and Wang (2008) affirm the joint effect of investor protection and Big4 auditors on the pervasiveness of reporting losses In Vietnam, the results of the study of Pham et al (2019) reveal that business sectors, auditing firms, and debt-to-equity ratio have significant effects on the behavior of managing towards positive earnings Since in the context of Vietnam, Student: Phung Thi Thu Huong 41 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang two factors include the enforcement of audit firm and leverage ratio are considered to have a relatively special impact, this study only assesses the effect of these two factors on loss avoidance earnings management Hence, for future researches, the independent variables can be broadened by adding some other variables such as duration of operation, indicator variables relevant to IPO, number of board members, the change in common stock, variables evaluating investor protection, etc 4.3 Recommendations from research findings Based on the four main findings stated above, this sections provides some recommendations to users of financial information and regulatory agencies on loss avoidance earnings management among Vietnamese listed firms 4.3.1 The pervasiveness of loss avoidance earnings management and recommendations to investors when using earnings information The empirical results reveal that Vietnamese listed companies manage accounting numbers to avoid reporting a loss This finding also supports the conclusion of Burgstahler and Dichev (1997) that "earnings management to avoid losses is pervasive" Back to the financial statement frauds of Truong Thanh Furniture Corporation in the introduction part, in financial statements for the second quarter of 2016, the value of non-existent inventory reached VND 980 billion As a result, the cost of goods sold went up dramatically and Truong Thanh company reported a loss of VND 1,100 billion Significantly, an unqualified audit report for the year ended 2015 was issued by audit firm DFK However, the problem of Truong Thanh Furniture Corporation was identified not in the inventory as announced, but the company pushed the revenue too many times during nearly 10 years, then "processing" into inventories worth up to VND 2,200 billion (Tap chi tai chinh, 2018) When the incident broke down, not VND 980 billion of inventory disappeared, but the point was the existence of fictitious revenue during the whole time After these issues were announced, Truong Thanh’s share price fell approximately 80% of the value from VND 43,600 to VND 8,100 and TTF’s shares sometimes fell below VND 5,000 at the beginning of 2017 (cafef.vn, 2017) The dramatic drop in TTF’s shares makes Student: Phung Thi Thu Huong 42 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang investors suffering a huge loss Noticeably, years before “accounting scandal”, from 2011 to 2015, ROA ratios of Truong Thanh Furniture Corporation are stable; 0.28, 0.08, 0.11, 1.76 and 4.12, respectively Moreover, from the first trading day in 2008 until 2015, there is no year that the Truong Thanh's ROA is below From a typical example of Truong Thanh Furniture Corporation, clearly, one of the important goals of managers when adjusting accounting figures is convincing investors, lenders, creditors about the stability of business operations and profitability of the entity for the purpose of attracting more resources Therefore, investors should pay more attention when using financial information, especially earnings information of companies with small reporting profit Besides, when looking at a company's financial statements, investors should apply financial theories to find whether the financial ratios are abnormal 4.3.2 The ineffective changes of accounting regime in reducing the prevalence of loss avoidance and recommendations to enhance the accounting regime towards IFRS The empirical distribution of reported earnings affirms the prevalence of managing towards positive profits among Vietnamese listed firms during the period 2010-2019 In addition, assessing the effect of change in accounting regime to be more appropriate, closer with IFRS through the issuance of the “Circular 200”, “Circular 202”, empirical evidence does not propose any reduction in the prevalence of loss avoidance among Vietnamese listed companies in the period 2015-2019 compared to previous period Hence, the result suggests that the change in accounting regime is only a technical change, not much change in practical practices Therefore, the accounting regime need to be further improved, ensuring practical implementation In other words, policymakers should not only focus on changes in technical, but also about applying them effectively One of the ways to