ACCOUNTING ETHICS AND ITS IMPORTANT ROLE FOR REDUCTION OF ACCOUNTING FRAUD AN EMPIRICAL STUDY IN HANOI

Given the code of ethics for professional accountant, and the factors that contribute to accounting fraud, this study aims to examine the significance of ethical issues that challenge pr

ACCOUNTING ETHICS AND ITS IMPORTANT ROLE FOR REDUCTION OF

ACCOUNTING FRAUD: AN EMPIRICAL STUDY IN HANOI

Vu Hai Yen

Date:

Abstract

ACCOUNTING ETHICS AND ITS IMPORTANT ROLE FOR REDUCTION OF

ACCOUNTING FRAUD: AN EMPIRICAL STUDY IN HANOI

By

VU HAI YEN June 2010 Supervisor: Dr Le Van Lien

Ethics is a sensitive concept of any profession in society, especially for career that closely associated with economic activities such as accounting Given the code of ethics for professional accountant, and the factors that contribute to accounting fraud, this study aims to examine the significance of ethical issues that challenge professional accountant in good corporate governance and sustainable business practices It is carried out via a survey of 200 accountants which are divided into 2 groups They are both from public and private companies The result of this study shows that, accountants who have less experiences work more objectively than the one who have more experiences But they have more possibility to break ethical culture than the one who have more experiences And, ethical conflicts commonly arise in the organization's relationship with customers, employees, suppliers, and other individuals, and also as a result of these

acts as courtesy gifts, kickbacks and discriminatory pricing

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Acknowledgements

This study wouldn’t have been performed without the help of helpful people

Sincere thanks to my supervisor, Dr Le Van Lien for his support, guidance and vision for all my study

Sincere thanks to Mr Dang Ngoc Quang for helping me conduct survey quickly and effectively

TABLE OF CONTENTS Page

Declaration of Originality and Word count 2

Abstract 3

Acknowledgements 4

Table of Contents 5

Chapter 1: Introduction 9

1.1 Research Background 10

1.2 Problem Statement 12

1.3 Objectives and Sphere of Research 14

1.3.1 Objectives of Research 14

1.3.2 Sphere of Research 14

1.4 Research Methods 15

1.5 Structure of Research 16

Chapter 2: Literature Review 17

2.1 Code of Ethics 18

2.2 Code of Ethics for Professional Accountant 19

2.3 The Factors that Contribute to Accounting Fraud 21 2.3.1 Corporate Transparency 21

2.3.2 Corporate Values and Behaviour 22

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2.3.4 Vices of a Capitalistic Society 26

2.3.5 Legalistic Culture 28 Chapter 3: Research Methodology 30

3.1 Research Objectives 31

3.2 Research Method 32

3.3 Scope of Study 33

3.4 Sources of Data and Sample Selection 34 3.4.1 Collecting Data 34

3.4.2 Sample selection 34

3.5 Hypothesis Statement 36

Chapter 4: Result Analysis 37

4.1 Collection of Questionnaires 38

4.2 Description of Result 39

4.2.1 Part 1 40

4.2.1.1 Integrity 40

4.2.1.2 Objectivity 41

4.2.1.3 Professional competence and due care 42

4.2.1.4 Confidentiality 43

4.2.1.5 Confidentiality 44

4.2.2 Part 2 45

4.2.2.1 Money culture 45

4.2.2.2 Corporate values and behaviour and vices of a capitalistic society 46

4.2.2.3 Corporate values and behaviour, corporate transparency and legalistic culture 47 4.3 Result Analysis 48

4.3.1 Hypothesis 1 48

4.3.2 Hypothesis 2 49 4.3.3 Hypothesis 3 50 4.3.4 Hypothesis 4 51

4.4 General Discussion 52 Chapter 5: Conclusion and Recommendation 53

5.1 Conclusion 54

5.2 Recommendation 56

5.3 Limitation of Study 58

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5.4 Suggestion for Future Research 59

