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Poor internal controls mask abuses of company funds

Update: March, 29/2012 - 10:11

HA NOI — The possible bankruptcy of construction company Hanic (SHN) has revealed possible misuses of company funds by staff and drawn attention to the inadequacy of many companies' internal control systems.

According to the deputy director of the Ministry of Finance's Debt and Asset Trading Corporation, Pham Manh Thuong, the rising misuse of shareholder capital for individual purposes reflects a failure of internal control systems.

"It could be caused by the collusion of major shareholders or the concentration of power into a group of individuals," Thuong told the newspaper Dau tu Chung khoan (Securities Investment).

In Viet Nam, the positions of chairman and chief executive officer were often held by one person, he noted. Independent audits, meanwhile, were post-transaction procedures and could not prevent the abuses.

"Once company leaders aim to hide their true operations, auditors can't do much," he said. Thuong suggested the use of independent monitoring systems such as supervising banks, as well as directors and officers liability insurance.

"Liability insurance would not only help limit the damage of capital misuse, but also strengthens control over company leaders by an independent third party," he said.

If an enterprise received loans, the lender could also monitor the use of the loan proceeds. "This helps companies use the money soundly and increases the trust of the financing entity."

Shareholders must also be aware of their rights within companies, Thuong said. The problem of small shareholders ignoring their rights to monitor business operations has led to the collusion of major shareholders and management boards.

Cases like Hanic have also been due to legal loopholes, said an analyst for the financial information website vietstock.vn, Nguyen Dinh Dung. "Under the Law on Enterprises, the board of management is given too much power," Dung said.

The State Securities Commission, which has the authority to directly monitor the securities market, has not functioned fully in that capacity, he said. "It does not have a professional analysis system to detect hidden risks and alert investors."

In his latest dispatch to the Ha Noi Stock Exchange, Hanic chairman and CEO Dinh Hong Long admitted his company was about to go bankrupt. If Hanic goes bankrupt, about 6,000 shareholders face the loss of their investment.

Hanic sought to be the exclusive distributor of the Thanh Ha-Cienco 5 project, so it worked with the Ministry of Defense's Beta Co and let Beta VND238 billion ($11.3 million), unaware that Beta was not the owner of the project and that Beta's charter capital was a mere VND20 billion ($952,380). — VNS

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