[Flashback] Accounting Fraud in Vietnam: Eyes turn to auditors after Bach Tuyet Cotton Corporation (BBT) accounting scandal; Vietnam Arrests Four More Former Vinashin Officials

http://vietnamnews.vn/economy/business-beat/179237/eyes-turn-to-auditors-after-bbt-scandal.html

http://www.bloomberg.com/news/articles/2010-09-06/vietnam-police-arrest-4-more-former-vinashin-officials-amid-investigation

Posted by LE Hoang Trinh, Year 4 undergrad at the School of Information Systems, Singapore Management University

Eyes turn to auditors after BBT scandal

(08-08-2008)

by Nguyen Duy

Never before in Viet Nam has the accuracy of a company’s audited financial reports raised so much concern, and never before has the quality of auditing companies come under such heavy fire. The problem has grown so critical that the ministries of Finance and Public Security are drafting a circular to improve the circulation of information about listed company and auditor violations, according to director of the State Securities Commission (SSC)’s Investigation Department Hoang Duc Long.

Problems began with Bach Tuyet Cotton Corporation (BBT), a HCM City Stock Exchange listed company, when in mid-July, the exchange temporarily suspended transactions for BBT shares due to heavy losses in 2006 and 2007. The news came as a shock to investors, who had heard nothing but good reports about BBT.Audited financial reports showed that the company was profitable, netting VND2.25 billion (US$136,360) in 2006 and VND3 billion ($181,820) in 2007. In actuality, combined losses exceeded VND17 billion ($1 million).

Suspicions quickly arose about the company’s management board, the board of inspectors and market managers in addition to the Auditing and Informatic Services Company (AISC), which audited BBT’s reports.

Le Dat Chi from HCM City Economics University’s Faculty of Corporate Finance said, “a basic principle of the [auditing] profession is to ensure reports are factual, but BBT’s audited reports were clearly not.” Shareholders had a legal right to accurate information to base their investment strategies on, Chi said.

Though solutions to the problem are underway, those not involved in the cotton company are still very concerned. The scandal has broadly shaken securities investors’ psychology at a time when the economy is already struggling and is suffering from increasingly lowered economic growth and high inflation.

Trung Hieu of Ha Noi said, “Investors buy shares according to their value, but how can real value be determined, when the authenticity of financial reports is compromised?”

“People should be more cautious in choosing shares for investment now, as some shares are likely to slump simply due to investor suspicions about a lack of transparency,” Hieu said.

Indeed, the phrase “if the financial reports are correct” is cropping up in many places now, particularly in analyst assessments about company performance.

However, Nguyen Thi Ngoc Trang from HCM City Economics University’s Faculty of Corporate Finance said it was unlikely that an audited report would be totally free of error. She said sometimes auditors “might not uncover some things” for “both objective and subjective reasons”.

Moreover, she said, “Many disasters caused by inaccurate financial reports are believed to involve some of the world’s leading auditors… The Enron and WorldCom cases in the US some seven years ago are examples.”

US telecoms giant WorldCom in 2002 shocked the business world after admitting a multi-billion dollar accounting fraud. It followed corporate scandals, at Enron and its accountant Arthur Andersen, which shook investor trust.

So it seems even the roles of even the world’s top auditors can occasionally be suspect.

Gains from loss

Director of Finance Ministry’s Department of Accounting Regulations Bui Van Mai said that despite the immediate negative impacts of the BBT case, the outcome would actually be positive for those involved in the stock market.

Authorities would now intensify their control of auditing companies, and auditors would be forced to take greater care before issuing results.

Investors would now pay more attention to financial reports and company performance, Mai said.

Obstacles

A financial analyst Ho Quoc Tuan said a professional market with knowledgeable investors would force companies to adhere to professional and moral business practices.

If authorities ensured proper punishment for violators, that would certainly help speed up the process, Tuan said.

