INTERNAL CONTROL AND FRAUD PREVENTION: PRIOR RESEARCH ANALYSIS

The focus of this study is to analyze prior research on fraud detection and prevention. Most researchers agree that strong internal controls are an influencing factor on fair financial reporting and fraud prevention and detection. Financial statement and employee fraud can be very expensive to businesses and the economy as a whole. The establishment and evaluation of the internal control methods and procedures can decrease fraudulent events and losses. Accounting professionals, CPA’s, and tax preparers are the first to detect “red flags” in business activities and must work together with boards of directors, CFO’s, and small business owners. Simple methods, such as ratio analyses can help to signal early signs of fraudulent events and prevent future damages. Implementation of fraud prevention measures are the most efficient deterrent. Some of the most effective controls like, job rotation, mandatory vacations, training, fraud hotlines, and surprise audits, need not be expensive and should be employed by all businesses. Unfortunately, the most important and effective fraud prevention techniques are seldom applied by businesses. Surprisingly, the least effective and most expensive measures, like external audits, are more frequently employed. As reported in this review of the literature, most businesses focus on fraud detection, while fraud prevention and implementing proper internal controls would result in better prevention of financial losses.

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Fraud Specialists On Independent Audits

Journal of Business & Economics Research (JBER) ◽

10.19030/jber.v4i7.2686 ◽

2011 ◽

Vol 4 (7) ◽

Author(s):

James A. Tackett ◽

Fran M. Wolf ◽

Gregory A. Claypool

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Fraud Detection ◽

Internal Controls ◽

Font Size ◽

Fraudulent Financial Reporting ◽

Background Checks ◽

Sarbanes Oxley ◽

Independent Auditors ◽

Accounting Software

The recent audit failures involving Enron, WorldCom, et al., have left the accounting profession and governmental regulators scrambling to find better methods of detecting and preventing fraudulent financial reporting. Congress passed the Sarbanes-Oxley Act of 2002 (SOX) which requires companies to report on the operating effectiveness of their internal controls over financial reporting.  Additionally, the independent auditor is required to assess and report on the effectiveness of their client’s internal controls, and they must attest to management’s internal control assessment.  Notably absent from SOX is a requirement that independent auditors must employ fraud specialists in their independent audits of SEC filers. This study examines the benefits and costs associated with requiring the use of fraud specialists on independent audits of SEC filers.  Fraud specialists have expertise better attuned to fraud detection not ordinarily possessed by regular auditors.  First, the narrow but deep perspective of the fraud specialist enables them to find fraudulent activity that would be missed by regular auditors.  Second, unlike regular auditors, fraud specialists employ methodologies that are effective in the presence of management collusion.  They are more highly skilled at interviewing potential witnesses and fraud suspects and are trained in recognizing deception.  Third, fraud specialists are better trained in the use of antifraud technology, methods, and computerized forensic accounting software.  Fourth, fraud specialists have superior investigative skills and can conduct covert examinations, access restricted databases, conduct background checks, and locate hidden assets better than regular auditors.  Finally, they understand the legalities of gathering evidence of fraud and can operate without violating the rights of potential witnesses and fraud suspects. Qualitative analysis demonstrates that utilizing fraud specialists on independent audits has positive net benefits to financial reporting.  Recommendations are made regarding the types of fraud detection/deterrence skills and techniques that would be beneficial to independent auditors.

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The Severity of Internal Controls over Financial Reporting Deficiencies: Differences among Types and Industries

FINANCIAL REPORTING ◽

10.3280/fr2014-001003 ◽

2014 ◽

pp. 55-77

Author(s):

Tatiana Mazza ◽

Stefano Azzali

Keyword(s):

Information Technology ◽

Financial Reporting ◽

Internal Control ◽

Service Industry ◽

Listed Companies ◽

Internal Controls ◽

Service Companies ◽

Finance Industry ◽

Material Weaknesses ◽

Fixed Assets

This study analyzes the severity of Internal Control over Financial Reporting deficiencies (Deficiencies, Significant Deficiencies and Material Weaknesses) in a sample of Italian listed companies, in the period 2007- 2012. Using proprietary data the severity of the deficiencies is tested for account-specific, entity level and information technology controls and for industries (manufacturing and services vs finance industries). The results on ICD severity is compared with one of the most frequent ICD (Acc_Period End/Accounting Policies): for account-specific, ICD in revenues, purchase, fixed assets and intangible, loans and insurance are more severe while ICD in Inventory are less severe. Differences in ICD severity have been found in the characteristic account: ICD in loan and insurance for finance industry and ICD in revenue, purchase for manufacturing and service industry are more severe. Finally, we found that ICD in entity level and information technology controls are less severe than account specific ICD in all industries. However, the results on entity level and information technology deficiencies could also mean that the importance of these types of control are under-evaluated by the manufacturing and service companies.

