State Management of Fraudulent Acts in the Stock Market

important information in case they are not performing well. Signaling theory is also used by Richard (2012) in his study, concluding that higher quality companies will choose accounting policies that reveal more information, while low quality companies choose accounting policies that try to hide more information. Therefore, the quality of information disclosure is also considered as a signal to measure the quality of the business similar to other financial indicators such as size, growth rate, corporate profits, etc.

Signaling theories of underpricing assume that issuers and issuers’ managers know more about the quality of their firms than outside investors. With imperfect information, investors cannot distinguish between high-quality and low-quality firms. Therefore, high-quality firms choose to underprice their new issues to signal their true value. An important condition of these models is that the true quality of the firm is revealed before the firm takes actions that trigger the new valuation after the issuance event.

Insider trading is considered to be the most powerful alternative means of disclosure when the information in question is of a type that managers are discouraged from disclosing (Kraakman, 1991). Familiar examples include information that is complex or cannot be communicated effectively, bad news that can affect the price of a security, and good news that cannot be released directly to avoid competitors (Kraakman, 1991). In the case of these types of information, insider trading may be a better way to update prices than public announcements.

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The thesis applies this theory in qualitative research to analyze typical situations, when inside shareholders accumulate or sell shares before announcing important information that has a major impact on stock prices, it is necessary to consider whether there is insider trading behavior or not, especially in cases where there is no announcement of expected transactions or no reporting of transactions by inside shareholders and related persons...

1.3.4 Fraud Triangle Theory

In 1950, Donald Cressey - a criminologist, focused on the factors that lead individuals to commit fraud in his doctoral thesis, he proposed this theory to explain why people cheat. The main argument of

This theory is that fraud only occurs when all three factors are present: pressure, opportunity and justification. He developed the fraud triangle theory in 1953, which became the FTT - Fraud Triangle Theory in 1973. The fraud triangle theory has been applied in the world in fraud research for over 40 years. It has been widely analyzed and evaluated by various scholars such as Albrecht et al. (1995), Mackevicius & Bartaska (2003), Lou & Wang (2009). It has also become the basic principle of auditing standards in many countries such as SAS No. 99 of the US, ASA 240 of Australia, international auditing standard ISA 240, Public Company Accounting Oversight Board PCAOB (2005). And is widely discussed in textbooks and professional guides in the field of fraud examination such as Murphy & Tibbs (2010), Ozkul & Pamukcu (2012), in academic studies such as Kolman (2007). It is also a key element in practitioner-oriented articles such as Murdock (2008) and teaching cases such as Clayton & Ellison (2011). The elements of the fraud triangle include:

Pressure: Pressure is when an individual perceives a problem that cannot be solved by legal means and cannot be shared. Every fraudster faces some pressure to act unethically. These pressures can be financial or non-financial. Pressure can come in many forms, especially financial demands that cannot be shared. Approximately 95% of fraud cases have been found to be due to financial pressures (Albrecht et al., 2006). Lister (2007) stated that pressure is an important factor in committing fraud. He identified three types of pressure: personal pressure, work stress, and external pressure. Vona (2008) examples of pressure include greed, living beyond one's means, large expenses or personal debt, family financial or health problems, drug addiction, and gambling. The author argues that personal pressure and corporate pressure are the main motives for fraud. Murdock (2008) also argues that pressure can be financial, non-financial, political and social. Political and social pressure occurs in a situation where a person feels and believes that they are incapable of failure due to their position or reputation. Rae & Subramaniam (2008), employees are motivated to commit fraud because of greed or personal financial pressure.

Opportunity: When under pressure, if given the opportunity, they are willing to commit fraud. There are two factors related to opportunity: the ability to grasp information and having loopholes to do so. Accordingly, they can abuse their position to solve the problem.

Financial fraud cannot be shared. In many cases, the ability to solve a problem secretly is the key to the perception of a viable opportunity. Opportunities are created by ineffective control or governance systems that allow an individual to commit fraud (Rae & Subramaniam, 2008). The concept of opportunity perception suggests that people will take advantage of situations that are available to them, financial fraud cannot occur unless there is an opportunity. In most cases, the lower the risk of being caught, the more fraud will occur (Cressey, 1953). Several factors lead to the existence of an opportunity to commit fraud in an organization such as policy lapses and lack of disciplinary action (Sauser, 2007). Research by Wilks & Zimbelman (2004), Moyes et al. (2005) found that related party transactions are among the most common opportunities for fraudsters. Vance (1983) stated that another proxy for opportunity is ineffective supervision due to director incompetence. Singleton et al. (2006), stated in their National Report that most of the employees and managers who commit fraud have long tenure with the organization. Ewa & Udoayang (2012) hypothesized that employees and managers are quite aware of the weaknesses in internal controls and have acquired adequate knowledge on how to successfully commit the crime without fear and stress.

