Impact of internal audit on firm performance in vietnam

LETTER OF DECLARATION I hereby declare that the Graduation Project “Impact of Internal Audit on Firm Performance in Vietnam” is the results of my own research and has never been published in any work of others During the implementation process of this project, I have seriously taken research ethics; all findings of this projects are results of my own research and surveys; all references in this project are clearly cited according to regulations I take full responsibility for the fidelity of the number and data and other contents of my graduation project Hanoi, 31/10/2019 Student Hoang Nhat Ha ACKNOWLEDGEMENT This Barchelor thesis contained huge amount of work, research and dedication Still, implementation would not have been possible if I did not have a support of many individuals and organizations Therefore, I would like to extend my sincere gratitude to all of them Foremost, I would like to express my sincere gratitude to my instructor – MBA Le Quang Dung for the continuous support of my research, for his patience, motivation, enthusiasm, and immense knowledge His guidance has helped me in all the time of research and writing of this thesis Without his superior knowledge and experience, the Barchelor thesis would not like in this quality of outcomes, and thus his support has been essential My sincere thanks also goes to lectures at International School, Vietnam National University (IS-VNU), who not only helps me get a clear understanding on fundamental knowledge about finance, accounting and auditing but also nurture essential soft skills such as analyzing and the decision-making capability Nevertheless, I express my gratitude toward our families and friends for their kind cooperation and encouragement which help me in completion of this Barchelor thesis Because my knowledge is limited, in the process of finishing this bachelor thesis, I inevitably make mistakes, so I respectfully receive comments from my teachers and experts Contents TABLE OF NOTATIONS AND ABBREVIATIONS LIST OF TABLE LIST OF CHARTS AND FIGURE ABSTRACT CHAPTER 1: INTRODUCTION 1.1 The necessity of thesis 1.2 Research objectives 1.3 Research questions 1.4 Methodology and scope of research 1.5 Structure of research CHAPTER 2: THEORETICAL FRAMEWOEK 2.1 Overview of internal audit 2.1.1 Definition of audit 2.1.2 Concept of internal audit 10 2.1.3 Functions and responsibilities of Internal Audit 12 2.1.4 Scope of implementation of internal audit 13 2.1.5 Legal documents on internal audit in Vietnam 13 2.1.6 The necessity of internal audit in each enterprise 14 2.2 Firm performance 16 2.3 The association between internal audit and firm performance 17 2.4 The other factors the author uses in the thesis affect the firm performance 19 2.4.1 Stock ownership of board members 19 2.4.2 CEO – Chair separation 19 2.4.3 Firm’s size .20 2.4.4 Leverage 20 CHAPTER 3: RESEARCH METHODOLOGY 22 3.1 Scope of the study 22 3.2 Design of research and methods 22 3.2.1 Methods of analyzing and synthesizing information 22 3.2.2 Survey method 23 3.2.3 Data processing method 23 3.3 Data and data collection 24 CHAPTER IV: ANALYSIS RESULTS 26 4.1 Descriptive Statistics 26 4.2 Correlation Test 27 4.3 Regression Analysis 27 CHAPTER 5: CONCLUSION AND DISCUSSION 30 5.1 Conclusion 30 5.2 Discussion about result of internal audit factor 30 5.3 Limitations of the study 32 APPENDIX 33 Appendix Questionnaire 33 1.1 English 33 1.2 Vietnamese 35 REFERENCES 38 A International sources 38 B Vietnamese sources 42 TABLE OF NOTATIONS AND ABBREVIATIONS Abbreviation Meaning HOSE Ho Chi Minh Stock Exchange HNX Hanoi Stock Exchange LIST OF TABLE Table The research factors code 25 Table Data descriptive statistics results for all variables (2016-2018) 26 Table The correlation between the independent variables 27 Table Model Summary 27 Table ANOVA Testing 28 Table Coefficients 28 LIST OF CHARTS AND FIGURE Figure Conceptual framework of the study 21 ABSTRACT Purpose: The purpose of this paper is to investigate whether internal audit factors along with some other elements (firm’s size, leverage, CEO –Chair separation, stock ownership of board members) affect firm performance in Vietnam as well as how these factors impact firm performance Design/methodology/approach: This research collected the data by quantitative research and tested the model by Statistical Package for the Social Sciences (SPSS) Findings: Survey results with 150 samples during 2016 -2018 period from enterprises listed on Vietnam’s stock market, HOSE and HNX in particular The author found that the firm’s size as measured by the log of total assets (LTA) and the leverage as