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VIETNAM ACADEMY OF SOCIAL SCIENCES THE INSTITUTE OF SOCIAL SCIENCES BUI THANH SON INTERNAL CONTROL SYSTEM IN VIETNAMESE COMMERCIAL BANKS Major: Economic Managemet ID : 34 04 10 SUMMARY OF DOCTORAL THESIS IN ECONOMICS Hanoi - 2020 The paper is completed at: VIETNAM ACADEMY OF SOCIAL SCIENCES Supervisor: Assoc.Prof Dr Tran Dang Kham Reviewer 1: Assoc.Prof Dr Bui Duc Tuan Reviewer 2: Assoc.Prof Dr Hoang Van Hai Reviewer 3: Assoc.Prof Dr Do Duc Minh The thesis is defensed before the Doctoral guidance committee, organised at Vietnam Academy of Social Science At …… , … … 2020 The thesis can be found at: National Library Vietnam Academy of Social Sciences Library INTRODUCTION Abstract Since the early stages of establishment and development, the commercial banking system has always played an important role and is one of the centers of the economy The banking business is a type of business with a lot of risks, fraud, and errors Ensuring the prudence in the business activities of commercial banks is not only managed by bank administrators but also the concern of state management agencies and the whole society The bankruptcy of a bank can cause a chain collapse in the financial - banking system, greatly affecting the entire economy The operation of Vietnamese commercial banks has been having big problems in corporate governance Negative impacts on commercial banks and the economy in recent times such as the appropriation of assets, removal of State assets, theft of assets, misuse of assets, collusion between banks' goods with businesses, between banks to profit, causing consequences to the whole economy Based on the findings and causes of internal control, commercial banks can improve internal control in the direction of development and use appropriate tools to promote the role of internal control It is best to base on the research results of the limitations of internal control A survey of the Basel Committee on major failures and the collapse of banks around the world have shown that one of the main causes is the failure of the management of banks in establishing and maintain strong, regular, and effective internal control To prevent losses and risks that may occur in the course of banking business, in addition to the inspection, examination, and supervision measures of the State management agencies, first of all, the bank itself Commercial goods must have effective measures, one of which is to establish an adequate and effective internal control system Stemming from the above reasons, the author chose the topic "Internal control in Vietnamese commercial banks" as the research topic for the thesis The purpose and research tasks of the thesis Research purpose: Proposing solutions to perfect the internal control system (internal control system) in commercial banks (commercial banks) in Vietnam Research tasks: - Based on the theory of internal control systems, internal control systems in general, and internal control systems in particular banks, the thesis systematized and added basic theoretical issues about internal control systems in commercial banks - The thesis researches analyze, synthesizes, and assesses the current state of the internal control system in commercial banks, showing the limitations of the internal control system and the causes - The thesis researches and proposes solutions to perfect internal control systems in commercial banks in Vietnam Subject and scope of the thesis research - The object of research: The research object of the thesis is the internal control system at commercial banks in Vietnam - Research scope * In terms of content: Internal control is known to be an effective method in management and Internal control system is an effective tool to achieve management objectives Therefore, when researching on the internal control system, the thesis topic limits the scope of the thesis's research is the internal control system in commercial banks in Vietnam To achieve the research purpose, the thesis focuses on (i) Clarifying control functions in management; determine the nature, role, objectives, principles, and components of the internal control system in commercial banks; banking sector characteristics and factors affecting internal control system; the relationship of the internal control system with risk management in the bank; basic contents of state management on internal control system in commercial banks and lessons from international experience (ii) Analyze and assess the status of state management of internal control systems and components of internal control systems in commercial banks between 2013 and 2018; Evaluate the results, limitations, and causes (iii) Identify comprehensive views, directions, requirements, and solutions to improve internal control systems in commercial banks in Vietnam * Space: Focusing on the internal control system of Vietnamese commercial banks * Time: Research the current situation of the internal control system in commercial banks in the period of 2013 – 2018 The research method of the thesis: - Method of generalizing, synthesizing, and analyzing: Used to generalize, analyze, and synthesize basic principles of internal control system through works, documents, works of some authors With the operation of commercial banks to see the factors and characteristics of the banking industry to design and operate internal control systems in commercial banks The thesis studies the experience of some countries in the world on the operation of internal control systems in banks, from which to draw experience that can be applied to Vietnam - Methods of investigation, observation, interview: The author designed a questionnaire to investigate combined with in-depth interviews at commercial banks The author combines observations of state management agencies, operations of internal control units in commercial banks, the purpose is to clarify the state management situation on internal control systems and its components Internal control equipment in Vietnamese commercial banks Respondents to the questionnaire were bank officials working at the sections of the professional departments, the Internal Audit Department, and the Supervisory Board of commercial banks Respondents are officials who are involved in state management in the banking sector; banking experts; Board of Directors (Board of Directors) at some bank branches, leaders, and employees of Supervisory Board (Supervisory Board) of some commercial banks - Data processing method: From the results of surveys, observations, and indepth interviews, the author has synthesized and used statistical software to analyze and assess the current state of the internal control system at commercial banks in Vietnam - Data sources: + Secondary data source: To systematize the theoretical basis of internal control systems at commercial banks in Vietnam, the author has compiled the source of documents and studies that have been done domestically and internationally Learn the summarized reports, audited financial statements of Vietnamese commercial banks in the period of 2013-2018 from the website of the State Bank and of commercial banks, from which statistics, summarizing the audit opinions, read audited reports and audited financial statements compared to current regulations to get information about the operation process of commercial banks Studying the summarized reports of