Internal Auditors' Responses to Fraud Risks

Document Type : Research Paper

Authors

1 Assistant Professor of Accounting, Shahid Beheshti University, Tehran, Iran.

2 Associate Professor of Accounting, Shahid Beheshti University, Tehran, Iran.

3 M.A. of Accounting, Shahid Beheshti University, Tehran, Iran.

10.22103/jak.2022.19106.3681

Abstract

Objective: Fraud is likely globally the most costly and common form of financial crime. The Fraudsters attacked large multinational businesses, small private companies, government agencies, nonprofits, and every other size or type of organization imaginable. The (ACFE) report truly is a global study of occupational fraud, and as its results make clear, no organization is immune from these crimes. According to the ACFE report, global losses are likely measured in trillions of dollars. This represents money that could have been spent creating jobs, producing goods and services, or providing public services. Instead, it went into the pockets of fraudsters. Internal auditors have a unique position in the fight against fraud to prevent and detect fraud because they are considered part of the internal controls (IC) that continuously evaluates and monitors the IC. IC is regarded as the primary mechanism of prevention, deterrence and detection of fraud. According to The International Standards for The Professional Practice of Internal Auditing (Standards), Internal auditors must have sufficient knowledge to evaluate the risk of fraud and must exercise due professional care by considering the Probability of significant errors, fraud, or noncompliance and the internal audit activity must evaluate the potential for the occurrence of fraud and how the organization manages fraud risk. The standards require the internal audit activity to evaluate the potential for fraud and how the organization manages fraud risk. Internal auditors must consider the probability of significant errors, fraud, noncompliance, and other exposures when developing the engagement objectives, and Internal auditors must exercise due professional care by considering the Adequacy and effectiveness of governance, risk management, and control processes & Probability of significant errors, fraud, or noncompliance. According to recent corporate governance reforms, Iranian companies have been required to establish an internal audit unit since last decade. The major companies listed on the Tehran Stock Exchange have established an internal audit function to fulfil the recent requirements. In recent years, the risk of fraud in Iranian organizations has increased as various frauds are disclosed in various organizations. These disclosures destroy the trust of investors and the general public. With the loss of trust, great damage is inflicted on companies and society. Therefore, the prevention of fraud is very important. Considering the importance of fighting against fraud and considering the unique role and position of internal auditors in companies in this regard and considering that recently internal audit Functions have been established in Iranian companies, so considering their reaction to the risks of fraud are not explained and also due to the lack of similar Iranian research in the past, this study examines the response of internal auditors to the risks of fraud in Iran.
Method: Participants in this study are 106 chief audit executives of companies listed on the Tehran Stock Exchange in 2021. Data were collected by survey. This research questionnaire is based on the 2015 Common Body of Knowledge (CBOK) study of the Institute of Internal Auditors Research Foundation (IIARF) with slight changes. This study studied about 20% of the statistical population using random sampling. The response of internal auditors is measured through the professional competence of the human resources of the internal audit unit, how the internal audit work is performed, and the tools and software used by the internal auditors.
Results: Analysis of the Research participants' responses and perceptions shows that Internal auditors lack sufficient competence and knowledge to evaluate and respond to the risk of fraud, they do not have enough knowledge about fraud prevention and detection techniques, mainly because they do not assess the risk of fraud, and they mostly do not use new tools to respond to the risk of fraud.
Conclusion: Generally, according to the analysis result and the chief audit executive of companies listed on the Tehran Stock Exchange opinion, internal auditors do not adequately respond to fraud risks. That is, the internal audit functions of Iranian companies lack the necessary qualifications and resources and do not have appropriate formal procedures to assess the risk of fraud in the performance of audit work. Probably, this situation could be due to the low maturity of internal audits due to the infancy of internal audits in Iranian companies due to the recent corporate governance reforms in Iran. These findings indicate that internal audit in Iran requires special attention. Further promotion of university and professional education and allocation of sufficient resources to the internal audit units of Iranian companies are the leading suggestions of this research.

