Business Sustainability: Effective Internal Control Required

11:38:28 AM | 3/11/2019

Many studies and surveys showed that corruption in the private sector has not declined in Vietnam in the past decade. Moreover, corruption has emerged as a threat to business operations and weakened the country's economic growth prospects and long-term sustainability.

Legalizing corporate internal control

At the Consultation Workshop jointly organized by the Vietnam Chamber of Commerce and Industry (VCCI) and the United Nations Development Program (UNDP) in Hanoi, a draft research report themed “Applying internal control and code of conduct in Vietnamese businesses: Key findings and recommendations” was released by the Office for Business Sustainable Development - VCCI and the Integration and Development Consulting Co., Ltd (TDI) together with the National Economics University, the Academy of Finance and the International Business Leaders Forum (IBLF Global - UK).

This research was launched when the new Anticorruption Law was passed by the National Assembly on November 20, 2018 and scheduled to take effect in July 2019. Chapter 4 of the law is applied to the private sector, referring to some new obligatory tasks, particularly the internal control system and the code of conduct (CoC).

According to international experience, the application of a reliable internal control system together with a good CoC can help businesses control all activities, enable them to improve operational efficiency, enhance information reliability and law compliance. However, in Vietnam, these concepts are still quite new, while methods adopted by enterprises and management tools applied by them are not very clearly defined.

The research surveyed 239 companies and interviewed 40 companies. Results showed that a large share still understood incorrectly or incompletely the concept of internal control and CoC. Many still thought that internal control is merely the responsibility of internal control officers rather than a matter of corporate governance. Among respondents, only 50% - 60% clearly understand internal control and CoC as well as their important roles to corporate sustainable development.

Compliance issues, for example relation with State bodies, present two important issues that need to be considered: A large share of businesses have violated some regulations, and unofficial facilitation payment for government officials seems to be a popular business practice in Vietnam.

In order to explain or justify these actions, they pointed to some challenges to ensure law compliance like encountering hardships in fulfilling regulations or facing overlapped/contradictory or changeable regulations that they lack personnel to update and track such developments.

Besides, in relationship with business partners, informal and relation-based business affairs are popular. Personal relations and unofficial expenses cloaked in various forms account for 25% - 30% in business transactions. One-third of respondents said they have never applied for any competitive procurement. Unusual procurements and sales are mentioned by a considerable share of respondents and this is believed to be a significant killer of business integrity. In procurement, bad practices such as “placing orders not for real demands”, “placing orders not in right quality”, “intervened price quotation that negates objectivity” account for about 10%. Similarly, in sales, 11% - 16% of surveyed enterprises (24% - 34% of respondents) clearly recognized these anomalies like “writing wrong invoices”, “selling beyond the company’s policies” and “delivering goods not as committed in the contract”.

A more alarming issue is irregularities in human resource management. From 27% to 38% of respondents said they are aware of such issues as “Not fully applying payables to employees”, “Not complying with labor laws in signing and fulfilling contracts” and “recruiting employees based on personal relationship rather than capacity”.

The research clearly illustrated weaknesses or even inefficient aspects in corporate governance to a certain extent. In addition, in large-scale companies, the Supervisory Board works quite superficially. It does not perform highly independent functions and tasks but it, in fact, relies heavily on the Board of Directors and the Management Board as it is deemed a subordinate body. Recent reports on corporate governance violations partly proved weak and unclear internal control and CoC compliance.

Effective internal control system is essential

According to survey results and international experience, this research put forth some recommendations for businesses and the Government. State-owned enterprises (SOEs) are recommended to bring their internal control system into full play. To motivate SOEs to do this, they need to be given more business power rather than the current mess of half-business and half-State management.

According to the report, private enterprises should change their business approach from short-term philosophy to long-term sustainable growth. They should work out long-term strategies, respect accepted regulations, standards and practices and apply them internally and with external partners. To do this, they need to be trained in internal control in the way they will adapt for their internal control system. Medium and large enterprises which have successfully deployed this system should share and inspire their partners and customers to apply it to spread its benefits to the entire economy.

For its part, VCCI should become an information and professional center to advise and train enterprises and business associations; organize, coordinate and license training courses on internal control and CoC because it will be highly practical, easy to implement and easy to apply, the research suggested. VCCI should also act as a coordinating center of collective actions to connect businesses, government agencies, business associations and industry associations to make the business environment fairer.

The Government necessarily develops and issues official guidelines to instruct enterprises to enforce the Law on Anticorruption. These documents must be made in detail for all businesses regardless of their sizes and types of ownership and should include guidance on basic principles of corporate governance. The government should improve its monitoring capacity by encouraging the participation of communities and non-governmental organizations.

Dr. Vu Tien Loc, President of VCCI

In large-scale companies, the Supervisory Board works quite superficially. It does not perform highly independent functions and tasks but it, in fact, relies heavily on the Board of Directors and the Management Board as it is deemed a subordinate body. Recent reports on corporate governance violations partly proved weak and unclear internal control and CoC compliance. Meanwhile, small and medium-sized companies in Vietnam lack focus on internal control/risk management or cannot afford salaries for full-time personnel in charge of these issues because of their insufficient financial resources and awareness.

