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Current Status of Internal Control in Vietnamese Garment Enterprises



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- Characteristics of ownership form :

Table 4.6. Classification of garment enterprises in Vietnam by ownership form



Year


Total number of enterprises

Divide by ownership

State-owned company

>50%


FDI


Joint venture

Non-state

Quantity

Rate (%)

Quantity

Rate (%)

Quantity

Rate (%)

Quantity

Rate (%)

2015

5,998

33

0.55

778

12.97

41

0.68

5.146

85.80

2016

6,461

23

0.36

810

12.54

44

0.68

5,584

86.43

2017

6,871

21

0.31

878

12.78

48

0.70

5,924

86.22

2018

7,693

19

0.25

865

11.24

44

0.57

6,765

87.94

2019

8,775

16

0.18

870

9.91

51

0.58

7,838

89.32

Source: General Statistics Office and author's calculations

According to the data of business groups from 2015 to 2019 shown in Table 4.6, the main form of ownership is private ownership, accounting for over 85%, FDI enterprises account for over 9%, the rest are state-owned companies and joint venture enterprises account for a very low proportion. Although the number of garment enterprises is large, they are mainly privately owned and operate with their own capital, so they have autonomy in production and building internal control activities based on compliance with relevant legal regulations. With the view of saving costs, many managers design and operate incomplete control procedures, the structure of departments is not suitable and there are still too many concurrent responsibilities.

4.1.3. Selecting a sample of Vietnamese garment enterprises for research

Criteria for selecting garment enterprises for research: Internal control exists in most enterprises. Therefore, the scope of the thesis is all garment enterprises in Vietnam. The author determines the scope of the research as such because the author wants to consider the impact of internal control on financial performance between Vietnamese garment enterprises and foreign garment enterprises operating in Vietnam under the condition that these enterprises are strongly influenced by foreign parent companies or by capital contributing partners who have control or significant influence on the operation of the enterprise.

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Current Status of Internal Control in Vietnamese Garment Enterprises


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4.2. Current status of internal control in Vietnamese garment enterprises

4.2.1. Current status of control environment

The control environment includes the attitude, awareness and activities of the Board of Management regarding internal control and the importance of internal control in the unit. In other words, the control environment includes internal and external environmental factors that affect the design, operation and data processing of internal control types. In which, the control environment in Vietnamese garment enterprises includes internal factors of the unit such as: communicating and validating integrity and ethical values; commitment to capacity; participation of the Board of Management; Philosophy and operating style of managers; organizational structure; assignment of authority and responsibility; policies and practices and personnel.

Table 4.7: Results of the investigation on the control environment



Question


Content

Reply

Have

Are not


N/A

Number

quantity

Proportion

(%)

Number

quantity

Proportion

(%)


1

According to you, does the Company build and communicate a culture of conduct, integrity and ethical values ​​to departments within the business in writing?

or not?


330


94.28


20


5.72


0


2

In your opinion, does the Manager put the interests of the business first by implementing integrity?

integrity and work ethics?


350


100


0


0


0

3

In your opinion, risk management activities are important

important to the company?

195

55.71

155

44.29

0


4

The company has clear regulations in written documents.

the work and responsibilities, authority of each position or individual in the enterprise or not?


264


75.43


86


24.57


0


5

According to you, the company's organizational structure has

ensure the principles of non-concurrent holding of positions and division of tasks


247


70.57


103


29.43


0


6

Are human resource policies such as recruitment, training, placement, promotion, rewards, and discipline officially issued in writing?

Are not


337


96.29


13


3.71


0

7

Is planning important in?

DN or not?

