MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY  NONG QUANG THANH DETERMINANTS OF AN EFFECTIVE INTERNAL CONTROL: A STUDY OF FIRMS IN VIETNAM MASTER THESIS OF BUSINESS ADMINISTRATOR HO CHI MINH CITY – 2013 MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY  NONG QUANG THANH DETERMINANTS OF AN EFFECTIVE INTERNAL CONTROL: A STUDYOF FIRMS IN VIETNAM Subject: Master of Business Administrator Code: 06.34.01.02 MASTER THESIS OF BUSINESS ADMINISTRATOR SUPERVISOR: DR NGUYỄN THỊ NGUYỆT QUẾ HO CHI MINH CITY – 2013 I ACKNOWLEDGEMENT I would like to take this opportunity to express my gratitude to all those who have helped and supported me during the time I conducted the study Firstly, I would like to express my deepest sincere gratitude to my supervisor, Dr Nguyen Thi Nguyet Que for her patient and invaluable advices to my thesis Without her support, the thesis could not have been completed Secondly, I would like special thanks to all instructors and lecturers in eMBA course for their teaching invaluable knowledge and experience to me I am very great honor to introduce with my relationships that I have been participated in eMBA program of Economic University, Ho Chi Minh City Many thanks to Mr Cao Quoc Viet, as well as the other classmates in eMBA K19 class for their sharing valuable knowledge to me to complete this research study I also wish to thank my friends, external auditors in KPMG and A&C as well as other respondents Without them, my thesis could not have been conducted Lastly, I would like to send the deepest and most special thanks to my beloved parents, my wife and my family members who encourage me to overcome all difficulties to complete this course Nong Quang Thanh Ho Chi Minh, September 2013 II COMMITMENT I hereby would like to commit that the thesis, “Determinants of an effective internal control: a study of firms in Vietnam”, was accomplished based on my independent and serious studies and researches The data was collected in reality and it has clear origins In addition, the data would be trust-worthily handled and it has never been released in any menu Nong Quang Thanh III TABLE OF CONTENTS ACKNOWLEDGEMENT I COMMITMENT II TABLE OF CONTENTS III LIST OF FIGURES V LIST OF TABLES VI ABBREVIATIONS VII ABSTRACT CHAPTER 1: INTRODUCTION 1.1 Introduction 1.2 Background to the research 1.3 Research problems 1.4 Research objectives 1.5 Research questions 1.6 1.7 Research methodology and scope Thesis structure CHAPTER 2: LITERATURE REVIEW 2.1 Introduction 2.2 Internal control components 2.3 Internal control effectiveness 11 2.4 Gaps in the literature 13 2.5 Research hypotheses and theoretical model 14 2.6 Summary 19 CHAPTER 3: RESEARCH METHODOLOGY 20 3.1 Introduction 20 3.2 Research process 20 3.3 Questionnaires design 21 3.4 Operationalisation of measures 22 IV 3.5 Pilot test 25 3.6 Main survey 25 3.6.1 Sample design 25 3.6.2 Survey method 27 3.6.3 Data analysis techniques 27 3.7 Summary 28 CHAPTER 4: RESEARCH RESULTS 29 4.1 Introduction 29 4.2 Descriptive statistic of the study 29 4.3 Testing measurement scale 31 4.4 Testing the research model and the hypotheses 39 4.5 Summary 45 CHAPTER 5: DISCUSSION AND CONCLUSIONS 47 5.1 Introduction 47 5.2 Discussion of findings 47 5.3 Implications of the research 49 5.4 Limitations and recommendations 52 LIST OF REFERENCE 54 APPENDIX 60 APPENDIX 66 APPENDIX 