Profit is a central concern of listed companies and internal control is said to be an useful tool to
achieve such purpose. Construction companies face many types of risk so controls play an even
more important role. Using Internal control theory of COSO (Committee of Sponsoring
Organizations), this paper examines the relationship between Internal control quality and
profitability of the listed construction companies in Vietnam. In more details, the paper explores
the relationship between components of internal control and profitability of such listed companies.
The results show that internal control quality and each component of internal control (namely
Control Environment, Monitoring, Control Activities, Information and Communication, Risk
Assessment) are associated with profitability. These findings have practical implications for
executives and policy makers in designing internal control for profit purposes.
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International Conference on Finance, Accounting and Auditing (ICFAA 2018)
November 23rd, 2018
Hanoi City, Vietnam
Impacts of Internal Control Quality on Profitability of the Listed
Construction Companies in Vietnam
Nguyen Thi Phuong Hoaa, Dang Thuy Anhb, Phan Thi Thanh Loana
aNational Economics University, bVinh University
Submission day: 30/10/2018
Review day: 10/11/2018
Acceptance day: 15/11/2018
Abstract
Profit is a central concern of listed companies and internal control is said to be an useful tool to
achieve such purpose. Construction companies face many types of risk so controls play an even
more important role. Using Internal control theory of COSO (Committee of Sponsoring
Organizations), this paper examines the relationship between Internal control quality and
profitability of the listed construction companies in Vietnam. In more details, the paper explores
the relationship between components of internal control and profitability of such listed companies.
The results show that internal control quality and each component of internal control (namely
Control Environment, Monitoring, Control Activities, Information and Communication, Risk
Assessment) are associated with profitability. These findings have practical implications for
executives and policy makers in designing internal control for profit purposes.
Keywords: Internal control, Listed construction companies, Profitability
1. Introduction
Construction companies play an important role in the Vietnamese economy thanks to
their GDP contribution, employment generation and infrastructure development. However,
construction companies face many types of risks, ranging from weather risks, labour safety
risks, liquidity risks to dispersed locations and complexity of construction projects. These
pervasive risks make the profit target of construction companies vulnerable and may not be
realized. Hence, internal control becomes very essential to help management of listed
construction companies control risks and meet the profit and dividend expectations of
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shareholders. This seemingly logical argument however has not been confirmed by any
empirical study yet. To fill in this gap, the paper analyses theoretical framework of internal
controls and profitability, explains the empirical model and discusses the empirical results
for listed construction companies in Vietnam. Then, recommendations will be drawn
2. Theoretical Framework and Methods
Internal controls aim at 3 purposes: (i) reliability of financial information, (ii)
efficiency and effectiveness of operations, and (iii) compliance with rules and regulations.
Hence, internal controls are expected to be very useful for listed companies because of
management’ profit concern. Construction companies face with various kinds of risks, so
internal controls are even more relevant in listed construction companies. Acknowledged the
benefits of internal controls, the Sarbanes Oxley Act 2002 of US required listed companies’
management to establish and maintain effective internal controls.
Empirical studies indicate impacts of internal controls on profitability of companies.
Typically, Chih-Yang Tseng (2007) verified impacts of weaknesses in internal control
components on the market value of companies, and found that companies with weak internal
control associated with low market values. Ebarahim Mohammed Al – Matari et al. (2012)
found that features of CEO, size of audit committee, and leverage had impacts on ROA. John
Kang’Aru Kinyua (2016) indicated separate impacts of Control Environment, Internal Audit,
Control Activities, Risk Management inter alia on profitability of listed companies in
Nairobi stock exchange. Specifically, Control Environment, Internal Audit, Risk
Management, and Control Activities explained 16.9%, 10.8%, 30.2%, and 20.2%,
respectively, the change in profitability of such companies.
For listed companies, the central concern of management is profitability in general and
ROE in particular. ROE rather than ROA will be used in this study because shareholders and
investors are concerned with dividends on their investment.
Following the theoretical framework about positive impacts of internal controls and its
components on profitability, the following hypotheses are used for listed construction
companies in Vietnam:
H1: Quality of Internal Control (ICQ) has positive impact on ROE
H2: Control Environment (CE) has positive impact on ROE
H3: Control Activities (CA) exerts positive impact on ROE
H4: Information and Communication (IC) has positive impact on ROE
H5: Risk Assessment (RA) exerts positive impact on ROE
H6: Monitoring (M) has positive impact on ROE
ROE is calculated from the financial statements of listed construction companies in
Vietnamese stock exchange.
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Each component of internal controls is measured by constituent elements suggested
by COSO. Each element is measured using Likert measure 1-5 (1 means Totally disagree,
2: Disagree, 3: Neutral, 4: Agree, 5: Totally Agree). The measurement of elements is
conducted following Karagiorgos, T., et al. (2011), Conor O’Leary (2004), COSO (1992),
Faudziah Hanim Fadzil et al. (2005).
