Jun 7, 2012

Vietnam - Financial monitoring mechanism puts SOEs’ directors’ necks in the noose

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VietNamNet Bridge – The Ministry of Finance has submitted to the Prime Minister--the financial monitoring mechanism applied for state owned enterprises (SOEs) which aims to improve the SOE management efficiency.

“If I were the manager of a SOE, I would not dare to do anything,” said the representative from the Vietnam Airlines Corporation at the workshop on renovating the financial mechanism to serve the SOE restructuring process.

The executive said that the criteria for financial monitoring the Ministry of Finance (MOF) has suggested are not clear and sufficient.

“It’s necessary to keep cautious when “judging” enterprises. It’s necessary to analyze the circumstances and the history of enterprises as well, instead of relying on annual finance reports to pick holes in SOEs’ operation,” he said, adding that he cannot find any suggested criteria allowing to monitor SOEs’ operation applied to different business fields.

Under the drafted financial monitoring mechanism, SOEs would be put under the special financial monitoring, if losses are discovered at the time of making annual finance reports, if the ratio of accounts payable on stockholder equity exceeding the safety line (3 times), and the loss equal to 30 percent of the stockholder equity or higher, or if the enterprise has the debt service coverage ratio less than 0.5.

“The same criteria should not be applied to the SOEs in different business fields,” he said.

Analysts have agreed that the strict financial monitoring mechanism would make SOEs’ managers shrink themselves. They would not dare to do anything for fear that they may accidentally commit the charge of “being irresponsible, thus causing serious consequences” in managing SOEs.

“There is a fine line between taking loss because of risks and taking loss because of the irresponsibility,” the executive from Vietnam Airlines said, adding that if SOEs’ directors may be jailed just because they take loss.

Dinh Quang Tri, Deputy General Director of the Electricity of Vietnam (EVN), has pointed out the big problems EVN is facing when withdrawing capital from other companies as requested by the State in order to gather strength in its core business field.

The gloomy stock market makes it difficult to find the stock buyers. Some investors, who really want to buy stocks, only accept low prices. This means that EVN would have to sell the stocks at a loss.

What should EVN’s director do, then? Should he sell the stocks and accept loss from the financial investment deals, for which he may be committed to prison, or should he keep the stocks to preserve the capital?

Dr Vu Xuan Dung from the Hanoi Trade University has pointed out that it would be unreasonable to classify SOEs by considering the ROE (return on equity) ratio only. In general, enterprises increase their capital every year, while it takes at least 2-3 years to see the effectiveness of an investment project.

The internal auditing mechanism for SOEs, which was build up in 1997 died young just after two years of implementation. Dang Van Thanh, Chair of the Vietnamese Accountants’ Association, believes that it is the lack of internal financial monitoring which makes it very difficult to assess finance reports.

“Only when SOEs lose all of their capital, or when embezzlements or wrongdoings are discovered, will inspectors and auditors wok on the enterprises. However, it would be too late,” Thanh said.

Pham Duc Trung from the Central Institute of Economic Management, while affirming the importance of the financial monitoring mechanism, said that it’s necessary to set up criteria for every SOE, especially for state owned economic groups and general corporations.

Source: TBKTVN


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