215

61.43

135

38.57

0

Source: Author's synthesis


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- Integrity and ethical values

The survey results (Table 4.7) above show that for the communication and enforcement of integrity and ethical values. The majority of managers of garment enterprises always put the interests of the enterprise first, so the implementation of integrity and ethical values ​​in work is always considered important. Therefore, managers in large garment enterprises such as May 10, May Nha Be, ... have approached modern management tools such as ISO 9001, ISO 14001, ISO 45001 SA8000, 5S, ... to create an integrated management system including many official written documents to support managers in checking and controlling activities to help eliminate or reduce the motivation that can cause employees in the unit to commit dishonest, illegal or unethical acts. In addition, Integrity and ethical values ​​are also reflected in the vision, mission and core values ​​of major Vietnamese garment companies. Among them, Nha Be Garment Joint Stock Corporation always sets its mission as providing reliable fashion products to customers and consumers and with the core value of considering customers as the center, products are always high quality and environmentally friendly, responsibility to employees and society has made the Nha Be Garment brand always develop and reach the world . Or May 10 Joint Stock Corporation considers corporate culture as the foundation for the company to develop and wants to spread those cultural values ​​to the community. Thus, today's trend shows that major garment enterprises are interested in their responsibility to the community and society. The evidence is the increasing participation in compliance with environmental standards and social responsibility. This shows that the enterprise operates ethically and is responsible to its employees, the environment and society. Phu Yen Garment Company Limited applies the Business Social Responsibility Compliance Assessment Standard (BSCI), May 10 Joint Stock Company, Viet Tien Garment Company, etc. apply the SA8000 standard on social responsibility, the WRAP standard on ethical practices in the workplace, etc.

- Board of Directors participation

Along with that, the participation of the board of directors also significantly affects internal control. Large garment companies such as Nha Be Garment, Viet Tien Garment,... all have a Board of Directors and a Board of Supervisors. The Board of Directors and the Board of Supervisors are elected by the General Meeting of Shareholders and have clear operating regulations. In particular, the Board of Directors contributes to advising on senior personnel strategies and internal audit activities for the company, independently supervises strategic and administrative activities, and contributes to balancing interests.


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shareholders, investors and especially protect the interests of minority shareholders. In addition, some companies have established subcommittees under the Board of Directors, such as the Vietnam Textile and Garment Group, which has established an investment strategy subcommittee, a human resources subcommittee, a risk and audit subcommittee to advise the Board of Directors in specialized areas. In addition, the Board of Supervisors has the right to propose an independent auditing company and represent the Corporation in working with the independent auditor on issues related to the audit of financial statements. On the other hand, the Board of Supervisors is responsible for reviewing the General Director's reports on internal control activities. In addition, the Board of Supervisors is responsible for conducting periodic inspections of financial reports by quarter and by fiscal year before submitting them to the Board of Directors. Thus, it can be seen that the Board of Directors participates in control activities through the Board of Supervisors. However, the formation of Board of Directors and Board of Supervisors is only carried out in large corporations, not in small and medium-sized enterprises.

- Philosophy and management style of the Board of Directors


Philosophy and management style are expressed through the attention to building operating regulations, management regulations, and financial regulations to provide a foundation for implementing control activities. The issuance of control regulations shows that managers are making efforts to build an effective internal control system. In addition, Philosophy and management style are also reflected in the way of recognizing the importance of identifying, analyzing, evaluating, and controlling risks that affect the ability to achieve the unit's goals. Currently, the Philosophy and management style of garment managers in general still have many shortcomings. This inadequacy is reflected in the attitude and perspective of managers on operating and controlling business risks. Up to 55.71% of managers in enterprises are interested in risks and they believe that identifying, analyzing, and evaluating risks is the basis for designing control procedures to limit them. However, up to 44.29% of the remaining businesses are not interested in this issue. Because they think that with the outsourcing method, the risk has been shared with the import customers. On the other hand, with outsourcing activities depending on orders, the management board is very interested in processing information quickly and promptly to ensure that orders are completed according to customer requirements.

- Organizational structure

Besides, the organizational structure is considered the backbone of an organization, so large enterprises in the industry such as: Garment 10 Joint Stock Corporation, Nha Be Garment Corporation, Duc Giang Garment Corporation, Viet Tien Garment Corporation,...