69 APPENDIX 72 V LIST OF FIGURES Figure 2.1 Quantitative assessment of internal control framework 12 Figure 2.2: The relationship between internal control components and the efficiency and effectiveness of operation 18 Figure 2.3: The relationship between internal control components and the reliability of financial report 18 Figure 2.4: The relationship between internal control components and the compliance with laws and regulations 19 Figure 4.1 Respondent's age 30 Figure 4.2 Respondent's experience 31 Figure 4.3 Organization industry 31 VI LIST OF TABLES Table 2.1: Comparison of Control frameworks in the US Table 3.1: Measurement scale of internal control components 22 Table 3.2: Measurement scale of internal control effectiveness 24 Table 4.1: Sample characteristics 30 Table 4.2: Reliability of measurement scales 32 Table 4.3-4.5: The EFA result for internal control components measurement scales 36 Table 4.6-4.8: The EFA result for internal control effectiveness measurement scales 38 Table 4.9: Correlation of constructs 39 Table 4.10a-c: Summary of hypotheses testing results (Model I) 41 Table 4.11a-c: Summary of hypotheses testing results (Model II) 43 Table 4.12a-c: Summary of hypotheses testing results (Model III) 44 VII ABBREVIATIONS CONTROL Internal control components EFFE Internal control effectiveness COEN Control environment RISK Risk assessment COAC Control activities INFO Information and communication MONI Monitoring EFFI Efficiency and effectiveness of operation RELI Reliability of financial report LAW Compliance with laws and regulations COSO Committee of Sponsoring Organizations ABSTRACT This study reports the results on the internal control components and internal control effectiveness from the external auditor’s perspective by using measurement scale proposed by Annukka Jokipii (2009) The study is among the very few studies in Vietnam empirically examines internal control effectiveness as well as suggest the reference internal control components used in practice To assess the internal control components and internal control effectiveness, a study of 236 external auditors who audited the operation of companies in Vietnam in 2011 was conducted Even though some unexpected outcomes have incurred, “control environment” and “monitoring” are not supported in their relationship with “the reliability of financial report”; “information and communication” is not supported in the relationship with “the compliance with laws and regulations”, the empirical results indicate that all remaining internal control components (Control environment, risk assessment, control activities, information and communication, and monitor) have significant positive effect on internal control effectiveness which are also considered the company objectives: efficiency and effectiveness of operation, reliability of financial report, compliance with laws and regulations Key words: Internal control components, Internal control effectiveness 64 ðánh giá rủi ro Phản ñối Theo tơi, mục tiêu hoạt động Cơng ty đáng tin cậy hợp lý Các Thành viên quản lý chủ ñộng ñánh giá rủi ro bên lẫn bên ngồi có khả gây cản trở việc đạt mục tiêu Phân tích rủi ro cấp tồn Cơng ty thực năm qua Các Thành viên quản lý hiểu rõ biết cách kiểm soát rủi ro phạm vi trách nhiệm công việc họ Theo tơi, qui trình đánh giá kiểm sốt rủi ro Cơng ty lẽ hiệu