The Impact of Internal Controls and Penalties on Fraud

2010 ◽  
Vol 24 (1) ◽  
pp. 1-21 ◽  
Author(s):  
Roberta Ann Barra
Keyword(s):  
Internal Control ◽  
Internal Controls ◽  
Reliability Engineering ◽  
Ceteris Paribus ◽  
Sarbanes Oxley ◽  
Internal Control System ◽  
Analytical Reliability ◽  
Net Assets ◽  
Managerial Employees ◽  
The Impact

ABSTRACT: Little prior research exists on the parameters of internal control activities. The Sarbanes-Oxley Act of 2002 (SOX 2002) makes identifying the properties of these parameters under various conditions important. In this paper, an analytical/reliability engineering methodology is used to investigate the relative impact of penalties versus other types of internal controls on managerial and non-managerial employees’ propensity to commit fraud. Ceteris paribus, increasing required effort with internal controls and/or increasing employee penalties, increases the minimum amount stolen when a fraud incident occurs; that is, more net assets will be taken per fraud incident with controls than without controls. The findings show that the firm’s least-cost scenario with managerial employees is to enforce maximum penalties. The firm’s least-cost scenario with non-managerial employees is to utilize alternative internal controls while imposing minimum penalties. Further, the effectiveness of separation of duties is dependent on the detective controls in the internal control system.

The Impact of Information Technology Internal Controls on Firm Performance

2012 ◽  
Vol 24 (2) ◽  
pp. 39-49 ◽  
Author(s):  
Lemuria D. Carter ◽  
Brandis Phillips ◽  
Porche Millington
Keyword(s):  
Information Technology ◽  
Firm Performance ◽  
Internal Control ◽  
Ordinary Least Squares ◽  
Internal Controls ◽  
Publicly Traded ◽  
Sarbanes Oxley ◽  
Internal Control Weaknesses ◽  
Performance Results ◽  
The Impact

Since the introduction of the Sarbanes-Oxley (SOX) Act in 2002, companies have begun to place more emphasis on information technology (IT) internal controls. IT internal controls are policies that provide assurance that technical systems operate as intended, provide reliable data, and comply with regulations. Research suggests that firms with strong internal controls perform better than those with internal control weaknesses. In this study, the authors evaluate the impact of IT internal controls on firm performance. The sample includes 72 publicly traded firms, 36 that reported IT internal control weaknesses and 36 that did not. The results of ordinary least squares (OLS) regression indicate that substantive IT internal control weaknesses negatively impact firm performance. Results and implications for research and practice are discussed.

The Impact of Enterprise Resource Planning (ERP) Systems on the Effectiveness of Internal Controls over Financial Reporting

2011 ◽  
Vol 25 (1) ◽  
pp. 129-157 ◽  
Author(s):  
John J. Morris
Keyword(s):  
Financial Reporting ◽  
Enterprise Resource Planning ◽  
Internal Control ◽  
Control Sample ◽  
Resource Planning ◽  
Internal Controls ◽  
Erp Systems ◽  
Individual Account ◽  
Sarbanes Oxley ◽  
The Impact

ABSTRACT: Software vendors that market enterprise resource planning (ERP) systems have taken advantage of the increased focus on internal controls that grew out of the Sarbanes-Oxley (SOX) legislation by emphasizing that a key feature of ERP systems is the use of “built-in” controls that mirror a firm’s infrastructure. They argue that these built-in controls and other features will help firms improve their internal control over financial reporting as required by SOX. This study tests that assertion by examining SOX Section 404 compliance data for a sample of firms that implemented ERP systems between 1994 and 2003. The results suggest that ERP-implementing firms are less likely to report internal control weaknesses (ICW) than a matched control sample of non-ERP-implementing firms. It also finds that this difference exists for both general (entity-wide), and individual (account-level) controls.