References (Harvard System) 60 Appendices 64

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1.1 Research Background

Ethics is a sensitive concept of any profession in society, especially for career that closely associated with economic activities such as accounting If there is no professional ethics, the quality of accounting services provided to society will not ensure its use value For accountants, the professional ethics are “intangible assets”

In Vietnam, Ministry of Finance issued a decision on the issuance and publication of professional ethical standards of accounting and auditing in 2005 These standards are built on the foundation of “independence, integrity, objectivity, confidentiality, expertise and prudence, occupational status, compliance with professional standards.” (http://www.tailieu.vn) They indicate that the scope and the nature of accounting activities should be provided in an ethical way However, in practice, accountants do not always follow the rules and apply them in every aspect How many bosses will raise wages for employees if they do the work to comply with ethical standards, benefit the public but the boss made a loss, if they deny wrongdoing or ethical behavior can cause damage to the organization in a short time, but in the long term it can provide greater benefits to reputation as well as financial by the organizational decisions that remove acts as dishonest or fraudulent? It is a big and difficult question Clearly, the boundary between “ethical” and “unethical” is very ambiguous

Vietnam's economy is increasingly integrated with worldwide The financial institutions like banks, financial leasing companies, securities companies are appearing more and more This also means that when demand increases, the quality of accountant

are discussed in a prominent position than ever, and their activities and behavior affect strongly to the health of a nation

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1.2 Problem Statement

For an organization, ethics plays an important role in curbing accounting fraud Like Nguyen Phuong Mai, chief of the representative office of the UK-based Association of Chartered Certified Accountants (ACCA) said that expertise can train but training ethics is very difficult (http://vietbao.vn) And, the lack of ethical behavior in the accounting profession causes extremely serious consequences The collapse of companies such as Enron, WorldCom and Global Crossing in the USA are typical examples

The life of an accountant was filled by the laws and the figures which should be calculated accurately Every day they have to face many problems such as competition, outstanding figures, the charges "not official" and commissions Any deviation regarding accounting data also seriously affect the decision process For instance, data is adjusted

to suit the changing market, competitive effects, or "latency" in business cycles in the financial statements Following business perspective, it is positive adjustment in order to reassure investors and encourage them to continue to pour capital But shareholders may

be deceived and feel there is instability in the operation of the business How to balance between private interests and public interests? How to avoid accounting fraud? It depends greatly on doing the right thing voluntarily It is a big problem that senior managers, the boards of directors, the accountants have to face in building a culture based on ethical values

Vietnam’s goal by 2020 is comprehensive and equitable integration with countries in the field of accounting and auditing, including import and export accounting

and auditing services (http://www.vntax.vn) Therefore, along with the reform of accounting systems, accounting ethics is also a concern especially because it is the foundation for sustainability and long-term development of an organization

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1.3 Objectives and sphere of research

1.3.1 Objectives of research

 To determine applying the code of ethics for professional accountant in Vietnam

 To define the factors that contribute to accounting fraud related to the state of Vietnam

 To reflect reality from theoretical model to practical theory

 To recommend some suggestions to investors, companies for the importance of ethics within an organization to curb accounting fraud

1.3.2 Sphere of research

 Place of conducting research: National Economics University, Hanoi capital, Vietnam

 Object of research: accountants, students who are major accountants

 Companies in research : public companies and private companies

 Time period of conducting research: from 31 may 2010 to 15 June 2010

1.4 Research methods

The project is based on real investigation:

The researcher conducts a survey among accountants who are working in public companies and private companies, as well as students studying master degree in accounting in Hanoi city, Vietnam The questionnaire and measurement are created based on the knowledge and information of previous researches The method used in this research is qualitative method with the sample size n = 200 By dividing questionnaire to accountants who are different age, gender, and experience, the researcher can be based

on that collected data and see how well the perception of accountants toward ethical problems

In the research, statistical technique such as chi-squared test will be used in order to help the researcher in analyzing and inspecting the measurement after collecting information Besides, the research will also be using collective analysis methods based

on historical data in past researches

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1.5 Structure of Research

This project is divided into five chapters:

