ISBN: 978-604-84-3195-2

Doan Ngoc Trai, Thai Manh Kha, Luu Nguyen Truong Trung, Nguyen Tuan Dung/ ICOAF 2018 Proceedings

International Conference on Accounting and Finance (ICOAF 2018), June 7-8th, 2018
Danang City, Vietnam

The Impact of Corporate Governance on Financial Reporting

Quality – Empirical Evidence from Vietnam

Doan Ngoc Traia*, Thai Manh Khaa, Luu Nguyen Truong Trunga, Nguyen Tuan
Dunga
a
University of Economics, The University of Danang, 71 Ngu Hanh Son St., Danang, Vietnam

ABSTRACT

Vietnam, a developing country, offers an interesting case for researching the link between corporate
governance and financial reporting quality because of the differences in corporate governance code,
ownership structure of listed firms and so on. Our study examines the effect of corporate governance on
financial reporting quality, using STATA software to analyze the data of 90 listed companies selected
randomly on HOSE from 2013-2016. The empirical results indicate that board characteristics such as CEO-
Chairman duality, board financial expertise have effects on financial reporting quality while board
independence and gender diversity of board have no impacts. Although the Supervisory board is not aligned
with corporate governance good practice, it has a positive influence on financial reports. In addition,
ownership structure has interesting implications despite the insignificant. We also find that Circular 200 that
came into force in 2015 fiscal year improved financial statements. Based on these findings, we make
discussions and implications to enhance the impact of good corporate governance on financial reporting
quality.

Keywords: Corporate governance; financial reporting quality; fundamental qualitative characteristics; Circular
200

1. Introduction

Listed companies’ financial reporting is an important channel for current and potential investors to make
decisions. Corporate governance is a set of mechanisms through which outside investors protect themselves
against the managers’ abuse by directing and supervising the corporation’s activities, including financial
reporting process. Good corporate governance is expected to have a positive impact on financial reporting
quality. However, developing stock markets are different from developed ones in term of corporate governance
codes, ownership structures and different stages of development, therefore, the effect of corporate governance on
financial reporting quality in developing countries might not be the same as the developed countries. This
motivates us to test the impact of corporate governance on listed firms’ financial reporting quality in Vietnam - a
developing country.

* Doan Ngoc Trai. Tel.: +84914034278

E-mail address: ngoctraidoan@gmail.com
 Doan Ngoc Trai, Thai Manh Kha, Luu Nguyen Truong Trung, Nguyen Tuan Dung/ ICOAF 2018 Proceedings

There is a considerable amount of research into the relationship between corporate governance and financial
reporting quality around the world. However, not much research on that issue has been done in developing
countries. Vietnam offers an interesting case for studying how corporate governance influents financial reporting
quality for a number of reasons. Firstly, Vietnam ranks poorly in corporate governance among ASEAN countries
(The World Bank, 2016). Secondly, many Vietnamese listed companies are formed from the equitization of State
Owned Enterprises (SOEs) (The World Bank, 2013). Lastly, the institutional investor base is very thin while the
small retail investors dominate in the Vietnamese stock market (The World Bank, 2016). Up to now, there are a
few studies on the relationship between the board of directors and financial reporting quality in Vietnam. Ha
Xuan Thach, Nguyen Trong Nguyen (2015) find a relationship between the board of directors characteristics and
quality of financial reporting in the annual reports of 100 companies listed on the Ho Chi Minh City Stock
Exchange (HOSE) in 2013. Nguyen To Tam (2016) studies the factors affecting the financial information quality
of the listed companies in the Vietnam stock exchange with the data of 69 non-financial companies listed on
HOSE (out of 266 companies selected and send questionnaires) in 2012. We examine the impact of corporate
governance on financial reporting quality, using the data of listed companies from 2013 to 2016, with the effect
of the Circular No. 200/2014/TT-BTC applied to fiscal years beginning after January 01, 2015 (Circular 200).
The rest of the paper is structured into four sections. Section 2 presents literature and hypothesis development
followed by research design and empirical results in section three and four respectively. Finally, section 5 shows
implication and conclusion.

