Major determinants of corporate fraud : a Maltese internal audit perspective

Abstract

Purpose: The aim of this research is to ascertain the meaning of corporate fraud and analyse it with respect to the following six major determinants: pressure, opportunity, rationalisation, capability, greed and lack of personal integrity. Another objective is to analyse the roles and responsibilities of Maltese Internal Auditors with regard to such fraud and to assess the major issues encountered in exerting these duties, and to evaluate the company’s measures relating to the prevention, detection, reporting and investigation of corporate fraud. Design: To reach the stated objectives, this research study adopted a mixed methods approach to gather data. Sixteen semi-structed interviews were carried out with eleven internal auditors from the private sector and five from the public sector. Findings: The findings stipulate that for some Maltese internal auditors, corporate fraud consists of both internal and external fraud, whilst for others it refers to only internal fraud. Few solely considered either employee or management fraud. Furthermore, most participants agreed that all mentioned determinants lead to fraud. Also, although the primary responsibility to prevent and detect fraud rests with executives, internal auditors are still indirectly responsible to conduct fraud prevention and detection activities, with the majority focusing more on the prevention side. Additionally, limited resources and increased risks tend to be the most major challenges faced by internal auditors, whilst most participants’ views were conflicting as to whether independence is an issue between Maltese internal auditors. Moreover, most of the interviewed companies implement prevention and detection measures to combat fraud, and have an internal reporting mechanism, with some being anonymous. Lastly, an internal auditor in the private sector is not always immediately notified of potential fraud as opposed to one working in the public sector, and management in the private sector is generally aware of the presumed fraud, whereas those within the public sector are not involved, not to compromise evidence. Conclusions: The study concludes that companies and internal auditors should understand why fraud happens to be able to prevent and detect it efficiently and effectively. Although this helps in minimising fraud, it will not guarantee that fraud will not occur. Value: Maltese internal auditors and companies should adopt the recommendations available in the study to add value to the Internal Audit Function and to the company’s measures in the fight against corporate fraud.