The Role and Objectives of Internal Control System in Commercial Banks

timely risk and meet the requirements. The internal control system implements senior management supervision, internal control, risk management, internal assessment of capital adequacy and internal audit”[14]

In general, the definition of the internal control system can be approached from many different angles but is basically consistent with each other: (i) The internal control system is a management tool of business leaders: (ii) The concept of the internal control system refers to the organization of the control system with control policies and procedures established and operated in close connection with each other to achieve the goals set by the unit; (iii) The basic goals of the internal control system are to ensure compliance with laws and regulations, ensure the reliability of financial statements, protect assets and ensure the effectiveness of the unit's operations.

An effective internal control system will help bring many benefits to the unit. Normally, this system will be completed along with the development of the unit with the purpose of: Minimizing the risk of causing risks in business; Protecting assets from damage, loss due to loss, fraud, deception, theft; Ensuring the accuracy and reliability of accounting data and financial statements; Ensuring that all members comply with the organization's rules, regulations, and operating procedures as well as the provisions of law; Ensuring that the organization operates effectively, optimally uses resources and achieves set goals; Protecting the interests of investors and shareholders and building their trust. An effective internal control system is a key factor of an effective and efficient corporate governance system and this is very important for units with a separation between owners and operators. However, no matter how effective an internal control system is, it can only provide reasonable assurance to managers that the entity's objectives will be achieved, not absolute assurance. The ability to achieve objectives is affected by its inherent limitations.

Thus, the concept of internal control and the concept of internal control system have certain differences. According to COSO's definition of internal control, internal control is a process with activities carried out in the unit to achieve related objectives.

effectiveness, efficiency of operations, reliability of reporting, and compliance with the law. In this respect, the term “control” is understood as any aspect of one or more components of internal control. Meanwhile, “a system is a set of many elements, units of the same type or function, closely related or interconnected, forming a unified entity” [39]. The internal control system is understood not as a single element but as a set of elements of the same type that are closely related to each other in order to achieve the goals set by the unit.

The framework for assessing the internal control system issued by COSO is used not only in the US but also widely applied in many countries around the world. Most banks in the world apply the unified framework on internal control according to COSO to assess the internal control system. Based on the COSO internal control framework, the Basel Committee has issued the internal control framework applicable to banks, which is considered as a guide for establishing and assessing the internal control system in banks, especially banks that comply with Basel. In the guidelines, the Basel Committee has stated the need for banks to have/or be required to have an existing internal control system appropriate to the nature and scale of their operations. This control system includes the allocation of authority, responsibility, and functions involved in banking activities, treasury activities, asset and collateral audit, safeguarding of bank assets, an appropriate independent internal audit system, and appropriate measures to ensure compliance with the above controls and other relevant laws and regulations. All members of the Basel Committee agreed that the internal control framework should be used to assess the internal control system in banks. The Internal Control Framework sets out 13 principles, including principles 1-3 related to management oversight and control culture, principle 4 related to risk identification and assessment, principles 5-6 on control activities and assignment of tasks, principles 7-9 on information and communication, principles 10-12 related to monitoring activities and corrective actions, and principle 13 related to the assessment of the internal control system by inspection and supervision agencies.

2.2.1.2. The role and objectives of the internal control system in commercial banks

The internal control system plays a very important role in the operation of the bank. Because the operation of the internal control system is an inseparable part of the daily operations of the bank. The internal control system is organized and implemented regularly and continuously to ensure that all the operations of the bank are carried out in accordance with the law, safely and effectively. The self-inspection of daily operations of each staff member, the control and approval work of the management and operation levels at the head office and at the bank's member units for the implementation of the operational procedures of the staff members in the process of implementing policies, regulations, internal regulations, and related operational procedures, contribute to ensuring the safety of assets, effectively implementing the bank's goals, complying with the law and meeting the requirements of customers according to the bank's regulations.

Establishing and maintaining an effective and efficient internal control system is an important part of the management and operation of a bank. Internal control is designed, implemented and maintained to address identified business risks that pose a risk to the entity of not achieving one of the objectives related to: Reliability of the financial reporting process; Efficiency and effectiveness of operations; Compliance with applicable laws and regulations. Thus, a designed control always aims to reduce the likelihood of risks occurring to the identified objectives. After establishing its objectives, the bank needs to identify and assess the risks that may hinder the achievement of the objectives. From the appropriate information of risk identification and assessment, internal control procedures will be established accordingly. There are many ways to classify risks, however, the risk that can occur due to fraud from departments within a bank always exists and is associated with operations such as: High level of competition or saturated market, along with declining profits can cause executives to present dishonest financial reports or pressure on

The objectives set by corporate managers lead to fraudulent behavior in disclosing information to satisfy shareholders or investors. Therefore, internal control to prevent the possibility of fraud risks must pay attention to these factors or in other words, internal control is an important measure of managers in limiting fraudulent behavior in the unit.

