(Luận văn thạc sĩ) corporate fraud in the vietnam upcom stock market a case study of the central mining, mineral exporting and importing company

MINISTRY OF EDUCATION AND TRAINING
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
FULBRIGHT ECONOMICS TEACHING PROGRAM

ANH NGUYEN NHAT

CORPORATE FRAUD IN THE VIETNAM UPCOM STOCK
MARKET: A CASE STUDY OF THE CENTRAL MINING,
MINERAL EXPORTING AND IMPORTING COMPANY

MASTER IN PUBLIC POLICY THESIS

HO CHI MINH CITY - 2017


MINISTRY OF EDUCATION
UNIVERSITY OF ECONOMICS HO CHI MINH CITY
FULBRIGHT ECONOMICS TEACHING PROGRAM

ANH NGUYEN NHAT

CORPORATE FRAUD IN THE VIETNAM UPCOM STOCK
MARKET: A CASE STUDY OF THE CENTRAL MINING,
MINERAL EXPORTING AND IMPORTING COMPANY

MASTER THESIS
Major: Public Policy
Code: 06340402

THESIS ADVISORS
Prof. David O. Dapice

Thanh Nguyen Xuan

Ho Chi Minh City, 2017


i

CERTIFICATE OF ORIGINALITY

I hereby declare that the thesis entitled: "Corporate fraud in the Vietnam Upcom
stock market: A case study of the Central Mining, Mineral Exporting and Importing
Company" is my own original work carried out as a Master's student at Fulbright
Economics Teaching Program (FETP) except to the extend that assistance from others in
the thesis design and conception or in style, presentation and linguistic expression are duly
acknowledged.
All sources used for the thesis have been fully and properly cited. It contains no
material which to a substantial extent has been accepted for the award of any other degree
at FETP or any other educational institution in any language fully or partly except where
due acknowledgement is made in the thesis.
The thesis does not reflect the views of the University of Economics Ho Chi Minh
City or FETP.
Hanoi, 08/09/2017
Author

Nguyen Nhat Anh


ii

ACKNOWLEDGEMENT

Studying in FETP seems to be the hardest way to get Master degree, however it is
the fastest way that you can learn every things about how our society is going on. I am not
able to complete the coursework as well as the thesis without elegant supports by FETP
staff, my classmates and family.
I would first like to thank my thesis advisor Mr. Thanh Nguyen Xuan of the
Fulbright School of Public Policy and Management at Fulbright University Vietnam. He
consistently allowed this thesis is my own work and steered me in the right direction when
I lost my way. Without his adjustments, I do not think that I can have my own perfect
theoretical framework to solve a case study.
I would also like to thank experts in the Committee of my thesis defense: Dr. Khai
Dinh Cong as Chairman, Dr. Giang Tran Thi Que and Dr. Du Huynh The as the second
readers of my thesis, and I am deeply indebted to your valuable comments and corrections
on my thesis. I very much want to thanks again Dr. Du who is my second tutor in the
finalize stage of my thesis. His suggestion about the second framework is a brilliant idea to
wake me up to see what happened in the real life.
I do not know how to thank MPP7 members enough for your physical and mental
backup. Many challenges and accomplishments would not have been possible without our
teamwork. I also have a big thank to Mr. An Bui Quoc in particular, who sat next to me in
the 1st year and provide tremendous assistance to me in the finalize stage.
Finally, I owe my wife a great debt of gratitude for unfailing support and
continuous encouragement throughout my years of studying and researching.
Hanoi, 08/09/2017
Author