Hoạt động kiểm sốt Trong q trình hoạt động, phận kiểm sốt Cơng ty đưa cảnh báo có tình bất thường xảy Ngay thơng báo có tình bất thường xảy ra, biện pháp xử lý ln thực nhanh chóng thích hợp Khi bổ nhiệm cơng việc, Cơng ty có lưu ý đến quyền hạn u cầu đặc biệt cơng việc Theo tơi, biện pháp kiểm sốt nội lẽ cải thiện tốt Tồn nhân viên Cơng ty cập nhật rõ u cầu công việc Truyền tải thông tin Nhân viên không gặp khó khăn việc thu thập thơng tin liên quan đến cơng việc Báo cáo chuyển cho Cấp quản lý rõ ràng chứa đựng thơng tin thích hợp Thơng tin truyền tải phòng ban kịp thời nhanh chóng đảm bảo cho việc hoạt ñộng Hệ thống thông tin liên lạc Công ty chưa hồn thiện Cơng việc phối hợp hiệu nội phòng ban phòng ban với ðồng ý 5 5 5 5 5 5 5 Kiểm tra giám sát Thơng tin hoạt động cập nhật vào hệ thống thơng tin tài để phục vụ cho việc quản lý Cấp quản lý trực tiếp cẩn trọng việc thực kiểm soát hàng ngày Cơng ty có biện pháp hiệu việc kiểm sốt tính tn thủ nhân viên ñối với quy chế hoạt ñộng Trong năm qua, Cơng ty thực phân tích thay đổi (sự hài lòng khách hàng,sự hài lòng cơng việc, hiệu quả…) Trong năm qua, Ban Giám đốc khơng u cầu hồn thành biện pháp kiểm soát 5 5 65 ðánh giá hiệu hệ thống kiểm sốt Phản đối ðồng ý Hiệu hoạt động Cơng ty lẽ cải thiện Vẫn có khả xảy vấn đề q trình hoạt động, loại bỏ, hiệu hoạt động tốt Tơi ln nghi vấn tính hiệu qui trình hoạt động Các nguồn lực Cơng ty triển khai hiệu 5 Tơi khơng hồn tồn tin tưởng đơi phải kiểm tra thơng tin báo cáo lập quản lý tài Thỉnh thoảng có sai sót báo cáo cần phải chỉnh sửa thơng tin xác nhận ðơi chúng tơi nhận phản hồi sai sót báo cáo phát hành bên ngồi Chương trình kế tốn (phần mềm, hệ thống… sử dụng quản lý tài tồn nhiều vấn đề Cơng ty gặp khó khăn việc thực thi quy ñịnh pháp luật Các thay ñổi luật pháp ñã thường xuyên gây bất ngờ cho công ty Tôi quan sát thấy nhân viên ñã gặp nhiều khó khăn việc thực thi quy định pháp luật hành Cơng ty khơng có nhân chịu trách nhiệm theo dõi cập nhật thay ñổi hệ thống luật pháp quy ñịnh 5 5 5 5 66 APPENDIX 2: CRONBACH ALPHA ANALYSIS Cronbach alpha analysis of Control Environment (COEN) Reliability Statistics Cronbach's Alpha N of Items 730 Item-Total Statistics Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted COEN1 13.41 7.533 629 630 COEN2 13.32 7.073 724 590 COEN3 13.03 10.273 014 874 COEN4 13.24 7.148 727 591 COEN5 13.31 7.966 571 655 Cronbach alpha analysis of Risk Assessment (RISK) Reliability Statistics Cronbach's Alpha N of Items 893 Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted RISK1 13.15 9.583 712 875 RISK2 13.36 8.855 802 855 RISK3 13.26 9.738 739 871 RISK4 13.43 8.597 761 865 RISK5 13.43 9.382 689 881 Cronbach alpha analysis of Control Activities (COAC) Reliability Statistics Cronbach's Alpha N of Items 872 Item-Total Statistics Scale Mean if Item Scale Variance if Item Deleted Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted COAC1 14.10 8.631 747 834 COAC2 14.07 8.927 690 848 COAC3 14.09 8.393 811 819 COAC4 13.77 8.718 656 856 COAC5 14.03 8.525 616 869 67 Cronbach alpha analysis of Information and Communication (INFO) Reliability Statistics Cronbach's Alpha N of Items 849 Item-Total Statistics Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted INFO1 13.05 9.596 668 816 INFO2 13.42 9.723 690 811 INFO3 13.04 10.234 612 831 INFO4 13.39 9.453 632 827 INFO5 13.18 9.677 701 808 Cronbach