The bank's internal control system is established to implement the bank's goals and policies and comply with the legal regulations of the State Bank and the bank itself with the following specific and main goals:

Firstly, ensure that the bank's operations achieve the goals and policies set out in each period; protect, manage, and use the bank's assets and resources economically, safely, and effectively; protect the bank from losses; ensure that all officers and employees in the bank work to achieve the bank's operational goals.

Second, ensure that the financial information system and management information are honest, reasonable, complete and timely so that the Bank's competent authorities can make accurate decisions; ensure that financial reports and other business reports to shareholders and management agencies are public, transparent and authentic.

Third, ensure that all bank activities comply with the law, regulations of the State Bank, policies, regulations, internal rules, and business processes of the bank.

2.2.1.3. Basic principles of internal control system in commercial banks

The internal control system is closely linked to the responsibilities and authorities of every department, every process, every operation and every employee in a unit. It is designed by business administrators. A well-functioning internal control system must comply with the following 5 basic principles:

First, ensuring effectiveness: Implementing this principle requires commercial banks to develop policies, regulations, internal rules, business processes and install control points in business processes recorded in writing. These documents, depending on their nature, must be signed and issued by the competent authority of the Bank and must be mandatory for implementation throughout the system or in each affiliated unit of the Bank.

Second, ensuring effectiveness: Building an internal control system to achieve the Bank's common goals of efficiency, safety and legality. The internal control system is implemented consistently throughout the bank's system and all bank staff need to clearly understand the importance of the internal control system to ensure that the Bank's management and operational policies are effectively implemented.

Third, ensure completeness and comprehensiveness: Build an organizational structure and issue full policies, regulations, internal rules, business processes, operational instructions, products and services in the Bank's operations. In which, the design of business processes ensures full control points to meet the requirements of risk control in each business area. The operation of the internal control system must be linked to all daily activities of the Bank, established and maintained in all activities and departments, in which control over high-risk activities and operations must be strengthened.

Fourth, ensuring rationality: is the design of control points at necessary milestones in each business process to prevent risks that may occur in each specific type of business while not causing congestion or obstruction in handling internal work or transactions with customers.

Fifth, ensure timeliness: The internal control system must be established and identify risks right from the time of putting products, services and activities into operation; thereby allowing managers, executives and related staff to take timely remedial measures to minimize and prevent potential risks. However, timeliness does not mean haste because one of the goals of the system is to

The internal control system is to minimize risks for the Bank, so it is necessary to be careful when operating in each stage of the Bank's internal control system.

2.2.2. Components of internal control system in commercial banks

Before the 1992 COSO Report, it was generally accepted that an internal control system consisted of a control environment, an accounting system, and control procedures. In 2013, the COSO Report added principles to serve the comprehensive management of the enterprise to reduce business risks and move towards multi-objective strategic management. Thus, the internal control system according to the 2013 COSO Report includes five components of an internal control system based on the original 1992 version.

Table 2.1: Components of internal control system

Control environment

1. Make commitments to ensure political and ethical values. 2. Take overall responsibility 3. Establish structure, authority and responsibility 4. Execute commitment on capacity 5. Ensure accountability
Risk Assessment	6. Relevant and specific goals 7. Identify and analyze risks 8. Fraud risk assessment 9. Identify and analyze key changes
Control activities	10. Select and develop control activities 11. Select and develop general controls for technology 12. Correct application and procedure
Information and communication	13. Use the right information 14. Internal communication 15. External communication
Monitoring activities	16. Conduct continuous and separate assessments 17. Evaluation and communication between contents