Anh Nguyen Nhat


iii

ABSTRACT

The Central Mining, Mineral Exporting and Importing Company (MTM) is the
typical case that illustrates clearly the situation of agency cost and fraudulent behaviors in
the Vietnam Upcom stock market. The first part reveals the weaknesses of regulation and
current policies in Vietnam by using the principal-principal agency perspective of Young
(2008) particularly with regard to the mechanisms of stock scanning, no controlling the
changes of regulated capital, the undemanding capital contribution and no legal
responsibilities of former majority shareholders. The second part of thesis uses the
modified fraud of triangle of Soltani (2014) as a theoretical framework with several
adjustments to adapt the current circumstance of MTM. The case of MTM shows a number
of fraudulent behaviors by controlling shareholders including: (1) The reconstruction of
human resource before listing; (2) Having no major shareholder - holding more than 5% of
the chartered capital - but the power is concentrated; (3) Using the brand and pictures
makes confusion with another company; (4) Increasing the regulated capital in the short
term; (5) No core business or production, mainly the joint venture or capital contribution;
(6) The external audit accepted despite of the fact that financial statements have the
problems; (7) The business situation is not good but the price and volume of stock trading
is still high; (8) Tax obligation and social insurance are not completed. In conclusion, the
thesis strongly recommends the policies to reduce the likelihood of expropriation of
minority shareholders due to the principal-principal agency conflicts and these fraudulent
behaviors.

Keywords: corporate fraud, fraud triangle, MTM, principal-principal agency
conflicts


iv

LIST OF ABBREVIATIONS

Abbreviations

Meaning

BoD

Board of Director

HNX

Hanoi Stock Exchange

IPO

Initial public offering

JSC

Joint stock Company

Ltd

Private Limited Company

MoF

Ministry of Finance

MTM

The Central Mining, mineral Exporting and Importing Joint
Stock Company

OTC

Over-the-counter market

SFP

Statement of Financial Position

SSC

State Securities Commission of Vietnam

PO

Payment order

Upcom

Unlisted Public company market

US

The United States

VSD

Vietnam Securities Depository

VND

Vietnamdong


v

TABLE OF CONTENT
CERTIFICATE OF ORIGINALITY ...................................................................................... i
ACKNOWLEDGEMENT ..................................................................................................... ii
ABSTRACT..........................................................................................................................iii
LIST OF ABBREVIATIONS ............................................................................................... iv
LIST OF FIGURES ............................................................................................................viii
LIST OF APPENDICES .....................................................................................................viii
LIST OF TABLES ................................................................................................................ ix
Chapter 1.

Introduction .................................................................................................. 1

1.1.

Background.......................................................................................................... 1

1.2.

Thesis motivation and contribution ..................................................................... 3

1.3.

Research questions .............................................................................................. 4

1.4.

Research Methodology ........................................................................................ 4

1.5.

The structure of thesis ......................................................................................... 5

Chapter 2.

Theoretical frameworks ............................................................................... 6

2.1.

The Principal-Principal Agency Perspective ....................................................... 6

2.2.

Fraud triangle....................................................................................................... 8

2.2.1.

Incentives/pressures ..................................................................................... 9

2.2.2.

Fraudulent Opportunity .............................................................................. 10

2.2.3.

Attitudes/Rationalization............................................................................ 10

2.2.4.

Transformation of Fraud triangles ............................................................. 10

Chapter 3.

The weaknesses of regulations in Upcom market ...................................... 13

3.1.

Overview of regulatory framework in the Vietnam stock markets ................... 13

3.2.

No scanning fraudulent companies in the Upcom market................................. 15

3.2.1.

The easy and quick process to be listed ..................................................... 16


vi

3.2.2.

Audit companies are not the market guardians .......................................... 17

3.2.3.

Ranking is not enough ................................................................................ 17

3.3.

The increase of the registered capital without controlling ................................ 19

3.4.

The undemanding capital contribution .............................................................. 20

3.4.1.

The capital contribution through investment ............................................. 20

3.4.2.

The capital contribution though invoices ................................................... 21

3.5.

The legal responsibilities of former majority shareholders ............................... 21

Chapter 4.
4.1.

The fraudulent behaviors that led to the collapse of MTM ........................ 23

Overview of MTM ............................................................................................ 23

4.1.1.

Stealing the brand name of unlisted company ........................................... 23

4.1.2.

No tax payment .......................................................................................... 25

4.1.3.

A ghost company and its address ............................................................... 25

4.1.4.

Be a public company .................................................................................. 26

4.2.

Fraudulent opportunities .................................................................................... 28

4.2.1.

The capital contributions ............................................................................ 29

4.2.2.

Fake invoices and manipulating the financial statements .......................... 30

4.3.

Incentives ........................................................................................................... 34

4.3.1.

The high profit in the harsh economic ....................................................... 35

4.3.2.

Selling the stock of the valueless company................................................ 36

4.3.3.

The collusion of the former BoD ............................................................... 37

4.4.