Chapter I: Introduction

Chapter II: Literature Review

Chapter III: Research Methodology

Chapter IV: Result Analysis

Chapter V: Conclusion and Recommendation

CHAPTER 2

LITERATURE REVIEW

2.1 Definition of Ethics

2.2 Code of Ethics for Professional Accountant

2.3 The Factors that Contribute to Accounting Fraud

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2.1 Definition of Ethics

There are many definitions of ethics such as the science of human duty; the body

of rules of duty drawn from this science; a particular system of principles and rules concerning duty, whether true or false; rules of practice in respect to a single class of human actions (http://www.brainyquote.com) In conclusion, the word 'Ethics' is derived from the Ancient Greek word ethikos; means customs and habits It is a major branch of philosophy which is the study of values and customs of a person or group and covers the analysis and employment of concepts such as right and wrong, good and evil and do's and don'ts (Ghazala Saeed) Accounting has its own definition of ethics, which is primarily a field of applied ethics, the study of moral values and judgments as they apply

to accountancy It is an example of professional ethics Accounting ethics were first introduced by Luca Pacioli, and later expanded by government groups, professional organizations, and independent companies Ethics are taught in accounting courses at higher education institutions as well as by companies training accountants and auditors

2.2 Code of Ethics for Professional Accountant

Code of Ethics for Professional Accountant is issued by the International Ethics Standards Board for Accountants (IESBA), an independent standard-setting board within IFAC It set the ethical requirements for professional accountants and provides a conceptual framework for all professional accountants to ensure conformity with the five fundamental principles of professional ethics These principles are integrity, objectivity, professional competence and due care, confidentiality, and professional behavior

 Integrity: A professional accountant should be straightforward and honest

in all professional and business relationships

 Objectivity: A professional accountant should not allow bias, conflict of

interest or undue influence of others to override professional or business judgments

 Professional Competence & Due Care: A professional accountant has a

continuing duty to maintain professional knowledge and skills at the level required to ensure that a client or employer receives competent professional service A professional accountant should act diligently and

in accordance with applicable technical and professional standards when providing professional services

 Confidentiality: A professional accountant should respect the

confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal

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or professional right or duty to disclose This information should not be used for personal advantage by professional accountant

 Professional Behaviour: A professional accountant should observe the

relevant laws and regulations and should avoid any action that discredits the profession

The code of ethics for accountant is developed following a rigorous due process that includes input from the general public, IFAC member bodies and their members, and the IESBA Consultative Advisory Group It is applied to all professional accountants, those in public practice, industry, commerce, the public sector and education Under the framework, all professional accountants have to determine the threats to these fundamental principles and, if there are threats, apply safeguards to

(http://www.ifac.org/ethics/Pronouncements.php)

2.3 The Factors that Contribute to Accounting Fraud

The integrity of the accounting professional and the reliability of financial information provided by organizations have been undermined by accounting fraud According to the 2003 Task Force on Rebuilding Public Confidence in Financial Reporting, an independent group that was commissioned by the International Federation

of Accountants, “many of the examples of reporting failure evidence a failure to act in ethically by at least some of the participants The list is lengthy: misleading auditors, auditors looking the other way, disguising transactions, withholding information, providing unbalanced advice, abuse of trust, and misusing insider information Participants have been seen as following self-interest without concern for the interest of the company or its shareholders.” (p.15) Like Chambers, in Clarke et al (2003), write:

“corporate accounting does not do violence to the truth occasionally and trivially, but comprehensively, systematically, and universally, annually and perennially.” (p.3) Proof is the never-ending scandals Accounting fraud was derived from negative behaviour related to the following five factors: corporate transparency, corporate values and behaviour, money culture, vices of a capitalistic society and legalistic culture

2.3.1 Corporate Transparency

When accounting fraud occurs, it creates a lack of confidence and uncertainty in financial reports and reduces the decision usefulness of that reports Therefore, it shakes the confidence of investors, the public perception of corporates and the accounting profession And, if the authority wants to make the financial markets and economic

of financial reporting, and accounting rules required implementation by managers to disclose the complex activities of a transaction which were subsequently reviewed by auditors He stresses that managers and auditors could always circumvent both bright-line and principles-based rules when they no longer acted in the interest of shareholders