the banking industry, documents of the State Bank's Inspection and Supervision Agency to synthesize and compare with the current regulations to find shortcomings in the sector's document-making work banks as well as limitations in the state management of commercial banks + Primary source: To learn more about internal control systems at commercial banks, the author surveyed by questionnaire (appendix3) in combination with interviews with 17 Vietnamese commercial banks listed on the floor Securities as of December 31, 2018 The questionnaire is designed into parts: Part I - General information about the object to be surveyed Part II - Questionnaire on the internal control system * Survey questionnaire is built with 97 questions In which: Control environment (51 questions); Risk assessment (11 questions); Control (8 questions); Information and communication (19 questions); Supervision (8 questions) The "Totally inactive" response indicates that the control element was not implemented The author uses a scale from to 5, in which: (level 1) with the meaning "Completely invalid": the content asked does not have any signs that they appear/exist/perform; (level 2) with the meaning of "Ineffective": the control element questioned appears but is not sufficient or discontinuous; (level 3): with the meaning of "Possible effect": the questions asked about the occurrence of activities/procedures / related factors, there are signs of adequate and continuous implementation but not yet persuade or need additional considerations (in the opinion of respondents); (level 4) with the meaning of "Fairly effective": the contents of the questionnaire appeared, performed sufficiently, continuously and achieved relatively good results and with the meaning "Totally valid": activities/indicators/content are appropriately asked, implemented sufficiently, continuously and there is clear evidence of good results Respondents from levels to indicate that the control was implemented or applied in a bank * Sample size and sampling method: The random sampling method is used to select workers to perform data collection To calculate the sample size, the research project used the following formula: n = Z2p (1-p) e2 Due to the properties p + q = 1, so p.q will max when p = q = 1, so p.q = 0.25 We calculate the sample size with 95% confidence and the permissible error is e = 8% At that time the sample we need to choose will have the largest sample size: n = Z2p (1-p) e2 = 1,962.0.5 (1-0.5) 0.082 = 150 With: n: sample size Z: the corresponding value of the statistical domain (the threshold value of the normal distribution) With significance level α = 5%, Z = 1.96 P = 0.5 is the ratio at the maximum So the sample size to achieve is 150 observations According to Nguyen Dinh Tho and Nguyen Thi Mai Trang, the sample size used for factor analysis must be at least to times the number of observed variables to make the survey results meaningful However, under limited survey conditions and several other factors, the author investigated 400 samples During the implementation of the survey, the number of votes collected was 368 and the number of valid votes was 354 votes, so the author used data from these 354 questionnaires to conduct analysis New contributions of the science of the thesis + The dissertation developed the theoretical framework of internal control systems based on COSO Framework on internal control systems in commercial banks, researching internal control systems in commercial banks from the perspective of state management and corporate governance with the characteristics of the banking industry + The thesis analyzes key risks in banking business activities, factors affecting the construction and operation of internal control systems, basic contents of state management on internal control systems in commercial banks , thereby supplementing the theoretical basis for completing the internal control system based on risks in Vietnamese commercial banks following international practices Theoretical and practical meanings of the thesis - Theoretically: + The thesis generalizes general theory on control, internal control, and internal control system in commercial banks Analyzing the role, goals, principles, and components of internal control systems in commercial banks + The thesis analyzes the operational characteristics of the banking industry, factors affecting the design of internal control systems at commercial banks under state management + The dissertation researches the experience on the application of the internal control systems of banks in some countries around the world, thereby drawing some lessons learned in the design and operation of the internal control systems of commercial banks in Vietnam Male - In practical terms: + From researching the operational characteristics of the banking industry that affect the design and operation of the internal control system, as well as the factors affecting the internal control system, it is the basis for the management of commercial banks to adjust , supplementing management documents to improve the internal control system + From assessing the status of the state management of internal control systems in commercial banks, surveying the five components of the system to clarify the current situation of internal control systems at commercial banks in Vietnam is reference information for The macro manager gave management policies for the operation of the banking system and internal control activities in commercial banks + The proposed solutions to improve the internal control system at commercial banks based on risk is the reference information to help the management of commercial banks and management agencies to complete the management and operation of the system Internal Audit aims to predict and control the key risks affecting the achievement of the goals of commercial banks in line with international practices Structure of the thesis In addition to the introduction, conclusion, list of references, the thesis has chapters, as follows: Chapter 1: Overview of research related to the topic Chapter 2: Basic issues of internal control and internal control system of commercial banks Chapter 3: Actual situation of the internal control system in Vietnamese commercial banks Chapter 4: Complete solutions to internal control systems in Vietnamese commercial banks Chapter OVERVIEW OF RESEARCH RELATED TO THE TOPIC 1.1 Foreign research 1.1.1 Research on internal control Internal control is an issue that always attracts attention in both practice and theory In the early stage, the internal control system originated from the interest of independent auditors whose initial form was money control By 1905, in Robert Montgomery's "Auditing - Theory and Practice" by Robert Montgomery began the term "Internal control" Thus, in the formation stage, the concept of internal control has been constantly expanded from the procedures of asset protection and accounting records Before the publication of COSO (1992), Internal Audit still stopped as a means of serving auditors in financial statements audits By 1992, companies in the United States were growing rapidly, accompanied by an increase in fraud, causing heavy economic losses The COSO Report provides a comprehensive view of internal control in an organization, an enterprise under different perspectives such as internal control according to the view of management, components