Quality of internal control (ICQ) is measured by averaging components of internal
controls, following Faudziah Hanim Fadzil et al. (2005), Karagiorgos, T., et al (2011):
ICQ = (CE+CA+IC+M+CR)/5
Beside internal controls, other factors are argued to have impacts on company
profitability, namely Size of company (Doyle, J. et al. 2006), Leverage (Al-Matari et al.
2012), Listing time. These variables are also included in our empirical model to ensure the
explanatory power of the model.
3. Results and Discussion
The study was conducted based on a survey of all 107 construction companies listed in
the stock exchange of Vietnam. After cleaning data for missing observations, data on 54 listed
construction companies are used in the empirical model. Eviews 9.0 is used to estimate the
impacts of internal controls on ROE and the results are presented in Tables 1-6 below.
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Table 1: Empirical impact of internal control quality (ICQ) on ROE
Dependent Variable: ROE
Method: Least Squares
Sample: 1 54
Included observations: 54
Variable Coefficient Std. Error t-Statistic Prob.
C -52.65457 13.65049 -3.857341 0.0003
ICQ 11.55978 1.811170 6.382493 0.0000
SIZE 1.199073 0.742937 1.613963 0.1131
LEV 0.053566 0.046931 1.141358 0.2594
T -0.783377 0.592103 -1.323042 0.1921
LD -0.000724 0.000360 -2.013271 0.0497
R-squared 0.503992 Mean dependent var 7.049778
Adjusted R-squared 0.452324 S.D. dependent var 8.470330
S.E. of regression 6.268479 Akaike info criterion 6.613384
Sum squared resid 1886.104 Schwarz criterion 6.834382
Log likelihood -172.5614 Hannan-Quinn criter. 6.698614
F-statistic 9.754509 Durbin-Watson stat 1.907895
Prob(F-statistic) 0.000002
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Table 2: Empirical impact of Control environment (CE) on ROE
Dependent Variable: ROE
Method: Least Squares
Sample: 1 54
Included observations: 54
Variable Coefficient Std. Error t-Statistic Prob.
C -50.17696 15.05149 -3.333688 0.0017
CE 9.240950 1.820402 5.076325 0.0000
SIZE 1.591353 0.809413 1.966058 0.0551
LEV 0.077911 0.051488 1.513181 0.1368
T -1.191042 0.647532 -1.839356 0.0721
LD -0.000816 0.000400 -2.038855 0.0470
R-squared 0.403355 Mean dependent var 7.049778
Adjusted R-squared 0.341205 S.D. dependent var 8.470330
S.E. of regression 6.875044 Akaike info criterion 6.798112
Sum squared resid 2268.779 Schwarz criterion 7.019111
Log likelihood -177.5490 Hannan-Quinn criter. 6.883343
F-statistic 6.489982 Durbin-Watson stat 2.155792
Prob(F-statistic) 0.000110
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Table 3: Empirical impact of Control activities (CA) on ROE
Dependent Variable: ROE
Method: Least Squares
Sample: 1 54
Included observations: 54
Variable Coefficient Std. Error t-Statistic Prob.
C -41.83564 16.07527 -2.602484 0.0123
CA 8.046432 2.119351 3.796650 0.0004
SIZE 1.230677 0.891218 1.380893 0.1737
LEV 0.087638 0.056214 1.558998 0.1256
T -1.039216 0.703784 -1.476611 0.1463
LD -0.000550 0.000426 -1.290483 0.2031
R-squared 0.294813 Mean dependent var 7.049778
Adjusted R-squared 0.221356 S.D. dependent var 8.470330
S.E. of regression 7.474286 Akaike info criterion 6.965253
Sum squared resid 2681.518 Schwarz criterion 7.186252
Log likelihood -182.0618 Hannan-Quinn criter. 7.050484
F-statistic 4.013414 Durbin-Watson stat 2.074055
Prob(F-statistic) 0.004018
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Table 4: Empirical impact of Information and Communication (IC) on ROE
Dependent Variable: ROE
Method: Least Squares
Sample: 1 54
Included observations: 54
Variable Coefficient Std. Error t-Statistic Prob.
C -27.82940 15.98130 -1.741373 0.0880
IC 4.781683 1.510977 3.164629 0.0027
SIZE 1.264080 0.926708 1.364055 0.1789
LEV 0.005692 0.061008 0.093305 0.9260
T -0.966250 0.730916 -1.321971 0.1924
LD -0.000388 0.000438 -0.884840 0.3807
R-squared 0.241334 Mean dependent var 7.049778
Adjusted R-squared 0.162306 S.D. dependent var 8.470330
S.E. of regression 7.752521 Akaike info criterion 7.038352
Sum squared resid 2884.876 Schwarz criterion 7.259351
Log likelihood -184.0355 Hannan-Quinn criter. 7.123583
F-statistic 3.053789 Durbin-Watson stat 1.905424
Prob(F-statistic) 0.017940
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Table 5: Empirical impact of Risk Assessment (RA) on ROE
Dependent Variable: ROE
Method: Least Squares
Sample: 1 54
Included observations: 54
Variable Coefficient Std. Error t-Statistic Prob.
