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Providing recommendations to improve the AQ of financial statements of FDI enterprises conducted by independent audit firms in Vietnam in terms of professional quality as well as in terms of service quality.
MINISTRY OF EDUCATION AND TRAINING THUONGMAI UNIVERSITY LAI THI THU THUY RESEARCH ON THE INFLUENCE OF FACTORS ON THE AUDIT QUALITY OF FINANCIAL STATEMENTS OF FDI ENTERPRISES IN VIETNAM MAJOR: ACCOUNTING CODE: 62.34.03.01 SUMMARY OF DOCTORAL THESIS IN ECONOMICS HANOI, 2018 THE THESIS WAS COMPLETED AT THUONGMAI UNIVERSITY Scientific supervisors: 1. Assoc. Prof. PhD Pham Duc Hieu 2. Assoc. Prof. PhD Pham Thi Thu Thuy Reviewer 1: Prof. PhD Phan Trung Kien NEU Reviewer 2: PhD Ha Thi Ngoc Ha MOF Reviewer 3: Prof. PhD Truong Thi Thuy AOF The thesis is presented at the Thesis Council at Thuongmai University At …, on……………… , 2018 The thesis is available at: The National Library of Vietnam The Library of ThuongMai University INTRODUCTION 1. Urgency of the thesis topic Independent audit plays an important role in the market economy. Independent audit, including financial statements audit, is firstly considered as a tool to protect the stability of the economy through audit opinions and professional recommendations for decisionmaking of interested users However, the bankruptcy of Enron Corporation, one of the leading energy corporations in the US in 2001, resulting in the downfall of Arthur Andersen, a worldclass prestigious audit firm in 2002, raised the concerns about audit quality. A number of scandals about audit quality of independent audit firms were disclosed after that, which leads to the reduction in the confidence of investors in the role of independent audit in confirming the reliability of financial information and thus the issue of audit quality of financial statements becomes really urgent In addition to its role as an economic management tool, independent audit is also a form of business service recognized by law. In order to maintain and develop the market, to attract customers, in addition to guarantee audit quality in terms of expertise, independent audit companies also need to improve audit quality in terms of service quality, to meet customer needs. Therefore, it is necessary to study audit quality from the perspective of customers. According to data compiled from final reports of the Ministry of Finance and Vietnam Association of Certified Public Accountants (VACPA), revenue from FDI clients always accounts for the highest proportion, reaching 4050% of the total revenue of the independent audit industry In terms of average revenue per customer, revenue from FDI enterprises is always superior to other customers and surpasses the industry average. It can be said that FDI enterprises are the most potential customers of the independent audit industry in Vietnam. FDI enterprises have not only made great contributions to the independent audit industry, but also made important contributions to the economic development of Vietnam over the past 30 years: contributing to increase budget revenue, improving payment balance, being an important supplementary source for economic development, modern economic restructuring, upgrading of technical and technological level, developing the market economy in Vietnam, integrating Vietnam's economy into the world economy, jobs creating, training human resources, raising living standards From the significant contributions of FDI enterprises to the independent audit industry as well as to the economic development of Vietnam, it can be seen that the improvement of the quality of audit services to meet the needs of customers (FDI enterprises) not only ensures the maintenance and development of customers for the independent audit industry but also creates favorable conditions for FDI enterprises operating in Vietnam, thereby contributing to the sustainable development of the national economy Therefore, the author chooses the thesis topic, namely “Research on the influence of factors on the audit quality of financial statements of FDI enterprises in Vietnam” to assess the audit quality of financial statements of FDI enterprises in terms of expertise and in terms of service quality, thereby enabling auditors and independent audit companies to make appropriate decisions and adjustments to improve the audit quality of financial statements on both these perspectives 2. Literature review and research gaps 2.1 International researches 2.1.1. The researches on audit quality Audit quality (AQ) is one of the most important topics in audit studies (Kit, 2005) However, the evaluation of AQ is not easy. Because the process of providing audit services is not observable by third parties (Krishnan and Schauer, 2000), so in the empirical studies the researchers selected two methods for measuring AQ, direct method and/or indirect method Direct measurement method is the method of evaluating AQ from the audit process of the auditor. This method requires researchers to directly join the audit team as independent auditors, or have direct access to the auditor's working papers and audit documents, or be involved in peer review of the audit process related to each specific audit contract (Carlin et al., 2009) Indirect method of measurement is the method of evaluating AQ through influencing factors. DeAngelo (1981) in the study "Auditor Size and Audit Quality " proposed that the size of an audit firm is a measure of AQ, as larger firms will have better conditions to conduct the audit. After DeAngelo's study, many empirical studies conducted a test of the relationship between the size of the audit firm and AQ (Krishnan and Schauer, 2000; Ajmi, 2009; Lawrence et al., 