The impact of audit opinion on cost of debt: Evidence from Vietnam

Nguyen Vinh Khuong et al. Ho Chi Minh City Open University Journal of Science, 11(1), 83-93 83 
 The impact of audit opinion on cost of debt: 
 Evidence from Vietnam 
 Nguyen Vinh Khuong1*, Nguyen Thi Lan Huong1, Vy Bao Chau1, Nguyen Ton Huong Mai1, 
 Nguyen Le Cam Thi1, Cu Tong Hoai Linh1 
 1Faculty of Accounting and Auditing, University of Economics and Law, Vietnam National 
 University Ho Chi Minh City, Vietnam 
 *Corresponding author: khuongnv@uel.edu.vn 
 ARTICLE INFO ABSTRACT 
DOI:10.46223/HCMCOUJS. We consider whether the category of audit opinion an 
econ.en.11.1.1067.2021 enterprise receives is pertained to the cost of debt of Vietnam 
 corporations and how does it impact them. Proceeding from the 
Received: September 29th, 2020 data collected from 80 listed companies in the Vietnam stock 
 exchange in the period of 2007 - 2017, we used a quantitative 
 th
Revised: January 12 , 2021 method to demonstrate the negative impact of modified audit 
Accepted: January 18th, 2021 opinion on the cost of debt. When companies receive a modified 
 opinion, they have to pay higher interest rates and have a shorter 
 maturity. From the results, this paper suggests some 
Keywords: 
 implications for the financial statement disclosure of listed firms 
audit opinion, cost of debt, listed and regulators in order to contribute to the transparency of the 
company, Vietnam financial reports. 
 1. Introduction 
 When internal funds are not enough for daily operations and investments, companies tend 
to seek external equity (loans) or borrowings. “Debt is easier access and more popular for all 
businesses than selling company shares for the capital call.” (B. C. Liu, 2016). In Vietnam, raising 
capital is very regular and popular, but sometimes not all of the capital-raising processes go 
smoothly and bring success to companies (Dinh & Tran, 2019). In order to gain external capital, 
companies are required to provide financial information, most needed are the annual financial 
statements (Shivakumar, 2013; Watts, 1986). But how do users trust in the provided information? 
One way to ensure the reliability of the published financial statements is using an autonomous 
audit process. 
 Previous studies have shown that audited financial statements are considered more 
valuable, more reliable and more widely acceptable than unaudited financial statements (Minnis, 
2011). Auditors may issue different types of opinions to reflect the different reliability levels of 
financial statements. The unqualified audit opinion is the most common, in which the auditor 
indicates that the financial statements present a true and fair view in all material respects, and 
becoming dependable. The more reliable it is, the more creditors (e.g., banks) provide credit to 
companies with beneficial terms (e.g., lower interest rates, longer maturity) (Ding, 2016). In 
contrast, the modified opinion is considered to be the cause of the less favorable debt terms (P. C. 
Chen, 2016). The reliability of the audited financial statements may also change based on who is 
the auditor, which auditing firms, but the larger firms (Big 4) are more reliable (Gong, 2016). 
According to (H. Liu, Cullinan, & Zhang, 2018), based on auditing standards, a modified opinion 
may notify both financial difficulties (which creditors can detect from financial results even 
84 Nguyen Vinh Khuong et al. Ho Chi Minh City Open University Journal of Science, 11(1), 83-93 
without financial statements) and lack company planning management. In addition, the modified 
opinion is also an indication that this financial information may be unreliable. The audit opinion 
also reduces the prestige of the financial statements such as the unqualified audit opinion with the 
explanatory paragraph, qualified and adverse audit opinion. Explanatory paragraph leads to 
unfavorable loan terms (P. C. Chen, 2016) and may signal the possibility of future errors (Czerney, 
Schmidt, & Thompson, 2014). Few studies have the topic of modified or adverse audit opinion 
because of their infrequent nature, but they are likely to have a stronger influence on the reliability 
of the financial statements than the unqualified opinion with an explanation. 
 Based on these insights, we believe that modified audit opinion can reduce the creditor’s 
credibility about firm’s financial ability, the reliability of management’s plans in order to solve the 
financial problems and reliability of the financial statements, all of the above may make the 
characteristics of the debt less favorable including higher interest rates and shorter debt maturity. 
Higher interest rates lead to greater interest expenses over the life of the loan. A shorter loan term 
requires the borrower to pay the loan quickly, potentially making it harder for companies to repay 
and higher transaction costs when the debt is refinanced. With greater reliability when the audit 
opinion comes from a larger firm, the relationship between the modified opinion and the debt 
agreement will be stronger when the firm is audited by a larger firm. 
 The team chooses to research the topic “The impact of audit opinion on the cost of debt: 
Evidence from Vietnam” in order to provide more practical evidence on the relationship between 
audit opinion and the debt characteristics of listed companies in Vietnam with an aim of helping 
companies make easier to access external capital and help investors make appropriate decisions. 