Ethical problems ................................................................................................ 40

4.5.

The fraudulent behaviors in the case of MTM: ................................................. 42

Chapter 5.

Conclusion, policy recommendation, limitation ........................................ 43

5.1.

Conclusion ......................................................................................................... 43

5.2.

Policy recommendations ................................................................................... 43

5.3.

Limitations ......................................................................................................... 44


vii

References ............................................................................................................................ 45
Appendix 1.

Market capitalization of the Upcom market since 2013 to 1st quarter 2017
47

Appendix 2.

The trading detail of MTM stock ............................................................... 47

Appendix 3.

The detail of Market Capitalization and trading value on the Upcom

market

48

Appendix 4.

The reform of Vietnam in Business report over time. ............................... 49

Appendix 5.

The highlighted fraudulent cases in the Vietnam stock market ................. 49

Appendix 6.

The business license of MTM .................................................................... 52


viii

LIST OF FIGURES

Figure 1. Market capitalization of the Upcom market since 2013 to 2rd quarter 2017 .......... 2
Figure 2.Trading value and volume of the Upcom market annually ..................................... 2
Figure 3. Principal-agent conflicts versus Principal-principal conflicts (Young, Peng,
Ahlstrom, Bruton, & Jiang, 2008) ......................................................................................... 8
Figure 4. Classification of incentives for fraud-committing.................................................. 9
Figure 5. Fraud Triangle ...................................................................................................... 11
Figure 6. Modified Fraud Triangle ...................................................................................... 11
Figure 7. The components of ethical problems.................................................................... 11
Figure 8. The modified fraud triangle with several adjustments ......................................... 11
Figure 9. Legal Matrix System ............................................................................................ 14
Figure 10. The timeline of the MTM collapse ..................................................................... 27

Figure 11. The continuous process of selling and issuing stocks of FID and MTM. .......... 34
Figure 12. Trading price and volume of MTM stock since 15/4 to 20/6/2016.................... 37

LIST OF APPENDICES
Appendix 1.

Market capitalization of the Upcom market since 2013 to 1st quarter 2017
47

Appendix 2.

The trading detail of MTM stock ............................................................... 47

Appendix 3.

The detail of Market Capitalization and trading value on the Upcom

market

48

Appendix 4.

The reform of Vietnam in Business report over time. ............................... 49

Appendix 5.

The highlighted fraudulent cases in the Vietnam stock market ................. 49

Appendix 6.

The business license of MTM .................................................................... 52


ix

LIST OF TABLES
Table 1.Comparison of traditional principal-agent model and principal-principal model .... 7
Table 2. The strength of minority investor protections in Vienam and some countries in
2017 ..................................................................................................................................... 13
Table 3.The market capitalization and the value matching monthly in Upcom .................. 18
Table 4. The document of changing the regulated capital. .................................................. 19
Table 5. Some highlighted contents in Decree 71/2017/Dec-Gov ...................................... 22
Table 6. The information of tax payer - MTM .................................................................... 25
Table 7. The submitting document of MTM to HNX to list................................................ 27
Table 8. The increase of regulated capital ........................................................................... 29
Table 9. The fake invoices of MTM .................................................................................... 31
Table 10. The first part of the note of the financial statement ............................................. 32
Table 11. The short-term receivables in 2014 audited financial statement ......................... 33
Table 12. The capital construction in process...................................................................... 33
Table 13. The warning list in the Announcement of HNX .................................................. 35
Table 14. The list of MTM members ................................................................................... 37
Table 15. The money transactions to another companies/bank of the former MTM BoD .. 38
Table 16. The structure of the shareholders in MTM .......................................................... 41
Table 17. The characteristics of new leaders of MTM ........................................................ 41
Table 18. The fraudulent behaviors in the case of MTM .................................................... 42


1

Chapter 1. Introduction

1.1.

