Increasing penalties to reduce violations in independent auditing

Strengthening penalties can improve the quality of audited financial reports

Independent auditing exposes shortcomings

According to data from the Ministry of Finance, Vietnam currently has around 2,400 practicing auditors who are certified to perform audit services, with over 220 audit firms certified to provide these services.

As of May 2024, 6,387 individuals had been awarded Vietnamese auditor certificates, with 2,501 actively working in auditing firms. Since 2013, 114 auditors have been suspended, thrê auditing firms have been suspended from providing auditing services, and three auditing firms have had their business licenses for providing auditing services revoked.

The Law on Independent Auditing (Law No. 67/2011/QH12), passed by the National Assembly on March 29, 2011, took effect on January 1, 2012.

The law has contributed to preventing waste and corruption, supporting the government's management and oversight of businesses, especially in ensuring financial transparency for publicly listed companies. Additionally, the government's role in audit management has gradually improved, and legal compliance monitoring has been carried out effectively.

However, with the development of the economy, society, and international integration, the current legal framework for independent auditing has revealed several shortcomings. The penalties for violations are neither strong enough nor effective enough to regulate professional conduct, and administrative sanctions lack deterrence. The process for handling violations by auditing firms and auditors remains limit ed due to inconsistencies in other legal provisions. Furthermore, authorities responsible for auditing inspections lack the authority to impose penalties, and the statute of limit ations for penalizing violations in the field of independent auditing is only one year, resulting in cases where penalties could not be imposed due to the expiration of the statute of limit ations.

In addition, regulations concerning auditing firms, audit firm branches, and practicing auditors have proven inadequate, failing to meet the needs of the economy and the required quality standards for independent auditing. The current law does not fully encompass all entities that should be audited.

In practice, many large businesses with complex transactions, significant labor forces, and substantial revenues, which have a considerable impact on the economy, should have their financial statements audited annually to ensure financial transparency. This would aid regulatory authorities and tax agencies in monitoring and managing these businesses, ensuring full tax compliance and preventing tax evasion.

The Ministry of Finance asserts that excluding such businesses from mandatory audits creates risks of inaccurate financial information and non-compliance with accounting and financial discipline, potentially leading to hidden risks. Therefore, it is crucial and urgent to include these entities under mandatory audit requirements, particularly given recent serious corporate violations.

Increasing penalties

The Ministry of Finance has drafted a law amending and supplementing several articles in laws under its jurisdiction, including the Law on Independent Auditing. One proposed solution is to strengthen the effectiveness of penalties. The draft law proposes increasing the maximum fines from VND100 million to VND3 billion for organizations and from VND50 million to VND1.5 billion for individuals, extending the statute of limit ations for violations from one year to ten years, and introducing additional penalties that better reflect current conditions.

The Vietnam Association of Certified Public Accountants (VACPA) has expressed concerns that the proposed fine of VND3 billion is too high given the nature of audit operations.

However, the Ministry of Finance argues that increasing penalties not only directly boosts state revenue but also helps improve the quality of audited financial reports. It ensures that audited businesses fulfill their obligations to the state, contributing significantly to proper tax collection and increasing state revenue, thereby promoting growth. Additionally, stronger penalties will help reduce violations by audit firms and auditors, forcing these firms to restructure and organize themselves to provide higher quality audit services.