measured by debt ratio (DR) have a positive and negative impact on the firm performance respectively The remaining factors, CEO – Chair separation (DUAL), Stock ownership of board members (BOS) and especially internal audit, have no significant impact on firm performance Practical implications: The research may assist businesses and organizations, especially enterprises in Vietnam in order to determine whether the internal audit department should be established Originality/value: The thesis met the university criteria in examining whether the internal audit has an influence on firm performance in Vietnam Keywords: Internal audit, Firm performance, Firm’s size, CEO – Chair separation, Stock ownership of board members, Leverage CHAPTER 1: INTRODUCTION 1.1 The necessity of thesis Internal audit has been mentioned very early in the world with existence and development history over 60 years and recognized in over 165 countries (according to VACPA) as a professional career, an inevitable trend, an important element of management in the state economic sector, private economic sector and non-profit organizations as well In 2001, the miracle of the financial figures under the audit giant’s hand – Arthur Anderson brought Enron Group to the peak to become the leading energy company in the 90s but also quickly went bankrupt (Boon & McKinnon, 2007) Then, in 2002, WorldCom Group – the second largest long-distance telecommunications company in the United States – filed for bankruptcy because of accounting frauds, concealing weak financial conditions and forging growth in order to raise stock prices From the collapse of big corporations (Enron, WorldCom …) to the global financial crisis in 2008 – 2009, there is a connection between the existence and operation of a business management mechanism in order to manage and control risk (COSO, 2004) Companies are under high pressure to identify all the risks that they are facing and must explain how to handle them at an acceptable level Along with the development of the risk management framework, internal audit is gradually being seen as an effective tool for a company to control its risks through both the assurance and advisory functions for board of directors and shareholders The role of internal audit has changed from the traditional role in management evaluation activities to consulting activities and providing objective guarantee for managers Internal auditors are directly involved in the corporate governance cycle, including the operational cycle, internal control procedures, risk management and financial statements as well Model Summary Model R R Square 652a Adjusted R Std Error of Square the Estimate 425 405 5.28253% a Predictors: (Constant), LTA, DUAL, BOS, DR, IA Table ANOVA Testing ANOVAa Model Sum of df Mean Squares F Sig Square Regression 2972.759 594.552 Residual 4018.333 144 27.905 Total 6991.092 149 21.306 000b a Dependent Variable: ROA b Predictors: (Constant), IA, DR, LTA, DUAL, BOS Table Coefficients Coefficientsa Model Unstandardized Standardized Coefficients Coefficients B Std Error 28 Beta t Sig (Constant) 7.310 8.526 857 393 LTA 507 283 116 1.793 075 DUAL 155 1.097 009 141 888 BOS -.012 021 -.038 -.576 565 DR -.260 026 -.642 -10.120 000 IA 341 556 039 614 540 a Dependent Variable : ROA The statistical results show that R - Square is 0.425, reflecting variables explaining 42.5% of the fluctuation of the firm performance (ROA) With a statistical significance level of 10%, the variable LTA is statistically significant in the model The regression coefficient of the LTA variable is 0.116, showing a positive relationship between firm’s size as measured by total assets (LTA) and the firm performance (ROA) In the context of other factors not changing, when the firm’s size as measured by total assets (LTA) increases by unit, the firm performance (ROA) will increase to 0.116 units With a statistical significance level of 1%, the variable DR is statistically significant in the model The regression coefficient of the DR variable is -0.642, showing a negative relationship between leverage as measured by debt ratio (DR) and the firm performance (ROA) In the context of other factors not changing, when the leverage as measured by debt ratio (DR) increases by unit, the firm performance (ROA) will decrease to 0.642 units The remaining factors, CEO – Chair separation (DUAL), Stock ownership of board members (BOS) and especially internal audit, have no significant impact on firm performance 29 CHAPTER 5: CONCLUSION AND DISCUSSION 5.1 Conclusion Survey results with 50 samples during 2016 -2018 period from enterprises listed on Vietnam’s stock market, HOSE and HNX in particular The