Background
The collapse of the Central Mining, Mineral Exporting and Importing Company

(MTM) raised the concern of corporate deviances in Vietnam. Known as the frontier
market, minority investors have suffered from series of frauds, scams, fraudulent financial
statements and failure of the external audits. Although the number of scandals in the stock
market is still small compared the huge number of listed companies (see Appendix 5), but
it should be considered the warning signal for the financial consequences that has direct
impact on the economic progress and dampen a confidence of investors. According to
Giannertti and Wang, if the corporate frauds are revealed in a state, the household
decreases the holdings in both the fraudulent and non-fraudulent firms (Giannetti & Wang,
2016). It means that investors intend to reduce their saving on stocks of both good and bad
companies as a way to have negative impacts to the capital market. In case of MTM,
hundred billions VND were gone with the scammers while thousands of investors had to
rebuild this valueless company1 with the hope that the regulatory bodies can bring their
valuable investment back.
Upcom market, the abbreviations of a stock exchange that "is the stock market of
public unlisted or delisted companies" (Ministry of Finance, 01/2015). The Upcom Market
was permitted by HNX to operate officially on 24/06/2006 with 10 registered firms and the
market capitalization was 1231.4 billion VND2. As shown in figure 1 below, the market
capitalization has increased dramatically around 400 times with 600 registered firms (at
31/07/2017). With the high volume and value in trading (Figure 2), Upcom has become an
active market for investors. The Upcom stock used to attract the money flows such as
WSB, GEX, etc. HNX has increased the transparency, attracted the capital flows, extended
the trading time up to 03:00 pm and to ease the reference price up to ±15%. To reduce the
gap between the free and listed markets, HNX has operated the Upcom premium ranking3

to direct the investors.

1

Mr Phuong Chu Danh, who is one of the minority investors of MTM, were elected to the BoD Chairman of MTM. He knew that his
investment was lost and he attempts to rebuild MTM which was no core business or money to become a real company.
2
/>3
Upcom premium is the companies that has the regulated capital in the last year up to 120 billions dong, EBIT> 30 billions dong and
ROE ≥5%.


2

Figure 1. Market capitalization of the Upcom
rd

market since 2013 to 2 quarter 2017

Figure 2.Trading value and volume of the Upcom
market annually

35,000,000,000
Trading
Volume

30,000,000,000
25,000,000,000
20,000,000,000
15,000,000,000

Trading Value

10,000,000,000
5,000,000,000
2013

2014

Trading Volume
2015

2016

2017

Source: Upcom data on website

Apart from the active efforts to protect the minority investors, the stock market still
has a series of firms that register to trade with the purpose of appropriating the property of
the dispersed investors. The most typical case is in the beginning of July - 2016, Phuong
Chu Danh filed a lawsuit against HNX because HNX made the damage to the investors
who bought the share of MTM. In detail, HNX issued Decision 201/QD-HNX4 based on
the inadequate documents. It is an opportunity for the top of MTM and founding
shareholders to appropriate 70 billion VND5 of the investors. With the evidences of fraud,
on 19/09/2016, Bureau of Security and Investigation (A92) initiated the indictment and
temporarily detained Tiep Tran Huu, the current Chairman of MTM. The fraudulent
process of MTM prolonged since its establishment, becoming a public company, trading
on Upcom and suspension of trading. Each ladder is not in compliance with the law and
regulation. After the suspension, the minority investors are the most vulnerable parties

while the entire investment would not be recovered.
In the process of reclaiming the amount of investment, the shareholder, Phuong Chu
Danh, joined the MTM as the role of the Chief accountant. He has attempted to organize
the extraordinary shareholder meeting to find out a remedial solution. Simultaneously, he
has cooperated with the police offices and regulatory bodies to provide evidences of fraud
activities. Even he had been threatened with death by the anonymous people who claimed

4
5

to allow MTM to trade in the Upcom stock market
The estimation of author


3

themselves as the representatives of A92, HNX and another mining companies6. Thus, the
case of MTM is the pioneer which the minority investors sued and took a part in the
company instead of being disadvantaged so far. Additionally, this case scandalized due to
the prolonged fraudulent process and massive damage to related parties. The lax
management of HNX leaves the doors open for fraudulent behaviors and raises the
confusion in the investing communities. With all points above, the thesis is going to
analyze the case of MTM in order to recommend a policy to strengthen the weaknesses of
regulation in Upcom market as well as avoiding the fraudulent firms.

1.2.

