Financial transparency to resolve lending bottlenecks

In the draft proposal to amend and supplement several provisions of seven financial laws, published in August, the Ministry of Finance (MoF) recommended increasing the maximum penalties for administrative violations in independent auditing by 30 times for both organisations and individuals compared to current levels. Additionally, large-scale enterprises and organisations would be required to undergo mandatory audits.

“The draft amendments and supplements include extending the statute of limitations for penalties from a year to 10 years; increasing the maximum fine from $4,000-125,000 for organisations, and from $2,000-62,500 for individuals; and adding several new penalty measures to align with current practices and related regulations. The statute of limitations for handling violations of independent auditing laws is 10 years,” stated in the draft presented by the MoF to the government.

In the Van Thinh Phat case, for over 10 years, auditors from KPMG, Deloitte, and E&Y audited the bank without uncovering any irregularities, with financial statements consistently reflecting “no significant issues”. SCB was embezzled of billions of USD, leading to enormous cumulative losses and a capital deficit nearing $21 billion.

“Enterprise lending continues to weigh on the banking system, as foreign investors view Vietnam as a frontier market with high speculative risks,” said Nguyen The Minh, head of Research & Development for Retail Clients at Yuanta Securities Vietnam.

“Strengthening penalties via amendments to the Independent Auditing Law will hold auditing firms more accountable, improving financial transparency. This, in turn, will enhance investor confidence in the Vietnamese market, reducing companies’ dependence on bank loans. Transparent financial reports are key to helping listed companies raise capital and lower leverage ratios,” Minh said.

With the help of two auditing firms, financial reports were manipulated, turning losses and bank debts of nearly $833 million into fake profits, allowing the chairman of Tan Hoang Minh Group to successfully carry out fraudulent bond issuances and misappropriate more than $358 million from investors.

“Currently, most shareholders and lenders rely on the analysis of financial reports produced by independent auditors. If these reports fail to accurately reflect the risks and operational issues of businesses, it will pose even greater risks in the future, as evidenced by the consequences of recent scandals like those involving Van Thinh Phat and Tan Hoang Minh,” Minh added.

Enhancing the responsibility of independent auditors will improve the quality of information and create solid input for investors and lenders, Minh said. Additionally, it will help retain investors, as the entry and exit of investors in the market is largely influenced by the risk associated with listed financial reports.

According to data from FiinGroup, the International Finance Corporation, and Market Intelligence, only about 32 per cent of the credit demand of small- and medium-sized enterprises in Vietnam has been met, equivalent to $11.2 billion, leaving an estimated financial gap for such enterprises of nearly $24 billion.

“For Vietnam, corporate financing still primarily relies on bank loans. As the stock and bond markets develop, along with the economy opening up, the reliance on bank loans by enterprises decreases, though not significantly yet. Solving the economic bottleneck hinges on addressing the issue of corporate financing through loans,” said Dr. Nguyen Thi Kim Thanh of the Banking Strategy Institute under the State Bank of Vietnam.

In the FLC case, due to the misconduct of certain leaders and staff at Hanoi Auditing and Accounting and TTP Auditing, the financial statements of FLC’s subsidiary, Faros, were falsely improved. As a result, Trinh Van Quyet and his accomplices were able to commit fraud and embezzle over $150 million from stock market investors.

Regarding the role of independent audits in the stock market, Dr. Nguyen Huu Huan, head of Financial Markets at the Ho Chi Minh City University of Economics, pointed out that while numerous financial statement violations have occurred, only a few have faced criminal prosecution.

“The role of auditing firms in such cases has remained unclear, despite their theoretical responsibility to be the first to identify irregularities within enterprises and issue exclusions or warnings to inform investors. Stricter regulations and enhanced roles and responsibilities for auditing firms in detecting corporate violations helps protect investors’ rights and retain investors in the market,” said Huan.