improve the Vietnamese accounting regime is promoting the application of IFRS Although there are conflicting opinions, it cannot be denied that IFRS is a good accounting standard system Since IFRS requires higher level of disclosure, more accurate, complete and timely information, IFRS increases the Student: Phung Thi Thu Huong 43 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang transparency and reduces information asymmetry Hence, earnings quality faithfully reflects the performance of the entity and is helpful for decisions Whether IFRS is effective in practice requires time and depends on other factors such as corporate governance, investor protection, incentives, etc In other words, it is necessary to improve the elements of the accounting environment to promote the effectiveness of the application of IFRS Regarding corporate governance, it is considered as one important factor to constraint the tendency of reporting small profits, towards earnings quality faithfully reflects the performance of the entity as strong corporate governance will create incentives and control mechanisms for managers to increase transparency and faithful financial reporting that reflect the performance of the entity In regard to research for loss avoidance of listed companies in Southeast Asian countries, Saleh, Iskandar and Rahmat (2005), focus on listed firms Kuala Lumpur Stock Exchange (now is Bursa Malaysia) for the period 1989-2001, find that earnings management practices (to avoid losses) were reduced after the introduction of a code of corporate governance by the Malaysian government in 2001 since there is no significant discontinuity around zero earnings detected for the year 2001 compared with three previous years Therefore, in order to reduce the prevalence of loss avoidance, maintaining and improving corporate governance among Vietnamese listed firms is one of key factors In fact, in recent times, corporate governance has been being paid more attention from regulatory agencies Recently, in August 2019, the first Vietnam Corporate Governance Code of Best Practices for Public and Listed Companies (The Corporate Governance Code) was launched by the State Securities Commission of Vietnam for the purpose of improving the efficiency and transparency of Vietnamese stock market The Code consists of ten principles, in which, six principles are focused on the responsibility of the Board of Directors, the remaining four principles cover areas such as control environment, disclosure and transparency, shareholder rights, and stakeholder relations However, the adoption of the corporate governance code is voluntary for the public and listed companies Moreover, almost enterprises in Vietnam are small, medium, and micro-enterprise, which pay little attention and face many difficulties in improving corporate governance Hence, enhancing the quality Student: Phung Thi Thu Huong 44 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang of corporate governance in Vietnamese listed companies, contributing to reducing the pervasiveness of loss avoidance requires a lot of time, as well as more efforts from both agencies and the businesses themselves Besides corporate governance, prior studies also affirm the important relation between investors’ protection and earnings quality In particular, Francis and Wang (2008) evaluate the joint effect of investor protection and Big4 auditors on the pervasiveness of reporting losses In which, investor protection is measured five ways, including a county’s legal tradition, corporate law (measure protect the rights of minority investors), securities law, disclosure index and the liability index The loss avoidance analysis is made through five logistic regression models testing each investor protection variable one at a time The results reveal that higher earnings quality exists in countries with stronger investor protection environments and big4 auditors not enforce high-quality earnings without the incentives created by stricter investor protection regimes Clearly, a strong investor protection plays an important role in reducing the pervasiveness of loss avoidance earnings management Regarding Vietnam, a country with a code law legal and a bank-based financial system, accounting is considered to focus on tax and creditors Moreover, in a code law country, accounting information tends toward secrecy, less transparency compared to Anglo-Saxon countries with common law legal (according to Nobes’ simplified model) It leads to the presence of information asymmetry, detrimental to investors In addition, in Vietnam, the regulations on investor protection are found in many different legal documents such as the Law on Securities and the Law on