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attaches great importance to building an organizational structure that is suitable for its business strategy and characteristics. In general, these companies have a parent company - subsidiary model and another similar organizational structure, which is that in addition to the office block, dependent accounting enterprises also have member companies such as subsidiaries or companies with capital contributions from the parent company. Thus, based on the capital contribution ratio and ownership relationship, parent companies can control or have the right to influence the business strategy and management methods of subsidiaries or companies receiving capital contributions. With a suitable organizational structure, large garment enterprises have certain advantages to gradually shift from a simple processing model to an OEM (Original Equipment Manufacturing) and OBM (Original Brand Manufacturing) model in order to seek higher profits when penetrating the global textile and garment value chain. In addition to the export market, in recent years, large garment companies have also targeted the domestic market, so in the organizational structure of May 10, May Viet Tien, May Nha Be, ..., attention is paid to the design department, marketing department, supply department, quality management department. However, not all companies have such specialized departments. On the contrary, up to 29.43% have not paid attention to building a proper organizational structure, focusing mainly on small and medium-sized enterprises with many concurrent departments or lacking a planning department such as Hung Long Garment and Service Joint Stock Company, the planning function is done by the Board of Directors, without a separate planning department or the human resources department is located in the administrative organization department. Or many small-scale garment enterprises do not have any official documents to regulate the authority and responsibility of each job position in the organization, leading to work overload and failure to complete tasks. On the other hand, to save costs, many businesses have let many departments take on too many concurrent responsibilities, such as the human resources function, accounting function, and general administration. The inappropriate organizational structure has created obstacles in decision making, implementation, and control of implementation.

- Commitment to attracting, developing and retaining talent

Labor is the main important resource in Vietnamese garment enterprises. Therefore, the issue of social responsibility management and responsibility towards employees needs special attention. This is the foundation for sustainable development. According to the survey results, up to 96.29% of garment enterprises have issued written policies for employees, human resource policies that fully cover regulations from recruitment, training, promotion, reward and discipline. The implementation of employee benefits as stipulated in the Enterprise Law, Social Insurance Law, SA8000 Standards, WRAP has been of interest to enterprises. In addition,


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Many businesses also pay special attention to taking care of the material, spiritual and health life of workers. At May 10 Company, they create conditions for workers to participate in cultural and artistic performances, sports competitions; organize periodic health check-ups; build kindergartens so that workers can work with peace of mind. In addition, to meet the demand for quality labor in the garment industry, some garment businesses also focus on the best conditions to develop human resources, including training and recruitment such as May 10, Vietnam Textile and Garment Group opens textile training schools to directly provide labor to serve businesses or some businesses also cooperate with garment training schools to have a workforce with sufficient capacity to meet job requirements. In addition, the State also has a policy to support funding for training human resources in Vietnam's textile and garment industry for Vietnam Textile and Garment Group. This is also the basis for garment enterprises in the group to have a direction to send employees for training to improve their skills in garment making.

Although companies have focused on building human resource policies, implementing diverse and synchronous measures for employees, they have not yet encouraged employees to stay with the business for a long time. The reason for this situation is partly due to low-skilled workers, so their awareness is also limited, leading to low compliance with labor discipline and labor awareness, and partly due to the shortcomings in human resource policies that have caused garment enterprises to lack many skilled workers or have difficulty in recruiting new workers. A reality that garment enterprises are facing is the very high rate of labor turnover of about 25% to 30%. This is a difficult problem that requires garment enterprises to have mechanisms and measures to limit its impact on the goals of the enterprise. Labor turnover has a great impact on garment enterprises in both the short and long term. In the short term, production activities may be interrupted, leading to delays in delivery or increased transportation costs due to changes in transportation methods to meet delivery deadlines. In the long term, it affects the costs of recruiting and training new workers and long-term production plans. Thus, large labor fluctuations cause significant damage to businesses in terms of both production efficiency and investment and development strategies. It is labor fluctuations that force businesses to require workers to work overtime to meet delivery deadlines, leading to a situation where workers are overloaded and productivity is low. On the contrary, too much overtime leads to stressful labor intensity, making them tired and unwilling to stick with the profession for a long time. In addition, the income of workers in the garment industry is still low, although