Thesis motivation and contribution
The thesis explores the case of corporate fraud by using the principal-principal

agency perspective and fraud triangle with the broader context. The first motivation of
research is to describe the weaknesses of regulation in the Upcom market and fraudulent
behaviors that caused the MTM collapse. Although the research only focuses on one
fraudulent company but the analysis is set up in the legal environment of the frontier
financial market. Corporate fraud is a topic that mentioned in the larger number of
published paper and professional journals. However, most of cases happened in the United
States and Europe and a small number of cases happened in China and other countries. In
Vietnam, the research could not find any case related to corporate fraud, to my best
knowledge. A single featured case with the broader framework, the anatomy of MTM
reveals the weaknesses and fraudulent behaviors of a collapse in the Vietnam Upcom stock
market.
Contribution of the thesis is to understand the fraudulent behaviors and weaknesses
of regulation that led to the collapse of MTM in the context of Vietnam Upcom stock
market. With broader view, these evidences will have practical implications for regulatory
bodies and policy makers to reduce the likelihood of expropriation of dispersed minority
shareholders due to agency cost and fraudulent firms.

6

The petition of Phuong Chu Danh was sent to A92 and A84


4

1.3.

Research questions
Because the prosecution against the former BoD members and CEO of MTM is in

process, the thesis is not able to declare that MTM is the case of fraud without the

conclusion of regulatory agencies. Therefore, the lesser extent focuses on current
evidences to identify the fraudulent behaviors and the weaknesses of regulation. The thesis
will attempt to answer the following research question:
(1) What were the weaknesses in the Upcom stock market regulation that led to the
collapse of MTM?
(2) What were the fraudulent behaviors of controlling shareholders in the collapse of
MTM?

1.4.

Research Methodology
The thesis will apply the case-study methodology and the single-case design with

multiple units of analysis to describe and analyze the MTM company. The case study is
defined as "explore and investigate contemporary real-life phenomenon through the detail
contextual analysis of a limited number of events or conditions, and their relationships"
(Zainal, 2007). MTM is considered the phenomenon in the Upcom market due to the active
role of minority shareholders and show the groups of fraudulent behaviors. Instead of
waiting for the response from the regulatory bodies after submitting their petitions, the
group of investors take part in the BoD to provide the evidences and to reborn the MTM.
The case study is selected due to the advantages of data collecting and analysis.
MTM is rewritten based on the stories, the history of company collected in the annual
financial statements, the official documents, research and press information. As the author
Yin mentioned that "when the boundaries between phenomenon and context are not
clearly evident; and in which multiple sources of evidence are used" (Yin, 2013). All
fraudulent behaviors had done due to a weakness of regulation or a mechanism of investor
protection. These interactions of MTM and the legal environment were strong and
complicated. As the result, the case study seems to be the most suitable method in this
circumstance.

5

1.5.

The structure of thesis
The thesis consists of five chapters. After the introduction in the first chapter, the

second chapter describes two theoretical frameworks. The third chapter presents the
weaknesses of regulation in the Upcom market. The fourth chapter intends to describe the
fraudulent behaviors that caused the collapse of MTM. The final chapter concludes all
points above and suggests policy recommendations.


6

Chapter 2. Theoretical frameworks

To analyze the case study of fraudulent behaviors in the Upcom stock market, the
thesis uses frameworks including the principal-principal agent perspective and Fraud
triangle. The principal-principal agent theory applies to show the relations between
majority and minority shareholders in the Upcom market as well as the case of MTM.
In emerging economies, the controlling shareholders thus have the motive and means to
exploit their positions. Therefore, fraud triangle is a framework that uses to analyze the
case of MTM and determine the fraudulent behaviors that dominate the regulatory
weaknesses.

2.1.

The Principal-Principal Agency Perspective

The separation of ownership and control in joint stock companies had mentioned by

Adam Smith since 1776. He had raised concerns about related organizational and public
policy consequences (Smith, 1827). After 150 years later, Berle and Means had
conceptualized the concern of Adam Smith in terms of a theory of governance in the
modern corporation in the United States that have dispersed ownership and separation of
ownership and control (Adolf A Berle & Means, 1932). As the result, the divergence of
interests led to the phenomenon that often called "agency cost" by Jensen and Meckling
(Jensen & Meckling, 1976). Although principal-agent relations have been published widely
in a developed economy context, and agency theory becomes one of the most influential
perspectives that explained the relationship in modern joint stock company and corporate
governance (Awasthi, 2017), but in the emerging context, a different kind of interest
conflict between majority shareholders (control) and minority shareholders, known as
principal-principal relations, has not been covered. However, it was the groundbreaking
work of Young et al (2008), providing a first major conceptual view of principal-principal
research in emerging and transitional economies (Young et al., 2008).
Both of agency models show the relations that involve the principal, the agent, and
the contractual relationship between them. The huge differences between them are
institutional and national contexts. The traditional model, known as the principal-agent
model, is applicable in the developed countries where have the powerful enforcement of
property rights. In contrast, the emerging-market institutional contexts have concentrated