alpha analysis of Monitoring (MONI) Reliability Statistics Cronbach's Alpha N of Items 880 Item-Total Statistics Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted MONI1 14.05 9.011 759 843 MONI2 14.20 9.637 720 853 MONI3 14.03 9.781 632 873 MONI4 13.81 9.290 834 828 MONI5 14.35 9.356 643 873 68 Cronbach alpha analysis of Effective&Efficient Operations (EFFI) Reliability Statistics Cronbach's Alpha N of Items 871 Item-Total Statistics Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted EFFI1 9.52 5.832 781 812 EFFI2 9.53 6.379 670 856 EFFI3 9.63 6.139 700 845 EFFI4 9.55 5.967 748 826 Cronbach alpha analysis of Reliable Financial Reporting (RELI) Reliability Statistics Cronbach's Alpha N of Items 852 Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted RELI1 10.10 5.588 713 804 RELI2 10.25 5.605 698 810 RELI3 10.11 5.706 615 845 RELI4 10.10 5.183 750 787 Cronbach alpha analysis of Compliance with laws and regulationss (LAW) Reliability Statistics Cronbach's Alpha N of Items 830 Item-Total Statistics Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Cronbach's Alpha if Item Deleted LAW1 10.70 5.639 630 798 LAW2 10.59 5.055 771 731 LAW3 10.37 5.979 582 818 LAW4 10.46 5.523 652 788 69 APPENDIX 3: EXPLORATORY FACTOR ANALYSIS (EFA) Appendix 3.1: The first EFA implementation of five independent variables KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Approx Chi-Square Bartlett's Test of Sphericity 902 4352.194 Df 276 Sig .000 Total Variance Explained Initial Eigenvalues Component Total Extraction Sums of Squared Loadings % of Cumulative Total Variance % 11.011 45.878 45.878 11.011 1.909 7.956 53.833 1.780 7.416 1.532 Rotation Sums of Squared Loadings % of Cumulative % of Cumulative Total Variance % Variance % 45.878 45.878 3.680 15.331 15.331 1.909 7.956 53.833 3.610 15.042 30.373 61.250 1.780 7.416 61.250 3.581 14.920 45.294 6.383 67.632 1.532 6.383 67.632 3.386 14.109 59.403 1.167 4.864 72.497 1.167 4.864 72.497 3.142 13.094 72.497 809 3.369 75.866 675 2.812 78.678 597 2.486 81.164 548 2.283 83.447 10 510 2.124 85.571 11 443 1.845 87.416 12 438 1.827 89.243 13 388 1.618 90.862 14 305 1.272 92.134 15 294 1.227 93.361 16 260 1.085 94.446 17 249 1.038 95.484 18 215 894 96.378 19 191 795 97.173 20 184 766 97.940 21 159 663 98.602 22 146 606 99.208 23 115 477 99.685 24 075 315 100.000 Extraction Method: Principal Component Analysis 70 Rotated Component Matrix(a) Component INFO1 827 INFO5 752 INFO3 688 INFO2 665 INFO4 511 COEN1 820 COEN2 793 COEN4 757 COEN5 642 RISK2 791 RISK4 767 RISK3 650 635 RISK1 524 RISK5 594 MONI4 856 MONI1 775 MONI3 758 MONI2 588 611 532 MONI5 COAC3 864 COAC1 833 COAC2 697 COAC4 545 COAC5 524 Extraction Method: Principal Component Analysis Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations Appendix 3.2: The first EFA implementation of three dependent variables KMO and Bartlett's Test Kaiser-Meyer-Olkin Measure of Sampling Adequacy Approx Chi-Square Bartlett's Test of Sphericity Df Sig .847 1621.320 66 000 71 Total Variance Explained Initial Eigenvalues Component Total Extraction Sums of Squared Loadings % of Cumulative % of Total Variance % Variance Rotation Sums of Squared Loadings Cumulative % of Cumulative Total % Variance % 5.817 48.474 48.474 5.817 48.474 48.474 2.819 23.492 23.492 1.458 12.149 60.623 1.458 12.149 60.623 2.816 23.469 46.961 1.117 9.306 