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MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY  VÕ THU PHỤNG THE IMPACT OF CONSTITUENT FACTORS OF THE INTERNAL CONTROL SYSTEM ON THE BUSINESS PERFORMANCE IN VIETNAM ELECTRICITY Major: Accounting Code: 62.34.03.01 SUMMARY OF ECONOMIC THESIS Hồ Chí Minh City- 2016 LIST OF THE DISCLOSURE Vo Phung Thu (2013), Interest groups and its negative effecting on the economy and corrective solutions, Journal of EconomicsTechnology, Binh Duong University, No 04, pp 110-119, December 2013 Vo Phung Thu (2014), The impact of control environment on the effectiveness and efficiency of the operations of Vietnam Electricity, Journal of Economics- Technology, Binh Duong University, No 06, pp 77-95, June 2014 Nguyen Dat Tien, Vo Phung Thu (2016), Factors of Internal Control affecting performance by business group Vietnam Electricity, Journal of Economics- Technology, Binh Duong University; Vo Nhi Van, Vo Phung Thu (2016), Internal Control System at Southern Power Corporation_ current state and improving solution, Proceedings of the International Conference on Science and Technology of Electric Power University 1 PREFACE Study’s reason In recent years, many state-owned enterprises (SOEs) have not fulfilled their most important political role, due to their inefficient operation, as a tool supporting the government to regulate the nation’s macro-economy Extant literature found that internal control affects operational efficiency However, in the context of Vietnam, there is lack of evidence showing that operational inefficiency, specifically of SOEs, is caused by weakness existed in internal control system Therefore, this study focuses on the impact of internal control on operational efficiency, empirically at Vietnam Electricity Group (EVN) Research aims This research is aimed to explore elements of internal control system and evaluate their impact on effectiveness and efficiency of EVN’s operation, with the following goals:  Finding factors of Internal Control System which effect EVN’s performance  Evaluate those impact on EVN’s performance Research questions Question 1: How is the current performance of EVN? Question 2: Which factor of Internal Control System impacts on EVN’s operation? Question 3: What is the level of impact that each factor has on EVN’s performance? Research Subjects and Research Scope Research subjects: Factors of Internal Control System which impacts on EVN’s performance Research scope: focus on the impact on EVN’s performance, but not other goals such as: the truth and fair of financial reporting or regulation compliance Research Method This work employs mixed methodology, combining qualitative and quantitative paradigm All factors discovered in qualitative step by using Exploratory Factor Analysis (EFA) model will be assessed in quantitative step for hypothesis test Questionaire is filled via either face-to-face interviews or emails, by non-probability sampling method Survey process is conducted through two stages: Preliminary stage: is to evaluate the reliability of the scale (using Cronbach's alpha) and discover factors (using EFA) Any flaw in questionnaire found will be fixed before official questionnaire are sent (in stage 2) This research optimally employs least-squares index in STEPWISE model to define and evaluate the impact of internal control factors on EVN’s performance The suitability of the model is tested by the R2 coefficient Dissertation contributions In theory Reviewing the theories of internal control and internal control reports, both internationally and domestically Accomplishing the framework of the internal control consisting of factors, 10 elements with 49 observed variables which affect SOEs’ performance, evidence from EVN 3 Building up a new measuring scales, which may be used by future research in the field In practice Discovering 20 new observed variables affecting the business performance of EVN, this research mitigates weaknesses of internal control at EVN which makes the entity’s operation inefficient These twenty variables together with the 29 variables identified in COSO Report 2013 constitute measuring scales of factors in internal control system which has an influence on the operational efficiency of EVN Via quantitative research this dissetation has discovered 49 measured variables correlated with the 10 elements that affect the performance of EVN In this light, the work has developed a model comprising of specific factors in the internal control system that affects efficiency of EVN’s operation CHAPTER OVERVIEW OF FORMER RESEACHES ABOUT FACTORS OF INTERNAL CONTROL SYSTEM AFFECTING THE EFFECTIVENESS OF BUSINESS 1.1 Studies on factors of Internal Control System affecting the business performance of the enterprise 1.1.1 International studies Main streams include:  Impact of Internal Control on efficiency of business operations: Reviewed studies have shown that there is close relationship