2.3.2 Corporate Values and Behaviour

Higgs (in EIU, 200 paper, p.5) summarized aptly the situation regarding corporate values and behaviour as follows: “The first thing in this game is that there are

no absolutes There are no blacks and whites There is no such thing as getting it there are only behaviours that tend to improve the outcomes” People tend to look for black and white, but culture of an organization is the way people behave when they are not being watched Lapses in personal and professional integrity can cause the crisis in corporate confidence and effect on organization and their corporate clients The ongoing business and accounting scandals such as Enron, Tyco, Worldcom recently raise questions about issues of ethical behaviour Should we not examine ethical values of the participants, if we want to improve stakeholder confidence in what we do? Could we,

right-through education, influence participants’ behaviour? Can they be taught and influenced

on how to behave appropriately for the overall good of society? What is this elusive quality that will make us all winners in the world that we live in? (Mary Low, Howard Davey, Keith Hooper) It is very difficult to answer these questions Like Jones (1998)

comments, it is a war within each of us, and there is a battle between our material desires and satisfactions and our deeper, possibly buried, convictions about nature and the integrity of creation

Sykes (1988) investigated about the history of corporate collapses in Australia, from the closure of the first bank in the 1820s through the four great recessions of the 1840s, 1890s, 1920s and 1970s to the downfall of the house of Gollin He concluded:

“Nor can we ignore the high incidence of fraud and dishonesty which has been chronicled in official reports and investigations It is probably true to say that nearly every company in Australia is being plundered to some extent by its directors and senior management The most frequent form is by falsifying expense accounts or charging items of personal consumption to the company’s account As long as the company stays healthy, with strong and genuine earnings, these practices can be tolerated as perquisites

of office.” (p.551) The success of individual is measured by the accumulation of

personal wealth So, they often put their material desires first But we need to create a

system that makes power accountable to life from talented professionals who value people, nature, and our living planet more than they value money and people who have expertise in the design of large-scale behavioural systems, or money will destroy us

(Korten, 1998)

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2.3.3 Money Culture

Money plays an important role in our world If there is no money, we cannot have resources to develop and grow, we cannot have a comfortable life and some would like to have more than just a comfortable life Each of us has been introduced to the idea

of money and it importance in providing the things we need from toddlerhood to adulthood There is no deny the fact that money and values associated with money allows us to have things that other matters become secondary and make us become more active participants in the world But there is a question that how peoples’ values and behaviour change when their sole purpose in life is devoted to acquiring money and its associated pleasures Is it necessary to build money culture in an organization? The answer is yes Embezzlement case in a branch of Saigon Jewelry Holding company-SJC

is an example which support for this answer The fact of this case is that when the inspection teams of SJC Company check financial records periodically for the settlement

in 2008, they discovered that Ms Hoang Thi Thu Ha, the director of the North Branch and accounting department has intentional act, causing loss of about 15 billion They use these amounts of money for personal purpose (http://www.tainguyenmoitruong.com.vn)

Cahn (2000) writes, “we are so immersed in a money environment that we can no more perceive how it shapes or affects our perception than a fish can imagine that water might distort the world it perceives” It has been suggested that the worship of money has become our secular religion and that we live in an age where money talks and people listen (Lapham, 1988) “Money can’t buy you love, but it can buy a piece of the editorial action of a prestigious journal like Accounting Horizons, especially when money materialises as academic labor power” (pp 58), Tinker (2000) wrote