Sarbanes-Oxley Compliance, Internal Control, and ERP Systems

2011 ◽  
pp. 208-226
Author(s):  
Pall Rikhardsson ◽  
Peter Best ◽  
Claus Juhl-Christensen
Keyword(s):  
Enterprise Resource Planning ◽  
Internal Control ◽  
Academic Research ◽  
Resource Planning ◽  
Internal Controls ◽  
Erp Systems ◽  
Erp System ◽  
Sarbanes Oxley ◽  
Internal Control System ◽  
The World

The effort to comply with the Sarbanes-Oxley Act (SOX) has focused management attention in companies all over the world on the importance of assessing, developing, and maintaining an effective and efficient internal control system. Enterprise resource planning (ERP) systems are a crucial factor in developing such a system. Despite the attention this has attracted in practice, little academic research has focused on this area. This chapter addresses the question: How are ERP systems implicated in Sarbanes-Oxley compliance? It aims to show how SOX requirements regarding assessment and improvement of internal controls are related to the functionalities of an ERP system both in local and global implementations. It examines a solution (mySAP ERP) offered by one specific vendor (SAP) and what functionalities are relevant to global SOX compliance. Based on this, the chapter discusses likely developments regarding compliance functionalities in future releases of ERP systems.

scholarly journals The Impact of Internal Control through Computerized Accounting System among Small and Medium Enterprises in Oman

2021 ◽  
Vol 2 (3) ◽  
pp. 65-74
Author(s):  
Asila Alzakwani ◽  
◽  
Maria Matriano ◽  
Keyword(s):  
Control System ◽  
Control Systems ◽  
Internal Control ◽  
Small And Medium Enterprises ◽  
Internal Controls ◽  
Control Measures ◽  
Accounting System ◽  
Internal Control System ◽  
The Government ◽  
The Impact

Purpose: The aims of the study were to identify and evaluate the internal controls used in a computerized accounting system of the SMEs, to identify and evaluate the merits and demerits of the internal controls used in the companies, and to identify the challenges in the implementation of internal control systems in the computerized accounting system of the SMEs. Design/methodology/approach: The population of the study was the employees of the SME’s registered with Ministry of Commerce and Industry (MOCI) in Muscat, Oman. Samples were selected from this population on a random sampling basis. One-member employee from the SMEs representing the enterprise filled the questionnaire. The survey was conducted through a questionnaire using a Google form. 220 samples were collected from the population. The data collected was analyzed using data processing methods and Microsoft excel. Findings: The study found that SMEs were using computers to perform their daily transactions and the accounting software used by SMEs were cheap, of low quality and not proficient enough. One of the components of internal control system, i.e. monitoring was implemented by most of the SMEs and they also stated that they rarely hired an external auditor for auditing because of the expensive auditing fees. It was also stated that the security mechanisms were not properly implemented in the SMEs because of the expensive cost. Research limitations/implications: The study suggested that the Government should emphasize the SMEs to implement a good internal control system. This can reduce the errors and also increase the efficiency of operations. SOX in Omani context should be strictly implemented making it statutory and mandatory for all the SMEs in Oman and such statutory laws will help the auditors to abide by the rules and regulations to be followed. Social Implications : Government should support SMEs through providing education on the importance of internal control systems as most of the employees of SMEs are poorly educated/illiterates. The Government should set a price ceiling to the external auditors on the auditing fees exclusively for SMEs so that they can afford. Originality / Value: No study was carried before in relates to the impact of the internal control system through the computerized accounting system among the SMEs in Muscat, Oman. This study will through light on the statutory laws required for the sake of internal control measures required for the SMEs.

Real Earnings Management before and after Reporting SOX 404 Material Weaknesses

2015 ◽  
Vol 30 (1) ◽  
pp. 119-141 ◽  
Author(s):  
Tuukka Järvinen ◽  
Emma-Riikka Myllymäki
Keyword(s):  
Earnings Management ◽  
Internal Control ◽  
Internal Controls ◽  
Real Earnings Management ◽  
Public Disclosure ◽  
High Quality ◽  
The Public ◽  
Material Weaknesses ◽  
Internal Control System ◽  
Before And After

SYNOPSIS The purpose of this study is to investigate whether SOX Section 404 material weaknesses manifest in real earnings management behavior. The empirical findings indicate that, compared to companies with effective internal controls, companies with existing material weaknesses in their internal controls engage in more manipulation of real activities (particularly inventory overproduction). This implies that the weak commitment by management to provide effective internal control system and high-quality financial information relates to a tendency to use real earnings management methods. Moreover, we find evidence suggesting that companies employ real earnings management (overproduction and reduction of discretionary expenses) after disclosing previous year's material weaknesses. We conjecture that the public disclosure of material weaknesses induces management to strive to mitigate the expected negative reactions of stakeholders to the disclosure by engaging in real earnings management, which is not easily detected or constrained by outsiders. Overall, this study suggests that material weaknesses in internal controls signal an environment where management is more inclined to employ real earnings management.