2. Literature review and hypothesis development

2.1. Financial reporting quality

Financial reporting is the financial results that a company releases to the public. Financial reporting typically
encompasses the following: Financial statements, accompanying footnote disclosures, other financial
information on company’s website, annual reports issued to shareholders, any prospectus issued to potential
investors concerning the issuance of securities by the company. Although financial and nonfinancial information
might be communicated by in different means, traditional financial statements are always the most popular
reports. In this study, we focus on evaluating the quality of financial statements because they are the central
feature of financial reporting.
Primary individual users have different and possibly conflicting information needs. Thus, their perspectives
about the assessment of financial reporting quality are also various. Consequently, many prior studies measure
the quality of financial reports by several methods. According to Beest & Boelens (2009), these methods include
accrual models, value relevance models, specific elements in the annual report or qualitative characteristics. We
notice that accrual models and value relevance literature focus on accounting financial figures to assess the
financial reporting quality. Meanwhile, a comprehensive measurement tool of financial reporting quality would
at least include the complete annual report, including both financial and nonfinancial information (Beest and
Boelens, 2009). The method that focuses on specific elements in the annual report ensures evaluating properly
and deeply the impact of specific information in the annual report on the decisions made by users. However, the
quality of financial information should be evaluated as a whole report, not a separate element that cannot provide
enough information to help users make decisions.
According to Conceptual Framework for Financial Reporting 2010 (IASB, 2017), financial reports have
function providing useful information for users in making decisions about providing resources to the entity.
Thus, the quality of financial reports could be evaluated by the level of usefulness that users base on for making
decisions. In other words, the qualitative characteristics of financial information can be defined as an appropriate
measurement for financial reporting quality. The qualitative characteristics are divided into fundamental
qualitative characteristics and enhancing qualitative characteristics (IASB, 2017). For the limited ability of
collecting the data, we decided to use only fundamental characteristics for evaluating the quality of financial
reports.

2.2. Corporate governance and relevant theories

Corporate governance is the mechanism distributing rights and responsibilities among different participants in
the corporation, such as, the board, managers, shareholders and other stakeholders, and spelling out the rules and
procedures for making decisions on corporate affairs (OECD, 2015). According to Tricker (2011), there are
various theories influencing the development of corporate governance. For the purpose of this paper, we review
main theories, including agency, stewardship, stakeholders and resource dependency theory.
 Doan Ngoc Trai/ ICOAF 2018 Proceedings 3

2.2.1. Agency theory

Agency theory, or principal-agent theory, is based on the idea that there is the conflict between the owner
(principal) and manager (agent) in modern corporations because of the difference of interests and attitude of risk
as well as the asymmetry of information. In listed companies, principal-agent relationship can be described as
shareholders delegate some responsibilities to managers while keeping in mind that they will perform best for
the companies‘ success (Jensen, & Meckling, 1976). Corporate governance are regarded as a mechanism in
which a board of directors is a crucial monitoring device to minimize the problems brought from principal-agent
relationship (Fauziah, Yusoff and Alhaji, 2012). According to agency theory, board of directors needs to ensure
all things management do is to serve the interests of the owner. The production of external financial reports
allows outside shareholders to evaluate managerial performance. However, managers have incentives to mislead
shareholders by providing financial information that does not portray the true underlying performance of the
business (Healy and Wahlen, 1999). Therefore, board has to include independent and non-executive directors to
ensure they supervise effectively and fairly the management, monitor strictly preparing the financial statements.
Besides, board generally forms an audit committee that has expertise and knowledge to administer the
management activities, including preparing financial reports, on their behalf. In additional, agency theory
requires the existence of Chief Executive Officer (CEO) duality should be limited. Board of director is
responsible to approve the decisions made by the managers and monitor the implementation of those decisions.
If a CEO is also a chairperson, there may be a self-review threat that affects the effectiveness of board of
directors. Also note that, the agency problem depends on the ownership characteristics of each country (Fauziah,
Yusoff and Alhaji, 2012). Vietnam is characterized by the dominance of state-control over listed companies
when about one-third of the listed companies are majority state-owned (The World Bank, 2016). Therefore, the
state ownership effect on financial reporting quality needs to be tested.

