UNIVERSITY OF ECONOMICS INSTITUTE OF SOCIAL STUDIES HO CHI MINH CITY VIETNAM THE HAGUETHE NETHERLANDS VIETNAM – NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONOMICS THE IMPACT OF AUDIT QUALITY ON FIRM PERFORMANCE: EMPIRICAL EVIDENCE IN VIETNAM A thesis submitted in partial fulfillment of the requirements for the degree of MASTER OF ART IN DEVELOPMENT ECONOMICS By LÊ THỊ ANH THƯ Academic Supervision Dr. LÊ HỒ AN CHÂU HO CHI MINH CITY, November, 2016 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION “I certify the content of this thesis entitled “The impact of audit quality on firm performance: empirical evidence in Vietnam” has not already been submitted for any degree and is not being currently submitted for any other degrees I certify that, to be the best of my knowledge, any help received in preparing this thesis and all sources used, have been acknowledged in this dissertation” Signature Lê Thị Anh Thư Date: November ……., 2016 I LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ACKNOWLEDGEMENT First and foremost, I would like to express my gratefulness and my dearest thank to my supervisor, Dr. Lê Hồ An Châu for her guidance and support during my thesis completion. In additional, I would like to thank Dr.
Trương Đăng Thụy, who also gave me the useful help for my research. More special thanks for all lecturers and staffs at Vietnam- Netherlands Program and my VNP 21 classmates. Furthermore, thanks to the support from my colleagues at Gia Cat Consulting and Auditing Co., Ltd who create more conditions for me to complete this thesis. Last but not least, I would like to express my many thanks to my family and my friends, who encourage and support to me in both mental and physical during the thesis process.
II LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABBREVIATIONS CSMAR: China Stock Market Accounting Research ICAEW: Institution of Chartered Accountants in England and Wales IPO: Initial Public Offering ISA: International Standards Auditing IFAC: International Federation of Accountants. GAO: Government Accountability Office GMM: Generalized Method of Moments HOSE: Hochiminh Stock Exchange NSE: Nigeria Stock Exchange OLS: Ordinary Least Squares PCAOB: Protecting Investors through Audit Oversight TPP: Trans-Pacific Strategy Economic Partnership Agreement UKFRC: United Kingdom Financial Reporting Council VACPA: Vietnam Association of Certified Public Accountants VSA: Vietnam Standards of Auditing WTO: World Trade Organization III LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ABSTRACT This study empirically examines the impact of audit quality on firm performance in Vietnam. Audit quality is considered as an external monitoring factor which objectively affects firm performance. In this thesis, audit quality is measured by three variables including audit rotation, audit reputation and audit experience whereas firm performance is proxied by accounting profits (ROA), market value (Tobin’s Q) and risk of bankruptcy (Z- score).
The dataset includes 268 listed non-financial companies in Vietnam over the period from 2010 to 2015. The results show that there is no relationship between audit rotation, audit reputation and audit experience on Tobin’s Q and Z-score. However, audit reputation and audit experience are insignificantly correlated with firm profitability. The effect of audit rotation on ROA is positive, suggesting that companies which have audit rotation are more likely to have higher profits.
This implies that the change of audit firm increases the independence of auditors as well as enhances audit quality and hence positively affects firm performance. Key words: audit quality, audit rotation, audit reputation, audit firm experience, firm performance, listed companies, Vietnam. IV LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com TABLE OF CONTENTS CHAPTER 1:INTODUCTION. RESEARCH OBJECTIVES AND RESEARCH QUESTIONS.
RESEARCH METHODOLOGY AND DATA. 4 CHAPTER 2:THEORETICAL FRAMEWORK AND EMPIRICAL EVIDENCE OF AUDIT QUALITY AND FIRM PERFORMANCE .1 THEORETICAL LITERATURE OF AUDIT QUALITY AND FIRM PERFORMANCE. Audit quality definition and relevant theoretical framework. The stakeholder theory.
Theory of Asymmetric Information. Definition and measure of firm performance. EMPIRICAL EVIDENCE ABOUT THE IMPACT OF AUDIT QUALITY ON FIRM PERFORMANCE. The impact of audit rotation on firm performance.
The impact of audit reputation on firm performance. The impact of audit firm experience on firm performance. The effect of Vietnamese Auditing Standards (VSA 220) on “Quality control of financial statements audit activities” on firm performance. THE CONCEPTUAL FRAMEWORK.
19 CHAPTER 3:RESEARCH METHODOLOGY AND DATA. 20 CHAPTER 4:DATA ANALYSIS AND EMPIRICAL RESULTS. DESCRIPTIVE STATISTICS AND BASIC ESTIMATION. The correlation matrix of variables.
Identification of Endogeneity Problem. REGRESSION RESULTS AND DISCUSSION. Audit quality and firm performance measured by ROA: .2: Audit quality and firm performance measured by Tobin’s Q: .3: Audit quality and firm performance measured by Z-Score .4: Changing Policy and Firm Performance. 40 V LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 5:CONCLUSIONS AND POLICY IMPLICATIONS.
LIMITATION AND FURTHER RESEARCH. 50 VI LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF TABLES Table 1: Rules on mandatory audit firm rotation and mandatory auditor rotation for listed companies.49 Table 2: The Z-Score level. 23 Table 3: Summary of variables and predicted sign of coefficient. 26 Table 4: Categorized business fields .27 Table 5: Descriptive Statistic .28 Table 6: Correlation matrix.