The issues associated with money and power is also proposed by Young (2003)

as follows: “There are times when we may sell our souls to gain what money promises

in the way of power and license This is especially true in today’s culture of consumerism where we have sanctified appetite over character Money enables us to do what we want People seek it; they covet it; they even kill for it Money provides us with discretionary power, easing our ability to turn people and their needs to our use.” (pp 136-137) According to Soros (1998) “What I can say with confidence is that the substitution of monetary values for all other values is pushing society toward a dangerous disequilibrium and suppressing human aspirations that deserve to be

considered as seriously as the growth of GNP.[ .] Profit-maximising behaviour follows

the dictates of expediency and ignores the demands of morality Financial markets are not immoral; they are amoral By contrast, collective decision making cannot function

properly without drawing a distinction between right and wrong We do not know what

is right If we did, we would not need a democratic government; we could live happily under the rule of a philosopher king as Plato proposed But we must have a sense of what is right and what is wrong, an inner light that guides our behaviour as citizens and politicians” (p 208) People sometimes confused the relationship between money and wealth The real wealth is measured not only in money but also be measured in knowledge and virtue And, it is not what is more expensive is considered better

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2.3.4 Vices of a Capitalistic Society

The vices of a capitalistic society contribute to the never-ending nature of accounting fraud According to Percy (in Bruce, 2002) there are systemic reasons for corporate failure, based on behavioural issues and there is a wider issue than just the reforming of accountants in a crisis EIU (2002) white paper reports as follows: “In any case, corporate governance is about much, much more than the accuracy of the balance sheet” and “Indeed, except in cases of rudimentary fraud, the balance sheet is just an output of manifold structural and strategic decisions across the entire company, from stock options to risk management structures, from the composition of the board of directors to the decentralisation of decisionmaking powers” (pp 7) The purpose of senior management members is becoming leaders, even world leaders in their industry areas When they occupy a position of leadership they can profoundly influence those who follow them This desire may tend to outweigh corporate social responsibility issues General H Norman Schwarzkopf’s view on the leadership issue: “Leadership is a potent combination of strategy and character But if you must be without one, be without strategy” (pp 7) “While we are talking of economic performance, another separate discussion is going on about the lamentable loss of our ethical values Nobody seems to realize the two are connected or, even worse, that the unfettered free market economy is itself destroying our values” (Kammler, 2002, pp 9)

According to Philips (2002), speculative markets and growing wealth also corrupt philosophy and ideology, reshaping them to justify greed and ruthlessness Companies focus on maximizing their returns, irrespective of the cost burdens on society If corporate leaders commit themselves to an honest and deep self-reflection,

they will recognize the downsides to the narrow brand of capitalism that has marked much of recent decades (Googins (2002) Besides, Schwartz (2002) point out that the other side of speculative profit is speculative bust, the costs of which fall on small investors and workers rather than on corporate executives who are routinely rescued by government bailouts and “golden parachutes” Googins said that what will win back confidence in big business is not the sight of a chief executive behind bars, it is a solid record of companies that are practicing good corporate citizenship He explains: “Years

of working with hundreds of companies as they develop their citizenship strategies has taught me what citizenship is – and what it isn’t Corporate citizenship is not about how

a company gives away money It’s about how it makes its money and how it manages its money Good corporate citizenship is fiscal transparency, the demonstration of a corporate social conscience, and evidence that corporate values are more than pretty words on a framed plaque Look at Enron It had an ethics program, standard accounting practices and a code of conduct It even invested $18 million in minority – and women-owned businesses in what was a truly laudable community economic program Yet, all

of that was choked off by corruption at the core of the company” (P.E.4) The reason managers get involved in acts of corruption is not because they lack morals or that they have no sense of right and wrong Korten (1998) explains that “they do it because it is what they are paid to do and they work in a culture of capitalist ideology that says their job is to produce returns to shareholders – governments and society will take care of the rest Furthermore, it is what business schools train them to do.” (pp 395)

From Pratt (2002), another notion shows that: “Organisations can be portrayed as inherently evil, to be resisted and criticised at every turn Or they can be seen as, for the most part, led by inherently good people who are doing their best to create sustainable

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wealth and well-being for people, organizations and society with a set of tools and ideas about managing and accounting which are grounded in modernity and ill-suited for a post-modern world.” (pp 189) It is no surprise that accounting fraud continues to happen The current crisis of corporate honesty stemming from the collapse of giants such as Enron and WorldCom has highlighted the problem of vices of a capitalistic society