C -41.01902 16.27598 -2.520219 0.0151
RA 5.543062 1.545531 3.586510 0.0008
SIZE 1.678924 0.890604 1.885151 0.0655
LEV 0.084783 0.056874 1.490726 0.1426
T -1.116167 0.712595 -1.566341 0.1238
LD -0.000495 0.000430 -1.150462 0.2557
R-squared 0.276837 Mean dependent var 7.049778
Adjusted R-squared 0.201507 S.D. dependent var 8.470330
S.E. of regression 7.568952 Akaike info criterion 6.990425
Sum squared resid 2749.874 Schwarz criterion 7.211424
Log likelihood -182.7415 Hannan-Quinn criter. 7.075656
F-statistic 3.675014 Durbin-Watson stat 2.155363
Prob(F-statistic) 0.006773
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Table 6: Empirical impacts of Monitoring (M) on ROE
Dependent Variable: ROE
Method: Least Squares
Sample: 1 54
Included observations: 54
Variable Coefficient Std. Error t-Statistic Prob.
C -41.82267 15.14950 -2.760663 0.0081
M 5.231382 1.146481 4.562991 0.0000
SIZE 1.610552 0.837950 1.922014 0.0606
LEV 0.064532 0.053248 1.211900 0.2315
T -0.485754 0.683124 -0.711077 0.4805
LD -0.000579 0.000406 -1.426406 0.1602
R-squared 0.360457 Mean dependent var 7.049778
Adjusted R-squared 0.293838 S.D. dependent var 8.470330
S.E. of regression 7.117910 Akaike info criterion 6.867545
Sum squared resid 2431.903 Schwarz criterion 7.088543
Log likelihood -179.4237 Hannan-Quinn criter. 6.952775
F-statistic 5.410720 Durbin-Watson stat 1.988894
Prob(F-statistic) 0.000503
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The empirical results show that quality of internal control and each component of
internal control, namely control environment, risk assessment, control activities, information
communication and monitoring, have positive and statistical impacts on ROE of the
construction companies listed on the stock exchange of Vietnam. The impacts are all
statistically significant at the 99%.
The empirical results thus confirm the arguments for the benefits of internal controls
for the case of listed construction companies in Vietnam.
These results imply that implementing and enhancing internal controls do not only
mean to fulfill requirements of authorities, but also to help construction companies to control
their various risks and costs better, thereby increasing their profitability. It is thus worth to
suggest construction companies in general to enhance their internal control quality and each
component of their internal control system for the benefit of stakeholders of the companies,
including owners, tax authorities, creditors, employees, etc. Though establishing and
implementing internal control are seen to be costly from the viewpoint of the board of
directors, the positive and significant impacts of internal control on profit justify their
worthiness. The empirical results imply that each component of internal controls should be
established and implemented continuously and effectively.
As internal controls are complicated in nature and continuously evolve corresponding
to the market, understanding about modern internal controls and its five components remain
vague by companies’ directors and managers. Training will be thus very useful. The stock
exchange authorities may organize training courses about internal controls to help directors
of listed companies understand clearly about the benefits and contents of internal controls,
and the way to establish and run an effective internal controls. Vietnam Association of
construction companies may also provide training about internal controls in construction
companies. Besides, with expertise about internal controls, auditing firms should provide
more consulting services to help listed construction companies to establish and monitor
effective internal controls. As Control environment is the most important and complicated
factor of internal controls, training and consulting should focus and devise in details for
Control environment.
The positive impacts of internal control on profitability also imply that authorities
may require the board of directors of construction companies to establish and implement
their internal control adequately and effectively. This is for the benefit of company’s
stakeholders as well as for the sustainable development of society. From US experience,
Sarbanes Oxley Act 2002 requires the board of directors of listed companies to state about the
effectiveness of their internal controls in their financial statements and auditors have to verify
and confirm such kind of statement. Similarly is the case of Singaporean stock exchange. This
requirement is thus strongly relevant for construction companies listed in the Vietnamese stock
exchange due to the positive role of internal controls. Auditors should then have responsibility
to evaluate and to conclude about the clients’ internal controls.
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4. Conclusions
Internal controls have been discussed a lot in developed countries for their benefits
of helping company’ management to deal with risk and increase competitiveness. In
Vietnam, internal controls remain rather new and not be awared well by company
management. Listed construction companies play an important role in the Vietnamese
economy, but face many kinds of risks, so the possibility to meet dividend expectation of
shareholders is uncertain. The empirical results show that quality of internal controls and
each component of internal controls have statistically positive impacts on profitability of
listed construction companies in Vietnam. The results imply the necessity to establish and
maintain effective internal controls in listed construction companies in Vietnam. This is for
the benefits of not only listed construction companies’ stakeholders but also for the society
as a whole
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