2.2.2. Stewardship theory

In contrast to agency theory, stewardship theory reflects the original legal view of the corporation. The
shareholding members of the company sign up the managers, who will act as stewards for owners’ interests
(Tricker, 2011). Stewardship theory states that managers are more likely to serve organizational rather than
personal goal because their success is measured by the satisfaction that they bring to the owners by improving
firm performance. From the stewardship theory perspective, managers have no reasons to manipulate the
financial information because their job serving the organizational goals and the good performance of firm is also
their achievement. Similarly, CEO duality can lead to better firm performance due to clear and unified
leadership, with the superior amount and quality of information (Donaldson & Davis, 1991). Because of
focusing on structures that facilitate and empower than monitor and control, stewardship theory supports CEO
duality and a major of specialist executive directors rather than non-executive directors (Clarke 2004, cited by
Fauziah et al., 2012). Thus, board’s financial expertise may be a factor affecting financial reporting quality.

2.2.3. Stakeholder theory

According to Tricker (2011), stakeholder thinking involves a discourse on the balance of responsibility,
accountability, and power throughout society, so this society view of corporate governance is probably better
thought of as a philosophy rather than a theory. Stanford Research Institute found the support of all stakeholders
as central to the success of the firm (Freeman, 2001). Some examples of key stakeholders are creditors, directors,
employees, government, shareholders, suppliers, unions, and the community from which the business draws its
resources. Corporate governance, in which Board of directors is an important component, improves
stakeholders’ confidence and this would aid the sustainability of business in the long run (Fauziah, Yusoff and
Alhaji, 2012). Thus, Stakeholder theory requires Board not only serving the interests of shareholders, but also
the interests of related parties. Board has great responsibility to monitor the management and balance all of
interests of stakeholders. Meanwhile, the extent of users who need to know the situation of firm performance as
well as other information is broader. Consequently, the quality of financial reporting has to be ensured before
publishing to support the variety of purposes. Audit committee is an internal device that helps Board supervising
the process of preparing financial reports as well as the verifying the appropriateness of them. Institutional
investors (such as pension funds, insurance companies, investment firms), through their powerful influence in
corporate governance, can also positively affect the quality and reliability of financial statements because of their
point of view on company social responsibility.

2.2.4. Resource dependency theory

Resource dependency theory sees the Board of directors as a key factor between the companies and outside
resources and has role securing and acquiring the crucial resources of the organization by their external linkage
to the environment. According to the resource dependency rule, the directors bring resources such as
information, skills, key constituents (suppliers, buyers, public policy decision-makers, social groups) and
legitimacy that will reduce uncertainty in firm performance (Gales & Kesner, 1994), so may influence financial
 Doan Ngoc Trai, Thai Manh Kha, Luu Nguyen Truong Trung, Nguyen Tuan Dung/ ICOAF 2018 Proceedings

reporting quality. In this theory, board diversity that is defined as gender, ethnicity, age, business experience, and
geographic background, can contribute to better corporate governance (The Canada Institute of Corporate
Directors, cited by Firoozi et al., 2016). This theory also supports the appointment of directors to multiple boards
because they have many opportunities to gather information and network in various ways (Fauziah, Yusoff &
Alhaji, 2012).

2.3. Hypothesis development

2.3.1. Board’s characteristics and financial reporting quality

There is an obvious contrast between Agency theory and Stewardship theory about the relationship between
board’s characteristics and financial reporting quality. While Agency theory supports the independence of board
and the separation between CEO and chairman, Stewardship theory appreciates inside executive directors on the
board and supposes CEO duality can lead to the better control due to clear and unified leadership. Empirical
studies have shown that non-executive directors on board provide independent opinions and objective
monitoring of companies operations and direction, including preparing financial reporting (Peasnell, Pope, and
Young, 2005; Lo, Wong, and Firth, 2010; Erena and Tilahun, 2012, cited by Kibiya, Ahmad, & Afzaamran,
2016). Besides, separation of the roles of Chairman and CEO is one of the board characteristics associated with
strong corporate governance. The appointment of a CEO to the position of the chair can lead to concentration of
power and possible conflicts of interest, resulting in a reduction in the level of monitoring (Kantudu and Samaila,
2015). In addition, Kantudu and Samaila (2015) also find that firms characterized by two-tier systems of CEO
and a higher number of independent directors have higher financial reporting quality. Thus, two first hypotheses
in this study are:
H1: There is a negative relationship between CEO Duality and financial reporting quality
H2: There is a positive relationship between Board Independence and financial reporting quality
From the perspective of Resource dependency theory, board diversity can contribute to better corporate
governance, including monitoring the financial report preparation. In this study, the gender diversity of board
members is tested whether it affects financial reporting quality. According to Kibiya et al. (2016), Bernard and
Arnold (1997) point out that women have a higher predisposition to abide by the rules and regulations in
financial decision contexts than men, Obama and Mondi (2014) report that women have distinctive features
needed to contribute to the monitoring of financial reporting process in Nigeria. Therefore, we suggest the third
hypothesis:
H3: There is a positive relationship between the gender diversity of Board members and financial reporting
quality
Board diversity also includes a variety of expertise and experience. Although management have a duty to
prepare the financial reports, especially the financial statements, Board is responsible evaluating and approving
them. Therefore, the requirement of competent directors is essential, especially knowledge about finance or
accounting. It ensures the ability of Board to supervise the financial situation of company, solve problems related
to it and provide faithful financial statements to users. Thus, the fourth hypothesis is:
H4: There is a positive relationship between Board financial expertise and financial reporting quality