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PENGARUH KOMPETENSI APARATUR DESA, KETAATAN PELAPORAN KEUANGAN DAN SISTEM PENGENDALIAN INTERN TERHADAP PENCEGAHAN FRAUD DENGAN MORAL SENSITIVITY SEBAGAI VARIABEL MODERASI

Jurnal Akuntansi, Audit, dan Aset ◽

10.52062/jurnal_aaa.v1i2.9 ◽

2018 ◽

Vol 1 (2) ◽

pp. 63-89

Author(s):

Klara Wonar ◽

Syaikhul Falah ◽

Bill J. C. Pangayow

Keyword(s):

Control Systems ◽

Financial Reporting ◽

Internal Control ◽

Financial Management ◽

Quantitative Research ◽

Primary Data ◽

Survey Method ◽

Moral Sensitivity ◽

Fraud Prevention ◽

Study Results

This study aims to examine the effect of fraud prevention on village / village financial management as the dependent variable and the competency of village apparatuses, compliance of government financial reporting, internal control systems as independent variables while moral sensitivity as amoderating variable. This research is a quantitative research or hypothetic - deductive method that aims to answer such questions that are related to exploratory, descriptive, explanatory and predictive studies. Primary data is mainly used in this research. Data collection is conducted using a survey method in the form of a questionnaire that lists the statements, which were given to the respondents to be filled in order to get information, and then the data analyzing was conducted using the Warp-PLS 5.0 Application software. The study results show that the competence of village officials influences fraud prevention, financial reporting adherence affects fraud prevention, and meanwhile the internal control system does not affect fraud prevention. Furthermore, moral sensitivity does not moderate the competence of village officials, adherence to financial reporting and internal control systems.

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Do Negative Corporate Social Responsibility Events Signal Financial Misreporting? — Empirical Finding from Taiwan

Review of Pacific Basin Financial Markets and Policies ◽

10.1142/s0219091521500041 ◽

2021 ◽

Vol 24 (01) ◽

pp. 2150004

Author(s):

Ching-Lung Chen ◽

Hann-Pyng Wang ◽

Hung-Shu Fan ◽

Shiu-Chieh Chiu

Keyword(s):

Corporate Social Responsibility ◽

Social Responsibility ◽

Cash Flow ◽

Financial Reporting ◽

Internal Control ◽

Empirical Finding ◽

Internal Controls ◽

Control Rights ◽

Cash Flow Rights ◽

Corporate Social

This study examines whether negative corporate social responsibility events (NCSRs) signal potential firm misreporting and pending financial reporting restatements. Without formal opinions on the effectiveness of internal controls over financial reporting in Taiwan, we hypothesize NCSRs can represent and/or signal a firm’s internal control weakness, which may in turn result in poor financial reporting. Note that the concern with controlling owners expropriating wealth through ineffective internal controls is given important weight by investors and regulators. We further examine whether the signaling function of NCSRs is more pronounced in contexts with a serious agency problem, such as is found in the high divergence of control and cash flow rights case (denoted as high excess control rights) in Taiwan. Empirical results indicate that, as conjectured, incidence of NCSRs is positively associated with the likelihood of reporting restatements. Further evidence reveals that this result is particularly pronounced in the high divergence of control and cash-flow rights subsample test. We demonstrate several diagnostic tests and show the results are robust in various specifications.