of internal control, reporting to the outside and evaluation of internal control The COSO 1992 report was further completed and published with various changes in content, form as well as consideration of impacts on internal control in the new context in 2004, 2009, 2013, and 2015 Year 2004, It can be said that the COSO Report (2013) has the most significant change is the codification of 17 principles to support the five components The report on the 2015 Control Framework published by COSO also shows some new points in the view of internal control, whereby internal control is still established based on the principles and components stated in the COSO Report 2013 and 1992 but put more emphasis on risk management and corporate governance under changing operating environments 1.1.2 Research on internal control systems associated with risk management in several specific areas Research by the authors Lakis, Vaclovas, Giriunas, Lukas (2012) discovered the concepts of internal control systems, in which the basic values needed for internal control systems include honesty, trust, and respect respect, openness, skills, economy, initiative Research by many authors has also addressed the issue of improving internal control by placing it in the broader context of corporate risk management Laura F Spira and Michael Page (2002) showing the close relationship between management risk management with internal control Authors Lois D Etherington and Irene M Gordon presented research on internal control systems in Canadian businesses in "Internal controls in Canadian corporations." Gamage and colleagues conducted the study "A proposed research." framework effectiveness of internal control system in state commercial banks in Srilanka " Research on internal control systems concerning risk management was also studied by Merchant, K.A (1985) and Anthony, R.N and Dearden, J Bedford (1989) Several other studies examine internal auditing, evaluate internal control systems, and find ways to improve the effectiveness of control in management These include Alvin A Arens and James Loebeke's research on "Audit - a method of linking", Robert R Moller on "Internal Internal Audit" Inheriting and developing Brink's perspective on Internal Audit and Internal Audit content, the authors focus on clarifying the relationship between Internal Audit and Internal Audit When conducting practical surveys at Iran banks, the author's group Salehi, Mahdi; Shiri, Mahmoud Mousavi; Ehsanpour, Fatemeh pointed out that Internal Control plays a very important and effective role for the organization Srisawangwong authors, Papapit; Ussahawanitchakit, Phaprukbaramee researched the relationship between the internal control system and the achievement of operational goals in fast food and convenience food businesses in Thailand A study by the author Qiang Cheng, Beng Wee Goh, Jae Bum Kim tested the link between KSNB validity and performance by using a large sample of companies reporting KSNB's opinion according to SOX 404 in the period 2004-201 In the same view, researchers like Tseng, C.Y; Chirwa, E.W; Greenley, O.E and Foxall, GR also pointed out that the financial activities of business units with strong internal control systems are better than those with weak internal control systems and then, those enterprises have low market value then other businesses In summary, most of the research in different fields but focused on considering the impact of the internal control system on risk management, accordingly, the internal control system plays a role in preventing fraud, controlling the team organization and corporate governance, or impact/relationship with Internal Audit In banks of different sizes and forms of ownership, the internal control system is operated from different angles and is associated with different actors but has a very close relationship with risk management 1.2 Domestic research 1.2.1 Research on the internal control system The theory of Internal Control is mentioned in the Audit curriculum of universities such as Financial Academy, National Economics University, University of Economics Ho Chi Minh City, etc Some reference books such as "Auditing" Mathematics "(Vuong Dinh Hue and Doan Xuan Tien, Finance Publishing House 1996) Several studies in a broader scope than an enterprise, namely an industry, a ministry or a corporation, have appeared in many doctoral theses: Doctoral thesis of Bui Thi Minh Hai (2010) on "Improving internal control systems in garment enterprises in Vietnam Doctoral thesis of Nguyen Thu Hoai (2011) on "Completing internal control systems in cement manufacturing enterprises of Vietnam Cement Corporation" Doctoral thesis of Nguyen Thi Lan Anh (2013), research on internal control systems at Vietnam Chemical Group Doctoral thesis of Nguyen Thanh Trang (2015) on "Completing the internal control system in oil and gas technical service enterprises in Vietnam" Scientific project "Evaluation of internal control system of commercial banks in Vietnam and some recommendations" by Pham Thanh Thuy and colleagues in 2016 1.2.2 Study the internal control system concerning risk management The doctoral dissertation of author Dinh Hoai Nam (2016), research on internal control systems in enterprises in Housing and Urban Development Corporation Dr Nguyen Thi Thu Ha's thesis (2016), research Research on internal control systems in non-life insurance enterprises in Vietnam Doctoral thesis of Nguyen Thanh Thuy (2017), research on perfecting the internal control system of Vietnam Electricity 1.3 Conclusion on research gaps Through the author's overall research, there have been many studies on internal control systems in different industries, fields, and units but there are still gaps for the topic to continue researching and exploiting can: Regarding the content: According to the author's overall research, from a theoretical research perspective, most of the topics approach to internal control systems under the perspective of corporate governance within a Sector, a Ministry, or a Corporation but has not mentioned the role of the State with the function of macro-management, performing the management/supervision of operations for enterprises in general and banks in particular Regarding the scope of research: According to the author's overall research, there are very few general studies on the theory and practice of internal control systems of commercial banks in the industry, especially approaching internal control systems with the important function of warning and preventing risks that may occur in business activities of the banking industry From the above reasons, the author thinks that space for the author to study the topic "Internal control in Vietnamese commercial banks" is completely appropriate and necessary The thesis focuses on studying the basic issues of internal control systems in commercial banks; assess the status of the internal control system in commercial banks in Vietnam from the perspective of state management and the components of the internal control system itself; propose solutions to perfect the internal control system in commercial banks in Vietnam Chapter BASIC ISSUES ON INTERNAL CONTROL AND INTERNAL CONTROL SYSTEM OF COMMERCIAL BANKS 2.1 Internal control 2.1.1 Control in management 2.1.1.1 The concept and role of control in governance Control is a function that managers must perform, even though the results