October 18, 2019 07:05

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Completed legal framework for internal audit

17:42 | 02/03/2019

VCN - Recently, the Government issued Decree No. 05/2019 / ND-CP on internal audit. This is a new driving force to improve the governance quality in the business community and public units.

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completed legal framework for internal auditing

Strong expectations

Internal audit is known as an independent monitoring function and a third defense line for businesses. This function provides independent and objective reviews and evaluations of internal control and risk management and internal administration, thereby contributing to improving the operating efficiency and transparency of organization.

According to many experts, in Vietnam, internal audit has just only been implemented in large-scale enterprises with complex and risky activities. Some ministries and ministerial-level agencies have piloted internal audit in some specific projects. However, it has not been implemented in a systematic way and has not ensured the principle of independence in many cases.

Before the introduction of Decree 05, Vietnam did not have all legal documents on internal audit, but only had a few regulations scattered in many different documents. Previously, only a few sectors and fields had separate regulations on internal auditing such as banks and credit institutions.

The introduction of Decree No. 05 with the expectation of strong change of internal audit activity in Vietnam by providing specific regulations on internal audit; duties, responsibilities and powers of the internal audit division, internal auditors; responsibilities of the concerned parties for internal audit; and State management on internal audit. This is considered as the first comprehensive legal framework for internal audit activity at public units, listed companies, state-owned enterprises operating under the parent-subsidiary model.

Since the Ministry of Finance started to develop the Decree with the support of the World Bank more than 2 years ago, it can be affirmed that Decree 05 is very suitable for the context of corporate governance that is being promoted in Vietnam. Along with the Law on Securities which is being revised and the corporate governance principles that will be issued, Decree 05 is considered a great progress in corporate governance, aiming to ensure the investor’s interests and market’s transparency, as well as transforming corporate governance model in accordance with international practices.

Many challenges

Despites expectations, Decree 05 also brings many challenges. According to Mr. Hoang Hung, Deputy General Director of PwC Vietnam Company, former international consultant assisting the development of Decree 05, those who implement the Decree have 24 months from the effective date of the Decree to complete the necessary preparations for internal audit function. This is not a long time and businesses and organizations will have to speed up from now. They will need to solve many problems in order to meet the expectation of an effective internal audit function as well as the law requirements. Firstly, they need to raise awareness of role and function of internal audit as well as effective internal audit organization within their units, especially from senior leaders like administration board and executive board. Decree 05 provides requirements for internal audit work, but how to build and operate the internal audit division in particular will be a big problem that those who implement the Decree will need to solve.

In addition, in terms of reporting regime, according to international practices, internal audit reports will be sent to the audit committee under the board of directors. However, many enterprises in Vietnam are applying a corporate governance model with a control board. There are only a few enterprises changing into the model audit committee. The establishment of an internal audit will accompany the question of the reporting channel on accountability as well as the mechanism to have the most effective reporting channel, orientation, support and supervision of internal audit.

Moreover, in terms of internal audit resources, currently the number of persons whose have capabilities, experience and qualifications in internal audit in the market is limited, and it is difficult to fully meet needs of the subjects implementing the Decree. To partly solve this problem, Decree 05 allows enterprises and organizations to outsource internal audit services. At the same time, in practice, in the short term, existing auditors and accountants can also take the role of internal audit through training, improving for the necessary capacity in a short term.

Finally, it is challenge of standards. Currently, there are no specific regulations on standards and practices on internal audit. In the future, there needs to be more specific guidelines so that the implementing units can comply with standards consistently, thereby facilitating the internal audit function in the units for operating in the most effective way. At the same time, management levels, management agencies and investors will also have confidence in the results and quality of internal audit activities.

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Mr. Hung assessed that: With the issuance of Decree 05, it is a certainty that businesses and organizations will invest in internal audit function more seriously. They will soon realize the great benefits of the internal audit, firstly for their own organizations. Internal auditors have a role of independent review and evaluation for the three main governance components: internal control, risk management and corporate governance. Thereby, the internal audit can provide effective support and help operational objectives of the units gain the highest efficiency.

By Hong Van/ Huyen Trang