69.929 1.117 9.306 69.929 2.756 22.968 69.929 765 6.373 76.302 620 5.166 81.468 550 4.582 86.051 425 3.541 89.592 359 2.991 92.582 284 2.365 94.947 10 232 1.937 96.884 11 217 1.805 98.689 12 157 1.311 100.000 Extraction Method: Principal Component Analysis Rotated Component Matrix(a) Component EFFI1 882 EFFI4 863 EFFI2 714 EFFI3 687 RELI2 797 RELI1 787 RELI4 787 RELI3 696 LAW2 844 LAW4 753 LAW1 728 LAW3 714 Extraction Method: Principal Component Analysis Rotation Method: Varimax with Kaiser Normalization a Rotation converged in iterations 72 APPENDIX 4: MULTIPLE LINEAR REGRESSION ANALYSIS (MLR) Appendix 4.1: Testing correlation of constructs Correlations COEN COEN Pearson Correlation RISK Sig (2-tailed) N RISK Pearson Correlation Sig (2-tailed) N COAC Pearson Correlation INFO RELI LAW 606 ** ** 527 MONI ** 551 EFFI 556 ** ** 638 000 000 000 236 236 236 236 236 236 235 235 ** 606 000 236 ** 527 ** ** 236 236 236 236 236 235 ** 632 628 ** ** 000 000 000 236 235 235 ** 543 ** 574 491 ** 000 236 236 236 235 235 ** 491 000 000 N 236 236 236 236 236 ** ** ** ** ** 542 552 Sig (2-tailed) 000 000 000 000 000 N 236 236 236 236 236 ** 695 ** 630 565 ** ** 552 000 236 235 235 ** 000 235 235 ** 566 000 000 000 N 235 235 235 235 235 235 ** 731 ** 563 638 ** ** 496 ** 580 000 235 235 ** 580 Sig (2-tailed) 000 000 000 000 000 000 000 N 235 235 235 235 235 235 235 ** Correlation is significant at the 0.01 level (2-tailed) ** 496 000 000 ** 566 236 000 680 ** 638 000 000 ** ** 565 000 Sig (2-tailed) 638 ** 563 000 000 ** ** 630 000 000 545 ** 542 000 Sig (2-tailed) 691 ** 731 236 236 ** ** 695 000 236 588 ** 545 235 236 236 ** 574 000 000 N 620 ** 543 ** 680 236 000 554 ** 691 000 000 556 ** 588 000 000 ** 620 000 Sig (2-tailed) 556 ** 628 000 236 551 ** 632 000 000 Pearson Correlation ** 554 000 236 Pearson Correlation ** 556 LAW 000 000 Pearson Correlation RELI 000 N Pearson Correlation INFO 000 Sig (2-tailed) MONI Pearson Correlation EFFI COAC 235 73 Appendix 4.2: Testing assumptions for residuals of dependent variable Appendix 4.2.1: The relationship between internal control components and the efficiency & effectiveness of operation (Model I) Dependent Variable: EFFI 74 Appendix 4.2.2: The relationship between internal control components and the reliability of financial report (Model II) Dependent Variable: RELI 75 Appendix 4.2.3: The relationship between internal control components and the compliance with laws and regulations (Model III) Dependent Variable: LAW 76 Appendix 4.3 Mutiple Linear Regression Appendix 4.3.1: The relationship between internal control components and the efficiency & effectiveness of operation (Model I) Model Summary Model R R Square Adjusted R Square Std Error of the Estimate 686(a) 471 459 59132 a Predictors: (Constant), MONI, INFO, COEN, COAC, RISK ANOVA(b) Model Sum of Squares df Mean Square Regression 71.495 Residual 80.422 230 F Sig 14.299 40.894 000(a) 236 151.918 235 Total a Predictors: (Constant), MONI, INFO, COEN, COAC, RISK b Dependent Variable: EFFI Coefficients(a) Unstandardized Coefficients Model B Standardized Coefficients Std Error T Collinearity Statistics Sig Beta Tolerance 177 218 812 417 COEN 187 066 186 2.842 005 539 1.855 RISK 175 079 166 2.219 027 409 2.444 COAC 166 074 149 2.231 027 516 1.936 INFO 174 069 166 2.537 012 538 1.860 MONI 185 069 179 2.705 007 528 1.893 a