2.3.5 Legalistic Culture

According to Mary Low, Howard Davey, Keith Hooper, “society is increasingly being confronted with a legalistic culture that exists in corporations which seem to take the attitude that law can be interpreted to suit their own ends, that is, in such a manner that if the interpretation says that they are not breaking the law then it is fine for them to conduct the action.” (pp 235) This means that corporations take a narrow legalistic view when performing their business Therefore, accounting fraud continue to flourish, despite the reforms by profession and authoritative bodies In his study about legalistic culture, Hastings (2002) shows that since the early 1980s, management styles have become more aggressive over transactions not covered by specific accounting rules Managers have apparently adopted a permissive approach to accounting treatments and challenge auditors by arguing, “show me where it says I can’t” (p 57) Besides, Percy (in Bruce, 2002) also shows that the obsession with legally defined rules in a lawyer-dominated society would make it difficult to prefer substance over form “Lawyers make very good lawyers; they don’t make very good accountants” (Davies, in Bruce, 2002, pp 3) Jones (quoted in Bruce), a national audit technical partner with Deloitte & Touche in

London, says, “It will mean more rules linked to a litigious environment” and “more explanation is a better route than more regulators and more rules” (p 3)

Furthermore, Dodsworth’s (chief executive officer of Camico (California) quoted

in Ruquet, 2002) observations are: “Ultimately, CPAs must exercise their professional judgement and walk away from clients “who make them nervous” There are a lot of areas where the rules are not hard and fast and require professional judgement Our advice is that if it gets to the point, what they want to do is the right thing and be able to say good-bye to a client” (pp 15) It is not coincidence that accounting frauds have been centred in the country with a very legalistic culture Corporate executives today often have to confront situations that may not be illegal but may be unethical, and in such situations they must decide whether they will act in their private interest or public interest

3.1 Research Objectives

The studies and literature regarding the topic of code of ethics for professional accountant and the factors those contribute to accounting fraud have been discussed in chapter 2 It is general theory In the fact, each country is applying code of ethics for professional accountant in different ways And, each country is facing accounting fraud

in different situations For this research, it only focuses on state of Vietnam Based on the past research, the researcher continues adding some new researches in order to reach two objectives First, the researcher want to show how Vietnamese organization applies five fundamental principles of professional ethics (integrity, objectivity, professional competence and due care, confidentiality, and professional behavior) Second, from identifying and determining ethical problems related to five factors that contribute to accounting fraud (corporate transparency, corporate values and behaviour, money culture, vices of a capitalistic society and legalistic culture), the researcher wants to give idea of state of accounting fraud in Vietnam

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3.2 Research Method

This study used research method related to statistic techniques that involve quatitative data Especially, the researcher applied chi-squared tests for hypothesis testing and also for prediction or forecast of the result Chi-square is a statistical test commonly used to compare observed data with data we would expect to obtain according to a specific hypothesis (R.A Fisher and F Yates)

The follow equation is a general form of chi-squared test:

X2: the value of the test statistic

k, i: The outcome of each trial can be classified into one of k categories, called cells

oi: The observed frequency

ei = npi, where n is a fixed number of trials, p is the probability that the outcome

will fall into cell i remains constant for each trial Moreover, p1 + p2 + … + pk = 1

Each trial of the experiment is independent of other trials

The exact computation work is done by entering the necessary data and solving

by computer It is available in the following chapter

3.3 Scope of Study

The survey was conducted with two groups of accountants It has two parts The first part is related to the topic code of ethics for professional accountant The second part is related to the topic factors that contribute to accounting fraud Group one includes accountants who have worked in accounting field for less than 4 years, and they currently are studying for master degree in National Economics University, Hanoi, Vietnam Group two includes accountants who have more than 4 years experience, and they are working for various firms within Hanoi city, Vietnam This study was developed to specifically test accountant’s responses on how they thought they would behave in ethically challenging situation related to the factors identified in the literature review

Because of some advantages and disadvantages when the researchers distributed and collected questionnaire, the time of investigation is conducted in about two weeks, from 31st May 2010 to 15 June 2010 It only takes the researcher one hour for group one But in order to have response of group two, the researcher has to wait for 15 days