Advantage | Disadvantages | Research experiment | |
business for research sample | in accounting | ||
Value method | Measurable | Bypass method | (Ahmed & |
negative accrual (Givoly) | level of implementation | cost impact | Duellman, 2007); |
and Hayn, 2000) | kidney principle | not related to | (Klein & |
important for each | money (depreciation expense) | Marquardt, 2006), | |
specific business | loss) | (Beatty, Ke, & | |
Regardless of | Accumulated value section | Petroni, 2002), | |
market information | of accrual must | (Hille, 2011) | |
of the business | are gathered in | ||
This is the Method | long period of time | ||
measure carefully | from a specific base year | ||
no condition | can, make it difficult for | ||
choosing the year | |||
basis for time | |||
research time | |||
Not considered | |||
characteristics of the business | |||
industry as scale | |||
or financial leverage | |||
Stream method | Use of indicators | Cash flow is not | (Krishnan, 2007), |
money (Ball and | cash flow from operations | is a representative variable | (Lara, Osma, & |
Shivakumar, 2005) | business to | stable for stream | Penalva, 2009) |
flow measurement | information on the market | ||
positive information and | school | ||
negative in the market | Use cash flow only | ||
field => measurable | from economic activities | ||
measure carefully for | business without photos | ||
the whole company | cash flow effects | ||
Listed | from non-active | ||
business | |||
Not considered | |||
characteristics of the business | |||
industry as scale | |||
or financial leverage |
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Advantage | Disadvantages | Research experiment | |
Open method | Is an open method | (Affes & Sardouk, | |
Basu (Khan) | Basu's width, calculated | 2016); Le Tuan | |
and Watts, 2009) | got point C | Bach (2018), | |
Score – value of | (Khalilov & Osma, | ||
level of implementation | 2020) | ||
kidney principle | |||
accounting for | |||
each company | |||
Consider the specificity | |||
enemy of business | |||
industry as scale | |||
or financial leverage | |||
main | |||
Widely used | |||
widely in research | |||
save the present |
Source: Author's statistics
2.4. Factors affecting the principle of prudence of enterprises
From the overview of the research in chapter 1, in the context of the Vietnamese stock market, the thesis focuses on two groups of variables: variables belonging to management and control characteristics including characteristics of the Board of Directors (BOD), independent auditors and a group of variables belonging to the characteristics of the company's ownership structure. The thesis below presents each individual influencing factor in detail.
2.4.1. Factors belonging to management and control characteristics
2.4.1.1. Size of the Board of Directors
The Board of Directors is established to monitor and supervise the activities of managers, ensuring that they will act in the interests of shareholders. The effectiveness of this monitoring activity depends partly on the size of the Board of Directors, in other words, on the number of members in the Board of Directors. According to Decree 71/2017/ND-CP, the number of members of the Board of Directors of a public company is stipulated to be a minimum of 3 people and a maximum of 11 people. (Lipton and Lorsch, 1992) pointed out that the size of the Board of Directors should not be too small or too large, the optimal should be 7-9 members. In fact, in many countries, the size of the Board of Directors can be up to 31 members. Many studies have shown that the larger the size, the more effective the Board of Directors is.
The larger the board size, the more effective the control function will be, because the company has the opportunity to diversify and access many different perspectives and opinions to solve the company's problems. Beekes, Pope and Young, (2004); Lim (2010) in their study found a positive impact of board size on signs of implementing the accounting prudence principle.
However, there are also opposing views that when the size of the Board of Directors increases, the problem of cooperation and communication between members will appear. Jensen (1993) believes that a smaller Board of Directors is more effective because the ability and level of performance of the Board of Directors will be more uniform than that of a large Board of Directors, thereby contributing to resolving agency conflicts. Admed and Henry (2012) and Boussaid et al. (2015) also found an inverse effect of the size of the Board of Directors on the level of implementation of the principle of prudence. The reason is that with large-scale Boards of Directors, conflicts between members and disagreements in important decisions will occur. Vijayakumaran (2019) believes that due to lack of time for discussion and decision-making, large-scale Boards of Directors often depend on only 1 or 2 key members with important voices and positions. In other words, the problem of cooperation, the costs of coordination and the free-rider problem will appear. Therefore, the smaller the size of the Board of Directors, the more the level of implementation of the principle of prudence in enterprises is shown.
In Vietnam, Nguyen Ha Linh (2017) found an inverse relationship between board size and earnings management, (Nguyen, Doan, & Nguyen, 2020) found an inverse relationship between board size and agency costs, and Nguyen Thi Bich Thuy (2019) did not find a statistical relationship between board size and the level of implementation of the prudence principle in accounting. Based on the above overviews, along with the characteristics of the Vietnamese stock market, the thesis argues that when the board size increases beyond a certain point, additional disadvantages will arise, even surpassing the benefits and the board with a large scale. In some studies, the authors built a U-shaped impact function for this variable. However, considering that according to regulations, the size of the Board of Directors in Vietnamese companies is at an average level (Decree 71/2017/ND-CP, stipulating the maximum number of members in the Board of Directors is 11 people, the minimum is 3), not too high compared to other countries in the world; the thesis predicts that the size of the Board of Directors will only have an adverse impact on the level of implementation of the principle of prudence in the Vietnamese market.