between Internal Control and efficient business operations of firms And the performance of the business to be considered by profits, revenues, liquidity, ROI, ROA [Beeler and colleagues (1999), Jensen (2003), Ittner (2003), Fadzil and colleagues (2005), Kenyon and Tilton (2006), Brown and colleagues (2008), Mawanda (2008), Nyakundi and colleagues (2014) Zipporah (2015)] Weakness or shortcomings of Internal Control systems are negatively affecting the performance of the enterprises’ business General weaknesses of Internal Control such as: firms don’t build preventing risk system when operations; lack of risk analysis; lack of appropriate information, and mandate problems within the organization [Kakicha (2009), França same et al (2010), Muraleetharan (2011), Dechow and colleagues (2011)]  Research about the impact of each factor on the effectiveness of operations such as: Hooks (1994), Ezzamel (1997), Lannoye (1999), Cohen (2002), Springer (2004), Rittenberg (2005), Hevesi (2005), Steihoff (2001) and Hevesi (2005) demonstrated that control environment is the most important component affecting the effectiveness of Internal control, in which ethic factor and operating style factor impacts staff’s motivation and behavior, and organization's culture Remaining components have complementary relationship with each other closely, each department are essential for achieving all three target groups: Operations, financial reporting and corporate compliance  Common features of enterprises which have weak Internal Control System: Liu Xinmin (2005), Ge and McVay (2005), AshbaughSkaife (2006), Lin and Wu (2006), Shenkir and Walker (2006), Doyle (2007b) showed that the general characteristics of weak internal control, such as: often large scale enterprises but in the midst of restructuring or just established, or with high level of ownership concentration These companies are lack of policies in revenue recognition, clearly duty allocation, many changes in firms’s structure, lack of investment in human resources for Internal Control 5  Impact of Internal Control to firms’ value: Ohlson (2001), Doyle (2005), De Franco (2005), Beneish (2006), Cheh (2006), Doyle (2007) Ogneva (2007), and Hammersley (2007) shows that weaknessed in internal control negatively affect enterprises’ market value, profitability, financial condition, quality of financial reporting, revenue’s growth rate, and business investment  How to evaluate Internal Control: Emby (1994): audit approach is to rely on weaknesses of Internal Control through specific processes, such as the inventory cycle, sales Louwers (2002): most appropriate assessment method based on the five components of the COSO report This view is included in current auditing standards O'Leary, Conor (2004): built ICE model based on factors of components: control environment, information systems and control procedures 1.1.2 Studies in Vietnam related to Internal Control  Ngo Tri Tue et al (2004) with the nation-level thesis named "Building Internal Control with the strengthening financial management at the Vietnam Post and Telecommunication Corporation "  Pham Binh Ngo (2011), Ph.D thesis titled "Organizing Internal Control in accounting units of the Defense Ministry."  Nguyen Thu Hoai, Ph.D thesis entitled "Improving the system of internal control in the cement manufacturing factories of the Vietnam Cement Industry Corporation ";  Bui Thi Minh Hai, Ph.D with the theme "Improving the system of internal control in garment enterprises in Vietnam." In addition, there are many Master theses with the theme of improving the system of Internal Control in specific businesses Overall, dissertations and theses outlined above are based on the elements of the COSO report, then conduct surveys seeking recommendations for improvement Internal Control System Therefore, the research objectives of above work are not in the same direction with the objective of this dissertation 1.2 National Internal Control Reports 1.2.1 COSO Report and COSO Report in the public sector COSO is a committee of the National Council of the United States established to be against fraud in financial reporting The COSO Report issued in 1992 by COSO is the first document in the world providing a definition and factors attributing to internal control adequately and systematically This report established a general framework supporting entities improve effectiveness and efficiency in their operations Internal Control System consists of integrated parts, namely: Control environment; Risk assessment; Control activities; Information and Communication; and Monitoring The Report is superseded by its new version in 2013 COSO Report in the public sector To maintain effective Internal Control System in Public Sector, INTOSAI (International Organization of Supreme Audit Institutions) issued a report of internal control in the public sector in 2001 This document integrated COSO Report 1992 into INTOSAI standards with some