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- Merrill Lynch strategy report, February 2006
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Vietnam is a bit like Pinocchio, desperately dreaming that someday it will grow up to be a REAL stock market...
But, in order to become a REAL market, Vietnam must have REAL reporting. (Financial reporting, that is, although better news reporting would not hurt either!)
Take as a case in point the recent fracas over Bach Tuyet Cotton or BBT.
Bach Tuyet Cotton Corp’s magic turns loss into profit
VietNamNet Bridge – The trick by Bach Tuyet Cotton Corporation (BBT) of reporting profit when it really made a loss has shocked many shareholders. A question has been raised: how many other companies have released incorrect figures?
The 2007’s shareholders’ meeting heard a report that BBT made the profit of VND2.2bil. However, in fact, the corporation had lost more than VND14bil since 2006.
Before the Bach Tuyet case was discovered, investors heard about ‘mistakes’ in the business reports released by some other companies. The Hanoi Securities Trading Centre last year announced that Viglacera Tu Son (VTS) earned profit of VND1.3bil in the third quarter of 2007. However, investors later discovered that the real profit was VND600mil only. VTS had to correct the false piece of the news, and a lot of investors sold VTS at that moment.
SSI also had to correct a cash flow statement for the first quarter of 2008 after an investor discovered ‘mistakes’. The noteworthy thing was that SSI didn’t publish the correction of the figures of the first quarter of 2008 on its website until July 2008.
So to recap, BBT has been losing money steadily for at least 2 years, during which time it has declared to shareholders in audited reports that it was making profits...
Hmmm...
This Hocus Pocus leads us to several possible conclusions:
A) BBT has been engaged in massive and deliberate fraud and deception of its investors for years
B) Vietnamese auditors (in this case AISC or Auditing and Informatic Service Company) and their "audited" reports cannot be trusted
C) Given the potential for A) Fraud and B) Shoddy Audits, ALL firms and their accounts and reports are potentially suspect
In other words, a case like this deeply undermines investor confidence in the market.
Which brings to a theme we have harped on many times before.
In order for this market to function as a REAL market and not a casino for wild speculation and insider trading, companies must disclose timely, accurate and credible information to all investors and market participants AT THE SAME TIME.
Clearly this is not the case.
So there is something rotten in Denmark (er, Vietnam), the only question is how deep and how far the ROT has spread...
And if regulators aim to provide the transparency essential to build confidence in this market, then they need to come down hard on BBT and their auditors. But more importantly, they need to overhaul the ROTTEN system that allowed them to get away with this deception for more than 2 years until the company was on the brink of bankruptcy.
If not, there will be MANY more cases like BBT (likely as not there already are).
To cover this up and pretend BBT is a unique or isolated case, would be the biggest travesty of all.
Audit quality
The A conclusion is somehow indispensable in many companies, especially those of small or medium scale. No one expects a loss. They would try every way to make it at least a positive profit at the end of the day.
But A could not be materialized without B. There must be (1) hand-shake between the company and its auditor, or (2) the auditor is not good enough technically.
If (1) happened, AISC should have DECLINED TO MAKE COMMENTS on its audit report because they did not have ENOUGH PROPER INFOMATION or there were still TOO MANY ISSUES WHICH THEY COULD NOT IDENTIFY in the company. But it's just not the case here. They still guaranteed the reports were "fair enough". This is a matter of ethics.
If (2) happened, we should be more concerned and wary abt the audit quality of domestic audit companies. They are all very small-sized, do not have seperate research department. Most managers of these companies had 3 to 5 years working at big international audit firms before joining these small domestic firms. But 3 to 5 years is NOT LONG ENOUGH. It takes MORE TIME.
So we should only trust (of course not 100%) reports audited by big international audit firms .
Tip of the Iceberg
This case has exposed is that financial reporting in Vietnam is total crap.
Not only did the company mislead, lie and cover up their losses (and mishandle funds?), but their auditor (AISC in this case) aided and abetted the deception by signing off on these accounts.
It is possible the audit firm failed to uncover the deception, but far more likely someone got an envelope to look the other way...
So who is to blame?
a) the company for perpetrating the deception
b) the auditor for allowing it to stand
c) government regulators for allowing the credibility of its markets to be called into question due to poor audit standards and inadequate oversight
d) ALL of the above.
Personally I am in camp D: All of the above.
You can be sure this is just the top of the iceberg and there will be plenty more accounting and audit related scandals in the not too distant future.
This is not a case of a few bad apples, but widespread systematic rot.
BBT- More bad news
It seems the company was hit by rising inflation, capital shortage and apparently losses from the stock market...
Bach Tuyet Cotton Co discusses 2007 losses
The low output resulted from a shortage of working capital and an insufficient amount of materials due to price hikes.
Also contributing to higher financial costs were interest payments on bank loans and allocations to reserved funds in the event prices of securities the company invested in declined. High sales cost and other expenditures compounded the problem, the company said.
BBT plans to make several adjustments to its audited 2007 financial report, which was completed on July 3, to ensure that it is accurate and that it meets accounting standards...
Small, medium-sized businesses hunt for capital
Bach Tuyet Cotton Joint-Stock Company (BBT), for example, expects to avert bankruptcy if it can attract money from investment funds.
BBT general director Ta Xuan Tho said at the company’s annual shareholders’ meeting on Monday that the firm was on the edge of bankruptcy because it lacked working capital.
Currently, BBT is VND34 billion (US$2.15 million) in debt and has a short-term bank loan of VND15 billion, which must be paid back in August and September. If it is unable to pay the loan, BBT’s assets will be sold by the bank....
Next stop BANKRUPTCY?
Bankruptcy of a listed company?
That would be a first for Vietnam!