2011), as well as the indirect measurement of AQ through influencing factors becomes more common. Thus, the next part of the thesis will systematize factors influencing AQ by indirect method 2.1.2. Factors affecting the audit quality Through synthesis, it is possible to systematize the factors that affect AQ into the following groups: Groups of factors relating to auditors: Auditor qualifications and proficiency, Industry Expertise, Experience, Professional Due Care, Auditor’s independence Group of factors related to audit firms: Audit firm size, Control processes, Audit Tenure, Nonaudit service, Responsiveness to client needs Groups of factors relating to auditees: Risk level in the business of auditee, The internal control system of auditee Other factors relating to the context: Competition in the audit market, The system of accounting and auditing standards, and the system of accounting and auditing laws 2.2. Local researches Factors affecting AQ, which are studied as well as mentioned in studies in Vietnam, can be systematized into the following groups: Groups of factors relating to auditors: Methodology and professional skepticism of the auditors, Competence and Industry Expertise, Auditor’s independence, Auditor’s Tenure, Compliance with audit standards and professional ethics Group of factors related to audit firms: Audit firm size, professional degree of audit firms, The cost of the audit, Internal Quality Control, Ownership of the Audit Firm, Scope of the audit service Other factors: Audit fees, legal system, External Quality Control, Audit quality personnel training, Competition in the audit market, Characteristics of the audit clients 2.3. Research gaps From literature review, it can be seen that compared with studies on AQ in the world and in the region, studies on AQ in Vietnam are still rather modest with very few figures. Moreover, among the studies on AQ, there is not much research on AQ of FDI enterprises. In addition, most AQ studies refer only to one aspect (either from the service providers the audit firms or from the service users – the auditees). There are very few studies focusing on both aspects 3. Research objectives The research was carried out towards the following objectives: Systemizing and supplementing theory about AQ and factors affecting AQ of financial statements from professional perspective as well as from the perspective of service quality; Determining the factors and quantifying the influence of factors on the AQ of financial statements of FDI enterprises in Vietnam on these two perspectives; Providing recommendations to improve the AQ of financial statements of FDI enterprises conducted by independent audit firms in Vietnam in terms of professional quality as well as in terms of service quality 1.4. Research questions The thesis will answer the following questions: Question 1: Audit quality of financial statements and factors affecting AQ of financial statements in terms of professional quality and service quality? Question 2: What are influencing factors and their impacts on the AQ of financial statements of FDI enterprises from the perspective of auditors and audit clients? Question 3: What are the recommendations to improve the AQ of financial statements of FDI enterprises in Vietnam? 5. Research object and scope 5.1. Research objects AQ and the influence of factors on the AQ of financial statements of FDI enterprises 5.2. Research scope Scope of space: The thesis is conducted at independent audit firms in Vietnam and FDI enterprises, including 100% foreign invested enterprises and joint ventures operating in the nonfinancial sector in Vietnam Scope of time: The thesis collects data on FDI enterprises and independent audit activities in Vietnam from 2011 to 2016 6. Research methodology The research method used in this thesis is qualitative research method combined with quantitative research method 7. Contribution of the thesis 7.1. Theoretical contributions Firstly, based on previous studies on AQ, the thesis systematizes, synthesizes and classifies factors affecting AQ from different perspectives, supplementing and developing the theory of AQ Second, the thesis points out the role of economic theories as the basis for audit and AQ researches 7.2. Practical contributions Firstly, the results of empirical research show that, from a professional perspective, there are 9/11 influencing factors that have statistical significance to AQ with 33 criteria From the perspective of service quality, there are 5/6 influencing factors that have statistical significance to audit services quality with 21 criteria Secondly, the results of the study also show that there is a difference in the views of the auditors and audit clients on AQ provided by Big 4 and NonBig 4 audit firms Thirdly, from the results of the empirical study, the thesis provides recommendations to audit firms to improve AQ in terms of professional quality and to improve the services quality to meet customer needs 8. Thesis structure In addition to the introduction and conclusion, the thesis consists of 5 chapters: Chapter 1: Fundemental theory on the audit quality of financial statements and the factors affecting the audit quality of financial statements Chapter 2: Characteristics of foreign direct investment enterprises and independent audit in Vietnam Chapter 3: Research design and research methods Chapter 4: Research results and discussions Chapter 5: Conclusions and recommendations from research results 3.1.2. Research models 3.1.2.1 Model of audit quality of financial statements in terms of professional qualifications 3.1.2.2. Model of audit quality of financial statements in terms of service quality 3.2. Data collection and procedures in