changes in which ethics is a part the Internal control and Risk target This is considered a prerequisite to strengthen public confidence and to build effective governance 7 1.2.2 Turnbull Report 1999 The Turnbull Report was issued in 1999 in the UK by the Cadbury Committee As COSO's Internal Control Report, The Turnbull Report included definitions, objectives and factors in an internal control systems An internal control system has operations in controling, communicating and monitoring the effectiveness of the Internal Control 1.2.3 CoCo Report (Criteria of Control committee) of Canada Issued in 1995, in Canada by the Institute of Certified Public Accountant Canada (CICA - Canadian Institute of Chartered Accountants) The report is based on CoCo criteria which was similar COSO report, and combined with MBNQA standards 1.2.4 MBNQA standards (The Malcoln Baldrige National Quality Award) MBNQA standards are issued in 1987 in the United States by the Institute of Standards and Technology National NIST (The National Institute of Standards and Technology) MBNQA standards includes criteria, which help enterprises reduce management risk, measure the operational efficiency indicators These criteria are also the basis for building enterprise systems in the Internal Control 1.3 The achieved results and research issues 1.3.1 Results from reviewing extant literature Research in the effectiveness of Internal Control by factors in Internal Control  Study only the impact of Internal Control toward three overall goals of an organization: operational, compliance and financial reporting  Research about impact of Internal Control is only conducted in some specified industry such as schools, hospitals and certain types of businesses 1.3.2 The continuing research Previous studies only focused on constructing framework, then conveyed weaknesses of internal control and their impact on enterprise’ value and market value, the impact of internal control on operational effectiveness of some limited industries No study is found, that is evaluate the impact of internal control on operational effectiveness of large-scale entities, in term of their social significant (Electricity, Water, Oil&gas, Aviation…) These entities are often state-owned group, having huge financial resources, therefore their risk management is complicated: their influence on natural environment, industry risk, annual planning uncompleted Therefore, the identification and measurement of factors in Internal Control which affects the performance of Vietnam state-owned enterprises are significant and meaningful in both theory and practice in Vietnam’s context CHAPTER THEORY 2.1 Overview of Internal Control 2.1.1 History  Financial turmoils and political scandals in the United States in the 70s (i.e Watergate 1973) led to the introduction of Foreign Corrupt Practices Act in 1977  AICPA established a Special Committee on Internal Control (1979) US Securities and Exchange Commission (SEC) launched regulations requiring firms report internal control system toward financial reporting in the enterprise (1979)  These requirements were the main motivation to the establishment of COSO, which was responsible for conveying research about internal control The COSO Report 1992 is the first systematic and sufficient conceptual framework in internal control 2.1.2 Terms 2.1.2.1 Internal Control There are two main streams in Internal Control definition One considers Internal Control as a structure (Chaos Theory), while the other consider Internal Control as a process (COSO Report) According to Chaos Theory, internal control is a combination of 'control' and 'internal' which have closely relationship Internal controls can be viewed as either acts which are done, or the results achieved by those acts COSO Report defines "Internal control is a process driven by the manager, the board and the staff of the unit, it is set to provide a reasonable assurance to achieve operational, financial reporting, compliance objectives" 2.1.2.2 Performance  Prasser (1985); Yamamoto & Watanabe, (1989); Jones & Pendlebury, (1992); Glynn (1985, 1997); O'Leary (1996); McCrae & Vada, (1997); Grendon, Cooper & Townley (2001), Nath (2011, 67), said that efficiency is measured via the comparison between the inputs and outputs, the main purpose is to maximize the outputs with available resources 10  Yamamoto & Watanabe (1989) suggest that the efficiency is known as the responsibility of managers to use resources when they are assigned to control them  Whittington and Kurt (2001) said that the performance is often determined by indices, such as profit growth rate, revenue growth, return on equity  Reviewed foreign studies have shown that there is close relationship between Internal Control and efficient business operations of firms And the performance of the business to be considered by profits, revenues, liquidity, ROI, ROA [Beeler and colleagues (1999), Jensen (2003), Ittner (2003), Fadzil