of the work of all departments are achieved according to the set plan To ensure things are on track, managers must monitor and evaluate the results of their work Actual results must be compared with the goals established earlier for the manager to take the necessary actions to ensure the organization is on track From different perspectives on control and identifying the role of control in management, according to the author, a comprehensive understanding of control can be understood as follows: Control is an important function of management done regularly in all aspects of operations and all levels of management within the business The ultimate goal of control is to make the business reach its highest goal with the lowest cost and level of risk 2.1.1.2 Classification of control 2.2.2.4 Information system and information exchange The information and information exchange system creates a report, containing information necessary for the management and control of the unit The necessary information must be identified and collected and exchanged within the unit to help people perform their duties The information and information exchange system includes an overall system related to the processing, storage, and provision of information within the unit and contributes to the connection with other components in the internal control system 2.2.2.5 Monitoring Monitoring of controls is the process of assessing the performance of internal control systems in each period, to ensure that the internal control system is always operating effectively, promptly detecting the defects of the internal control system and taking measures remedy as soon as possible Monitoring includes regular and periodic monitoring, evaluation of internal control systems, and reporting of system limitations 2.2.3 Internal control system and risk management in commercial banks 2.2.3.1 Risks and risk management in the bank Risk is associated with any business in the process of operation Risks are things that happen unexpectedly and bring bad consequences There are many different ways of defining risks, the author approaches the State Bank's definition of risks "Risk is the possibility of losses (financial losses, non-financial losses) that reduce income and capital own capital has led to a reduction in capital adequacy ratio or restriction of foreign bank branch's ability to achieve business objectives " During its operation, the bank may encounter the following significant risks: Credit risk, operational risk, market risk, liquidity risk, interest rate risk on the bank book To minimize the losses and losses caused by risks to the bank and minimize the adverse effects of risks, managers at all levels in the bank must conduct risk management Figure 2.2: Risk management process of commercial banks 11 Source: Author complied 2.2.3.2 Internal control system and risk management in the bank Internal control systems and bank risk management have a two-way relationship, mutual interaction, and mutual support This is shown by the internal control system itself is built based on identifying and analyzing the risks that may occur in the operation of the bank, and the internal control system is set up and operated for purpose of preventing and minimizing possible risks, affecting the implementation of the bank's objectives 2.3 The influence of commercial bank characteristics on the internal control system 2.3.1 Commercial banks and the requirements set out for the internal control system Commercial banks are a special type of business with the most complex business operations in the economy In essence, a commercial bank is a form of financial intermediation standing between lenders and borrowers, the basic operation of the bank is to borrow to lend and the object of the bank's transactions are economic institutions and individuals Therefore, the bank's business activities have certain characteristics, thereby setting requirements for the design and operation of internal control systems based on scale, potential risks, broad customer relationships and diversity, the scope of activities and interdependence are very large and the most closely managed management agencies 2.3.2 Factors affecting internal control systems in commercial banks The internal control system is understood not as a factor but rather as a collection of elements of the same type that are closely related to achieve the set targets Therefore, to find out the factors affecting the design of internal control systems, the author is based on the concept of "mixing" in Mikes's research Figure 2.3 Factors affecting internal control system Source: Author complied 12 2.3.3 State management for the internal control system in commercial banks Within the scope of the study, the author limits the subject of state management to commercial banks as the SBV Therefore, when researching the state management of commercial banks on the internal control system, in the aspect of management of the State Bank for internal control of the internal banking system, including the following contents: 2.3.3.1 Building and maintaining the operation of internal control systems in commercial banks This is a mandatory requirement for commercial banks, whereby they must build an internal control system that helps the General Director (Director) to operate smoothly, safely, and lawfully all operations Ensuring compliance with the accounting and accounting regimes according to regulations and having an internal information system on finance, operations, compliance situation in the bank and economic situation, outside the market management, reliability, and timeliness to serve the management and effective operation 2.3.3.2 The internal control system in commercial banks must regularly selfcheck and evaluate To ensure the operation of the internal control system is effective and effective, individuals and departments at all levels of the bank must regularly, continuously inspect and self-inspect the implementation of internal regulations and processes related and must be responsible for the results of the performance of assigned operations 2.3.3.3 The operation of internal control systems in commercial banks must be independently assessed The independent evaluation of independent audits for the internal control system is implemented following the State Bank's regulations on an independent audit of commercial banks To ensure the objectivity of the review and completion, the internal control system of commercial banks must be independently evaluated by the provisions of Clause 3, Article 40 of the Law on Credit Institutions 2.3.3.4 Report the operation of the internal control system to the State management agency The State Bank manages the internal control system of commercial banks through the reports of commercial banks The report on the internal control system must update the existing, limited, new risks arising from the internal control system in all commercial banks (including parts at the head office, branches and other dependent units of According to the State Bank's regulations on the commercial bank's operation network, the report on the internal control system includes: Annual report on the results of self-examination and evaluation of internal control; about risk management, about the internal assessment of sufficient capital, and internal audit 13 2.4 International experience on the operation of internal control