Current Status of Completing Internal Control System at Vietnam's State-owned Enterprises According to COSO International Standards

Figure 2.3 has clarified the internal control system with three clear lines of defense associated with the functions of the internal control system according to Circular 13/2018/TT-NHNN.

2.2.1.2 Internal regulations of Vietnam Bank for Agriculture and Rural Development

Decision 600/QD-HDTV/2012 on promulgating the Charter on organization and operation of Agribank, which stipulates on internal control and internal audit. Accordingly: Internal control system is a set of mechanisms, policies, procedures, internal regulations, and organizational structure of Agribank built in accordance with the guidance of the State Bank and organized to ensure prevention, detection and timely handling of risks and to achieve the set requirements. Agribank needs to establish an internal control system to ensure the following requirements: (1) Ensuring efficiency and safety in operations; protecting, managing, and safely and effectively using assets and resources. (2) Ensuring the financial information system and management information are honest, reasonable, complete and timely. (3) Ensuring compliance with the law and internal regulations, procedures and rules. The activities of the internal control system must be periodically assessed by the internal audit department and an independent auditing organization in accordance with the provisions of law. This Decision also stipulates that the Board of Directors establishes a specialized internal audit unit under the Supervisory Board to conduct internal audit at Agribank with specific tasks of reviewing and independently and objectively assessing the internal control system; independently assessing the appropriateness and compliance with internal regulations, policies, procedures and processes established in Agribank; making recommendations to improve the effectiveness of the system, processes and regulations, contributing to ensuring that Agribank operates safely, effectively and in accordance with the law. This Decision also stipulates that the results of internal audit must be promptly reported to the Board of Directors, the Supervisory Board and sent to the General Director of Agribank. Thus, the Charter of organization and operation of Agribank has stipulated the establishment of an internal control system with control objectives and an internal audit department that is quite consistent with the practices and regulations in Circular 13/2018/TT-NHNN.

Accordingly, the Board of Directors issued Decision 102/QD-HDTV-KTNB/2014 on Agribank's Internal Audit Regulations and the Supervisory Board issued Decision 206/QD-BKS/2019 on the Regulations on the organization and operation of Agribank's Internal Audit. These are considered legal bases that create favorable conditions for establishing Internal Audit as well as Internal Audit activities at Agribank.

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2.2.2 Current status of completing the internal control system at Vietnam Bank for Agriculture and Rural Development according to COSO international standards

Through Agribank's reports as well as discussions with experts, the thesis synthesizes the current status of Agribank's internal control system according to the five components that make up the internal control system to see the level of completion of this system at Agribank according to the COSO internal control model, including: Control environment - Risk assessment - Control activities - Information & communication - Monitoring. Specifically:

2.2.2.1 Current status of control environment at Vietnam Bank for Agriculture and Rural Development

The thesis analyzes the current status of the control environment at Agribank according to the elements of the control environment (integrity and ethical values, commitment to capacity, Board of Directors & Supervisory Board, organizational structure, division of authority and responsibility, human resource policy) associated with five principles according to the COSO internal control model, specifically:

a. Commitment to honesty and adherence to ethical values

According to Circular 13/2018/TT-NHNN, Control culture is the corporate cultural value of a commercial bank that demonstrates a unified awareness of the importance of control and risk management activities of the Board of Directors, Board of Members, Supervisory Board, General Director (Director) and individuals and departments. Control culture is formed through professional ethics standards, internal regulations, reward and discipline regimes to encourage and ensure that individuals and departments proactively identify and control risks in their operations and the operations of the commercial bank. A strong enough control culture is believed to help commercial banks minimize or avoid losses due to failures of internal control.

Agribank has issued the Agribank Cultural Handbook, which specifically stipulates the Agribank cultural identity, ethical standards, behavior, communication, ethics, and responsibilities of Agribank officers and employees; regulations on standards, conduct, and transaction styles of tellers in the Agribank system; labor regulations... in written form and widely disseminated in the system via the Website, Eoffice internal network... to encourage and ensure that individuals and departments grasp the control messages, thereby proactively identifying and controlling risks in their own operations in particular and Agribank's operations in general. In 2019, Agribank continued to complete the draft Regulations on Professional Ethics Standards.

for employees (except internal auditors and BSK members) to submit to the Board of Directors for approval to create a healthy control culture in the system. However, Agribank's control culture has not been uniformly recognized; some officers have not yet realized the importance of control culture and risk management, leading to serious violations in the process of performing operations due to non-compliance with regulations, business processes and lax inspection and supervision at the unit. The Board of Directors and General Director of Agribank have also taken preventive measures and promptly handled violations and violations of the law and internal regulations of Agribank according to Decision 600/QD-HDTV-TCTL/2015 on promulgating the Charter of organization and operation of Agribank. Specifically, in 2019, Agribank was determined in handling violations of the law, internal regulations and professional ethics standards: Handling units and individuals related to existing problems and violations through internal inspection and examination work, internal fraud cases at units (Cho Lon Branch, Khanh Hoa); Disciplining the heads of branches with low credit quality, many problems, serious violations but slow to overcome (Nam Ha Noi Branch, Branch 10). Thus, Agribank has basically complied with the first principle of COSO standards when establishing a control culture with standards of conduct in the bank and assessing compliance as well as handling violations quite promptly.