Enterprises, etc.,though, these regulations sometimes overlap and lack uniformity Besides, until now, there is no specific regulation on the mechanism to build an investor protection fund and other mechanisms of protecting investors are assessed as just regulated, not implemented yet Stemming from these above issues, draft of the Enterprise Law (amended), the Investment Law (amended) are submitted to the National Assembly in 2019, including regulations on protecting the rights of investors and shareholders This is considered as one of the efforts of the regulatory agencies towards an environment with stronger investor protection As only when the interests Student: Phung Thi Thu Huong 45 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang of investors are guaranteed, the financial market will grow and the attraction of investment for expansion and business growth will be more favorable 4.3.3 The role of big auditors in constraining loss avoidance and recommendations to strengthen audit quality Clearly, independent audit has a significant contribution to enhancing the accounting quality through improving the transparency of financial information Regarding loss avoidance earnings management, the prior empirical studies and this study have confirmed that enforcement of Big4 auditor (Deloitte, EY, KPMG and PWC) help to constrain the pervasiveness of loss avoidance However, recent “accounting scandals” on the Vietnamese stock market have seriously impacted investor interests, and especially undermined the confidence for the reliability of the audited financial statements For example, Truong Thanh company reported a loss of VND 1,100 billion in financial statements for the second quarter of 2016 ,whereas, an unqualified audit report for the year ended 2015 was issued by audit firm DFK Meanwhile, according to a report of the State Securities Commission about the quality of audit services in 2019, among 10 auditing firms (including big4 firms) which are inspected, two big4 auditing firms were graded “Good”, whereas, eight others were rated “Acceptable” Obviously, the quality of audit services has a great difference between big4 and non-big4 audit firms Besides, the State Securities Commission of Vietnam has pointed out a series of limitations and shortcomings at these companies and suspended the licenses of four individual auditors in non-big4 firms due to their serious mistakes According to (Nguyen, 2018), factors are considered to have the most significant impact on the quality of independent audit service including experience of auditors and audit methodology Hence, for the purpose of strengthen audit quality, auditors need to accumulate experiences, develop professional competence and always maintain professional ethics, etc Regarding audit firm, developing a flexible and effective audit methodology and improving the quality of human resources are considered as essential steps to enhance the audit quality Student: Phung Thi Thu Huong 46 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang 4.3.4 The positive relationship between financial leverage and the prevalence of loss avoidance and recommendations to investors when looking at a company’s capital structure Focus on Vietnamese listed firms, both this study and the prior study of Pham et al (2019) find that financial leverage is a factor influencing managers managing accounting numbers to avoid reporting losses Since financial leverage refers to the amount of debt a firm uses to finance assets, a higher number indicates a company is more dependent on borrowing for its operations Section 3.4 suggests that the probability of listed firm reporting a small profit increase when total liabilities divided by total equity rises In other words, managers in firms with a high leverage ratio may be more motivated to manage accounting numbers Noticeably, financial leverage differs greatly by industry and business sector Thus, investors should pay more attention when looking at a company’s capital structure, especially firms with high leverage ratios compared with others in the same industry Summary of chapter Based on the research findings, chapter concludes research hypotheses, analyzes the factors affecting managing towards positive profits and compares these conclusions with expectations and results of some prior studies The main recommendations that this chapter makes from the above research results are recommendations to investors when using earnings information, enhancing the accounting regime towards IFRS, strengthen audit quality and recommendations to investors when looking at a company’s capital structure Regarding limitations, future studies can widen the sample size, focus on both listed companies and