1 International Conference on Accounting, ICOA 2015, 22 May 2015, Danang, Vietnam A THEORETICAL MODEL STUDYING THE IMPACT OF INTERNAL CONTROL ON PERFORMANCE AND RISKS OF VIETNAM COMMERCIAL BANKS Nguyen Tuan a , Duong Nguyen Hung b a Accounting & Finance Faculty, Nha Trang University, Nha Trang city, Khanh Hoa province, Vietnam, nguyentuandhts@yahoo.com b Accounting Faculty, University of Economics, The University of Danang, Da Nang city, Vietnam, toolympia@yahoo.com ABSTRACT The purpose of this study is to provide a theoretical model examining impact of Internal Control (IC) on control objectives, including performance effectiveness and risk management of Vietnam commercial banks. The study uses the agency theory and contingency theory approach, with literature review of empirical researches in IC. In term of result, the authors collect together some definitions of IC; using the framework of COSO, Basel and related Vietnam regulations for commercial banks, research builds a theoretical model on the impact of IC to the Vietnam commercial banks’ performance effectiveness and risks. This result helps find the theoretical relationship between IC and performance effectiveness, as well as between IC and commercial banks’ risks. Simultaneously, the authors determine the research problems and hypotheses based on the above model. Keywords: Internal control; performance; risk management; commercial banks Introduction All enterprises aim to perform effectively, manage the business risks, comply with laws and regulations, and prepare reliable financial statements. However, during the operations, they expose to the potential risk of not achieving these objectives due to weaknesses of managers, staff or a third person that cause risks and reduce their performance. Building IC is one of the solutions to evaluate and manage risks, improve performance effectiveness and achieve business objectives. In recent years, the commercial bank system in Vietnam has considerably developed in term of asset size, branch-office system, products and services, and the information technology system. However, besides growth in size and profit, the bank system is facing many limits, weaknesses and has potential risks. While the banking system tends to expand in size, its performance is unstable, and lots of risks arise and need to be resolved like bad debt, potential bankruptcy of banks. One of the urging strategic solutions is to establish and upgrade IC of commercial banks (Podpiera, R., 2006). IC becomes an important self-defense system against risks, which enhances effectiveness of banks’ performance. In reality, IC activities at Vietnam commercial banks has been recently mentioned in term of theory and application, however, during implementation confusion arises due to the lack of theoretical knowledge and practical experience. Therefore, IC is underestimated by most of commercial banks, and is perceived and applied differently. Besides, the State Bank has proposed the Circular no. 44/2011/TT-NHNN on 29/12/2011 about the IC of financial institutions and foreign banks. This is the rising sign of the regularization