2.4.1.2. Percentage of non-executive Board members
According to agency theory, board independence is a factor to more effectively monitor the performance of the Board of Directors, aiming to minimize agency costs.
This independence is demonstrated through the proportion of non-executive board members - those who have no material relationship with the company, including subsidiaries and affiliates. According to Decree 71/2017/ND-CP, one-third of the total number of board members must be independent members.
In fact, executive board members are responsible for business, production, and sales tasks, so they cannot fully perform the role of supervising the Board of Directors. Therefore, a mechanism consisting of independent board members who do not participate in management is necessary, which will help control the agency problem in the company. Fama and Jensen (1983) argued that with information asymmetry, board members can access more information, so they can easily collude with managers to oppose shareholders by influencing accounting methods and practices. Therefore, a board of directors including outside members will increase the ability to monitor to eliminate this problem. Beekes, Pope, and Young, (2004) or Mohammed, Ahmed, and Ji (2017) all found a positive relationship between the level of independence of the board of directors and the level of implementation of the principle of prudence in accounting. In other words, the more independent the board of directors is, the higher the sign of the company implementing the principle of prudence in accounting.
In listed companies in Vietnam, the actual independence of the Board of Directors may be questionable because companies in fact tend to only deal with legal regulations and have not focused on building a truly independent Board of Directors. Therefore, some studies have found no evidence of a relationship between the independence of the Board of Directors and the implementation of the accounting prudence principle (Nguyen Thi Bich Thuy, 2019); or Bui Van Duong and Ngo Hoang Diep (2017) also showed that there is no relationship between the number of non-executive Board members and earnings management.
2.4.1.3. Concurrent positions of CEO and Chairman of the Board of Directors
In theory, clearly defining the responsibilities and powers of the CEO (General Director) and the Chairman of the Board of Directors is an important criterion that helps businesses plan their work and operating strategies. Some opinions say that separating these two positions will make the management apparatus unnecessarily cumbersome, making it difficult for employees to follow instructions due to the lack of consistency in orders from above. Especially for small and medium-sized enterprises, the synchronization of these two positions will reduce costs when having to hire additional high-quality personnel from outside to work as CEOs, as well as control costs arising in the process of monitoring the CEO's activities. On the other hand, studies also show that if businesses do not consider separating the CEO and the Chairman of the Board of Directors, it will be difficult to ensure objectivity in assessing the level of performance of the business.
The executive board, when the Chairman of the Board of Directors is the person assigned to manage the business, sometimes does not have enough expertise in this area of management. Jensen and Meckling (1993); Fama and Jensen (1983) believe that when the Chairman of the Board of Directors is both a strategist and a monitor, implementing these decisions will increase agency costs. (Bhagat & Back, 2001) also agreed and pointed out that the degree of independence of these two positions is negatively correlated with Agency costs, thereby contributing to better implementation of the accounting prudence principle. Dechow & Schrand (2010) also believe that when the Chairman of the Board of Directors also functions as the CEO, it will reduce the effectiveness of monitoring from the Board of Directors, as well as eliminate the monitoring mechanism of independent monitors on the CEO. This can lead to a tendency for the company to conceal unfavorable information from shareholders, or even increase profit adjustment behavior from accounting activities (Nguyen Ha Linh, 2017).
In fact, in Vietnam, starting from Circular 121/2012, there has been a provision that ' The Chairman of the Board of Directors shall not concurrently hold the position of Executive Director (General Director) unless this concurrent position is approved annually at the Annual General Meeting of Shareholders '. And when Decree 71/2017/ND-CP was issued, from August 1, 2020, the Chairman of the Board of Directors shall not concurrently hold the position of Director (General Director) of the same public company to contribute to separating the functions of supervision and operation. Because the legislative body has recognized the negative impacts of concurrently holding these two positions, in fact, for companies listed on the Vietnamese stock market in recent years, this concurrent position is no longer common. This may also be the reason why many studies in Vietnam show that the relationship between the concurrent position variable and other indicators has a relatively low relationship.
The thesis decides to keep the duality variable of CEO and Chairman of the Board of Directors as a factor affecting the level of implementation of the prudence principle in accounting to verify theoretically.