non-listed companies (especially firms preparing IPO); identify more factors influencing loss avoidance earnings management, or find evidence on whether small profit companies manage earnings or not by using abnormal accrual, etc Student: Phung Thi Thu Huong 47 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang CONCLUSION The findings from topic “Loss avoidance earnings management in an emerging market – evidence from Vietnam” with the sample of 108 listed companies, corresponding 1,080 observations distributed across all non-financial industries, are exploratory examinations on the existence of earnings management practices by companies listed in the Vietnamese stock market Using earnings distribution approach, the empirical distribution of ROA (net income scaled by total assets) for the period from 2010 to 2019 affirms the existence of loss avoidance earnings management among Vietnamese listed firms The discontinuities in the distribution of ROA exist, not only before but also after the change in accounting regimes through the issuance of the “Circular 200”, “Circular 202” Besides, using the binary logistic regression model to identifying factors influencing loss avoidance, this study finds that loss avoidance is constrained by the enforcement of Big4 audit firms; whereas, convincing investors, lenders, creditors and shareholders about the profitability of the entity is one of the incentives for managers to manage accounting figures with the positive correlation between the leverage ratio and probability firms reporting small profits The main recommendations that this study makes from the research findings are recommendations to investors when using earnings information, enhancing the accounting regime towards IFRS, strengthen audit quality and recommendations to investors when looking at a company’s capital structure; all of which contribute partially to reducing the pervasiveness of loss avoidance earnings management Future studies can use the binary logistic regression model with widening the sample size, focusing on both listed companies and non-listed companies (especially firms preparing IPO); identifying more factors influencing loss avoidance earnings management, or find evidence on whether small profit companies manage earnings or not by using abnormal accrual, etc Student: Phung Thi Thu Huong 48 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang REFERENCES Atmathew (2015) Evaluating Logistic Regression Models | R-bloggers Available at: https://www.r-bloggers.com/evaluating-logistic-regression-models/ (Accessed: 19 May 2020) Barth, M E., Landsman, W R and Lang, M H (2008) ‘International Accounting Standards and 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Evidence from Germany’, Journal of Banking and Finance Elsevier B.V., 36(8), pp 2403–2415 doi: 10.1016/j.jbankfin.2012.05.001 Burgstahler, D and Dichev, I (1997) ‘Accounting &Economids Earnings management to avoid earnings decreases and losses’, Journal of Accounting and Economics, 24, pp 99–126 cafef.vn (2017) Đã tròn năm sau biến cố kiểm kê thiếu 1.000 tỷ đồng hàng tồn kho khiến Gỗ Trường Thành (TTF) giảm sàn 24 phiên liên tiếp Available at: https://cafef.vn/da-tron-1-nam-sau-bien-co-kiem-ke-thieu-1000-ty-dong-hangton-kho-khien-go-truong-thanh-ttf-giam-san-24-phien-lien-tiep201707190924567.chn (Accessed: June 2020) cafef.vn (no date) Kênh thông tin kinh tế - tài Việt Nam Available at: https://cafef.vn/ (Accessed: 22 May 2020) Callao, S and Jarne, J I (2010) ‘Have IFRS affected earnings management in the European Union?’, Accounting in Europe, 7(2), pp 159–189 doi: 10.1080/17449480.2010.511896 Circular No 200/2014/TT- BTC, G for enterprise accounting regime (2014) Thông tư 200/2014/TT-BTC Hướng dẫn chế độ kế toán doanh nghiệp - Cơ sở liệu quốc gia VBQPPL - Bộ Tài Available at: http://vbpl.vn/botaichinh/Pages/vbpq-van-ban-goc.aspx?ItemID=66801 (Accessed: 27 May 2020) Student: Phung Thi Thu Huong 49 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang 10 Circular No.202/2014/TT-BTC, G on preparation and presentation of consolidated financial statements (2014) - Cơ sở liệu quốc gia VBQPPL Bộ Tài Available at: http://vbpl.vn/botaichinh/Pages/vbpq-van-bangoc.aspx?ItemID=110994 (Accessed: 27 May 2020) 11 cophieu68.vn (no date) Chứng Khoán, Cổ Phiếu, Tin Chứng Khoán, Thị Trường Chứng Khoán, Chứng Khoán Việt Nam Available at: https://www.cophieu68.vn/ (Accessed: 22 May 2020) 12 Dechow, P., Ge, W and Schrand, C (2010) ‘Understanding earnings quality: A review of the proxies, their determinants and their consequences’, Journal of Accounting and Economics, 50(2–3), pp 344–401 doi: 10.1016/j.jacceco.2010.09.001 13 Dechow, P M., Richardson, S a and Tuna, İ (2003) ‘Why Are