and colleagues (2005), Kenyon and Tilton (2006), Brown and colleagues (2008), Mawanda (2008), Nyakundi and colleagues (2014) Zipporah (2015)]  According to Decree 200/2015 / TT-BTC dated 12/15/2015 of the Ministry of Finance on financial supervision for SOE (Article 5, Section 1), efficiency of capital usage is measured by: margins aftertax profit/Equity (ROE), or profit margin after tax/total assets (ROA) 2.2 Fundamental theory of Internal Control and Internal Control system 2.2.1 Chaos Theory: factors in models are mutually interact, a mistake in a unit or a division can cause serious consequences 2.2.2 Agency theory applied in this thesis context explains establishment of Internal Control System could minimize the selfinterested behavior of managers, monitor delegator’s behavior, establish and maintain a mechanism to ensure that delegators act 11 toward interest of the owners, particularly in the case of Vietnam state-owned enterprises 2.2.3 Contingency Theory: Internal Control System can not be the same in all firms, and the control of each entity depends on factors such as: technology, culture and external environment 2.2.4 The Theory of the Firm: An operating company needs to meet stakeholders’ requirements against inputs and outputs to maximize profits (in current cash flow) with available resources Therefore, firms have to build Internal Control to meet these requirements 2.2.5 Stakeholder theory: help enterprises identify rights and obligation of each relating parties, limit and scope in control of the business, in order to minimize risk, reduce negative impact on the organization, ensure efficient Internal control 2.3 Overview of state-owned enterprises (SOEs) 2.3.1  Characteristics Vietnam SOE These are joint-stock or limited liability companies wholly or major owned by the state 2.3.2 Characteristics of business enterprises in public service sector of the United States  The US business enterprises in public services are either state owned or private ones  Federal government of the United States controls these enterprises through the provisions of the law (most important law is anti-monopoly law) and the banking system through the Fed  The group uses standard MBNQA to control the effectiveness of their operations 12 2.3.3 Features of Chinese SOEs and efficiency of SOEs operating in China  Similar to Vietnam counterpart, all public service businesses are owned by the Central Government SOE leaders are appointed by the government 2.3.4 The reality of the business performance of SOEs Vietnam  Most Vietnam SOE business operate inefficiently Some even went bankrupt  Many SOEs have not completed their most important political target: effective performance, the role as tool of Government to moderate macro-economic  Reason: weakness in corporate governance and internal control, existence of group interests, ineffective audit activities, lack of information transparency  Vietnam Electricity Group is one of the ten SOE leading groups of Vietnam Similar to some SOE groups, in recent years, Vietnam Electricity has many shortcomings in the management and unfinished tasks: distribution electricity power, business performance is not corresponding with available resources CHAPTER METHODOLOGY AND RESEARCH MODEL 3.1 Research methodology and data collection Dissertation used mixed methodology, including qualitative paradigm to explore new factors which fit to characteristics in Vietnam Next, and quantitative paradigm to confirm qualitative’s results 13 Data were collected from various sources related to the study: (1) Secondary data including text, documents in the power sector (the specified documents, newspapers and magazines, opinions stated by the leaders of EVN, the documents from inspecting EVN which were been published; EVN’s Annual Report (2) Primary data from survey, combined with in depth interviews from experts 3.2 Data analysis 3.2.1 Qualitative data analysis The process of analyzing qualitative data consists of steps: Step 1: Sort and prepare the data, take notes from EVN's operation, and interview Step 2: Read the entire documents thoroughly to figure out research issues appropriately and insightfully Step 3: Encode operation’s data and interview’s data separately Step 4: Use data to synthesize the factors which affect performance of EVN and describe the relationship between the factors in the model proposed Step 5: Interprete and present the meaning of the data based on analytical models established Step 6: Verify the validity of the findings in the study 3.2.2 Quantitative data analysis process Subsequently, factors explored from interviews, combined with the elements of the COSO Report 2013, formulate factor matrice affecting EVN’s performance The steps are as follows: Step 1: Prepare questionaire from the elements discovered; Step 2: Test the questionaire’s reliability and value of the scale; 14 Step 3: Recommend the factors affecting performance of EVN and use multivariate