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Many garment enterprises have policies to increase wages for workers, but the wages of garment workers are still low compared to consumer prices at a relatively high or low level compared to other industries, causing workers to not really focus on their work and tend to switch to other jobs. Because wages are not enough to cover living needs, workers have to work extra to earn more income, leading to not using their breaks or not having free time to visit relatives and friends. In addition, workers often work in an environment with many toxic agents such as fabric dust, waste, noise, lack of light, and fire and explosion risks because garment factories contain many flammable materials and goods such as fabrics. Management and supervision of labor safety have not been given attention. The above problems are one of the reasons leading to many strikes of workers taking place in garment enterprises, which have greatly affected the production and business activities of enterprises. Some garment enterprises have changed their recruitment strategy to work-study, but it is still very difficult to recruit because the number of garment enterprises is increasing while the labor supply is limited. Therefore, in order to survive and develop, garment enterprises must tend to apply labor responsibility standards such as SA8000, WRAP,... Some benefits are not small when applying social responsibility standards such as: creating friendly relationships between enterprises and workers, increasing productivity and product quality, attracting many skilled workers. Although the benefits that SA8000 and WRAP bring are huge, so far the number of garment enterprises applying them is not much. Due to the following obstacles: due to the limited qualifications of the human resources, due to the time and cost of assessment, due to the relatively complicated records and documents. The reality is that the human resource policy of garment enterprises has not received due attention. Garment enterprises are only interested in solving immediate labor needs but do not have a strategy to train high-quality workers. The salary regime and salary deductions applied according to the regional minimum wage are still low, only meeting 60% to 70% of the living needs of workers.

In addition to the above factors, the external environment also includes: industry environment, political institutions, legal environment, etc.

The factors that directly affect the production and business activities of enterprises must first of all include factors belonging to the industry environment. With the production model according to the method of sewing according to orders, it shows the dependence of enterprises.


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garment industry to customers in markets such as the US, EU, Japan, ... In addition, large markets apply many barriers on technology, hygiene, safety, environment, social responsibility, anti-subsidy to protect domestic production. This has greatly affected the awareness of managers in designing and operating KSNB to best meet the requirements directly or indirectly related to the products that importers set out. On the other hand, each country has its own political system, system of regulations and specific legal regimes, so to penetrate the market of each country, managers must understand their regulations and regimes.

In recent times, expectations of the TPP and EU-Vietnam FTA free trade agreements have led to a continuous increase in foreign direct investment in Vietnam's textile and garment industry. However, the increase in FDI enterprises has created significant competition with domestic enterprises in terms of orders, input materials, and labor. On the other hand, Vietnam's garment manufacturing industry participates in the global value chain mainly in the production stage according to the CMT (Cut - Make - Trim) method, in which only cutting, sewing and finishing stages are performed, lacking the ability to provide a complete package of garment stages from the supply of main production materials from fabric fibers, so the added value is still low, not meeting the preferential regulations set forth in the Free Trade Agreements. In addition, the trade war between the US and China has caused Vietnam's garment exports to increase dramatically in the near future. Vietnam may also be at risk of being placed on the US's special watch list and subject to higher tariffs. This is entirely possible as recently, Vietnamese textiles and garments have been investigated for dumping in several markets around the world.

Currently, there are many policies and laws of the State affecting the Vietnamese textile and garment industry. Among them, Decree No. 111/2015/ND-CP on the development of supporting technology to reduce costs and encourage linkages in the textile and garment value chain. Although the Government's policy encourages investment in the supporting industry, localities tend not to attract investment in the textile and dyeing industry due to environmental issues. Or Decision No. 288/QD-TTg issued in 2014 on supporting funding for training human resources for the Vietnam Textile and Garment Group. In addition to policies that are beneficial to the textile and garment industry, some policies also significantly affect the development of textile and garment enterprises, such as the policy on annual increases in regional minimum wages, affecting labor costs, and salary deductions also increase significantly, affecting product prices, which tend to increase.

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