However, the Ministry of Finance’s regulation is vague, stating, “Organisations and individuals that violate the law on pronouncing information, depending on the events’ nature and level, will be disciplined, fined or criminally prosecuted; if damages are caused, they must be compensated, according to the law” (Article 6, Circular 38/2007/TT-BTC).

SSC chief inspector Hoang Duc Long pointed out that fines SSC had set so far were not enough to deter violators. “Really, if an enterprise issues tens of billions of dong worth of shares, a fine between tens of million dong and even VND500 million (US$30,300) is trivial.”

Mai said the Ministry of Finance is drafting an Independent Audit Law which will address these problems that have recently arisen. The law will have a separate chapter for regulations on the auditing of public companies as “these kind of companies are connected to the interest of many people.”

“We hope that the law will help minimise unfortunate cases like BBT,” Mai said. — VNS

Vietnam Arrests Four More Former Vinashin Officials

byBloomberg News

September 6, 2010

Sept. 6 (Bloomberg) — Vietnamese police arrested four former officials of Vietnam Shipbuilding Industry Group, known as Vinashin, as the government extended its investigation into financial difficulties at the state-owned company.

The people arrested on Sept. 3 include two former board members, Tran Quang Vu and Tran Van Liem, and ex-general directors of two of Vinashin’s subsidiaries, Nguyen Van Tuyen and Nguyen Tuan Duong, according to a statement from the Ministry of Public Security posted on the government’s website on Sept. 3. Pham Thanh Binh, the company’s former chairman and chief executive officer, was arrested a month ago.

Vinashin has been a centerpiece of the government’s strategy of building its industrial structure through state-owned companies, as the Southeast Asian nation targets developed status by 2020. Before nearly collapsing under 86 trillion dong ($4.4 billion) in debt, Vinashin had sought to expand into areas ranging from securities to tourism.

“This is an issue of corporate governance,” said Ayumi Konishi, the Hanoi-based Vietnam country director for the Asian Development Bank. “The current form of oversight for state-owned enterprises in Vietnam hasn’t been working effectively.”

Investors have “rightly” expressed concern about corporate governance at Vietnamese companies, Min-Hwa Hu Kupfer, who chairs U.K.-listed Vietnam Holding Ltd., said when the fund released results on Aug. 19 “The recent developments at Vinashin only serve to underline the predicament.”

Branching Out

In 2007, Credit Suisse Group AG said it agreed to arrange financing of as much as $700 million for Vinashin, describing the company as “at the forefront of the rapid economic development taking place in Vietnam.” That year, Vinashin paid more than $90 million for a stake in Bao Viet Holdings, the biggest state-owned insurer in Vietnam.

“There have been a number of companies in Vietnam that have branched out into areas where they don’t have any special expertise,” the ADB’s Konishi said.

In 2009, Bao Viet said the Vinashin stake would be transferred to the control of the government-controlled State Capital Investment Corp.

Vinashin says on its website that it accounts for as much as 80 percent of Vietnam’s domestic shipbuilding capacity, and that it “benefits from strong government support to lead the country’s ambition to establish itself as a leading shipbuilding nation.”

‘Confessions’

The Vinashin officials “have intentionally violated state regulations on economic management that have resulted in serious consequences,” the Ministry of Public Security said in the statement. The findings are “based on investigation results, evidence and confessions from Pham Thanh Binh.”

Binh was suspended in July after an investigation into the financial difficulties at the Hanoi-based company, which received the $750 million proceeds of the government’s first foreign-currency bond sale in 2005. He was then arrested on Aug. 4.

The government said in 2005 that Vinashin’s development plans to 2020 had been “exhaustively checked” before a decision was made to give the company access to the bond sale proceeds.

The four former company officials could not be reached for comment because they are in police custody. Nguyen Quoc Anh, the company’s acting CEO, could not be reached immediately to comment on the arrests.

To contact Bloomberg News staff on this story: Nguyen Dieu Tu Uyen in Hanoi atuyen1@bloomberg.net; Jason Folkmanis in Ho Chi Minh City atfolkmanis@bloomberg.net

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