A study of internal controls in fraud detection and prevention

Abstract

Purpose: This study aims to identify perceived fraud drivers and their impact on internal control systems through literature review. The second objective is to validate the identified factors by evaluating the perceptions of individuals not involved in internal control system development. This study will examine how various demographics impact perceptions and identify the most significant factor. Design: The study employed a mixed-method methodology to attain the stated research goals. The study collected 270 valid responses from individuals working in companies of different sizes, hierarchical positions, and industries through surveys. The research utilized EFA as a methodology to detect underlying variables or constructs, regression analysis to examine the influence of demographics on these variables, and the Friedman test to determine the variable with the highest rank. Findings: The EFA yielded three latent factors based on the collected responses. The fraud driver model comprises of efficient internal control systems, business risk, and rapid development, all of which were found to be statistically significant. Furthermore, the study revealed that the fraud driver model maintains consistency irrespective of demographic factors. The internal control systems' effectiveness was found to be the most significant variable in the model, as it received the highest ranking. Conclusion: Fraudulent activity tends to occur in three primary scenarios: a lack of internal controls, which creates an opportunity for fraudsters to act; business risks, which motivate individuals to commit fraud in order to protect the business; and rapid development, which can prompt fraudsters to act quickly in order to keep up with the changing environment, which can be referred to as rationalisation by such individuals. Value: Through a comprehensive understanding of the various perceived factors that comprise the fraud driver model and their respective impacts on the internal control function of an organization, senior management can focus their attention and efforts on monitoring these factors to enhance fraud prevention and detection.