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Causality and multidimensionality of internal controls: Impact on organizations

Corporate Ownership and Control ◽

10.22495/cocv8i2c5p2 ◽

2011 ◽

Vol 8 (2-5) ◽

pp. 502-515

Author(s):

Joshua Onome Imoniana ◽

Verônica Moreira Costa ◽

Mariana Araujo ◽

Luiza Helena Pereira Alberto ◽

Patrícia P. Alves

Keyword(s):

New York ◽

Financial Reporting ◽

Internal Control ◽

Response Rate ◽

Research Question ◽

Internal Controls ◽

Causal Effects ◽

Chief Financial Officer ◽

Final Response ◽

Final Response Rate

This study analyzes the managers’ (Chief Financial Officer (CFO)) perception of impact of implementation of internal controls. It investigates the causes of adoption in the multidimensionality of internal control of the Brazilian companies traded in the New York Stock market. A survey sent to the CFOs of the 70 companies listed in the NYSE collected empirical data from these companies. The final response rate was 15.16 %. The study uses partial least squares modeling for statistical analysis to test the research question. Our empirical evidence supports the hypotheses that “the greater the level of multidimensionality of controls in an organization the lower the level of causal effects and damage to the control environment. Based on work performed, one is able to infer that overall, there is a significant relationship between causal effects on operating activities, financial reporting and compliance in relation to the multidimensionality of internal controls, thus, when there are uncommon features, depending on the level of multidimensionality special attention should be paid to the causes of adoption of controls to track risks posed to business.

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Integration of Internal Control and Financial Statement Audits: Are Two Audits Better than One?

The Accounting Review ◽

10.2308/accr-52197 ◽

2018 ◽

Vol 94 (2) ◽

pp. 53-81 ◽

Cited By ~ 10

Author(s):

Lori Shefchik Bhaskar ◽

Joseph H. Schroeder ◽

Marcy L. Shepardson

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Audit Quality ◽

Internal Controls ◽

Data Availability ◽

Financial Statement ◽

Auditor Judgment ◽

Public Company ◽

Better Than

ABSTRACT The quality of financial statement (FS) audits integrated with audits of internal controls over financial reporting (ICFR) depends upon the quality of ICFR information used in, and its integration into, FS audits. Recent research and PCAOB inspections find auditors underreport existing ICFR weaknesses and perform insufficient testing to address identified risks, suggesting integrated audits—in which substantial ICFR testing is required—may result in lower FS audit quality than FS-only audits. We compare a 2007–2013 sample of small U.S. public company firm-years receiving integrated audits (accelerated filers) to firm-years receiving FS-only audits (non-accelerated filers) and find integrated audits are associated with higher likelihood of material misstatements and discretionary accruals, consistent with lower FS audit quality. We also find evidence of (1) auditor judgment-based integration issues, and (2) low-quality ICFR audits harming FS audit quality. Overall, results suggest an important potential consequence of integrated audits is lower FS audit quality. Data Availability: Data are publicly available from the sources identified in the text.

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How Effective are Organizations' Internal Controls? Insights into Specific Internal Control Elements

Current Issues in Auditing ◽

10.2308/ciia-50146 ◽

2012 ◽

Vol 6 (1) ◽

pp. A31-A50 ◽

Cited By ~ 22

Author(s):

Dana R. Hermanson ◽

Jason L. Smith ◽

Nathaniel M. Stephens

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Financial Services ◽

Audit Committee ◽

Internal Audit ◽

Internal Controls ◽

Component Level ◽

Public Companies ◽

Tone At The Top ◽

Survey Responses

SUMMARY Based on survey responses from approximately 500 Chief Audit Executives (CAEs) and other internal auditors, this article provides an insider's view of the perceived strength of organizations' internal controls (i.e., internal control over financial reporting) in the Control Environment, Risk Assessment, and Monitoring components of the Committee of Sponsoring Organizations' (COSO 1992a) Internal Control—Integrated Framework. Although the respondents largely rate control strength as relatively high, we identify several areas for potential improvement of internal controls, especially related to assessing the “tone at the top,” as well as following up on deviations from policy and management override of controls. In analyzing individual control elements, we find that public companies' controls are consistently rated as more effective than those of other organizations. We also find a number of interesting differences across key industries, especially in the Monitoring component, where banks and other financial services firms appear to have more robust Monitoring controls than do healthcare and other services firms. The component-level analysis reveals that internal control component strength is positively related to the CAE reporting primarily to the audit committee, public company status, and the average tenure of the internal audit function staff, among other findings. Based on the survey findings, we describe key implications relevant to internal and external auditors, accounting researchers and educators, and management.