Rationalization: is the process of convincing oneself that the act is acceptable. For example, they see themselves as normal people who are trapped in a bad situation. This allows them to reason the crime into an acceptable way for themselves. If an individual cannot justify a dishonest act, it is unlikely that he or she will engage in fraud. To understand the psychology of a fraudster, one must first understand how he or she justifies the content of the fraud. Justifications for fraud can take many forms but are often an important factor in motivating an individual to act. Justifications are difficult to recognize, as it is impossible to read the mind of a fraudster. The tendency to cheat depends on the moral values as well as the attitudes of the individual (Cressey (1953), Kenyon & Tilton (2006)).

The three elements of fraud summarized by Cressey (1953) are often presented in a diagram shown in Figure 1.1.

Cheat

Pressure

Opportunity

Justify

Figure 1.1: Fraud Triangle

Of the three factors above, the pressure and justification factors belong to the individual mind, so they are difficult to identify and measure. Pressure factors are often difficulties that cannot be shared, difficult to recognize, especially pressures that are not financial. The justification factor is rarely studied because it belongs to the ethics and thinking of each person, which is difficult to express or difficult to accurately assess (Kolman (2007), Jennifer (2013)). Therefore, from the management perspective of the State Securities Commission, the thesis focuses on clarifying the opportunity factor leading to fraudulent behavior in the stock market. Because the opportunity factor represents the "loopholes" that, if present, the subject can take advantage of to commit fraud. Opportunity factors are often objective, can be identified or measured, so the thesis focuses on clarifying them.

1.4 State management of fraudulent acts in the stock market

1.4.1 Concept

State economic management is the State's management of the entire national economy by State power through economic management mechanisms to ensure the growth and development rate of the national economy (Mai Van Buu & Phan Kim Chien (1999).

The stock market is a field of activity in a country's economy. Therefore, State management of the stock market is the state's adoption of a legal system, policies, principles, regulations and necessary measures.

to manage and supervise the activities of participating entities to ensure the stock market develops sustainably and effectively, serving certain goals of the national economy (Bui Kim Thanh, 2015).

1.4.2 Management entity

There are two groups of regulatory agencies for the stock market, namely state regulatory agencies and self-regulatory organizations.

- State management agencies on the stock market

These agencies perform management functions by issuing or requesting superior agencies such as the Government and the National Assembly to issue legal documents to guide and regulate market activities. In addition, these agencies can use other forms to intervene in the market in necessary and urgent cases. Normally, the State management agencies of the securities market include the Securities Commission and relevant ministries and branches such as the Ministry of Finance, the Central Bank, and the Ministry of Justice. However, the Securities Commission is a full-fledged specialized management agency of the State in this field. The State Securities Commission regulates issues related to securities such as: issuance, purchase, sale, payment, guarantee, distribution, etc. In addition, the Securities Commission also performs the role of State management over securities companies, stock exchanges and other entities participating in the securities market, conducting inspections and supervision to ensure market stability. In addition, the Securities Commission also presides over and coordinates with relevant ministries and branches to operate the stock market effectively.

In most markets, the securities regulatory authority has the general task of ensuring the organized operation of the securities market by setting regulations and supervising the implementation of those regulations.

The earliest securities regulatory agency was the US Securities and Exchange Commission (SEC), established on June 6, 1934, following the market crash of 1929. The SEC is a highly independent agency headed by a Chairman and four Council members appointed by the President for a five-year term. The SEC has broad powers from issuing regulations, granting business licenses, granting licenses to establish exchanges to inspecting, supervising and disciplining market participants.

In the UK, although the Securities and Investment Board (SIB) was established relatively late (in 1986), it has a unique management model, a very high level of autonomy, with very little government management and supervision. SIB is under the direct supervision of the Ministry of Finance.

Minister of Finance but not funded from the budget, SIB staff are not civil servants or public employees of the Government.

In Japan, the Securities and Exchange Commission under the Ministry of Finance was previously responsible for market management and supervision. In addition, there are other auxiliary management agencies in the securities sector such as: the Securities Council (established in 1952), the Business Accounting Council, and the Public Accounting Certification Inspection Committee. In 1992, the Securities and Exchange Commission was established to ensure fairness, transparency, and safety in securities trading for investors at the Exchange. This commission is under the Ministry of Finance and operates relatively independently from other organizations. The Japanese management model also highly promotes self-management.