2.3.2. Ownership structure and financial reporting quality

OECD (2015) stated that ownership structure is an important factor of corporate governance that is presented
by the direct participation of investors in the operation and financial aspects of corporation. Nowadays, many
corporations have the high proportion of institutional ownership to owner equity. This indicates the importance
as well as the essential demand of this source. However, there is a difference in the thoughts of researchers about
the relationship between the institutional ownership and financial reporting quality. Klai (2011) states that
financial institutions are associated with a good quality of financial disclosure meanwhile Chalaki et al (2012)
support the hypothesis that there is no relationship between both of them. Institutional investors (such as pension
funds, insurance companies, investment firms) have resources and expertise to participate in corporate
governance. Therefore, these institutional investors, through their powerful influence in corporate governance,
can positively affect the quality and reliability of financial statements. With that judgment, the hypothesis 5 is
followed:
H5: There is a positive relationship between Institutional ownership and financial reporting quality
Another factor of ownership structure is state ownership, usually measured by the share proportion of the
government. Habib and Jiang (2015) survey the empirical archival literature on the effect of different facets of
corporate governance on financial reporting quality in China. They find recent evidences to support the popular
wisdom that the financial reporting quality of state-controlled firms is of lower quality. Vietnam is similar to
China on SOEs equitization process and at the end of 2012, the state is the dominant shareholder or one of the
dominant shareholders in listed companies (The World Bank, 2013), so we suggest the next hypothesis:
 Doan Ngoc Trai/ ICOAF 2018 Proceedings 5

H6: There is a negative relationship between state ownership and financial reporting quality

2.3.3. Audit committee and financial reporting quality

According to Rezaee (2004), audit committees are standing committees composed of non-executive and
independent directors of the Board. The audit committee’s responsibility is to oversee and monitor the integrity,
quality, and reliability of the financial reporting process without stepping into the managerial functions and
decisions related to the preparation of financial statements. Audit committee report significantly affects the
quality of financial reporting, in other words the qualification of audit committee members adds to the financial
reporting quality (Gina et al., 2013). In fact, most of listed firm in Vietnam have a Supervisory board instead of
an audit committee. Thus, this study will examine the function of Supervisory board, to see whether it can
improve the quality of financial statement as an audit committee or not. The last hypothesis will be:
H7: There is a positive relationship between Supervisory board and financial reporting quality
Besides independent variables, following relevant literature, we control for firm size (Klai, 2011; Yasser,
Mamun, & Hook, 2017) and audit firm type (Palmer, 2008). We also use another variable named Regulation
(REGL) to control the effect of the new accounting regulation, Circular 200 (Ministry of Finance, 2014), on the
quality of financial reports, especially the financial statements in our study period.

3. Research design

3.1. Sample and data

In this study, we used panel data to examine the impact of corporate governance on listed companies’
financial reporting quality in a four-year period from 2013 to 2016 under the influence of the new accounting
regulation, namely Circular No.200/TT/BTC, that is applied to fiscal years beginning on or after January 01,
2015. Our sample consists of 90 companies randomly selected from the non-financial listed companies on Ho
Chi Minh Stock Exchange (HOSE), ensuring that they meet the other conditions: they have been listed from
2013 or earlier and lasted until 2016. We used the official reports published by companies listed on HOSE,
namely the Annual Reports, especially financial statements in this study. So we have a balanced panel data from
2013-2016 with 360 firm-year observations.
We selected our sample from HOSE since companies on HOSE tend to be larger than companies listed on
Hanoi Stock Exchange (HNX), and HOSE has significantly higher capital requirements and requires at least two
years of profits before listing, versus one for HNX (The World Bank, 2013). We believe that larger companies
bring more meaning to the sample and the results of studies on the relationship between corporate governance
and financial reporting quality.