regression to identify suitable model: Step 4: Measure the impact of the five factors of the internal control system on the performance of the EVN Respondents are experts working at EVN In order to estimate the regression model, this study uses non probability sampling method (convenience sample) With mixed method: we determined factors affecting the operation of the EVN, which measure the impact of factors on Internal Control System and impact of each factor in the system effects the operating performance of the EVN 3.3 Theoretical research model  The dissertation uses five factors of Internal Control and COSO’s assess tools as standard criteria to assess the impact of these factors on firm’s performance  The popularity of COSO’s Report makes this model valid This Report is now widely applied by almost all countries around the world, by academics, and professional such as auditors  COSO Report 2013 includes 17 rules This is the framework of the Internal Control System for not only managers but also other parties outside the enterprise  This model closely links Internal Control, enterprise risk management (ERM) and corporate governance (Governance)  With the characteristics of SOEs in Vietnam, specifically EVN, this work selects COSO Report 2013 as the principal framework for researching with slight adjustments to fit Vietnam context 15 Demonstrates commitment to integrity and ethical values 2.Exercises oversight responsibility Control Environment 3.Established structure, authority and responsibility 4.Demonstrates commitment to competence 5.Enforces accountability 6.Specifies suitable objectives 7.Identifies and analyzes risk Risk assessment PER FOR MA NCE IN EVN 8.Assesses fraud risk 9.Identifies and analyzes significant change 10.Selects and develops control activities Control Activities 11.Generral controls over technology 12.Deploys policies and procedure 13 Uses relevant information Information & Communication 14.Communicates internally 15 Communicates externally Monitoring Activities Model 3.1: Theoretical research model 16.Conducts ongoing and/or separate evaluations 17 Evaluates and communicates deficiencies 16 CHAPTER ANALYSIS AND DISCUSSION 4.1 Reality of operational perfomance and Internal Control in EVN Analysis financial position of EVN:  In the last six years, EVN recognized loss in the first two years (2010, 2011) while profited in the remaining four years  Return on assets (ROA) is quite low (in 2014 was 0.0074)  Return on equity (ROE) is quite low (in 2014 just 0.0263) The financial expense was or times than financial revenue  Although in recent years EVN profited but didn’t commensurate with the companies’ available resources Reviewed documents show a negative picture of internal control at EVN, due to lack of some significant factors Furthermore, the existing factors were not ensuring that the system was in fully effective because of in most cases these factors were designed in system but not yet implemented Social effectives from EVN’s business  EVN is a state enterprise, besides doing business EVN also executes government’s policies for social and economy goal such as: stable electricity price for production needs of life, non-profit business objectives nhuan_cac social welfare projects This effectiveness is considered through two tasks: rural electrification and ensure nation’s security 4.2 Discover factors of Internal Control affecting performance Qualitative research showed that there were 15 elements in 49 obsevered variables affecting Internal Control This research discovers 20 new variables affecting the performance of the EVN 17 This is also the shortcomings of elements in Internal Control System and makes operation of inefficiency in EVN Twenty variables associated with the 29 variables of COSO Report are identified that affect the performance of the EVN, and formed the scale of factors in Internal Controls affects the operational efficiency of Vietnam Electricity To evaluate of the performance of EVN (dependent variables), This research measured the degree effects through previous studies (Grendon, Cooper & Townley (2001), Nath (2011, 67), John & Morris (2011), COSO’s report, Decree 200/2015/BTC, and results of in-depth interviews The variables were: EVN used assets in optimal way operating EVN used their equity effectively; EVN always improve profitability; EVN has policies and optimize use of resources Quantitative research + Preliminary study: Basing on results from a survey of 95 samples in EVN, this research uses Cronbach's coefficient alpha to test the reliability of questionaire All scales are satisfied condition of Cronbach's alpha: coefficient ranged from 0.700 to 0.932 Thus the scale for these factors are satisfied Result from EFA test shows that only remaining 10 elements (from beginning 15 elements) including 49 observed variables which were regrouped These findings were used to design the official questionnaire used quantitative stage 