systems in commercial banks and lessons learned for Vietnam In the UK The model of the internal control system is built based on practice, very effective in risk management at banks in the UK such as Lloyds, Bank of England is a three-round defense model The purpose of building this model is to better manage risk and thereby increase shareholder's assets In Thailand The Thai banking system has been in operation for hundreds of years, however, it was shaken during the Asian financial crisis in 1997-1998 Many commercial banks and financial companies went bankrupt or were forced to merge In this situation, Thai banks must review the entire policy, manner, process of banking activities, especially internal control activities in banks to minimize risks Conclusion for Chapter In chapter 2, the author systematized and concretized the basic theoretical issues about the internal control system The components of the system are also analyzed, synthesized, and generalized to clarify the nature of the internal control system as an effective tool for managers to realize the goals of the internal control system specific bank: - Systematize basic theoretical issues about internal control systems in enterprises in general and banks in particular Analysis of different views on the internal control system, the role, position, objectives, principles, and five components of the internal control system in commercial banks - Analyzing factors affecting the internal control system in commercial banks The thesis clarifies the influence of operational characteristics of commercial banks affecting the design and operation of internal control systems while analyzing internal control systems with risk management in commercial banks - Analysis of state management of the internal control system in commercial banks, limited state management entity is the State Bank and state management of internal control system in commercial banks, including main contents - The thesis researches the experience of operating internal control systems of banks in some countries around the world such as the United Kingdom, Thailand, Singapore, from which draw lessons for the construction and operation of internal control systems in banks Vietnam commercial banks Chapter CURRENT SITUATION OF INTERNAL CONTROL SYSTEM IN VIETNAMESE COMMERCIAL BANKS 3.1 Operation of Vietnamese commercial banks and internal control regulations in commercial banks 3.1.1 Overview of Vietnamese commercial banks Vietnam's commercial banking system consists of three main banking groups, namely state-owned commercial banks, joint-stock commercial banks, and 14 foreign commercial banks Also, there are joint venture banks and representative offices of foreign credit institutions Vietnam's commercial banking system has experienced rapid growth in both quantity and scale From the beginning of 2013, the Vietnamese commercial banking system has begun the restructuring process under Project 254 / QD-TTG of Prime Minister Table 3.1: Number of Vietnamese commercial banks in the period of 2013-2018 Year State-owned Comercial banks 2013 2014 2015 2016 2017 2018 5 4 Private Policy banks Foreign Foreign banks Joint-stock Joint-venture commercial banks banks 33 33 28 31 2 31 2 31 2 Total 49 49 45 47 48 48 Source: Author complied from website https: //www.sbv.gov.vn 3.1.2 Regulations on internal control systems in Vietnamese commercial banks 3.1.2.1 The internal control system was organized and operated by Decision No 03 / NHNN and the 1997 Law on Credit Institutions 3.1.2.2 The internal control system was organized following the Law on Credit Institutions 2004, Decision 36/2006 / QD-NHNN, and Decision 37/2006 / QD-NHNN dated August 1, 2006, of the State Bank of Vietnam 3.1.2.3 The internal control system was organized following the Law on Credit Institutions 2010 and Circular 44/2011 / TT-NHNN dated December 29, 2011, of the State Bank of Vietnam 3.1.2.4 The Internal Control system was organized following the Law on Credit Institutions amended and effective from January 15, 2018, and Circular No 13/2018 / TT-NHNN dated May 18, 2018 from January 2019 3.1.3 Material risks in commercial bank operations Credit risk In Vietnamese commercial banks, the credit risk has been quite complicated in recent years, reflected in the increasing bad debts which are difficult to control in the years before 2013 Since 2013 with the establishment of the Management Company asset (VAMC), the bad debt of commercial banks is also gradually controlled more effectively Non-performing loans of commercial banks in the period of 2013-2018 tended to decrease gradually from 3.6% in 2013 to 2.4 in 2018 Operational risks In recent years, operational risks have had quite complicated changes due to ineffective internal control activities, in the context of the lack of synchronism and incomplete legal corridor of banking operations Due to the increasingly diverse 15 and complex conditions associated with the development of information technology, the potential risks are higher for domestic commercial banks Market risks Interest rate risk: Because market interest rates have been quite complicated in previous years, it not only affects commercial banks' capital mobilization and lending activities but also causes disadvantages to the financial situation loan customers Exchange rate risk: In previous years, commercial banks all mobilized and lent in foreign currencies, so the exchange rate risk was always potential Securities price risk: The price of securities - a tool held by commercial banks always has erratic happenings that cause negative impacts on commercial banks holding large securities, and also cause risks the risk with securities lending banks Payment risk Liquidity in the market of commercial banks was relatively stable because this was the period when the banking sector implemented restructuring so the liquidity was always under control Centralized risk This is the risk because commercial banks have business activities focusing on one customer, partner, product, transaction, industry, economic field, currency at a significant impact level to the income, risk status according to internal regulations of commercial banks Strategic risks In the context of global and regional financial markets, there are always unpredictable developments, requiring commercial banks to make correct forecasts and have appropriate response scenarios for each situation and specific circumstances 3.2 The situation of internal control systems in Vietnamese commercial banks 3.2.1 Actual state management of internal control system in commercial banks As a state management agency for the operation of internal control systems in commercial banks, the State Bank Inspection and Supervision Agency is responsible for supervising the operation of internal control systems in commercial banks and is the recipient of a report on the internal control system of commercial banks following the provisions of the Circular 13 dated May 18, 2018, of the SBV on the Regulation on the internal control system of commercial banks and foreign bank branches This shows that the state management for the operation of internal control systems in commercial banks has gradually been completed In particular, the reports of commercial banks reflected the current situation of the internal control system of the bank, the reporting criteria have met the requirements of state management