3.2. Measurement of financial report quality

To construct a measurement tool, we use prior literature which defines financial reporting quality in terms of
the fundamental qualitative characteristics underlying decision usefulness as defined in the Conceptual
Framework for Financial Reporting 2010 (IASB, 2017). The fundamental qualitative characteristics (relevance
and faithful representation) are the most important and determine the content of financial reports. We construct a
conceptually-based 9 item index that is based on the measurement scales developed by Beest & Boelens (2009).
Scales are five levels Likert from Very important (fully complete) to Not importance (uncompleted) for each
characteristic. This process results in a score between 1 and 5 for each qualitative characteristic: 1 indicating a
poor score, while an outcome of 5 implies excellence. Appendix A provides an overview of the nine measured
items used to measure the financial reports’ fundamental qualitative characteristics. The quality of financial
reporting is measured by including the total of scores on two fundamental qualitative characteristics for each
company.

3.3. Regression models

Based on theoretical analysis, the following model is designed:

FRQit = β0 + β1*CEODit + β2*BINDit + β3*BDIVERit + β4*BEXPit + β5*OIit + β6*OSit +
β7*SBOARDit + β8*REGLit + β9*AFIRMit + β10*FSIZEit + εit
Where:
- FRQ: Financial reporting quality, measured by the total score of two fundamental qualitative characteristics
for each company;
- β0: The intercept term;
- β1- β10: Coefficients of explanatory variables;
- CEOD: Dummy variable (1 for duality and zero for separation);
 Doan Ngoc Trai, Thai Manh Kha, Luu Nguyen Truong Trung, Nguyen Tuan Dung/ ICOAF 2018 Proceedings

- BIND: The proportion of independent non-executive directors over all members on Board;
- BDIVER: Dummy variable (1 if Board has any female members, otherwise, 0)
- BEXP: The proportion of members who have the competence of finance or accounting in Board;
- OI: The percentage of share owned by institutional investors;
- OS: The percentage of share owned by Government;
- SBOARD: Dummy variable (1if Supervisory Board exists and 0 otherwise).
- REGL: Dummy variable (1 if the observation in years 2015 and 2016 and 0 otherwise);
- AFIRM: Dummy variable (1 if Big 4 audited that company, otherwise, zero).
- FSIZE: The firm size, measured by the natural logarithm of the company’s sales.

4. Research results and discussions

4.1. Descriptive statistics

Tables 1 and 2 below provide the descriptive statistics.

Table 1. Descriptive statistic of continuous independent variables

Variable Mean Std.Dev Min Max
FRQ 360 20.92778 2.372147 15 28
BIND 360 0.203651 0.229413 0 1
BEXP 360 0.44891 0.256756 0 1
OI 360 0.088371 0.153152 0 0.7109
OS 360 0.192519 0.263684 0 0.9672
FSIZE 360 13.47495 1.448203 8.628556 17.9896

Table 2. Frequency summary of binary variables

Value of variable
Variable Obs.
0 1
CEOD 360 283 77
BDIVER 360 181 179
SBOARD 360 102 258
REGL 360 180 180
AFIRM 360 255 105

The results of descriptive statistics in table 1 say that through 4 years (2013-2016), the average FRQ score is
around 21 points over the maximum of 45, which is quite low and indicates that the observed companies have
not provided useful information for user yet. Besides, FRQ score ranges from 15 to 28, which means the
reporting quality among companies varies considerably, but with relatively low dispersion 2.37. The average
proportion of independent non-executive on Board is approximately 20.4 percent with a large standard deviation
of 22.9 percent. This shows many observed companies do not appreciate the effect of having outsiders. In fact,
some companies have a high proportion of independent members while many others do not even have an
independent member in four years. In addition, the average proportion of experts on Board is about 45 percent
with the deviation of 26 percent. This means that companies have different thoughts about having those with
financial-accounting skills on their board. As for the ownership factors, the mean value of institutional
ownership and state ownership is almost equal to 0.09 and 0.19 respectively confirms that individuals rather than
institutions and government hold the ownership more. Despite that, there are several companies that have large
investment from institutions (e.g. Traphaco with 71.1%, Transimex with 70%) or majority owned by the
government (e.g. Petro Vietnam Gas with 96.7%). The difference of turnover of firms in the sample is quite
large, with a few large companies skew gross revenue. Therefore, we use the natural logarithm of the sales to
reduce this skewness, results in FSIZE range from 8.63 to 17.99.
According to table 2, about 21% observations have CEO duality and the rest has separation. Companies that
have women on the board and none are comparable. Table 2 also shows that there are 105 observed companies
chose Big-four audit firms while the rest does not. There are 258 firm-years have a Supervisory board over 360
observations.
 Doan Ngoc Trai/ ICOAF 2018 Proceedings 7