7

ownership, weak enforcement of agency contracts and legal protection of minority
shareholders, full of business group structures. As the result, there are more frequently
conflicts of interests between controlling shareholders and minority shareholders. The
additional differences are shown the Table 1 and Figure 3 below.
Table 1.Comparison of traditional principal-agent model and principal-principal model

Corporate

Principal-agent agency

governance

model

Agency cost

Due

to

Principal-principal agency model

divergence

interests

of Due to possibility of expropriation of

between minority shareholders by the controlling

shareholders (principal) and shareholder group
managers(agent)
Institutional

Majorly developed countries

Majorly emerging/transition economies

context
Assumptions

Bounded

rationality, Controlling

opportunism

and

shareholders

maximizing

self- wealth even at the cost of minority

interest, maximizing agents

shareholders, managers follow majority
owners' objectives

Reasons

for Opportunism

conflict

interest
managers

and

self- Expropriation of minority shareholders

behavior

by by large shareholders and their appointed

in

dispersed managers

ownership
Concept

due

to

weak

minority

shareholder protection

of Homogeneous group

Heterogeneous (controlling and minority)

shareholders
Largest

Hardly visible, no too strong

shareholders

State-owned

enterprises,

family

ownership, pyramid ownership

Role of boards

Monitor agents

Negligible,

facilitating

majority

shareholder's interest
Forms

of Managerial

expropriation

Liquid of stock

empire

entrenchment, Below market value asset transfers to

building,

private controlling

owner,

personal/private

benefit to managers

benefits of large controlling shareholders

Usually high

Generally low

Source: Taking Stock of the Principal–Principal Agency Perspective: A Review and the Way Ahead (p. 21)

8

As shown in Figure 3, the dashed arrow depicts the relationships between the controlling
shareholders and their affiliated managers. The solid arrow is drawn the conflicts of the
minority shareholders and the affiliated managers, who are representing the majority
shareholders.
Figure 3. Principal-agent conflicts versus Principal-principal conflicts (Young, Peng, Ahlstrom,
Bruton, & Jiang, 2008)

Wide dispersed

shareholders

(Principals)

Principal-Agent Conflicts

Professional
managers
(Agents)

shareholders

(Principals)

Wide dispersed

Principal-Principal Conflicts

Managers affiliated

with controlling
shareholder

Controlling

(Principals)

Shareholder

In the case of MTM, the thesis goes through the lens of principal- principal agency
model of Young (2008) showed the relationships that facilitate fraudulent behaviors in the
frontier market like the stock market in Vietnam. To examine the agency cost, the thesis
use the conceptualization of Jensen and Meckling (Jensen & Meckling, 1976): (1)
monitoring costs – costs incurred by principals including measuring or observing the
behaviour of agents; and (2) bonding costs – costs incurred by agents to guarantee they
will not take actions to harm the principal.

2.2.

Fraud triangle
The corporate scandals are so diverse that many different methods and levels

mentioned in the literature. Even the small acts of employee as thieve, improper uses of


9

company assets to the fraudulent behaviors of directors, BoD member such as
misappropriating funds and fraudulent financial statement, are affecting directly the
interests of investors. All fraudulent behaviors are discussed extensively in the literature

but the major of analyses used the fraud triangle of SAS No. 997 (AICPA, 2002): "Fraud is
an intentional act that results in a material misstatement in financial statements that are
the subject of an audit".
The fraud triangle involves three conditions which are enable to be fraud in
company: (1) Incentives/pressures, (2) Opportunities, (3) Attitudes/Rationalizations (Wilks
& Zimbelman, 2004). These components are defined by Sutherland (Sutherland & Geis,
1949) and developed by Cressey (Cressey, 1953) and Albrecht et al (Albrecht, Albrecht,
Albrecht, & Zimbelman, 2011) while applied this framework to the fraud accounting, then
reinforced three components by assessing 1500 fraud cases, as shown in figure 4 below.