18 + Official Research: 256 questionnaires were sent to managers, professionals at EVN There were 256 filled questionnaire received Evaluate the fitness of the model To test the compatibility of the overall regression model, we hypothesize: H0 : coefficient R2population = 0; H1 : coefficient R2population ≠ With significance level α = 5% From survey data, the following hypotheses are tested: (1) Hypothesis H1: There is an positive correlating impact of the control environment (MTKS) on EVN’s performance (2) Hypothesis H2: There is a positive impact of the risk assessment (DGRR) to the performance of EVN (3) Hypothesis H3: There is the positive correlating impact of control activities (HDKS) on EVN’s performance (4) Hypothesis H4: Information and Communications (MIC) positively impact on EVN’s performance (5) Hypothesis H5: there is a positive correlation between monitoring activities (GS) and EVN's performance (6) Hypothesis H6: The performance of EVN will increase when the existence of the Internal Control System (AHKSNB) Results from regression model showed that the proprosed model explains 64.9% of the data collected Hypothesis Testing The fitness of the model When R2 ≠ 0, only the relevance of the model to the data file is tested To test the compatibility of the overall regression model, we supposed H0: coefficient R2population = 0; 19 H1:coefficient R2population ≠ With significance level α = 5% Results from ANOVA’s variance analysis table shows the F value with sig = 0.00 [...]... operations 12 2.3.3 Features of Chinese SOEs and efficiency of SOEs operating in China  Similar to Vietnam counterpart, all public service businesses are owned by the Central Government SOE leaders are appointed by the government 2.3.4 The reality of the business performance of SOEs Vietnam  Most Vietnam SOE business operate inefficiently Some even went bankrupt  Many SOEs have not completed their most... corporate governance and internal control, existence of group interests, ineffective audit activities, lack of information transparency  Vietnam Electricity Group is one of the ten SOE leading groups of Vietnam Similar to some SOE groups, in recent years, Vietnam Electricity has many shortcomings in the management and unfinished tasks: distribution electricity power, business performance is not corresponding... links Internal Control, enterprise risk management (ERM) and corporate governance (Governance)  With the characteristics of SOEs in Vietnam, specifically EVN, this work selects COSO Report 2013 as the principal framework for researching with slight adjustments to fit Vietnam context 15 1 Demonstrates commitment to integrity and ethical values 2.Exercises oversight responsibility 1 Control Environment... control of the business, in order to minimize risk, reduce negative impact on the organization, ensure efficient Internal control 2.3 Overview of state-owned enterprises (SOEs) 2.3.1  Characteristics Vietnam SOE These are joint-stock or limited liability companies wholly or major owned by the state 2.3.2 Characteristics of business enterprises in public service sector of the United States  The US business... METHODOLOGY AND RESEARCH MODEL 3.1 Research methodology and data collection Dissertation used mixed methodology, including qualitative paradigm to explore new factors which fit to characteristics in Vietnam Next, and quantitative paradigm to confirm qualitative’s results 13 Data were collected from various sources related to the study: (1) Secondary data including text, documents in the power sector... the selfinterested behavior of managers, monitor delegator’s behavior, establish and maintain a mechanism to ensure that delegators act 11 toward interest of the owners, particularly in the case of Vietnam state-owned enterprises 2.2.3 Contingency Theory: Internal Control System can not be the same in all firms, and the control of each entity depends on factors such as: technology, culture and external... variables associated with the 29 variables of COSO Report are identified that affect the performance of the EVN, and formed the scale of factors in Internal Controls affects the operational efficiency of Vietnam Electricity To evaluate of the performance of EVN (dependent variables), This research measured the degree effects through previous studies (Grendon, Cooper & Townley (2001), Nath (2011, 67), John ... in Vietnam related to Internal Control  Ngo Tri Tue et al (2004) with the nation-level thesis named "Building Internal Control with the strengthening financial management at the Vietnam Post... lack of information transparency  Vietnam Electricity Group is one of the ten SOE leading groups of Vietnam Similar to some SOE groups, in recent years, Vietnam Electricity has many shortcomings... Internal Control which affects the performance of Vietnam state-owned enterprises are significant and meaningful in both theory and practice in Vietnam’s context CHAPTER THEORY 2.1 Overview of Internal