4.2. Correlation analysis

Table 3 shows the correlations matrix of variables in the model. As can be seen from the table, almost all the
explanatory variables do not have significant correlations with the dependent variable, FRQ score. The variables
that have a significant correlation with the FRQ are State ownership (OS), the application of Circular 200
(REGL) and firm size (FSIZE). Despite the fact that they all significantly correlated with FRQ, the correlations
are quite weak. The data from the correlation matrix also shows that the correlations between the independent
variables are not considerable and all the variance-inflation factors (VIFs) are smaller than 2, suggesting that
there are no multicollinearity problems.
Table 3. Correlations
CEO BEX BDIV SBO AFIR REG LNSI
FRQ D BIND P ER ARD OI OS M L ZE VIF
FRQ Pearson
Correlatio 1
n
Sig. (2-
tailed)
CEOD Pearson
Correlatio -.018 1 1.05
n
Sig. (2-
.728
tailed)
BIND Pearson
Correlatio .006 -.023 1 1.17
n
Sig. (2-
.913 .658
tailed)
BEXP Pearson
Correlatio .013 -.038 -.049 1 1.06
n
Sig. (2-
.804 .477 .353
tailed)
BDIVER Pearson
Correlatio -.028 .105* .104* .106* 1 1.23
n
Sig. (2-
.592 .048 .048 .044
tailed)
SBOARD Pearson
Correlatio .075 .087 -.057 .114* .157** 1 1.14
n
Sig. (2-
.158 .098 .277 .030 .003
tailed)
OI Pearson
Correlatio -.088 .104* .140** .034 .091 .020 1 1.14
n
Sig. (2-
.094 .048 .008 .521 .085 .702
tailed)
OS Pearson
.150* - - -
Correlatio * -.128* .109* -.085 1 1.39
.195** .279** .280**
n
Sig. (2-
.004 .015 .000 .038 .000 .109 .000
tailed)
AFIRM Pearson -
Correlatio .102 .023 .212** -.035 .120* .261* .152** .047 1 1.29
*
n
Sig. (2-
.053 .664 .000 .513 .023 .000 .004 .373
tailed)
REGL Pearson
.190*
Correlatio * -.047 .137** -.051 .039 .037 -.003 .002 .055 1 1.04
n
Sig. (2-
.000 .370 .009 .335 .462 .484 .947 .975 .298
tailed)
FSIZE Pearson
.149* - - .291*
Correlatio * -.068 .024 .133* -.007 .287** .078 1 1.31
.143** .108* *
n
Sig. (2-
.005 .197 .007 .654 .012 .041 .888 .000 .000 .139
tailed)
**. Correlation is significant at the 0.01 level (2-tailed).
*. Correlation is significant at the 0.05 level (2-tailed).
 Doan Ngoc Trai, Thai Manh Kha, Luu Nguyen Truong Trung, Nguyen Tuan Dung/ ICOAF 2018 Proceedings

4.3. Regression results and discussions

We used STATA to run the regression model with two techniques: Fixed effects (FEM) and Random effects
(REM). The table below shows the regression results in FEM and REM.
Table 4. Regression results
FEM REM
Variable
Coef. Sig. Coef. Sig.
CEOD -0.61018 0.159 -0.31173 0.361
BIND -0.20917 0.778 -0.21211 0.731
BEXP 1.114468 0.128 0.52719 0.357
BDIVER 0.338381 0.34 0.079509 0.783
SBOARD 1.01874 *0.014 0.807904 *0.014
OI 1.752535 0.144 0.610545 0.521
OS -2.00235 0.389 1.130847 0.162
AFIRM 1.330343 *0.012 0.97235 *0.010
REGL 0.91839 ***0.000 0.847629 ***0.000
FSIZE -0.48632 *0.026 -0.05169 0.691
_cons 25.63882 0 19.89993 0
Observations 360 360
R-squared 0.1859 0.158
Statistic F 5.94 48.35
Prob. 0.000 0.000