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• Pre-tax Profit of Bidv Tien Giang in the Period 2011-2015 zt2i3t4l5ee zt2a3gsnon-credit services, joint stock commercial bank zt2a3ge zc2o3n4t5e6n7ts At that time, the Branch had to set aside a provision for credit risks, which reduced the Branch's income. Chart 2.2. Pre-tax profit of BIDV Tien Giang in the period 2011-2015 Unit: Billion VND 140 120 100 80 60 40 20 0 63.3 80.34 89.29 110.08 131.99 2011 2012 2013 2014 2015 Profit before tax (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) However, through chart 2.2, it can be seen that BIDV Tien Giang's profit is still increasing continuously, and its operating efficiency is currently leaking. This is a contribution of non-credit services, and this service segment will be increasingly focused on growth by BIDV Tien Giang to ensure the highest profit safety because credit activities have many potential risks. At the same time, focusing on developing non-credit services is consistent with one of the contents of restructuring the financial activities of credit institutions in the project "Restructuring the system of credit institutions in the period 2011-2015" approved by the Prime Minister in Decision No. 254/QD-TTg dated March 1, 2012 [14]: "Gradually shifting the business model of commercial banks towards reducing dependence on credit activities and increasing income from non-credit services". 2.2. Current status of non-credit service development at BIDV Tien Giang. 2.2.1. BIDV Tien Giang has deployed the development of non-credit services in recent times. Along with the development of the Head Office, BIDV Tien Giang's products and services are constantly improved and deployed in a diverse manner to ensure provision for many different customer groups in the area: individual customers, corporate customers, and financial institutions. Typical services are as follows: Payment services, treasury services, guarantee services, card services, trade finance, other services: Western Union, insurance commissions, consulting services, foreign exchange derivatives trading, e-banking services,... 2.2.1.1. Payment services: In accordance with the Prime Minister's Project to promote non-cash payments in Vietnam [15], banks in Tien Giang province have continuously developed payment services to reduce customers' cash usage habits through card services and electronic banking services such as: salary payment through accounts, focusing on developing card acceptance points, developing multi-purpose cards, paying social insurance by transfer, paying bills through banks, etc. Chart 2.3. Net income from payment services in the period 2011-2015 Unit: Million VND 6000 5000 4000 3000 2000 1000 0 3922 4065 4720 5084 5324 2011 2012 2013 2014 2015 Net income from payment services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Along with the technological development of the entire system, BIDV Tien Giang has a payment system with a fairly stable transaction processing speed, bringing many conveniences to customers. The results of observing chart 2.3 show that the income from payment services that the Branch has achieved has grown over the years but the speed is not high and the products are not outstanding compared to other banks. Domestic payment products such as: Online bill payment, electricity bills, water bills, insurance premiums, cable TV bills, telecommunications fees, airline tickets, etc. bring many conveniences to customers. 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BIDV Tien Giang is currently providing card types such as: credit cards (BIDV MasterCard Platinum, BIDV Visa Gold Precious, BIDV Visa Manchester United, BIDV Visa Classic), international debit cards (BIDV Ready Card, BIDV Manu Debit Card), domestic debit cards (BIDV Harmony Card, BIDV eTrans Card, BIDV Moving Card, BIDV-Lingo Co-branded Card, BIDV-Co.opmart Co-branded Card). These cards can be paid via POS/EDC or on the ATM system. In addition, with debit cards, customers can not only withdraw money via ATMs but also perform utilities such as mobile top-up, online payment, money transfer,... through electronic banking services. In order to attract customers with card services, BIDV Tien Giang has continuously increased the installation of ATMs. As of December 31, 2015, BIDV Tien Giang has 23 ATMs combined with 7 ATMs in the same system of BIDV My Tho, so the number of ATMs is quite large, especially in the center of My Tho City, but is not yet fully present in the districts. Basic services on ATMs such as withdrawing money, checking balances, printing short statements,... BIDV ATMs accept cards from banks in the system. Banknetvn and Smartlink, cards branded by international card organizations Union Pay (CUP), VISA, MasterCard and cards of banks in the Asian Payment Network. From here, cardholders can make bill payments for themselves or others at ATMs, by simply entering the subscriber number or customer code, booking code that service providers notify and make bill payments. Chart 2.6. Net income from card services in the period 2011-2015 Unit: Million VND 3500 3000 2500 2000 1500 1000 500 0 687 1023 1547 2267 3104 2011 2012 2013 2014 2015 Net income from card services (Source: Report on the implementation of the annual business plan of the General Planning Department of BIDV Tien Giang [24]) Through chart 2.6, it can be seen that BIDV Tien Giang's card service income is constantly growing because the Branch focuses on developing businesses operating in industrial parks, which are the source of customers for salary payment products, ATMs, BSMS. Specifically, there are companies such as Freeview, Quang Viet, Dai Thanh, which are businesses with a large number of card openings at the Branch, contributing to the increase in card service fees [25]. Table 2.6. Number of ATMs and POS machines in 2015 of some banks in Tien Giang area. Unit: Machine STT Bank name Number of ATMs Cumulative number of ATM cards POS machine 1 BIDV Tien Giang 23 97,095 22 2 BIDV My Tho 7 21,325 0 3 Agribank Tien Giang 29 115,743 77 4 Vietinbank Tien Giang 16 100,052 54 5 Dong A Tien Giang 26 97,536 11 6 Sacombank Tien Giang 24 88,513 27 7 Vietcombank Tien Giang 15 61,607 96 8 Vietinbank - Tay Tien Giang Branch 6 46,042 38 (Source: 2015 Banking Activity Data Report of the General and Internal Control Department of the Provincial State Bank [21]) Through table 2.6, the author finds that the number of ATMs of BIDV Tien Giang is not much, ranking fourth after Agribank Tien Giang, Dong A Tien Giang, Sacombank Tien Giang. The number of POS machines of BIDV Tien Giang is very small, only higher than Dong A Tien Giang and BIDV My Tho in the initial stages of merging the BIDV system. Besides, BIDV Tien Giang has a high number of cards increasing over the years (table 2.7) but the cumulative number of cards issued up to December 31, 2015 is still relatively low compared to Agribank, Vietcombank, Dong A (table 2.6). div.maincontent .content_head3 { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: bold; text-decoration: none; font-size: 14pt; } div.maincontent .p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent p { color: black; font-family:"Times New Roman", serif; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; margin:0pt; } div.maincontent .s1 { color: black; font-family:"Courier New", monospace; font-style: normal; font-weight: normal; text-decoration: none; font-size: 14pt; } div.maincontent .s2 { color: black; font-family:"Times New Roman", serif; font-style: italic; font-weight: normal; 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Source: COSO organization 2013