author found that the firm’s size as measured by the log of total assets (LTA) and the leverage as measured by debt ratio (DR) have a positive and negative impact on the firm performance respectively The remaining factors, CEO – Chair separation (DUAL), Stock ownership of board members (BOS) and especially internal audit, have no significant impact on firm performance This is an important input for the author to discuss 5.2 Discussion about result of internal audit factor In Vietnam, internal audit is not mentioned much So, the establishment of the internal audit department in Vietnamese enterprises currently faces many difficulties and activities of internal audit are also ineffective In the internal audit system, one of the most important factors is always the internal auditor But the fact is that managers lack a strategic view of the development of the economy in general and of each business in particular This leads to the situation that when there is a demand for a factor, that factor is both severely lacking in quantity and not in assurance related to quality Internal auditors are not an exception, the number of auditors as well as internal auditors is seriously lacking for the economy in general as well as for businesses in particular On average, the number of auditors in a business ranges from to 8, which is sufficient for medium businesses, but not enough to ensure the effective operation of big companies, especially state-owned corporations Furthermore, internal auditors in most businesses are mostly not professional in internal audit activities Currently, the number of internal auditors is mostly experienced accountants The trained auditors in general and internal auditors in 30 particular are very limited The reason is partly due to the fact that the training program on internal audit is not much, only by the Business Informatics Institute (belong toVCCI) with the technical assistance of ACCA (The Association of Chartered Certified Accountants in the UK) Because the organization of the auditing has not been respected in accordance with its role and benefits, for businesses with an internal audit organization, the cost of implementing an internal audit organization is low compared to the workload that this apparatus must undertake Expenses for internal audits are determined including expenses paid for salaries of employees performing internal audit, working expenses Other costs related to surveys, analysis, etc are usually not determined during budgeting process for internal audits In fact, although the opinion of management has changed, the consideration of the internal audit organization is still a big problem when managers consider the costs for the organization Cost factors and awareness of internal audit are two basic reasons leading to the decision of the manager whether to set up an internal audit department or not In addition, the organization of internal audit work in companies still has several drawbacks: same as accounting checks; audit organizations not have audit processes or programs; about the audit content: some content is presented but not specific, it is not common practice to present audit plans or programs The auditors performed mainly still only by experience Moreover, types of internal audit are not fully performed by the internal audit department in the enterprise In the audit of financial statements, it is also focused on checking the regular items on the financial statements, not all the items in the financial statements Regarding the compliance test, although the internal audit department has made considerable efforts to review the compliance of the State regulations, inspect the implementation of the provisions in recording, statistics, as well as inspect therules and regulations However, internal auditors have 31 not yet performed the function of advising and supporting managers in the work of developing regulations, processes, rules to control the business better Because of the above reasons, even having established an internal audit department for themselves, the enterprise has not been able to make use all the benefits that internal audit could bring Therefore, the improvement of firm performance is not yet clear In addition, in Vietnam, small and medium-sized enterprises account for a high percentage Mr Richard.F Chambers - President of the American Association of Internal Audit, said that newly opened companies or small companies not really need an internal auditor, so they cannot understand the values and opportunities that an internal auditor can bring Moreover, a large company like Vinamilk has just established an internal audit committee to replace the control