2.4.1.4. Size of the board of supervisors
The Board of Supervisors in a joint stock company is the unit that has the function of supervising the board of directors, general director and directors in the company's operations and management, thereby ensuring prudence and transparency in reporting on business and financial situations. In joint stock companies in Vietnam, the Board of Supervisors is elected by the general meeting of shareholders while the Audit Committee is voluntarily established by the company, and is a subcommittee.
belong to the board of directors. For joint stock companies, due to conflicting interests, the establishment of a Board of Supervisors in a joint stock company will ensure the management and operation of the company's financial and accounting activities. According to Decree 71/2017/ND-CP, the Board of Supervisors is established from 3-5 members, of which the Head of the Board of Supervisors must be a professional accountant or auditor, and must work full-time at the company. In many studies around the world, the larger the number of members of the Board of Supervisors, the better the ability to cover and supervise, making the accounting system of the enterprise properly accounted for and the level of implementation of the principle of prudence is also higher. However, according to the study of Abbott, Parker and Peter (2004), there was no evidence of a relationship between the size of the Board of Supervisors and the level of implementation of the principle of prudence in accounting because the number of members is large, the monitoring function is not necessarily more effective but also depends on the independence, capacity, responsibility and level of performance of the Board of Supervisors.
2.4.1.5. Number of financial experts in the board of supervisors
According to Abbott, Parker, and Peter (2004), there is an inverse relationship between the number of financial experts on the board of control and the level of violations in financial statements and accounting systems. Accordingly, the proportion of financial experts on the board of control of companies without violations will be higher than in companies with violations.
According to Decree 71/2017/ND-CP, the Board of Supervisors has 3-5 members, of which at least one member is an accountant or auditor; at the same time, the head of the Board of Supervisors must be an accountant to ensure the ability to monitor the company's financial situation. Madah and Abdul (2016) studied the Malaysian market and found that the shortage of financial and accounting experts in the Board of Supervisors will lead to weaknesses in the internal control system of the enterprise, from which material errors are difficult to detect, accounting principles such as prudence can be broken. According to Nguyen Thi Bich Thuy (2019), a positive relationship was found between the number of financial experts in the Board of Supervisors and the level of implementation of the principle of prudence in accounting with a significance level of 10%. Research suggests that members of the audit committee with financial accounting expertise will ensure the effectiveness and quality of useful accounting information, and they have sufficient skills and experience to apply financial reporting standards and accounting policies to the company. Some opinions suggest that the establishment of a board of auditors with many financial experts is not as important as the independence of the board.
control as well as the responsibilities and ethics of members when performing their supervisory work.
In fact, in Vietnam, although there are regulations on the expertise of the board of control issued by the Ministry of Finance and the Government; however, the supervisory role of the board of control has not been really emphasized and valued in companies. Moreover, although members of the board of control by law have full accounting and financial expertise, these members can be selected from the company's employees, thus being under the control of the Board of Directors, making it difficult to perform their work objectively. This can hinder the expertise of the board of control. Therefore, this factor also needs to be studied further, especially in the current Vietnamese stock market.
2.4.1.6. Companies audited by Big 4
To ensure the principle of prudence in accounting, the quality of independent auditing is also a necessary factor, playing an important role in preventing and detecting errors in the accounting system or in financial reports. According to Farber (2005), using the auditing services of one of the Big 4 companies will bring better auditing quality, minimizing errors in accounting and financial reporting. Research shows that companies with errors in financial statements are often audited by non-Big 4 auditing companies. In other words, being audited by Big 4 will put pressure and make the level of implementation of the principle of prudence in accounting of companies higher. Fathi (2013) believes that when audited by a Big 4 company, the quality of accounting information will be more honest and useful due to the professionalism and reputation of these companies. In contrast, the study by Nguyen Cong Phuong and Lam Xuan Dao (2016) did not find a relationship between independent audit and errors in financial statements. Typically, when measuring this variable, studies will use a dummy variable with the value of 1 if the companies are audited by Big 4 and with the value of 0 if not Big 4.
2.4.1.7. Number of female members on the board of directors
According to Hofstede's cultural dimension theory, gender is one of the cultural aspects that will affect business. Men represent a style that prioritizes achievement, material rewards for success and assertiveness. On the contrary, women represent cooperation, modesty and security. Theories of human capital, leadership theory, etc. indicate that women support and maintain relationships better than men . While men are always overconfident, women are diligent,
conservative and risk-averse like men. These traits can influence strategy and financial decisions when they hold important positions in the company.
Studies related to gender impact on managerial decision making include Adam, Gray and Nowlan (2010), Huse and Solberg (2006). The results show that female members of the board of directors make monitoring the performance of executives more effective because women have good independent thinking and communication skills, promoting discussion and more open work. Moreover, women focus on safety, do not like litigation and reputation risks, so when working, women will be more cautious and choose a stricter monitoring mechanism than men. Therefore, the views that a high proportion of women in the board of directors will lead to a higher level of implementation of the prudence principle in accounting. Stewart and O'Leary (2007), Krishnan and Parsons (2008) also argue that female leaders tend to adhere to principles and maintain ethics more than men. They do not want to take risks or face risks to their own reputation and credibility; while men, due to their characteristics of liking achievements, material rewards, and being decisive, tend to easily accept violations of regulations to achieve personal goals.
In Vietnam, gender equality and discrimination in the workplace are still controversial issues. The proportion of women holding high positions in companies is relatively low compared to the proportion of male leaders. Therefore, this is also an appropriate variable to be included in the model for measurement.