The Impact of Client and Misstatement Characteristics on the Disposition of Proposed Audit Adjustments

2011 ◽  
Vol 30 (2) ◽  
pp. 103-124 ◽  
Author(s):  
Jennifer Joe ◽  
Arnold Wright, and ◽  
Sally Wright
Keyword(s):  
Financial Reporting ◽  
Internal Controls ◽  
Data Availability ◽  
Audit Firm ◽  
Sarbanes Oxley ◽  
Big 4 ◽  
Time Period ◽  
Confidentiality Agreement ◽  
Financial Scandals ◽  
The Impact

SUMMARY We present evidence on the resolution of proposed audit adjustments during a unique time period, immediately following several U.S. financial scandals and surrounding calls for reforms in auditing and financial reporting, which culminated in the passage of the Sarbanes-Oxley Act (SOX). During this period, auditors and their clients faced increased scrutiny from investors and regulators. In addition, auditors had to contend with changed incentives, a new external regulator (i.e., the PCAOB), and upcoming annual PCAOB inspections. We extend prior studies by considering a broader range of factors potentially impacting the resolution of proposed adjustments, including the effect of client tenure, strength of internal controls, and repeat adjustments. Data on 458 proposed adjustments are obtained from the working papers of a sample of 163 audit engagements conducted during 2002 by a Big 4 firm. We find that 24.2 percent of proposed adjustments were subsequently waived. The results indicate audit adjustments are more likely to be waived for clients with whom the audit firm has had a longer relationship, although the pattern does not reflect favoring such clients. We also find that adjustments are more likely to be waived for repeat adjustments. Data Availability: Due to a confidentiality agreement with the participating audit firm the data are proprietary.

scholarly journals ANALISIS SISTEM PENGENDALIAN INTERNAL ATAS PEMBIAYAAN MURABAHAH PADA BRI SYARIAH KC MANADO

2018 ◽  
Vol 13 (04) ◽  
Author(s):  
Ummu Almaas Khoirunnisaa ◽  
Hendrik Manossoh ◽  
Dhullo Afandi
Keyword(s):  
Control System ◽  
Internal Control ◽  
Descriptive Analysis ◽  
Internal Controls ◽  
Selling Price ◽  
Internal Control System ◽  
The Cost ◽  
Document Review ◽  
Rules Set ◽  
Collection Methods

            Murabaha is a sale and purchase agreement with the selling price of goods at cost plus an agreed profit which the seller must disclose the cost of the goods to the buyer. The purpose of this research is to analyze the internal control system applied to BRI Syariah KC Manado whether it has been effective and in accordance with the principles of COSO (Committee Of Sponsoring Organizations). Data analysis method of this research is using descriptive analysis that compares the results of observations, interviews, document analysis established by the company with existing theory. Data collection methods in this study are interviews, observation, and document review. The results shows that internal controls applied for murabahah financing at BRI Syariah KC Manado include rules set by management, organizational structure, forms and documents used in murabahah financing, recording of legitimate financing transactions, and monitoring of financing. Internal control of murabahah financing at BRI Suyariah KC Manado has been running quite well. But in application still found weaknesses that can hinder the implementation of internal controls in the company. Still found employees who do double job. This is not in accordance with the principle of COSO, where Commitment in the Competence of employees should be improved and more qualified in various areas of specialization. BRI Syariah KC Manado in applying internal controls can be affirmed and in accordance with the principles of COSO.Keywords: COSO, murabahah financing, internal control system.