33 Table 7: Heteroskedasticity test .34 Table 8: Endogeneity test. 35 Table 9: System GMM estimation of firm performance measured by ROA .36 Table 10: System GMM estimation of firm performance measured by Tobin’s Q .38 Table 11: System GMM estimation of firm performance measured by Z-Score .39 Table 12: Companies in year of establishment. 52 VII LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com LIST OF FIGURES Figure 2.1: The Agency Theory .2: The Stakeholder model of the corporation .3: The Asymmetric Information Theory .4: The Analytical Framework .1: The prediction of relationship between audit firm experience and ROA.2: The prediction of relationship between audit firm experience and Tobin’s Q .3: The prediction of relationship between audit firm experience and Z-Score. 32 VIII LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CHAPTER 1: INTRODUCTION 1.
Problem statement From the agency theory’s perspective, the separation of function between ownership and management in corporation leads to information asymmetry problem and conflict of interest between managers and shareholders. The role of third party who gives the opinion related to financial information disclosure is very important and audit quality is considered as an external monitoring factor which has a significant effect on firm performance. There are some previous studies which investigate the role of audit quality in terms of its effect on firm performance. However, they use the different measures of audit quality and conduct in different markets, so the empirical results are inconsistent.
Some studies point out that the impact of audit quality on firm performance is positive whereas other studies find negative or insignificant effects on firm performance. However, the role of audit quality as a key driver of firm performance has not yet attracted sufficient attention from researchers and policy makers in Vietnam. This may result in the fact that investors lack the proper consideration about audit quality which might affect the financial disclosure and useful information for investors’ decision-making. In the process of integration and development, Vietnam has more opportunities to approach and take part in the global organization such as WTO, TPP etc.
One of the difficulties in the foreseen future isto guarantee the reliance and the transparency of declared financial information to attract foreign investment and create the fair competitive environment. The collapse of Arthur Andersen, one of the five biggest audit firms (Big 5) in 2002, the scandal and infringement related to audit quality recently and the integrity of firms’ financial statements force to enhance the investors’ perception about the audit quality and even the pressure to improve the audit quality of external parties. In Vietnam, there is also a rising concern about this issue after a serial of scandal of listed companies in the stock exchange such as the evaporated inventories of Truong Thanh Corp (TTF), NTACO Corp (ATA) and bad debt from Ocean Group (OGC) which led to sharp deterioration in stock market and investor’s belief. 1 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Audit quality is a controversial issue between the legislators and a key consideration for auditors.
The audit quality framework of United Kingdom Financial Reporting Council (UKFRC) public in 2008 identifies key determinants of audit quality including culture within audit firm, skills and quality of auditors, the effectiveness of audit process, reliability and usefulness of audit reporting and outside factors. According to DeAngelo(1981) and PCAOB (2011), audit quality is identified as the probability of detecting errors or omissions which affect the financial statements in material aspects. IFAC (International Federation of Accountants) states that audit quality is the most fundamental characteristic of international auditing standards, it should be capable of consistent interpretation, unambiguous translation, enforceable and designed to achieve a high quality of audit. In Vietnamese Standards Auditing 220 (VSA 220) about Quality of auditing activities, audit quality refers to the degree of satisfaction of users of the audit results as the objectivity and reliability of the opinion expressed, and of the entity under audit as to the auditor’s recommendations with the view to improve the business efficiency of the entity within a time limit and at a reasonable price.
There is no consensus among researchers about the method to measure audit quality. Previous studies use indirect measurement such as audit rotation and audit fees (Sayyar et al., 2015),audit firm size, litigation, auditor tenure, non-audit services, industry experience and peer review (Hussein & Hanefah, 2013). According to Sori et al., (2006), size of audit firm is a good proxy for audit quality because the large audit firm with better reputation, experienced practitioners, superior technology and abundant financial resources will give assurance of audit opinion about the financial status of audited companies. Moreover, the large audit firm size might not be pressured by revenue from big clients that affect its independence and objectivity when expressing audit opinion.
The initial auditing institution appeared early in 1942, which is the institute of Internal Auditors in the United States of America. In Vietnam, the independent auditing firms started later in 1991. To maintain the audit quality, the audit firms and auditors have to comply with the audit standards that have been set by Ministry of Finance and Vietnam Association of Certified Public Accountants (VACPA). Moreover, auditors also conform to the Ethical Standards including the basic principles: integrity, independence, prudence and professional competence.
The main motivation of principles is to maintain both 2 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com independence of mind and independence of appearance (ISA 200, 2009) and audit rotation is considered a representative variable for audit independence. In an attempt to enforce and improve audit quality in Vietnam, on 6th December 2012, Ministry of Finance announced the composition of 37 new auditing standards. These standards are applied and effective from January 1st, 2014. One of which specially focuses on “Quality control of financial statements audit activities” – VSA 220.
This standard aims to give more requirements and increase the audit control activities to enhance the quality of independent audit activities in Vietnam. Research objectives and research questions The main objective of this study is to examine the impact of audit quality on firm performance of listed companies in Vietnam. Specifically, it aims to give the deep insight into the impact of three proxies for audit quality (audit rotation, audit reputation and audit firm experience) on firm performance measured by firm profitability, market value and risk of bankruptcy. Moreover, this thesis will also test the effect of the promulgation of VSA 220 which is considered as an important legal framework to improve audit quality in Vietnam on firm performance.