Note: ‘***’: Significant at 0.001; ‘**’: Significant at 0.01; ‘*’: Significant at 0.05
Since the F-test has levels of significance which are smaller than 5%, the two regression models are
acceptable. Next, we tested the FEM and REM by Hausman test to decide between fixed or random effect. The
result of Hausman test in Table 4 shows that FE model is better than RE model as the Prob>chi2 is <0.05 (=
0.0369), meaning that hypothesis H0 is rejected.
Table 4. Hausman test
Test: Ho: difference in coefficients not systematic
chi2 (10) = (b-B) ‘ [ (V_b - V_B) ^ (-1)] (b-B)
= 19.28
Prob>chi2 = 0.0369
(V_b – V_B is not positive definite)

Consequently, we tested the FEM model for heteroscedasticity and autocorrelation. Table 5 and 6 present the
results of a heteroscedastic and autocorrelated test. The results indicate that the data has heteroscedasticity and
autocorrelation since in both tests, hypothesis H0 is rejected.

Table 5. Heteroscedastic test

Modified Wald test for groupwise heteroskedasticity in fixed effect regression model
H0: sigma (i) ^ 2 = sigma ^ 2 for all i
chi2 (90) = 64015.67
Prob>chi2 = 0.0000

Table 6. Autocorrelation test

Wooldridge test for autocorrelation in panel data
H0: no first-order autocorrelation
F (1, 89) = 27.784
Prob > F = 0.0000

To fix both problems, the FE model will be estimated again with cluster option provided by STATA (Torres-
Reyna, 2007). The table below shows the results of FEM after using cluster option.

Table 7. Results of FEM after using cluster option

Variable FEM
Coef. Sig.
CEOD -0.61018 *0.040
BIND -0.20917 0.804
BEXP 1.114468 •0.054
 Doan Ngoc Trai/ ICOAF 2018 Proceedings 9

BDIVER 0.338381 0.337

SBOARD 1.01874 •0.069
OI 1.752535 0.172
OS -2.00235 0.100
AFIRM 1.330343 **0.021
REGL 0.91839 ***0.000
LNSIZE -0.48632 *0.035
_cons 25.63882 0
Observations 360
R-squared 0.09
Statistic F 3.45
Prob 0