 2. Theoretical and hypothetical basis 
 The Agency Theory was researched in the early 1970s, focusing on asymmetric 
information in relation to contracts of the insurance company (Ross, 1973). Jensen and Meckling 
(1976) defined a representative relationship as a contractual relationship, shareholders (owners) 
will appoint others as business managers (the agent) including the empowerment to make a 
decision to determine the assets of the business ... relation analysis 
Table 3 
Correlation matrix 
 IntRate AO CFO PPE Lev Size SOE Firmage 
 IntRate 1.000 
 AO -0.069 1.000 
 CFO 0.122 -0.008 1.000 
 PPE 0.026 -0.092 0.150 1.000 
 Lev -0.029 -0.131 -0.099 -0.113 1.000 
Nguyen Vinh Khuong et al. Ho Chi Minh City Open University Journal of Science, 11(1), 83-93 89 
 IntRate AO CFO PPE Lev Size SOE Firmage 
 Size 0.016 -0.099 -0.093 0.027 0.534 1.000 
 SOE -0.071 -0.009 -0.005 0.262 -0.141 0.028 1.000 
 Firmage -0.114 0.131 -0.080 -0.079 0.104 0.243 -0.106 1.000 
Source: Data analysis from author’s calculation 
 A correlation matrix is displayed in Table 3 indicates that AO is negative related to IntRate 
models. 
 4.3. Regression analysis results 
Table 4 
Results of FGLS regression analysis of model 
 Variable Coefficient Std. Error z-Statistic Prob. 
 AO -0.009 0.002 -4.11 0.000 
 CFO 0.021 0.004 4.82 0.000 
 PPE 0.001 0.003 0.29 0.773 
 Lev 0.004 0.005 0.82 0.409 
 Size 0.001 0.001 1.41 0.158 
 SOE -0.009 0.003 -2.77 0.006 
 Firmage -0.001 0.000 -3.99 0.000 
 Cons 0.007 0.019 0.37 0.711 
 Chi2(7) 79.59 
 Prob > Chi2 0.000 
Source: Data analysis from STATA software (version 14.2) 
 The author team uses the estimation method of panel data to select which model is more 
effective between REM and FEM to consider if there is autocorrelation between residuals and 
independent variables. However, this method gives similar results, we continue to use the 
Hausman test to select the suitable model. 
 With P-value = 0 <0.05, we proved that using REM model is more suitable. Then, we 
continue to perform some other tests: LM test - Breusch and pagan Lagrangian. 
 Multiplier - Heteroskedasticity test of REM models, Wooldridge test to test the 
autocorrelation phenomena in the data table. The result shows variance change and autocorrelation 
phenomena are violated on the data table. Hence, the research team used Robustness regression to 
overcome the above two phenomena. Finally, we perform the FGLS regression model to 
consolidate and minimize the variance change in the research model. 
 Table 4 displays the regression results connected with the relationship between audit 
opinions and interest expense in the 2007-2017 period of enterprises listed on the stock market in 
Viet Nam. 
 The result shows there are 4 variables - AO, CFO, SOE and Firmage have statistical 
90 Nguyen Vinh Khuong et al. Ho Chi Minh City Open University Journal of Science, 11(1), 83-93 
significance at 1%, therefore only these 4 variables have a significant impact on the cost of debt 
of companies. The FGLS test indicates that - audit opinion factors - AO, cash flow from operating 
activities of companies - CFO and number of years operation of companies - Firmage, these factors 
have a consistent and significant statistical effect on the interest expenses of the business. 
Moreover, research results expose that the AO has a negative impact on the interest expense and 
at 1% statistical significance, thus H1 hypothesis is accepted. 
 This result is consistent with previous research, particularly from P. F. Chen, He, Ma, and 
Stice (2016) and H. Liu et al. (2018). An audit opinion is an important factor in determining 
whether the interest expense a company will incur is high or low. The unqualified opinion will 
make the companies more favorable for loans and just bear relatively low-interest expenses. 
Besides, the research results also show other factors affecting the cost of debt, including 
observation variable that the auditor presents a modified audit opinion (AO) - opposite impact, 
rate of cash flow earned on assets (CFO) - same impact, control variables signify to state-owned 
enterprises (SOE) - opposite impact, control variables represent the number of operation years of 
companies (Firmage) - opposite impact. All of the factors listed are statistically significant in the 
research model. 
 5. Conclusions, meanings, and limitations 
 5.1. Conclusions 
 The research model is built to test the hypothesis by following the research of H. Liu et al. 
(2018). All analytical procedures (for example, statistics describing variables, univariate and 
multivariate analysis, polynomial tests) are performed using Stata statistical software. 
 The final results of the research clearly prove the initial hypothesis that the audit modified 
opinion has an inverse relationship with the debt characteristics consistent with the results of (H. 
Liu et al., 2018). At the same time, answering the question “How does the audit opinion affect the 
interest expenses of listed companies?”. An audit opinion is an important factor in determining 
whether the interest expense that a company will incur is high or low. An unqualified opinion will 
make the company more favorable for loans and will only bear relatively low-interest expenses. 