scholarly journals The role and tasks of the internal audit and audit committee as bodies supporting effective corporate governance in insurance sector institutions in Poland

2012 ◽  
Vol 3 (4) ◽  
pp. 23-39 ◽  
Author(s):  
Elżbieta Izabela Szczepankiewicz
Keyword(s):  
Control Systems ◽  
Internal Control ◽  
Audit Committee ◽  
Economic Recession ◽  
Internal Audit ◽  
Financial Supervision ◽  
Insurance Sector ◽  
Internal Control System ◽  
The Impact ◽  
Effective Supervision

Faced with the risk of consecutive waves of financial crisis and economic recession, government committees, financial supervision authorities and financial institutions themselves – both in Poland and worldwide – have launched a number of measures to make the supervision of insurance sector institutions more effective, particularly in aspects related to efficient risk management and internal control. The article describes the impact of the amendment of laws and other regulations on the development of the present internal control systems in insurance sector institutions. It draws attention to the need for a new structure of the internal control system, and the role and purpose of the internal audit and the audit committee as the bodies supporting effective supervision in insurance undertakings and reinsurance undertakings.

The Impact of Management Alumni Affiliation and Persuasion Tactics on Auditors' Internal Control Judgments

2017 ◽  
Vol 93 (2) ◽  
pp. 97-115 ◽  
Author(s):  
Sudip Bhattacharjee ◽  
J. Owen Brown
Keyword(s):  
Internal Control ◽  
Social Identity Theory ◽  
Audit Quality ◽  
Revolving Door ◽  
Auditor Judgment ◽  
Professional Skepticism ◽  
Sarbanes Oxley ◽  
External Auditor ◽  
One Year ◽  
The Impact

ABSTRACT Concerns over “revolving door” practices of companies hiring directly from their external auditor led to a Sarbanes-Oxley Act provision mandating a one-year cooling-off period before such hires can occur. Yet little is known as to whether these alumni affiliations, still prevalent today, actually impair audit quality. Drawing on Social Identity Theory, we conduct an experiment to examine whether auditors experience heightened identification with an alumni-affiliated client manager and, if so, how this perceived relationship affects their professional skepticism in response to a management persuasion attempt. As predicted, absent the use of a management persuasion tactic, auditors identify more with an alumni-affiliated manager than a non-alumnus with equal professional experience, and this perceived social bond enhances the manager's influence. However, the use of a common persuasion tactic, while effective at influencing auditor judgment when used by an unaffiliated manager, “backfires” when used by an alumni-affiliated manager, leading to diminished persuasion and increased professional skepticism. Evidence suggests that auditors are better able to identify the inappropriateness of the persuasion attempt when the tactic is used by an alumni-affiliated manager.

The Impact of Sarbanes–Oxley and Dodd–Frank Legislation on Loan Loss Provisioning in US Banks

2020 ◽  
Vol 23 (04) ◽  
pp. 2050028
Author(s):  
Gregory McKee ◽  
Albert Kagan
Keyword(s):  
Financial Institutions ◽  
Internal Control ◽  
Firm Growth ◽  
Loan Loss ◽  
Wall Street ◽  
Nonperforming Loans ◽  
Sarbanes Oxley ◽  
Risk Management Process ◽  
Loan Risk ◽  
The Impact

The Sarbanes–Oxley Act (SOX) of 2002 and the 2010 Dodd–Frank Wall Street Reform and Consumer Protection Act (DFA) were passed to address weaknesses in the internal control environment of the firm. Elements of these Acts reduce risky behavior of financial institutions by reducing informational asymmetry with borrowers. An important element of managing earnings quality in financial institutions is the loss provision, an annual expense set aside for uncollected loan and lease payments. These Acts affect the selection of loss provision expense levels in distinct ways. Using a dataset of community bank financial information observed between 1998 and 2017, it is shown that banks experience a complementary effect between SOX and DFA on loss provision expenses. Improved governance procedures to establish policy responses to nonperforming loans result in reduced expenses, whereas reduced information asymmetry tends to enhance a moral hazard effect. These results show that incentives for firm growth, income, capital, and loan specialization under the SOX and DFA regulatory environments complicate the loan risk management process.

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