agencies as prescribed in Circular 13 3.2.2 The situation of internal control systems in Vietnamese commercial banks 3.2.2.1 The real situation of controlled environment 16 The control environment includes internal and external factors that affect the design and operation of internal control systems Results of the survey of the controlled environment are shown in the following table: Table 3.3: Results of a controlled environment survey Measurement Indicator Minimum Honestly and Ethical Behaviour for Board of 1.00 Management and Employees Guarantee Capacity for Board of Management and 1.00 Employees Participation of BoM 1.00 Management’s philosophy and operating style 1.00 Management Organization structure 1.00 Functional authority and Responsibility 1.00 Human resource Policy 1.00 Maximum Mean 5.00 3.62 5.00 3.95 5.00 3.43 5.00 3.06 5.00 5.00 5.00 4.18 3.75 3.85 3.2.2.2 The situation on the risk assessment process Identifying and assessing risks will form the basis for the bank's leadership to determine the risks that need to be managed and the level of risk tolerance to ensure that the bank controls its significant risks and The risk does not affect the operational objectives of the bank Table 3.4: Results of the survey on the risk assessment process Measurement indicator Minimum Clear goals and focus on resources to achieve 2.00 goals Update on matter related to risk 2.00 Risk evaluation and Risk assessment based on 2.00 the changing of business environment Effective Decesion Making 2.00 Maximum Mean 5.00 3.52 5.00 5.00 3.55 5.00 3.22 3.19 3.2.2.3 Actual status of control activities Managers' directives are carried out by procedures and policies or in other words through control activities Therefore, the principle of "Independence in operation" needs to be strictly followed to ensure the effectiveness of internal control and the supervisory role of the Board of Directors is promoted Table 3.5: Results of the control survey Measurement indicator Minimum Maximum Mean Senior Manager Reviews 2.00 5.00 3.22 Operation Management 2.00 5.00 3.14 Effective employees responsible dividing 2.00 5.00 4.21 Internal Information processing 2.00 5.00 3.11 Material controlphaant 2.00 5.00 3.55 Analysis and review 2.00 5.00 3.52 3.2.2.4 The situation on information systems and information exchange 17 The information system (including the information system related to the preparation and presentation of the financial statements) includes recording procedures for recording, processing, and reporting on arising transactions Based on the recorded and reported operations, managers can grasp the reality of arising and make timely regulatory decisions Table 3.6: Results of information system survey and information exchange Measurement Indicator Minimum Maximum Mean The quality of Information Management System (include accouting information 3.00 5.00 3.54 system) is reflected of relevant, accurate, timely Information should be updated effective, 2.00 4.00 3.18 fast, timely to each employee 3.2.2.5 Current situation of supervision Table 3.7: Results of monitoring surveys Measurement Indicator Minimum Maximum Mean Monitor regularly 2.00 5.00 3.52 Maintaining period monitoring 1.00 5.00 3.45 Review and access internal control system 2.00 5.00 3.40 policy Monitoring is also to ensure that the controls continue to function effectively over time In some commercial banks, the Supervisory Board mainly supervised through internal audit systems but did not cover the entire internal control system of the bank from the specialized units and units regarding the existence of the internal control system, errors, and issues high risk 3.3 Assess the status of the internal control system in Vietnamese commercial banks 3.3.1 Advantages of the internal control system in Vietnamese commercial banks 3.3.1.1 Environmentally controlled Commercial banks have developed processes and procedures to establish an effective control environment at banks The Board of Directors always upholds the ethical value and sets an example for all officers Most commercial banks have issued a full set of operational regulations, the departments are designed in the direction of separation of functions to ensure the effective, independent operation and reduce conflicts of interest in the business 3.3.1.2 About the risk assessment process Internal control systems in banks have identified and assessed risks including the detection and evaluation of all internal and external factors that negatively affect the achievement of the bank's goals 3.3.1.3 In terms of control activities 18 Most commercial banks have issued documents related to the accounting process, regulations on accounting regulations and guidelines at banks, financial management regulations, data checking, and reconciliation process at the bank meet the requirements: ensure the accounting records are accurate, check, and compare the data daily, monthly, and year 3.3.1.4 About information systems and information exchange The Bank has established an information channel for an exchange through policies, regulations, processes, and operations Especially in the regulation of the bank's operations, very specific provisions on information channels, and how to exchange information of the departments in the bank 3.3.1.5 About supervision The Bank has designed and built a regular and periodic monitoring mechanism through the review of reports of supervisors to detect possible risks during its operation, from which feasible proposals 3.3.2 Some limitations of the internal control system in Vietnamese commercial banks 3.3.2.1 Environmentally controlled Awareness of internal control of officials, including senior officials at some banks, has certain limitations Since then, control activities have not been effective in early warning of possible risks in banking operations The balance of benefits and costs resulting in some control activities may be limited Other controls and supervision institutions of some commercial banks are disabled by senior management in banks The number and quality of specialized staff in control work is limited 3.3.2.2 About the risk assessment process The internal control system of commercial banks has not been completely active in identifying to prevent risks but often focuses on detecting and minimizing risks The function of risk management, identification, evaluation, and response to risks in the banking business activities of the internal control system is still limited 3.3.2.3 About control activities The design principles of controlling activities of some banks have not been fully complied with In particular, the principle of decentralization in a few banks is not clear 3.3.2.4 About information systems and information exchange Some commercial banks have not yet built an intranet system to communicate information but only via email The organization of the relationship between the accounting information system and other information systems is still inconsistent and inconsistent 3.3.2.5 About supervision Some senior managers in the bank have not paid much attention to regular and periodic supervision Regular supervisory activities have only been conducted through the receipt of feedback between employees and managers 19 3.3.3 The cause of the limitations on the internal control system in Vietnamese commercial banks Firstly, banking is a special business in the economy with many characteristics