2.2.1. Incentives/pressures
Despite many practical approaches toward the components of Fraud triangle by
different researchers, three fundamental components seem to be unchanged for 70 years.
Cressey suggested that pressure to commit fraud could be identified with a personal
incentive. As shown in Figure 3 below, these pressures are caused by personal problems
like a pressure from employers or external forces such as fear of loose job, low wage. In
addition, all these variables are considered as the incentives to commit fraud.
Figure 4. Classification of incentives for fraud-committing
Source: (Mackevičius & Giriūnas, 2013)

Personal (e.g, debts)
Financial
External (e.g, fierce business
competition, economic stability of
the country)

Incentives

Personal (e.g, inner
dissatisfaction with work, greed)

Non-financial
Company’s (e.g, fear of loose job,
low wage)
7

Statement on audit standard


10

These pressures have formulated before the fraudulent plan. Hence, it is very
difficult to identify the pressures without doing an in-depth interview with the former BoD
members and CEO of MTM. However, their missing is the biggest challenge to reveal
these pressures. In addition, the purpose of thesis evaluates the fraudulent aspects rather
than personal problems. Therefore, the pressure should be out the extent of discussion.
2.2.2. Fraudulent Opportunity
The comparative lack of the suitable management, control and administration into
the stock market could create a chance for a scammer. Dormine et al said: "the triangle
alone is an adequate tool for deterring, preventing, and detecting fraud because two of the
characteristics of pressure and rationalization-cannot be observed" and "All the predator
seeks is an opportunity. The predator requires no pressure and needs no rationalization"
(Dorminey, Fleming, Kranacher, & Riley, 2010). Any shortage of control, inefficient
management and overlapping is creating opportunities for fraud. Or lacking of efficient
control for the tone of top in this company would produce the vulnerability (Soltani, 2014).
In the case of MTM, it is too many gaps for the plunders to fraud.
2.2.3. Attitudes/Rationalization
Some individuals have attitudes/rationalization, characteristics or unethical values
so that they can rationalize their frauds to be acceptable norms. The bigger incentives or
pressures, the more possibility these people rationalize their fraud or scam. Cressey
suggested that "Perepetrator must formulate some type of morally acceptable

rationalization that the unethical behaviors is something other than criminal activity. If an
individual cannot justify unethical actions, it is unlikely that he or she engage in fraud".
Therefore, unethical behaviors are a top of an iceberg that the thesis can observe as well as
collecting information. It is very difficult, even impossible to read the perpetrator's mind
(Mansor, 2015). As a result, the thesis should focus on the ethical problems of MTM and
the parts that related to attitudes/rationalization require an independent research (Figure 7).
2.2.4. Transformation of Fraud triangles
Many researches adjusted the fraud triangle framework because of disadvantages
in analyzing a fraud company, especially the research of Soltani (Soltani, 2014), he said
that this framework has several critical gaps: Firstly, the framework should be placed in the
control environment. Secondly, all listed companies tightly control by government and


11

regulatory agencies. In this way, it is essential to put the framework in the context of
regulation. Thirdly, the framework should be examined in the ethical climate/business
ethics. Therefore, the environmental factors in this triangle are regulatory framework,
control environment and ethical climate/business ethics, as shown in Figure 5 below.
Figure 5. Fraud Triangle

Figure 6. Modified Fraud Triangle

Incentives/
Incentives/

Pressures

Pressures

Attitudes/
Opportunities

Opportunities

Rationalizations

Attitudes/Rationalizations

According to the modified fraud triangle of Soltani, a control environment and is
considered as the tone at the top. However, the fraud firm like MTM is a small company
with the small number of staff. The tone at the top is suitable to analyze the big companies
like Enron, Worldcom, HealthSouth, etc. In addition, the thesis does not expand our
analysis to the ethical climate/ business ethics because the period of MTM that is trading in
Figure 7. The components of ethical problems