Earnings Kinky ? An Examination of the Earnings Management Explanation Patricia’, (734) 14 Decree 14/2007/NĐ-CP, P detailed regulations for implementation of a number of articles of the law on securities (2007) Nghị định 14/2007/NĐ-CP Quy định chi tiết thi hành số điều Luật Chứng k - Cơ sở liệu quốc gia VBQPPL - Ngân hàng Nhà nước Việt Nam Available at: http://vbpl.vn/nganhangnhanuoc/Pages/vbpq-luocdo.aspx?ItemID=14722# (Accessed: 27 May 2020) 15 Degeorge, F., Patel, J and Zeckhauser, R (1999) ‘Earnings management to exceed thresholds’, Advances in Behavioral Finance, 2(1), pp 633–666 16 Francis, J R and Wang, D (2008) ‘The joint effect of investor protection and big audits on earnings quality around the world’, Contemporary Accounting Research, 25(1), pp 157–191 doi: 10.1506/car.25.1.6 17 Giang, D N (2015) ‘Quality of reported earnings in empirical researches: concepts and proxies’, pp 1–16 18 Giang, Đ N (2018) ‘Điều chỉnh số liệu kế toán nhằm tránh báo cáo lỗ tránh sụt giảm lợi nhuận báo cáo- chứng từ ngân hàng thương mại Việt Nam Đào’, pp 37–46 Available at: https://tiasang.com.vn/khoa-hoc-congnghe/Nhin-tu-su-viec-chu-Viet-Nam-song-song-40-Neu-khong-cai-tien-chuStudent: Phung Thi Thu Huong 50 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang Viet-thi-uu-tien-nghien-cuu-gi 23128?fbclid=IwAR2mPz0hcDw7wjoFVeBYgAzOZ1BX5RUEqxknkJx-5b2zIpY5GMP5JucIHU 19 Habib, A and Hansen, J C (2009) ‘Target Shooting: Review of Earnings Management around Earnings Benchmarks’, Journal of Chemical Information and Modeling, 53(9), pp 1689–1699 doi: 10.1017/CBO9781107415324.004 20 Hamdi, F M and Zarai, M A (2012) ‘Earnings Management to Avoid Earnings Decreases and Losses : Empirical Evidence from Islamic Banking Industry’, Research Journal of Finance and Accounting, 3(3), pp 88–107 21 Healy, P M and Wahlen, J M (1999) ‘A Review of the Earnings Management Literature and its Implications for Standard Setting’, SSRN Electronic Journal, (November) doi: 10.2139/ssrn.156445 22 Holland, D and Ramsay, A (2003) ‘Do Australian companies manage earnings to meet simple earnings benchmarks?’, Accounting and Finance, 43(1), pp 41– 62 doi: 10.1111/1467-629X.00082 23 IASB (2010) IASB publishes revised Conceptual Framework Available at: https://www.iasplus.com/en/news/2018/03/cf (Accessed: May 2020) 24 Jeanjean, T and Stolowy, H (2008) ‘Do accounting standards matter? An exploratory analysis of earnings management before and after IFRS adoption’, Journal of Accounting and Public Policy, 27(6), pp 480–494 doi: 10.1016/j.jaccpubpol.2008.09.008 25 Kanagaretnam, K., Lim, C Y and Lobo, G J (2010) ‘Auditor reputation and earnings management: International evidence from the banking industry’, Journal of Banking and Finance, 34(10), pp 2318–2327 doi: 10.1016/j.jbankfin.2010.02.020 26 Lang, M., Raedy, J S and Wilson, W (2005) ‘Earnings management and cross listing: Are reconciled earnings comparable to US earnings?’, Journal of Accounting and Economics, 42(1–2), pp 255–283 doi: 10.1016/j.jacceco.2006.04.005 27 Leuz, C., Nanda, D and Wysocki, P D (2003) ‘Earnings management and investor protection: An international comparison’, Journal of Financial Economics, 69(3), pp 505–527 doi: 10.1016/S0304-405X(03)00121-1 Student: Phung Thi Thu Huong 51 Class: K19CLC-KTA Graduation Thesis Supervior: Ph.D Dao Nam Giang 28 Miková, T (2014) ‘Pre and Post IFRS Loss Avoidance in France and the United Kingdom’, 8(8), pp 2563–2570 29 Nguyen, T H L (2018) ‘FINANCIAL SCANDALS AND THE QUALITY OF INDEPENDENT AUDIT SERVICE IN VIETNAM’, International Journal of Business, Economics and Law, 14(5) 30 Pham, D H et al (2019) Earnings Management of Listed Companies in Vietnam Stock Market: An Exploratory Study and Identification of Influencing Factors, Academy of Accounting and Financial Studies Journal Available at: https://www.abacademies.org/articles/earnings-management-of-listedcompanies-in-vietnam-stock-market-an-exploratory-study-and-identification-ofinfluencing-factors-8480.html (Accessed: May 2020) 31 Saleh, N M., Iskandar, T M and Rahmat, M M (2005) ‘Avoidance of reported earnings decreases and losses: evidence from Malaysia’, Malaysian Accounting Review, 4(1), pp 25–37 32 Shen, C H and Chih, H L (2005) ‘Investor protection, prospect theory, and earnings management: An international comparison of the banking industry’, Journal of Banking and Finance, 29(10), pp 2675–2697 doi: 10.1016/j.jbankfin.2004.10.004 33 Tap chi tai chinh (2018) Thao túng báo cáo tài doanh nghiệp niêm yết giải pháp khắc phục Available at: http://tapchitaichinh.vn/tai-chinh-kinhdoanh/thao-tung-bao-cao-tai-chinh-tai-cac-doanh-nghiep-niem-yet-va-giai-phapkhac-phuc-138761.html (Accessed: May 2020) Student: Phung Thi Thu Huong 52 Class: K19CLC-KTA