In addition to the achieved results, the survey also found that the Board of Directors and the Executive Board of Agribank have not yet established a strong enough control culture.

Table 2.2 Survey results of some factors belonging to Control Environment

of Agribank

Source: Compiled from survey results at Agribank

Firstly, some managers have not been good role models in complying with ethical standards through words and actions. Secondly, control messages are still communicated to employees in traditional forms such as sending documents and not implementing commitments to ensure compliance. Agribank has not done a good job of promoting and raising employees' awareness of internal control so that they understand and clearly define the functions, tasks, powers and responsibilities in internal control. As a result, employees do not have a control culture and are not really proactive in effectively participating in the implementation of control policies and procedures. Thirdly, the capture and handling of violations of rules and standards has been done but sometimes delayed at Agribank, leading to the consequences of incidents being often large and difficult to overcome. The main reason identified through the above survey results is that Agribank has not established appropriate information channels for employees to promptly report violations. All of the above may lead to a decline in the control culture at Agribank, creating a message throughout the system that internal control only plays a secondary role after other goals of the bank; individuals and departments only focus on performing their own work and forget about control responsibilities.

b. Supervision of the Board of Members and the Board of Supervisors

The supervisory organization structure of the Board of Directors and General Director of Agribank has complied with the regulations of the State Bank (Circular 40/TT-NHNN/2011 on regulations on licensing and organization and operation of commercial banks and Circular 13/TT-NHNN/2018), accordingly: The Board of Directors has established four Committees, including: Risk Management Committee (Decision No. 853/QD-HDTV-TCCB/2009); Personnel Committee (Decision 125/QD-HDTV-TCTL/2014); Policy Committee (Decision 34/QD-HDTV-TCTL/2015); Investment Committee (Decision 781/QD-HDTV-UBNS/2017). Not only improving the organizational structure, in 2019, the Board of Directors issued the Regulations on organization and operation of the Committees to replace the previously issued Regulations on organization and operation to supplement the advisory tasks for the Board of Directors to carry out supervision of senior management according to assigned fields and sectors. The CEO also established three Councils (Risk Council, ALCO Council,

(capital management board) and promulgate the Regulations on organization and operation of the Councils to perform the task of advising the General Director to supervise individuals and departments involved in risk management and asset/liability management. Particularly for the internal control system, the Board of Directors of Agribank has established the function of supervising the internal control system through the internal audit department under the Supervisory Board, which has ensured the second principle of the COSO standard on establishing the responsibility to supervise the development and operation of internal control independently. In addition, the Chairman of the Board of Directors and members of Agribank are all people with appropriate expertise and are mostly aware of risk management. Currently, the Board of Directors and the Supervisory Board of Agribank are also quite independent from the Board of Management (Decision 600/QD-HDTV/2012 and Decision 116/QD-HDTV regulating the Regulations on the operation of the Board of Members of Agribank); has closely directed, fully supported and comprehensively assisted the activities of the Board of Directors. This has created the basis for establishing and operating an effective internal control system as well as a healthy control environment at Agribank.

However, the management and operation at Agribank still show limitations, so it does not ensure complete independence between the Board of Directors and the Board of Management. The General Director decides on issues under the authority of the Board of Directors or the Board of Directors also performs the management work of the General Director . In addition, the decentralization and authorization between management and operation are not specific and clear at Agribank; reflected in the fact that the Board of Directors still has to handle administrative tasks, reducing the role of supervision, strategic planning, and building mechanisms and regulations, which are the main functions of the Board of Directors. If this situation continues, Agribank will not fully meet the principles of COSO standards on ensuring the independence of the Board of Directors from the Board of Management as well as the new regulations in Circular 13/2018/TT-NHNN in separating the two functions of "management" and "operation" to promote a healthy corporate governance, minimizing conflicts of interest. To do so, Agribank needs to enhance the supervisory role of the Board of Directors, completely independent from the operations of the Executive Board.

c. Organizational model and division of authority and responsibility.