In Korea, there are two parallel state securities regulatory agencies, the Korea Securities Commission (KSEC) and the Securities Supervisory Board (SSB). KSEC and SSB are responsible for managing and supervising the securities market under the direction of the Ministry of Finance. The Chairman of the SSC is also the Head of the Supervisory Board, which, in addition to managing the securities market and related institutions, also directly manages and controls the market, securities companies, listed organizations, investors or foreign issuers.

In China, the Securities and Exchange Commission (CSRC) was established in 1992 as an agency under the State Council of China, responsible for regulating the securities market. Later, this commission merged with the Market Supervision Commission and changed its name to the Securities Regulatory Commission.

- Self-governing organizations

Along with the formation and development of the stock market, the subjects participating in the market are increasingly numerous and diverse. The State management agency of the stock market finds it unnecessary to directly and completely manage all activities taking place in the market. Some issues and some areas can be decentralized and assigned to other organizations for self-management on the basis of compliance with the regulations of the State management agency. These are self-management organizations or self-institutional organizations.

The self-regulatory organization can be a stock exchange or an association of securities dealers.

First, the Stock Exchange. For most stock markets in the world, the Stock Exchange is an organization consisting of member securities companies that are directly responsible for operating and managing the activities taking place on the Exchange. In addition, the Stock Exchange is also responsible for providing information

related to listed securities. In general, most of the agencies operating the Stock Exchange are self-governing organizations under the management and close supervision of the state management agency in the securities field. The Stock Exchange self-governs and supervises its members through its charter, contracts and legal regulations. It also manages listed and issuing organizations, trading activities, investment funds... The Stock Exchange self-monitors, inspects, resolves and handles disputes and violations within its management scope. The self-governing system creates flexibility and dynamism, better responding to the needs and changes and fluctuations of the market.

In Germany, England and Japan, self-management plays an important role, and market participants are also members of self-management organizations.

In the US, disputes between entities are resolved by self-regulatory organizations. Newly established and developing stock markets such as China, the Philippines, Indonesia, Malaysia, etc. all apply a semi-autonomous regime. The exchange conducts self-regulation based on reports and consultations with state management agencies.

Second, the Association of Securities Dealers. This is a social-professional organization representing the securities industry to ensure and harmonize the interests of its members on the basis of ensuring the common interests of the market. The main activities of the Association of Securities Dealers are to manage over-the-counter transactions, representing the securities industry to make recommendations to state management agencies to enhance the efficiency and stability of the market. In addition, the Association also collects and reflects customer complaints to its member units. State management agencies and self-regulatory organizations in the securities market, although having different tasks, management mechanisms and organizations, have the main goal of ensuring the stability and development of the market. Therefore, in the process of management and operation, it is necessary to have close and smooth coordination between these two organizations.

1.4.3 Management content

According to Nguyen Thi Thanh Hieu (2011), state management of the stock market can be considered from three perspectives: by function, by business activities and by market factors.

- From the perspective of functional management, state management of the stock market will include the functions of planning, organizing, commanding and supervising.

Regarding the planning function: State management agencies must develop strategies to manage fraudulent behaviors, build a legal corridor, and propose appropriate policies to develop the stock market to ensure fairness, openness, and transparency.

Regarding organizational functions: It is necessary to organize and build management agencies, define functions and tasks and delegate power to implement functions and tasks. Build, train and develop staff for management agencies.

Regarding command function: Superior management agencies direct and coordinate subordinate management agencies. Urge and inspect the implementation of management activities.

Regarding the supervisory function: based on the established regulations and criteria in management and supervision, the management agency monitors and inspects all entities participating in the securities market, including issuers, investors, securities trading organizations, and securities service providers.

- From the perspective of professional management, state management of the stock market will include:

Management of securities issuance and listing activities: is the management of securities issuance and listing activities to fully meet the standards, records, and procedures as prescribed by law.

Management of securities trading activities: after issuance and listing, securities are traded and bought and sold by investors. Management of securities transactions aims to ensure that transactions are fair and transparent. Therefore, insider trading and manipulation of securities prices are prohibited in securities trading.

Information disclosure management: information is a factor that directly affects stock prices, so information needs to be disclosed fully, accurately and promptly. State management of information disclosure must ensure that information is not omitted or disclosed incorrectly, leading to wrong decisions by investors. Information disclosure activities of entities must be timely in accordance with the provisions of law, especially information disclosure of issuing organizations and insiders.

Management of depository and clearing activities: State management agencies develop and promulgate necessary legal bases for securities registration, depository, clearing and payment activities such as regulations on payment procedures, regulations on organizational models and supervision of these activities.

Management of securities business activities: State agencies manage the establishment, operation and implementation of business operations of securities business organizations.

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