compared to other industries Secondly, due to external factors such as an unfavorable macroeconomic situation or internal factors such as the rapid development of banks in the past years, while the internal control system is limited , not keeping up with the development of banking activities Thirdly, the evaluation of the internal control system from the independent audit company still has certain limitations Fourthly, the shortage of experienced personnel in the field of auditing Fifthly, the coordination between State management agencies (Inspection and Supervision Agency of the State Bank, Ministry of Finance ) CONCLUSION OF CHAPTER In chapter 3, the author assessed the current state of the internal control systems from the perspective of state management and through five components of internal control systems of commercial banks to analyze the advantages, limitations, and causes of the limitations of internal control systems The internal control system in commercial banks, specific contents: - Overview of the activities of Vietnamese commercial banks in the period of 2013-2018 and legal documents related to the internal control system in commercial banks in Vietnam - Presentation of significant risks that affect the operations of commercial banks - Summing up the reports of the commercial banks on the internal control system and the report of the banking supervision and inspection agency to make an overview of the state management of the internal control system in the commercial banks in Vietnam At the same time, conducting surveys and surveys on internal control systems in Vietnamese commercial banks through five components of the control environment, risk assessment, control activities, information and communication, supervision activities - From analyzing the current situation of internal control systems in commercial banks in Vietnam, the author has generalized the advantages and limitations of the internal control system at these units and pointed out the causes of those limitations Chapter SOLUTIONS TO PERFECT THE INTERNAL CONTROL SYSTEM IN VIETNAMESE COMMERCIAL BANKS 4.1 Opportunities and challenges for Vietnamese commercial banks in the context of international integration 4.1.1 Chances Firstly, opportunities to expand and develop markets abroad for Vietnamese banks Secondly, the market participation of foreign commercial banks not only increases the level of competition but also increases the health and safety of the whole commercial banking system Thirdly, Vietnamese banks are allowed to 20 participate in a level playing field for equality and professionalism Fourthly, opportunities to receive advice and training on new knowledge from foreign banks and financial institutions 4.1.2 Challenges Firstly, the fintech trend is indispensable, the development speed is very fast, requiring banks to quickly participate to meet the needs of customers while the level of technology, capital, personnel are still very limited Second, the competition of the banking system is increasingly fierce Thirdly, international economic integration increases capital transactions and risks of the banking system, while the management mechanism is incomplete, especially the inspection and supervision mechanism, lacking close coordination , synchronization among relevant ministries will be a big challenge for Vietnamese commercial banks Fourthly, the pressure to improve quality and move high-quality banking and financial human resources to foreign and regional organizations Fifth, the ability of the SBV to control monetary is still limited in the context of opening the financial and banking market is also very easy to cause systemic risks for Vietnamese commercial banks 4.2 Orientation to improve the internal control system in Vietnamese commercial banks 4.2.1 Perspective perfecting the internal control system The development strategy of Vietnam's banking industry to 2025 with an orientation to 2030 was approved in Decision No 986 / QD -TTG of August 8, 2018, which clearly states the Government's view of the monetary and banking system and operation of credit institutions, which are the lifeblood of the economy, continue to play an important role in the overall financial system of Vietnam and at the same time "Strengthen institutional capacity, effectiveness, inspection, and supervision effectiveness bank of the State Bank " 4.2.2 Principles and requirements for perfecting the internal control system 4.2.2.1 Principles of completion The completion of internal control systems in commercial banks must ensure the principle: ensuring the achievement of objectives; tight, not complicated, easy to manipulate; practical and effective; consistent with the level of the bank administrator 4.2.2.2 Request for completion Completing the internal control system in commercial banks must meet the following requirements: Internal control system must help ensure operational efficiency, compliance, and information goals; ensure flexibility to suit each bank's specifics; suitable with the operating characteristics of each bank due to the difference in size and form of ownership; appropriate with the costs and benefits that the internal control system can bring 21 4.3 Complete solution of the internal control system in Vietnamese commercial banks 4.3.1 Perfecting control environment Completing the control environment for administrators to be fully aware of the importance of the internal control system from which they always pay due attention to the design and operation of regulations, policies, steps, and control procedures at every stage, every level, every part of the bank In particular, the Board of Directors needs to be aware of the control environment that has a pervasive effect on all activities in the organization, impacts on behaviors and consciousness of its members, is influenced by cultural factors and history The control environment will be the foundation for the construction of the remaining components of internal control The improvement of the basic elements of the control environment in commercial banks focuses on such issues as strengthening the communication on the enforcement of integrity and ethical values; Develop commitment policies on capacity; Building credibility, management philosophy, and executive style of the Board of Directors; Improving personnel policies 4.3.2 Complete the risk assessment process Completing the risk assessment process must first come from a clear awareness of risks arising from inside or outside the entity Therefore, the identification, analysis, and assessment of risks that may occur in the process of achieving the goals need to be carried out scientifically, realistically, and need to develop a risk management unit risks and maintain the operation of this department with a sufficient information channel to analyze, assess, and identify risks on time so that it is not only detected as present but also a forecast of possible risks in the business activities of the bank 4.3.3 Completing control activities and procedures Control activity is a set of policies and procedures that ensure that managerial decisions are made, which are necessary procedures to deal with the risk that threatens to achieve the goal of the organization Completing control activities and procedures to minimize risks related to the achievement of objectives in the direction of Having clear regulations on the work