qualitative research 3.2.1. Data collection 3.2.2. Implementation process Conducting semistructured interviews with experts through two drafts of factors and attributes of factors affecting AQ of financial statements from the professional perspective and from the perspective of service quality. Then, performing indepth interviews with experts through openended questions to gather expert opinions 3.3. Data collection and data processing in quantitative research 3.3.1. Data collection 3.3.2. Quantitative data processing 3.3.2.1. Data coding 3.3.2.2. Descriptive statistics 3.3.2.3. Measuring the reliability of the scale (Cronbach's alpha) 3.3.2.4. Explore factors analysis (EFA) 3.3.2.5. Regression analysis Summary of Chapter 3 In this chapter, the author presents the research design of the thesis, including two phases: qualitative research and quantitative research; research process consists of 5 steps from identifying research problem to research results analysis. The thesis has proposed two research models: the AQ model in term of professional quality and the AQ model in terms of service quality. In addition, the author also presents methods of collecting and processing qualitative data, methods of collecting and processing quantitative data, such as sample selection, questionnaire design, data coding and methods of data processing CHAPTER 4: RESEARCH RESULTS AND DISCUSSIONS 4.1. Results of qualitative research 4.1.1. Expert Interview Results 4.1.1.1. Semistructured interview results Semistructured interview results are as follows: From the perspective of professional quality, there are 13 factors affecting AQ of financial statements of FDI enterprises, including: (1) Professional attitude of the auditors, (2) Auditor qualifications and proficiency, (3) Industry Expertise, (4) Experience, (5) Audit time, (6) Auditor’s independence, (7) Audit process, (8) Internal Quality Control, (9) Audit reports, (10) Audited financial statements, (11) Audit Market, (12) Law system, (13) Characteristics of the FDI enterprises From the perspective of service quality, there are 6 factors that affect AQ of financial statements of FDI enterprises, including: (1) Tangibles, (2) Reliability, (3) Responsiveness, (4) Assurance, (5) Empathy, (6) Non audit service 4.1.1.2. Results of indepth interviews Results of indepth interviews: Authors and experts agreed to supplement and adjust 14 variables 4.1.2. Survey results on audit quality control From the results obtained on the establishment and implementation of quality control policies at ABC Auditing Co., Ltd and XYZ Consulting and Auditing Co., Ltd, we can see that the internal quality control of these companies remains the following issues: Although audit companies have established quality control procedures but have not implemented them adequately, the implementation of the audit has been sketchy with the inspection of the authorities. Compliance with the Vietnamese auditing standards system is generally incomplete and justified to the extent necessary Audit companies have not conducted a reevaluation of customers in a certain period of time or when there are major changes in the customer company 4.2. Results of quantitative research 4.2.1. The results of research on quality of audit in terms of professional qualifications 4.2.1.1. Sample description statistics 4.2.1.2. Results of reliability of the scale The model retains 14 factors which ensure good quality with 50 items 4.2.1.3. Results of exploratory factor analysis Through the evaluation of the scale and EFA analysis, the thesis identifies 11 scales representing the factors influencing AQ with 42 items 4.2.1.4. Results of regression analysis Standardized regression equations are as follows: CLKT = 0.263 CSKN + 0.217 QTKS + 0.376 TDNN + 0.227 DLKT + 0.203 HTPL + 0.208 TDCM + 0.104 TGKT + 0.102 DDDN + 0.093 TTKT The level of impact of the variables from high to low are: TDNN (0.376) > CSKN (0.263) > DLKT (0.227) > QTKS (0.217) > TDCM (0.208) > HTPL (0.203) > TGKT (0.104) > DDDN (0.102) > TTKT (0.093) 4.2.1.5. Independent Sample TTest The results show that there is a statistically significant difference between the Big 4 and NonBig 4 audit companies on the factors of: the audit process and the control procedures, auditor qualifications and proficiency On the other hand, the test results showed no statistically significant difference between the Big 4 and NonBig 4 audit companies on the factors of: audit quality, experience and industry expertise, professional attitude, auditor’s independence, law system, audit time, characteristics of FDI enterprises, and audit market 4.2.2. Results of quality audit study in terms of quality of service 4.2.2.1. Descriptive statistics 4.2.2.2. Results of reliability of the scale The model retains 7 factors which ensure good quality with 26 items 4.2.2.3. Results of exploratory factor analysis Through the evaluation of the scale and EFA analysis, the thesis identified 6 dimensions representing the factors affecting the audit services quality and a scale representing the audit services quality with 24 items 4.2.2.4. Results of regression analysis Standardized regression equations are as follows: CLDV = 0.478 NLPV + 0.242 PTHH + 0.546 DUKH + 0.240 PKT + 0.356 TCKH The level of impact of the variables from high to low are: DUKH (0.546) > NLPV (0.478) > TCKH (0.356) > PTHH (0.242) > PKT (0.240) In addition, to test the hypothesis whether or not the difference in audit services quality provided by Big 4 and NonBig 4 audit companies is assessed by FDI clients, the thesis adds the CTKT variable and performs regression with dummy variables The results show that the value of control variable CTKT is statistically significant (Sig