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Business Banter: Eyes turn to auditors after BBT scandal
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
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