 Research by P. C. Chen (2016) shows that such additional paragraphs are related to less 
approving loan terms. According to Gong (2016), the reliability of the audited financial statements 
may also vary contingent on who is the auditor, which larger accounting companies often 
considered to be more reliable. This research supports previous researches and the results are 
similar. We stated there is an inverse relationship between the modified opinion and the 
convenience of the loan terms. The modified opinion of the financial statements may reduce the 
convenience of the loan. This finding supports the hypothesis of the study. However, the research 
does not avoid shortcomings and limitations. The research paper only takes data from a certain 
field and a single country, as well as time, which is limited. So, we hope that this research will be 
used as a reference for other researches to be more complete and able to overcome. 
 5.2. Recommendations 
 From the above research results, we would like to make some recommendations for listed 
companies and Government Agency as follows: 
 For listed company 
 The information on the financial statements plays an important role for all companies in 
general and listed companies in particular. It shows the financial year of the company and is the 
basis for analysts, investors, banks relying on to analyze the financial condition of a company. A 
Nguyen Vinh Khuong et al. Ho Chi Minh City Open University Journal of Science, 11(1), 83-93 91 
financial statement that has been audited by big auditing firms always makes more faith for 
analysts, investors and banks. However, this doesn’t mean that an investor’s trust is absolute to a 
financial statement being audited. In addition, a financial report is nothing without trust from the 
second party. The confidence of an investor, a bank creates a lot of motivation for the development 
of the stock market, especially when the Vietnam stock market is still young. Therefore, the 
research team would like to make some recommendations as follows: 
 Firstly, companies need to focus on disclosing financial statements information 
transparently and clearly: timely, quality of financial statements information, and above all 
choosing a reputable auditing firm credibility, professionally and reliably. 
 Secondly, companies need to choose an appropriate and effective communication method 
to widely publicize financial statements for investors and those who are interested in it, which 
increases openness and transparency and make it easy for the public to access the information. 
 Thirdly, accountants and administrators shouldn’t or refrain from applying accounting 
methods intentionally to falsify financial statements information or affect the stock price of 
companies or investors’ decisions, especially using accounting estimates. For example, at present, 
companies use many methods to increase profits, reduce costs, “distort” the data to window 
dressing. Moreover, they explain the financial statements in a transient, inadequate way to hide 
bad information, contingent liabilities, and recorded dishonest and reasonable amounts. 
 For government agency 
 The duty of the state is to establish, manage stability and develop the stock market. In order 
to achieve this goal, the Government agency must perform the management to increase investment 
efficiency and attract new investors, potential investors, ...They must increase market liquidity and 
manage transparency issues such as auditing quality, time of publishing financial statements, 
controlling negative behaviors to increase the effectiveness of the market. According to the 
research results, the disclosure of financial statements of listed companies that have been audited 
by Big4’s auditing firms, which affects the cost of debt. This will help the financial statement 
information reflect the relationship between audit opinion and debt terms or cost of debt, thereby 
increasing the efficiency to stabilize and develop the market. 
ACKNOWLEDGMENT 
 This research is funded by the University of Economics and Law, Vietnam National 
University Ho Chi Minh City, Vietnam. 
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 APPENDIX 
 The stock market code of 80 companies that we collected 
 Stock Stock Stock Stock 
 Firm market Firm market Firm market Firm market 
 code code code code 
 APP.HN APP GEX.HM GEX PLC.HN PLC RAL.HM RAL 
 ASP.HM ASP GSM.HNO GSM PLX.HM PLX SFC.HM SFC 
 BDW.HNO BDW GSP.HM GSP POV.HNO POV SII.HM SII 
 BTW.HN BTW HFC.HNO HFC PPS.HN PPS SWC.HNO SWC 
 BWA.HNO BWA HPW.HNO HPW PPY.HN PPY TDM.HNO TDM 
 CAV.HM CAV HTC.HN HTC PSB.HNO PSB TDW.HM TDW 
 CCI.HM CCI KHP.HM KHP PSC.HN PSC TGP.HNO TGP 
 CKV.HN CKV KHW.HNO KHW PSD.HN PSD TIE.HM TIE 
 CLW.HM CLW LAW.HNO LAW PTH.HNO PTH TMC.HN TMC 
 CMI.HN CMI LKW.HNO LKW PTS.HN PTS TSB.HN TSB 
 CMV.HM CMV MTG.HNO MTG PVC.HN PVC TYA.HM TYA 
 CNG.HM CNG NBW.HN NBW PVD.HM PVD UIC.HM UIC 
 COM.HM COM NTW.HNO NTW PVE.HN PVE VAV.HNO VAV 
 DHP.HN DHP PAC.HM PAC PVG.HN PVG VCW.HNO VCW 
 DNC.HN DNC PCG.HN PCG PVP.HNO PVP VIP.HM VIP 
 DNW.HNO DNW PGC.HM PGC PVS.HN PVS VLW.HNO VLW 
 DOP.HNO DOP PGD.HM PGD PVT.HM PVT VMG.HNO VMG 
 DQC.HM DQC PGS.HN PGS PWS.HNO PWS VSP.HNO VSP 
 DTV.HNO DTV PGT.HN PGT PXS.HM PXS VTB.HM VTB 
 GDW.HNO GDW PJC.HN PJC PXT.HM PXT VTO.HM VTO