Figure 8. The modified fraud
triangle with several adjustments

Incentives

Ethical problems
Opportunities

Attitudes

Ethics

Rationalization
Regulatory Framework

Source: author's construction


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the Upcom market is just two months. In addition, the initial purposes of MTM is try to
fraud the minority investors, so that the impacts of the ethical climate/ business ethics to
MTM is trivial. As a result, this thesis mainly focuses on the regulatory framework. The
interaction of MTM with regulatory bodies and another partners are the extent of the
environment parts. For a comprehensive analysis, the thesis will use the modified fraud
triangle with these adjustments, as shown in Figure 8 above.
The strength of each component would reinforce the others. People who have more
the number of ethical problems would have greater incentives when they saw the
opportunities to fraud. Or Howe and Malgwi agreed that a bridge between incentives and
opportunity is created when an individual is able to rationalize the fraudulent behavior
(Howe & Malgwi, 2006).


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Chapter 3. The weaknesses of regulations in Upcom market

3.1.

Overview of regulatory framework in the Vietnam stock markets
The stock market of Vietnam ranked in the lowest group as the frontier market8.

The sustainability of institutional framework is modest. These weaknesses are the chances
for the firm to fraud the minority investors in Vietnam. The stock market is operating as
the market mechanism under the control of the regulatory bodies. If not work efficiently,

the market failures should be detected and intervened by public policies.
Law foster economic activities (exclusively) by protecting property rights (a rule of
law) (Milhaupt & Pistor, 2008). "Properties are protected by law" that is the precondition
to develope the economic. The simple equation could interpret the relationship between
law and economic development by two authors Milhaupt and Pistor. In the stock market,
the following equation shows the future work for policy markers to strengthen investor
protection as well as developing the share market as the main funding channel (Nguyen,
Oates, & Dunkley, 2014).
good law + good enforcement = good economic outcomes
The first content is how to build a good law. The legal system of the stock market in
Vietnam is strengthened to adapt the new challenge of the economic development.
Especially, the strength of minority shareholder investor protection index of Vietnam has
improved over time. The rank in 2016 was 118th and then moved to 87th in 2017 (see
details in Appendix 4).

Table 2. The strength of minority investor protections in Vienam and some countries in 2017
Indicator

VN

VN

East

16

17

Asia

OECD

New

Hong

York

Kong

Sing

Strength of minority investor protection index

4.5

5.3

5.2

6.5

6.3

8.0

8.3

Extend of conflict of interest regulation (0-10)

3.7

4.3

5.6

6.3

8.3

9.0

9.3

Extend of shareholder governance (0-10)

5.3

6.3

4.8

6.6

4.3

7.0

7.3

Source: accessed on 25/03/2017

8

accessed on 23/03/2017


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Despite the fact that system is improved with the changing of market, series of scandals
happened to the outside investors before MTM. The stories of DVD9, BBT10, KSS... rise
the warning of how good law we have. Two major concerns about the system that are a
civil law and a centralized and signaling legal system.
One of disadvantage for investors in Vietnam is a civil law, especially a French
civil law. The extent of protection in the common law market is greater than the civil one.
With the better law equipment, their rights are protected from the dominant groups or
majority shareholders and they comfortably to diversify their portfolios (La Porta, Lopezde-Silanes, Shleifer, & Vishny, 2001). As shown in Table 2, Hong Kong and Singapore are
leading the world in the indicator of minority shareholder protections. Two countries have
common law systems instead of a civil law.
The protective and decentralized system gives the individual investors (and their
lawyers) more weapon rather government agencies to against the fraud firms (Figure 12).
However, in the context of Vietnam, the system considers as the centralized and
signaling11. With these characteristics, the minority shareholders are less protective and
passive. The case of MTM reinforces the point that the shareholder protection in Vietnam
just stops at the signaling level.
Figure 9. Legal Matrix System
Coordinative

Protective

Centralized

Decentralized

Source: Milhaupt and Pistor, 2008

Suspecting the operation of MTM, the group of investors comes to the head office of
MTM. With the address on the 2016 prospectus, all of them are shocked because there is
the cheap restaurant instead of the mining company. The news is spread widely and HNX
know they had a big mistake. They rush to do the quick investigation and recognize that it
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Vien Dong Pharmacy JSC
Snow white Cotton JSC
Signaling is a middle point in the horizontal scale (from coordinative to protective) (Figure 12)

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