board in 2017 (according to http://cafef.vn/) Therefore, the research results show that internal audit does not have a significant impact on the firm performance of Vietnamese companies, which is partly reasonable for Vietnam's economic context 5.3 Limitations of the study The thesis is done thoughtfully by the author However, due to limited time and resources, the thesis has the following limitations in research First and foremost, the sample size of 150 is not high enough due to time and resources constraints If the scope of the study could be expanded to a sufficiently large sample size, the results of the study would be more valuable to represent the population as a whole Secondly, it is very likely that the responses of the survey participants as well as the interviewees have raised biases or perhaps only indirectly reflect the basic perception in answering the questions which the author has given Last but not least, it is the shortage of research experience and skills that prevent the author from explore the matters further 32 APPENDIX Appendix Questionnaire 1.1 English QUESTIONNAIRE Dear Mr / Mrs! My full name is Hoang Nhat Ha, a final year student in Accounting, Analyzing and Auditing program at International School, Vietnam National University, Hanoi I am currently researching on the topic “The impact of internal audit on firm performance in Vietnam The object of the study is the companies in Vietnam Therefore, I need to collect your assessment on this issue The information you provide will be used only for this research project and does not serve any other economic purpose Thank you for your participation! I Background of the respondents What is your gender? □ Male □ Female You are working at: … What is your current job position? … What is your age? □ 20-25 □ 26-35 □ 36-45 □ More than 45 33 How long have you been working in job position? □ Less than years □ 2-5 years □ 5-10 years □ More than 10 years II Assessment of the impact of internal audit on firm performance Does your organization have the internal audit department? □ Yes □ No  If “Yes”, the internal audit department was established in: … (time) According to Decree No 05/2019/NĐ-CP on internal audit issued by the Government on 22/01/2019 and applied from 01/04/2019, many state organizations and enterprises will have to perform internal audit If your company has an internal audit department, what is your opinion? Strongly disagree Disagree Neutral Agree Strongly agree Return on assets (ROA) is an indicator of how profitable a company is relative to its total assets ROA gives a manager, investor, or analyst an idea as to how efficient a company's management is at using its assets to generate earnings If your company has an internal audit department, the company's ROA will be: Very unaffected 34 Unaffected Neutral Affected Very affected 1.2 Vietnamese Bảng câu hỏi khảo sát (Tiếng Việt) Thưa anh / chị! Em tên Hoàng Nhật Hạ, sinh viên năm cuối chun ngành Kế tốn, Phân tích Kiểm tốn Khoa Quốc tế - Đại học Quốc gia Hà Nội trình làm luận văn tốt nghiệp Em nghiên cứu đề tài “Ảnh hưởng Kiểm toán nội tới hiệu hoạt động doanh nghiệp Việt Nam” Đối tượng nghiên cứu cơng ty Việt Nam Do đó, em cần thu thập đánh giá anh/chị vấn đề Thông tin anh/chị cung cấp sử dụng cho dự án nghiên cứu không phục vụ cho mục đích kinh tế khác Cảm ơn anh/chị giúp đỡ I Thông tin cá nhân người tham gia khảo sát Giới tính anh/ chị là: □ Nữ □ Nam 35 Anh/chị làm việc tại: Vị trí cơng tác Anh/Chị là: Độ tuổi Anh/Chị là: □ 20-25 □ 26-35 □ 36-45 □ Trên 45 Anh/Chị làm nghề được: □ Dưới năm □ 2-5 năm □ 5-10 năm □ Trên 10 năm II Đánh giá ảnh hưởng Kiểm toán nội tới hiệu hoạt động doanh nghiệp Cơng ty anh/ chị có phận kiểm tốn nội khơng? □ Có □ Khơng  Nếu có, phận kiểm tốn nội thành lập từ năm: … 36 Theo Nghị định số 05/2019/NĐ-CP kiểm tốn nội Chính phủ vừa ban hành ngày 22/1/2019 bắt đầu có hiệu lực từ ngày 1/4/2019, nhiều quan nhà nước, đơn vị nghiệp công lập doanh nghiệp phải thực cơng tác kiểm tốn nội Anh/Chị đánh giá việc đơn vị nơi Anh/Chị làm việc có phận kiểm tốn nội bộ? Rất không tán thành Không tán thành Phân vân Tán thành Rất tán thành Chỉ số ROA (viết tắt Return on Assets) – gọi tỷ số lợi nhuận tài sản, số thể tương quan mức sinh lợi cơng ty so với tài sản ROA cho ta biết hiệu công ty việc sử dụng tài sản để kiếm lời Nhà đầu tư thấy doanh nghiệp kiếm tiền lãi đồng tài sản Theo Anh/Chị, cơng ty Anh/Chị có phận kiểm tốn nội việc có tác động lên số ROA công ty hay không? 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Overview of internal audit 2.1.1 Definition of audit 2.1.2 Concept of internal audit 10 2.1.3 Functions and responsibilities of Internal Audit 12 2.1.4 Scope of