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Does Control Self-Assessment Influence Financial Reporting Quality?

Regular issue - International Journal of Management and Humanities ◽

10.35940/ijmh.d1199.125420 ◽

2020 ◽

Vol 5 (4) ◽

pp. 70-76

Author(s):

Hiroshi Uemura

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Negative Relationship ◽

Reporting Quality ◽

Audit Fees ◽

Internal Controls ◽

Financial Reporting Quality ◽

Control Environment ◽

Self Assessment ◽

Positive Effects

The aim of this study is to examine the effect of control self-assessment (CSA) on financial reporting quality by using CSA as a proxy of monitoring quality. CSA has an important feature that allows the employees themselves to become involved in the assessment of internal controls’ effectiveness. Moreover, CSA has two important monitoring functions. First, it can add value to internal auditing. Second, because all employees of operational units participate in the assessment of internal controls in CSA, that control environment is expected to be mature. The investigation of this study used data from 3,517 Japanese firms listed on the First Section, Second Section, Mothers, and JASDAQ of the Tokyo Stock Exchange. The result of 2SLS regression shows that CSA adoption has a negative relationship with the number of financial restatements and audit fees, and therefore, I conclude that CSA has positive consequences for financial reporting quality. This result indicates that the internal monitoring mechanism that continuously monitors internal control over financial reporting (ICFR) effectiveness and in which all employees participate has some positive effects on financial reporting quality. There are two reasons for this result. First, employees have easier access to negative information concerning ICFR effectiveness than outsiders and can share that information with the internal personnel in charge of monitoring (e.g., internal auditors). Moreover, CSA is expected raise an entity’s awareness of ICFR, that is, the control environment of ICFR components is made into an environment that prevents and detects impropriety in the accounting process. Keywords: Control

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Effective Internal Controls for Not-For Profit Entities

International Journal of Business and Applied Social Science ◽

10.33642/ijbass.v6n2p4 ◽

2020 ◽

pp. 47-58

Author(s):

Achraf Seyam, CPA ◽

Barry Copper, CPA

Keyword(s):

Financial Reporting ◽

Internal Control ◽

Continuous Monitoring ◽

Internal Controls ◽

Professional Services ◽

Non Profit ◽

The Public ◽

For Profit ◽

Not For Profit ◽

Non Profit Organizations

The importance of internal control is clear. Effective internal control makes sure non-profit organizations to carried out their mission and objectives, such as proper use of funds and provide professional services to the public without any risk of fraud and mismanagement or breach of ethics. Through continuous monitoring of non-profit’s performance and activities, internal controls dispose of the behaviors of non-profit organizations with their objectives. Internal controls also engaged in good management and make sure to provide appropriate financial reporting by providing accurate and complete reports to the management in a timely manner and make sure the sources are correctly allocated. Internal control is also the tool to safeguard assets that make sure the organizations physical and intangible assets are protected from fraud, misused, and error. Internal control is not only able to deter and detect fraud and error but also is able to reduce the chance to risks.

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Material Weaknesses in Tax-Related Internal Controls and Last Chance Earnings Management

Journal of the American Taxation Association ◽

10.2308/atax-51511 ◽

2017 ◽

Vol 39 (1) ◽

pp. 25-44 ◽

Cited By ~ 14

Author(s):

Cristi A. Gleason ◽

Morton Pincus ◽

Sonja Olhoft Rego

Keyword(s):

Earnings Management ◽

Financial Reporting ◽

Internal Control ◽

Internal Controls ◽

Early Years ◽

Control Material ◽

Material Weaknesses ◽

Implementation Period ◽

Tax Expense

ABSTRACT We investigate the consequences of tax-related internal control material weaknesses (ICMWs) for financial reporting. We hypothesize that the presence of ineffective controls over the tax function makes earnings management through the income tax accrual (both income increasing and income decreasing) easier to implement relative to firms with effective controls. We also predict that the remediation of tax-related ICMWs has the effect of constraining earnings management through the tax accrual. The results provide support for our predictions. We also find that last chance earnings management via tax-related ICMWs is concentrated in the early years of our sample, during the initial SOX implementation period. Our results suggest that tax-related ICMWs were initially associated with greater tax-expense management but that SOX internal control assessments subsequently improved the quality of financial reporting by reducing opportunities for tax-expense management.

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