This study aims to analyze the relationships between corporate-governance
mechanisms and audit quality of Vietnam listed firms. Based on a sample of 221 listed
firms collected from FiinPro database, annual reports, financial statements and corporate
governance reports from 2015 to 2017, this study examines the use of Big 4 auditors as a
proxy to measure audit quality and applies the logistic regression method to analyse these
relationships. The empirical results show that the use of Big 4 auditors is significantly
positively related to corporate governance mechanisms (e.g. the proportion of independent
directors in the board of directors, controlling shareholding and foreign investor equity).
Thus, the findings support the perspective claiming that improved control mechanisms will
lead to higher audit quality. The study has a number of practical implications for
managers and the Vietnam Government in terms of enhancing corporate governance
effectiveness and audit quality. This study also adds to the limited number of empirical
studies on audit quality of listed firms in Vietnam.
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s study support Decree No. 71/2017 / ND-CP of Vietnam
government which requires that "The composition of the of a listed BoD must ensure that
at least 1/3 of the members of the BoD are independent members" (Section 5, Article 13).
In this study, however, 5% of the sample of 221 listed firms still have the ratio of
independent members lower than one third, thus the stock regulators need strictly provide
the surveillance of listed firms to ensure them point enough independent member in the
BoD.
Second, the study does not support the association between the duality between
CEO and chairman of the BoD and audit quality, suggesting that the duality is not a poor
control mechanism in Vietnam listed firms. Therefore, Vietnam government does not need
to have the policy on the separation between the two positions in the listed firms.
Third, the study does not find a relationship between state ownership and audit
quality. Thus, the finding does not support the findings of prior studies (Guedhami et al.,
2009; Alfraih, 2017; Wang et al., 2008) which found that state owners in other countries
prefer selecting low-quality auditors to protect their political interests at state firms. In
the case of Vietnam listed firms, state owners do not play a significant role in the
decision of choosing auditors. Indeed, Vietnam government monitors its equity in listed
firms via state representatives and Circular No. 21/2014 / TT-BTC of the Ministry of
Finance (2014) also promulgated the regulation on the operation of authorized
representatives for state capital invested in enterprises. However, the question of whether
the representatives effectively protect the interest of government is still a critical issue in
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practice that needs an effective policy to improve their role at listed firms (Tran Van
Binh and Nguyen Thanh Huong, 2017).
Fourth, in 2017, foreign capital inflows into the Vietnam stock market increased
dramatically with the value of the foreign direct investment by the end of December 2017
reached USA$ 32.9 billion, an increase of over 90% compared to the end of 2016. This is
attracting a great interest of foreign investors in the stock market of Vietnam. However,
foreign investors are still not fully familiar with the investment environment in the
Vietnam stock market such as legal framework, corporate governance and internal business
issues (Financial Magazine, 2018). The findings of this study show a positive association
between audit quality and foreign equity holding, suggesting that listed firms need to
choose high-quality auditors to attract foreign shareholders. This is because these
shareholders often claim that the financial statements and the performance of the company
audited by high-quality auditors are more reliable (Jiang and Kim, 2004).
Finally, the findings also suggest that a firm with larger controlling shareholders is
more likely to choose high-quality auditors. In other words, with a larger size of
shareholding, the controlling shareholders can more effectively monitor the behaviour of
managers. Thus, this is a signal for information users to analyse which companies have
more effective control mechanisms.
Although this study has a number of contributions to both theory and practice, there
are still some limitations. Future studies should extend the sample to measure for all
companies listed on the stock exchange of Vietnam. In addition, the use of a binary
variable of the Big 4 auditors to measure audit quality still has some limitations, therefore
future studies should combine with different proxies to measure audit quality. Finally,
further research should examine other elements of the governance mechanism (control
committee, other ownerships such as group owners, financial owners...) and other elements
of the audit firms (auditing capacity professional ethics, audit methods, auditing support
systems...) may affect audit quality of listed firms.
Overall, this study has examined the relationship between audit quality and
corporate-governance mechanisms of Vietnam listed firms. The empirical results support
three out of five hypotheses used to test the research model. Firms with higher independent
member ratios, higher foreign shareholdings, and larger controlling owners have more
incentive to choose high-quality auditors. This study has a significant contribution to the
literature on audit quality and corporate governance, and managerial practices.
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