Agribank has also basically met the third principle of COSO standards on establishing the bank's organizational structure associated with reporting channels. Time

The organizational structure at the Head Office (TSC) and branches of Agribank has been gradually rearranged to better suit the business model and conditions of this bank. Accordingly, Agribank has continued to consolidate the management model, both centralized and decentralized, restructured and developed the network in accordance with its management capacity. The organizational model has gradually been completed in the direction of independence between the advisory and decision-making departments in business activities and the department that monitors and supervises processes and policies. By December 31, 2019, the organizational structure at the Head Office (TSC) was completed, including: Board of Directors (Chairman and 11 members), Board of Management (General Director, 09 Deputy General Directors, 01 Chief Accountant), Board of Supervisors (Head of the Board and 03 members); 04 Committees have the task of directly advising and assisting the Board of Directors (Policy Committee, Personnel Committee, Risk Management Committee, Investment Committee; ALCO Committee under the Board of Directors has been abolished); 27 Departments/Centers and equivalent units; 03 public service units; 03 regional representative offices; established Councils under the General Director since January 2019, including the Risk Management Council, the Agribank Asset/Liability Management Council (ALCO Council - converted from the ALCO Committee under the Board of Directors), and the Capital Management Council. At the same time, to meet the requirements of governance and management in accordance with the scale of operations, Agribank's senior personnel apparatus has continued to be supplemented and improved over the past time.

Agribank also regularly reviews and evaluates the performance of branches and transaction offices; merges ineffective branches and transaction offices with low development potential; develops networks in agricultural and rural areas - where there are favorable conditions for business expansion. Specifically, Agribank has adjusted the scope of management of Type I branches under TSC in the direction of reducing the scale, in accordance with the requirements of the Restructuring Plan associated with bad debt settlement for the period 2016-2020 (Issued under Decision 01/QD-NHNN/2018 of the State Bank). Accordingly, in 2019, Agribank completed the procedures for adjusting the scope of management of 09 branches in the provinces. In addition, Agribank reorganized the Type I and Type II Branches in Hanoi and Ho Chi Minh City in the direction that TSC does not manage the Type I and Type 3 Branches, ending the Type II Branch model in Ho Chi Minh City.

The basis for dissolving branches and establishing transaction offices after reorganization, typically the merger of Nam Hoa Branch and District 5 Branch into Branch 5, An Suong Branch and Hung Vuong Branch in Ho Chi Minh City into Bac Ho Chi Minh City Branch (in the transitional period before terminating type II branches and establishing transaction offices). This adjustment will help to improve the system, thereby creating more favorable conditions for control activities as well as internal audit.

Agribank has also changed the organizational model of credit granting activities - the main activity of this bank. The Board of Directors of Agribank issued Decision 225/QD-HDTV-TD/2019 on the Regulations on lending to customers in the Agribank system; the General Director issued Decision No. 1225/QD-NHNo-TD/2019 on guidelines for the Regulations on lending to customers in the Agribank system. Accordingly, the department with the function of credit appraisal is independent of individuals and other departments (a) Customer relations; (b) Re-appraisal (if any); (c) Approval of credit granting decisions; (d) Control of credit risk limits, management of problem credit grants, risk provisioning and use of provisions to handle credit risks. Thus, this regulation has met the requirements of Circular 13/2018/TT-NHNN (Clause 2, Article 11 of the Law on Credit Risk Management).

16) and regulations on the authority to restructure the debt repayment period to meet the requirements of Circular 36/TT-NHNN/2014 stipulating the limits and safety ratios in the operations of credit institutions (Point d, Clause 1, Article 4). The decision to restructure the debt repayment period must be made on the principle that the person deciding to restructure the debt repayment period is not the person deciding/approving that loan" while ensuring the principles according to the COSO internal control model on separating the functions of implementing steps in the credit process to minimize risks and fraud.

In addition, the survey results show that Agribank is currently developing a draft Job Description - a document that is essential for defining job positions with specific duties and powers and has been successfully implemented at many other banks. Therefore, Agribank has not fully ensured the third principle of the COSO framework in ensuring the identification, assignment and limitation of powers and responsibilities of individuals and departments in the bank. Specifically,

It is possible that some Departments/Centers at TSC, according to current regulations, have both the function of advising and assisting the Board of Directors and the function of advising and assisting the General Director, so it is inevitable that they will face difficulties in performing their duties . Internal relations between Departments/Centers and units are still administrative in nature; functional departments have not clearly defined the linkages according to work areas, product groups, and customer types . Furthermore, Agribank has not yet developed a set of performance measurement indicators (KPIs) to be able to objectively evaluate the work results of employees.

d. Commitment to capacity

In recent times, the quality of human resources has been increasingly improved at Agribank, and average labor productivity has been increased. Compared to 2014, the scale of operations (assets, capital, outstanding loans, profits) of Agribank has more than doubled with an insignificant increase in the actual number of employees. This shows that labor productivity and the quality of human resources of Agribank have been significantly improved; specifically, average labor productivity continued to increase compared to 2018 and increased 1.5 times compared to the first year of implementing the Restructuring Plan for the period 2016 - 2020.

However, Agribank's human resources are still uneven and labor productivity is still low compared to other large commercial banks, specifically:

Table 2.3 Number of employees as of December 31, 2019 of some banks

Source: 2019 financial reports of banks

Thus, although Agribank is the bank with the largest number of employees in the system, compared to other large banks such as Vietcombank with only half the number of employees, it is clear that the labor productivity of Vietcombank employees is higher.

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