of positions in the organization, especially the review of levels manage; Apply the internal control principles in accounting; Completing control procedures 4.3.4 Improve the quality of information and communication systems Modernizing IT systems, developing internal management systems, upgrading the core banking system by the scale, operational complexity, and the requirements of banking management and administration Improve the effectiveness of communication by establishing channels of information exchange between departments in the bank; between departments and senior managers; between commercial banks and external entities such as partners, independent auditors, regulatory agencies, and customers 4.3.5 Completing supervision activities 22 The Bank must perform regular monitoring of the internal control system in the unit Monitoring is the process of assessing the quality of internal control over time including regular and segregated (periodic) monitoring To be able to establish the supervisory function of internal control, from which it is possible to correct the internal shortcomings of the internal control network, it is necessary to follow the following directions: Strengthening the supervision of the Board of Directors to ensure transparency; Strengthen monitoring based on risk orientation; Set up a system of periodic (quarterly) reports from all departments and units to report to the Supervisory Board through IA Establishment of employee control activities during work performance; Enhancing the oversight role of the Internal Audit through strengthening the empowerment of inspection and punishment of branches 4.3.6 Improve the quality of human resources for internal control systems Capacity and experience have a great influence on the judgment of internal control, so the board of directors of the banks must have a plan to improve the training of auditors To improve the experience of auditors, commercial banks must regularly update and update auditors and specialized officers in their units 4.4 Proposing the implementation of a solution to perfect the internal control system in Vietnamese commercial banks 4.4.1 For the State Perfecting and stabilizing the legal environment Stabilizing macroeconomic environment and monetary policy Complete the infrastructure of economic information Complete the administrative procedures in a simple and convenient manner 4.4.2 Completing the banking supervision process and procedures of the SBV 4.4.1.1 Complete content collection, aggregation, and processing of information, data and documents Complete for the collection of information and data documents and the general process of processing and storing data information documents 4.4.1.2 Improve the content, procedures, and procedures for banking supervision Completing by the process: Collecting, synthesizing and processing information, data and documents of the banking supervisory subjects according to the supervision requirements; Examine and monitor the compliance with regulations on the safety of banking activities and other relevant laws; Regularly analyzing and evaluating financial and operational situation; Detecting and alerting negative impact factors, trends, risks of unsafety, risks and risks leading to violations of the laws on currency and banking for commercial banks; Proposing and proposing measures to prevent, prevent and handle risks and violations of the banking supervision subject following provisions of applicable laws 23 4.4.2 Creating a communication channel between the SBV and relevant agencies The State needs to create information channels between functional agencies such as Tax, Customs, Court, Police with the SBV to be able to capture information about individuals and organizations On that basis, the SBV has warnings to commercial banks in case of necessity To this, it is necessary to have a modern information system, close links between agencies and departments, the assurance of security and confidentiality of the information system together with strict regulations and regulations information security, subjects, and the authorization of individuals and organizations permitted to exploit information Conclusion Internal control is a method of effective management Internal control is studied in many different aspects, associated with the subject of different controls In Vietnam, research on internal control and system of internal control is still limited and not systematic, especially without an evaluation from the state management agencies The thesis conducts an assessment of the status of internal control systems in commercial banks from COSO's point of view, under the approach from the perspective of managers This model was implemented by 17 authors in Vietnamese commercial banks through observation and interviews with experts and officials in charge of state management of banks At the same time, the author conducted surveys, surveys, and interviews with bank branch managers, auditors, controllers in some commercial banks to assess the current status of components of the internal control system in Vietnamese commercial banks between 2013 and 2018 Findings from the survey and interview results show that the management still has some limitations; Each factor in internal control of commercial banks currently has certain limitations, affecting the effectiveness and efficiency of the internal control system of commercial banks From these results, the author proposes overall solutions from a management perspective to improve the internal control system based on the risk according to the constituent factors, which are environmental control and evaluation factors risks, operations, and procedures for control, information, and communication, supervision Besides, the author also proposed the necessary conditions to implement such solutions from the macroenvironment affecting the system of Vietnamese commercial banks 24 LIST OF SCIENTIFIC WORKS RELATED TO THE THESIS Bui Thanh Son (2019), "Factors affecting the existence of internal control systems in commercial banks", Journal of Human Resources for Social Sciences, No 09 (76) Bui Thanh Son (2019), "Risks in business activities and some recommendations to improve the efficiency of risk reduction, internal control at Vietnamese commercial banks", Human Resources Magazine social sciences, number 07 (74) Bui Thanh Son (2018), "Bank credit in the implementation of the national target program on building new rural areas in Vietnam", Journal of Human Resources Bank No 10 Nguyen Trong Tai, Bui Thanh Son (2018), "Impact of US-China trade conflict on global trade and finance - some policy recommendations,", Journal of Human Resources distinct Bui Thanh Son (2016), "Monetary policy and transmission channels", Journal of Science, Hanoi Open University Institute, No 16 ... Bui Thanh Son (2018), "Bank credit in the implementation of the national target program on building new rural areas in Vietnam", Journal of Human Resources Bank No 10 Nguyen Trong Tai, Bui Thanh... Vietnam Doctoral thesis of Nguyen Thu Hoai (2011) on "Completing internal control systems in cement manufacturing enterprises of Vietnam Cement Corporation" Doctoral thesis of Nguyen Thi Lan Anh. .. control systems at Vietnam Chemical Group Doctoral thesis of Nguyen Thanh Trang (2015) on "Completing the internal control system in oil and gas technical service enterprises in Vietnam" Scientific