According to Vietnamese Accounting Standards (VSA), the internal control system is a combination of five elements: control environment, risk assessment, control activities, information and communication, and monitoring activities. To study the internal control system in commercial banks, the author relies on the COSO 2013 Internal Control Framework, according to which the internal control system consists of five constituent elements including: control environment; risk assessment; control activities; information and communication; monitoring.

2.2.2.1. Control environment

According to the COSO Report, “The control environment reflects the general tone of an organization, affects the consciousness of everyone in the unit, and is the foundation for other parts of the system” [31]. The control environment includes the administrative and management functions, the perceptions and actions of the Board of Directors and the Board of Management related to internal control for the unit's operations. The control environment reflects the characteristics of the unit, influenced by the consciousness of the people in that organization. A weak control environment is the main cause of violations in the financial activities of the unit. Therefore, building an effective control environment has a strong impact on the process of management and corporate governance. The control environment begins with administrators, business managers and is a factor that affects other components of internal control.

There are many studies on the elements of the control environment. According to VSA 400, the control environment is the awareness, views, concerns and activities of the members of the Board of Directors and the Board of Management towards the internal control system and the role of the internal control system in the unit. According to VSA 315, the control environment includes the following elements: Honesty and ethical values; Assurance of capacity; Participation of the Board of Directors; Philosophy and management style of the Board of Management; Organizational structure; Assignment of authority and responsibility; Human resource policies.

Honesty and Ethical Values: Environmental factors that mainly influence the perceptions of senior managers in banks. Important factors

First of all, in the control environment related to integrity and ethical values ​​as well as commitment to the capacity, philosophy and management style of the administrator, especially the senior administrator in the enterprise and the assignment of tasks at the unit is the management characteristic. These are factors that are related to each other to form the management characteristic in the unit. The management characteristic affects the design of control procedures and maintenance of control activities.

Competency Assurance: Is the Board of Directors' commitment to the levels of competence and skills required to perform each task.

Participation of the Board of Directors and the Supervisory Board: This participation is to ensure the interests of the Board of Directors themselves, they have very important responsibilities stipulated in the professional ethics standards, laws and other regulations of the unit. The Board of Directors has a great influence on the perception of internal control. The Board of Directors is also responsible for monitoring the design and effectiveness of the procedures for reporting violations and reviewing the effectiveness of internal control in the unit. The effectiveness of this factor depends on the independence of the Supervisory Board, Internal Auditors compared to the Board of Directors; the experience of the members, as well as the coordination between the members.

Management philosophy and operating style of the Board of Directors: Is the viewpoint, attitude and actions of the Board of Directors towards accepting business risks, preparing and presenting financial statements.

Organizational structure: Organizational structure reflects the division of power, responsibility and obligations of all members in the unit as well as reflects the relationship of cooperation, coordination, control and information sharing within the same unit. A reasonable organizational structure will help the management and control of the administrator to be carried out reasonably, avoiding overlap in implementation or the existence of uncontrolled activities.

Determination of authority and responsibility: The principle in dividing authority, responsibility and obligations in the organizational structure includes clearly defining the functions and tasks of each department and individual through a system of documents (assignment of tasks, approval of authorization); appropriately isolating the functions of approval, implementation,