Dependent Variable: EFFI Collinearity Diagnostics(a) Model Dimension Eigenvalue Condition Index VIF (Constant) Variance Proportions (Constant) COEN RISK COAC INFO MONI 5.890 1.000 00 00 00 00 00 00 030 14.011 57 33 03 02 04 01 025 15.384 00 23 01 00 66 19 023 16.084 30 41 13 08 02 23 017 18.354 01 02 03 59 16 49 015 19.744 12 01 80 30 12 09 a Dependent Variable: EFFI 77 Appendix 4.3.2: The relationship between internal control components and the reliability of financial report (Model II) Model Summary Model R R Square Adjusted R Square Std Error of the Estimate 791(a) 625 617 47325 a Predictors: (Constant), MONI, INFO, COEN, COAC, RISK ANOVA(b) Model Sum of Squares df Mean Square Regression 85.504 Residual 51.287 229 F Sig 17.101 76.356 000(a) 224 136.791 234 Total a Predictors: (Constant), MONI, INFO, COEN, COAC, RISK b Dependent Variable: RELI Coefficients(a) Unstandardized Coefficients Model B Standardized Coefficients Std Error T Collinearity Statistics Sig Beta Tolerance (Constant) 107 175 611 542 COEN 057 053 060 1.085 279 539 1.854 RISK 261 063 262 4.128 000 407 2.454 COAC 364 060 344 6.114 000 517 1.936 INFO 212 055 212 3.844 000 537 1.863 MONI 066 055 067 1.212 227 528 1.892 a Dependent Variable: RELI Collinearity Diagnostics(a) Model Dimension Eigenvalue Condition Index VIF Variance Proportions (Constant) COEN RISK COAC INFO MONI 5.889 1.000 00 00 00 00 00 00 030 13.982 57 33 03 02 04 01 025 15.236 00 24 01 00 65 18 023 16.051 30 41 13 08 02 24 018 18.316 01 02 03 60 16 48 015 19.747 12 01 80 29 13 09 a Dependent Variable: RELI 78 Appendix 4.3.3: The relationship between internal control components and the compliance with laws and regulations (Model III) Model Summary Model R R Square Adjusted R Square Std Error of the Estimate 818(a) 669 662 44423 a Predictors: (Constant), MONI, INFO, COEN, COAC, RISK ANOVA(b) Model Sum of Squares df Mean Square Regression 91.349 Residual 45.192 229 F Sig 18.270 92.578 000(a) 197 136.541 234 Total a Predictors: (Constant), MONI, INFO, COEN, COAC, RISK b Dependent Variable: LAW Coefficients(a) Unstandardized Coefficients Model B Standardized Coefficients Std Error T Collinearity Statistics Sig Beta Tolerance (Constant) 102 164 619 537 COEN 199 049 209 4.042 000 539 1.854 RISK 174 059 175 2.935 004 407 2.454 COAC 412 056 390 7.368 000 517 1.936 INFO 043 052 043 831 407 537 1.863 MONI 166 051 169 3.227 001 528 1.892 a Dependent Variable: LAW Collinearity Diagnostics(a) Model Dimension Eigenvalue Condition Index VIF Variance Proportions (Constant) COEN RISK COAC INFO MONI 5.889 1.000 00 00 00 00 00 00 030 13.982 57 33 03 02 04 01 025 15.236 00 24 01 00 65 18 023 16.051 30 41 13 08 02 24 018 18.316 01 02 03 60 16 48 015 19.747 12 01 80 29 13 09 a Dependent Variable: LAW ...MINISTRY OF EDUCATION AND TRAINING UNIVERSITY OF ECONOMICS HO CHI MINH CITY  NONG QUANG THANH DETERMINANTS OF AN EFFECTIVE INTERNAL CONTROL: A STUDYOF FIRMS IN VIETNAM Subject: Master... commit that the thesis, Determinants of an effective internal control: a study of firms in Vietnam , was accomplished based on my independent and serious studies and researches The data was collected... effectiveness of operation, reliability of financial report, and compliance with applicable laws and regulations 3.4 Operationalisation of measures The constructs of the internal control components and internal