Around the world, internal control is one of the most important links of corporate governance because it is an effective tool to reduce risks, detect fraud and ensure law compliance. IFC's Good Corporate Governance Practices recommend that Vietnamese businesses need to consolidate and improve internal control and/or perfect their strong and capable Internal Control Board to support the Board of Directors, effectively perform its supervisory roles and ensure interests of all stakeholders.

When corporate control and compliance systems are not applied or functioned properly, bad behaviors may emerge within companies and go beyond borders through supply chains, global investment and trade. Right leadership, corruption risk management and compliance systems and clear governance and supervision are important to build corporate integrity.

Mr. Gareth Ward, British Ambassador to Vietnam

With the Government’s efforts, particularly in the upcoming Law on Anticorruption, I believe that it will motivate the business community to comply with and demonstrate its commitments to upholding integrity in business culture. But, to launch an effective corporate integrity program requires the engagement of all stakeholders, not only from government agencies but also from businesses and civil society. Promoting the business environment, with a focus on corporate integrity, continues to be one of the UK's priorities in Vietnam. I am very happy to see growing business interests in this area, including foreign businesses operating in Vietnam.

Ms. Caitlin Wiesen, Resident Representative, UNDP Vietnam

The critical importance of addressing corruption and its impact on achieving the Sustainable Development Goals is well known. An estimated US$3.6 trillion is lost to development through corruption annually and it is why addressing this challenge is a key target under SDG Goal 16.

The UNDP Regional Project “Promoting a Fair Business Environment in ASEAN” aims at promoting a fair business environment in ASEAN by minimizing corruption risks and encouraging sustainable practices. It targets 6 countries in ASEAN: Indonesia, Malaysia, Myanmar, Philippines, Thailand and Vietnam which is one of the priority countries of this new program. The Vietnam program will focus on three inter related objectives: Promoting business integrity and sustainable practices for private companies and state-owned enterprises; Strengthening anti-corruption strategies, policies and laws; and Improving redress mechanisms for companies, investors and the broader public.

The new Anti-Corruption Law was recently adopted by the National Assembly on 20th November 2018. The Law will come into effect on 1st July 2019. The more important work of the Vietnamese Government and the business community from now on is to prepare for effective implementation of the new Law.

UNDP has provided extensive support to Vietnamese partners during the process of developing and adopting the Law. VCCI has played a leading role in promoting business integrity initiatives in Vietnam for many years. Since 2016, with support from the British Embassy, VCCI has conducted a number of activities on business integrity which has led to the formulation of a Government Business Integrity Initiative (GBII). This initiative was supported by the Government of Vietnam in 2017.

Effective implementation of the Anti-Corruption Law is key for the realization of the Sustainable Development Goals or SDGs by 2030. In order to achieve the 17 SDGs and meet the 169 targets, SDG 16 on peace, justice and strong institutions and its targets on substantially reducing corruption and bribery in all their forms plays a pivotal role.

UNDP stands ready to deepen its support to Vietnam in its efforts to address corruption in all its forms and improve business integrity. It is key to achieving the triple bottom line of advancing business for People, Planet and Prosperity.

Mr. Brook Horowitz, CEO of Int’l Business Leaders Forum, IBLF Global

There are many guaranteeing factors to translate the principles of the Code of Conduct, in which enterprises need appropriate information technology systems, need to be trained on corruption resistance and on CoC. In particular, they need a self-monitoring and supervising system to know what is going wrong.

A strict internal control system will help enhance performance, increase profitability and reduce risks and business costs. Leading Vietnamese and international companies which are currently applying strong internal control systems can share knowledge and experience with other businesses. Those with strict internal control systems will easily join international service supply chains and attract foreign investment.

Vietnam is currently developing very fast. A clear commitment of the government and the business community to business integrity can make the Vietnamese economy more attractive to international investment and trade.

Dr. Nguyen Van Thang, National Economics University, Research Team Leader

In general, companies think a lot of high profits but pay less attention to associated high risks. Integrity values are not cared about much. In many companies, internal control and CoC are not applied in a substantive and systematic way. The application of internal control will help reduce violations and wrongdoings in business.

Institutional reform and business actions are the “two legs” of development. Institutional reform takes one step forward, business actions must take longer steps. Companies need to balance between “embracing opportunities” and protecting business results. VCCI needs to help them improve the internal control system to enable them to protect their business achievements.

In fact, internal control or CoC do not necessarily require a big investment. Companies can invest in the internal control system based on their conditions. But, they need to raise awareness of internal control and CoC, extensively inform and disseminate benefits of the internal control system through their supply chains. At the same time, they need to take part in collective action initiatives that promote business integrity. They should change their business philosophy from “quick profit” to “sustainable development”.

Quynh Chi

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