Note: ‘***’: Significant at 0.001; ‘**’: Significant at 0.01; ‘*’: Significant at 0.05; ’•’: Significant at 0.1
It can be seen from the model that the coefficient of CEOD is -0.6102 and significant at 5%, indicating that
CEO duality negatively influences the financial reporting quality. This result is consistent with the finding of
Kantudu and Samaila (2015). Hence, the hypothesis H1 is accepted. This also supports the provisions in Clause
2, Article 12 of the Decree No. 71/2017/ND-CP - Guidelines on corporate governance of public companies:
“The chairman of the board of directors must not take over the position as the director of the same public
company” (Government, 2017). This provision will come into force from August 1, 2020. The research,
however, fails to figure out how having outside directors on the board of director affects the financial reporting
quality since the significance of BIND is not acceptable. In other words, the hypothesis H2 is rejected. This may
be due to in Vietnam, the presence of independent and experienced professional is quite rare, and they are not
fully aware of their role in monitoring financial reporting quality.
We reject the hypothesis H3 since the influence of BDIVER is not significant. From our point of view, this
may because the majority of female directors in Vietnam listed companies have family relations with some other
members in the board of directors, so their independence is limited. Next, the coefficient of BEXP means that the
proportion of financial experts on board positively related to the report quality at 10% significance. In fact, board
members are typically investors or businessman in the field in which the company operates, although they have
the expertise and experience to make a profit for the company, monitoring preparing financial statements needs
more than that. This result has explained the importance of having financial experts as members of the board.
Members who are financially qualified supervises the quality of the financial reports and helps to improve it
(Wu, Wang, Yin, 2007). As a result, the hypothesis H4 is proved. Subsequently, the variable SBOARD has a
positive correlation with the financial reporting quality since the coefficient is 1.02 and it is significant at 10%.
So, the hypothesis H5 is accepted. This means that although a Supervisory board does not completely function
like an audit committee, it has contributed to financial reporting quality.
The hypotheses H5 and H6 are rejected since the coefficients of the variables OI and OS are not significant.
However, the sign of OI coefficient implicates that institutional investors may have a positive relationship with
the quality of financial reports. The relationship between institutional ownership and financial reporting quality
is weak, which may due to the thin institutional investor base in Vietnam, meanwhile, the dominance of small
retail investors curtails the demand for financial reporting (The World Bank, 2016). In contrast, OS coefficient
(with a p-value of 0.1) points to that financial reporting of the listed companies that are majority state-owned
may have lower quality compared to their privately owned counterparts. In the 2016 Vietnam Report on The
Observance of Standards and Codes (ROSC) - Accounting and Auditing Module, World Bank noted that some
listed companies’ financial statements that are majority state-owned can be affected by accounting treatments
mandated by ad hoc decisions and instructions that do not comply with generally accepted accounting practice
(The World Bank, 2016). In addition, the bureaucratic interference, weak incentives, and the poor monitoring
mechanisms in these companies are frequently associated with poor corporate governance (Boardman & Vining,
1989; Shleifer, 1998, cited by Habib & Jiang, 2015). This is similar to China situation where there is popular
wisdom that the financial reporting of state-controlled firms is of lower quality (Habib and Jiang, 2015).
For control variables, we find the positive (negative) relationship at 5% significance between AFIRM
(FSIZE) and financial reporting quality, respectively. These results are similar to prior research, such as Palmer
(2008) for audit firm type, Qaiser Rafique Yasser; Abdullah Al Mamun & Margurite Hook (2017) and Klai
(2011) for firm size. Especially, the existence of Circular 200 has changed the financial report quality in an
effective way since the coefficient (REGL) is 0.9184 and significant at 0.1%. Circular 200 has updated initially
to international financial reporting standards, especially on footnotes, thereby reducing defects in making
statements, increasing the transparency as well as the quality of the report. This result proved, in reality, the
advantages of Circular 200 in rising fundamental qualitative characteristics of financial reports.
 Doan Ngoc Trai, Thai Manh Kha, Luu Nguyen Truong Trung, Nguyen Tuan Dung/ ICOAF 2018 Proceedings

5. Implication and conclusion

We use a dataset of 90 listed companies randomly selected on HOSE from 2013-2016 to examine the impact
of corporate governance on financial reporting quality in Vietnam. Then, we use STATA to run fixed and
random effects regression models and performed the Hausman test to decide between them. Since the test result
pointed out that FEM is the suitable model, we test for heteroscedasticity and autocorrelation, after that, fix both
problems by option cluster in STATA. We find that CEO duality has a negative effect on financial reporting
quality, while board expertise and Supervisory Board have a positive effect, but significant at 10%. In addition,
institutional and state ownership may have a positive and negative impact on financial reporting quality,
respectively, although the significant level is more than 10%. We also find that financial reports of larger listed
companies and those audited by Big Four firms tend to be of higher quality. Especially, the study result shows
that after Circular 200 came into force, the quality of listed companies’ financial reports is improved.
Our findings have some practical implications. Firstly, the provision in Clause 2, Article 12 of the Decree No.
71/2017/ND-CP was confirmed for the reasonableness. Secondly, despite the lack of specialized expertise of
Supervisory Board members, the presence of Supervisory Board had a positive influence on financial reporting
quality. If Audit committees in listed companies are mandated in legislation in Vietnam, they will contribute to
monitoring financial reporting quality better than Supervisory Board due to the expertise in finance and
accounting. Typically, Audit committee is a standing committee of the Board, comprised of independent outside
directors, and has widespread authority to work with the external auditor, senior management, the finance
function, and the internal audit function. The appointment, rotation, and dismissal of auditors, as well as the
review of audit reports, performed by audit committee will enhance audited financial reporting quality. Finally,
the Government’s plans to sell equity in SOEs should be implemented actively and effectively to reduce the state
control in listed companies that are majority state-owned. This will increase transparency in the listed companies
to attract strategic and other institutional investors.
Our research has two main limitations. The first limitation is that the evaluation financial reporting quality
based only on a fundamental qualitative characteristic (relevance and faithful representation). The second is that
we ignored the endogenous relationship between corporate governance and financial reporting quality. Future
research may have better results if overcome these restrictions.