Keywords

References

انجمن حسابرسان داخلی ایران کمیته فنی و استانداردها (1396). استانداردهای حرفه‌ای حسابرسان داخلی (بازنگری شده 2016). تهران، انجمن حسابرسان داخلی ایران، چاپ اول.
پورعبدالهیان، مرجان (1394). کارکردهای حسابرسی داخلی در ایران. پایان نامه دوره کارشناسی ارشد حسابداری، دانشگاه الزهرا.
چالاکی، پری و قادری، بهمن (1394). حسابداری قضایی و نقش آن در پیشگیری و کشف تقلب. مطالعات حسابداری و حسابرسی، 6(2)، 57-44.
حافظ‌نیا، محمدرضا (1387). م‍ق‍دم‍ه‌ای‌ ب‍ر روش‌ پژوهش‌ در ع‍ل‍وم‌ ان‍س‍ان‍ی. تهران، سازمان مطالعه و تدوین کتب علوم انسانی (سمت)، چاپ شانزدهم.
داداشی، ایمان؛ کردمنجیری، سجاد و برادران، مریم (1396). تأثیر ساختار حسابرسی داخلی بر احتمال تقلب در صورت‌های مالی شرکت‌های پذیرفته شده در بورس اوراق بهادار تهران. دانش حسابرسی، 70(18)، 178-159.
ردینگ، کورت اف؛ سوبل، پاول ج؛ اندرسون، یورتن ال؛ رامامورتی، سریدهار؛ سالاماسیک، مارک و ریدل، کریس (2009). حسابرسی داخلی، خدمات اطمینان‌بخشی و مشاوره، ترجمه حسین کثیری، بهمن زندیه و علی کمال زارع، تهران، انتشارات کیومرث، چاپ اول.
مسیح آبادی، ابوالقاسم و سرچمی، محمد (1396). توانایی رویکردهای فازی در کشف تقلب در گزارشگری مالی و مقایسه کارایی آنها. مجله دانش حسابداری، 8(4)، 190-161.
ملک شیرآبادی، نسرین؛ دارابی، رویا و طالب نیا، قدرت‌اله (1399). شناسایی و اعتبارسنجی عوامل مؤثر بر ارزیابی ریسک تقلب توسط حسابرسان. دانش حسابرسی، 83(21)، 33-5.
منتی، وحید (1396). همنوایی بین پایداری کسب‌وکار، راهبری و واحد حسابرسی داخلی. کنفرانس انجمن حسابرسان داخلی ایران، تهران.
منتی، وحید و بابایی، مقداد (1394)، حسابرسی داخلی و تقلب. حسابرسان داخلی، 5(1)، 60-33.
منتی، وحید و زمان، الهه (1394). برنامه های حسابرسی ضد رشوه و فساد. حسابرسان داخلی، 7(2)، 99-78.
نیکبخت، محمدرضا؛ منتی، وحید؛ رضایی، ذبیح اله و رحمانی، علی (1397). کیفیت حسابرسی داخلی در ایران: چالش‌ها و موانع. دانش حسابداری و حسابرسی مدیریت، 7(27)، 28-1.
نیکبخت، محمدرضا؛ رضایی، ذبیح اله و منتی، وحید (1396). راهبردهای ارتقای کیفیت حسابرسی داخلی. مطالعات تجربی حسابداری مالی، 55(14)، 70-31.
References
Abdolmohammadi, M., D’Onza, G., & Sarens, G. (2016). Benchmarking internal audit maturity; a high-level look at audit planning and processes worldwide. The IIA Research Foundation, The Global Internal Audit Common Body of Knowledge, www.theiia.org/goto/CBOK.
Abuazza, W.O., Mihret, D.G., James, K., & Best, P. (2015). The perceived scope of internal audit function in Libyan public enterprises. Managerial Auditing Journal, 30(6/7), 560-581.
ACFE, Report to the Nations. (2020). Global study on occupational fraud and abuse. http://acfe.com/RTTN
Ahlawat, S.S., & Lowe, D.J. (2004). An examination of internal auditor objectivity: In-house versus outsourcing. Auditing: A Journal of Practice & Theory, 23(2), 147-158.
Allegrini, M. D’Onza, G., Melville, R., Sarens, G., Selim, G. M., (2011). The IIA’s global internal audit survey: A component of the CBOK study; What’s next for internal auditing? Report IV. The Institute of Internal Auditors Research Foundation (IIARF), 247 Maitland Avenue, Altamonte Springs, Florida 32701-4201.
Araj, F. (2015). Responding to fraud risk, exploring where internal auditing stands. The IIA Research Foundation, The global internal audit common body of knowledge, www.theiia.org/goto/CBOK.
Asare, S.K., Davidson, R.A., & Gramling, A. A. (2008). Internal auditors' evaluation of fraud factors in planning an audit: The importance of audit committee quality and management incentives. International Journal of Auditing, 12, 181–203.
Bao, Y., Ke, B., Li, B., Yu, Y.J., & Zhang, J. (2020). Detecting accounting fraud in publicly traded U.S. firms using a machine learning approach. Journal of Accounting Research, 58(1), 199-235.
Beasley, M.S., Carcello, J.V., Hermanson, D.R., & Lapides, P.D. (2000). Fraudulent financial reporting: Consideration of industry traits and corporate governance mechanisms. Accounting Horizons, 14(4), 441-454.
Bik, O., & Hooghiemstra, R. (2017). The effect of national culture on auditor-in-charge involvement. Auditing: A Journal of Practice & Theory, 36(1), 1-19.
Cangemi, M. P. (2015). Staying a step ahead; internal audit’s use of technology. The IIA Research Foundation, The global internal audit common body of knowledge, www.theiia.org/goto/CBOK.
Carcello, J.V., Hermanson, D.R., & Raghunandan, K. (2005). Factors associated with U.S. public companies' investment in internal auditing. Accounting Horizons, 19(2), 69-84.
Carey, P., Craswell, A., & Simnett, R. (2000). Voluntary demand for internal and external auditing by family businesses. Auditing: A Journal of Practice & Theory, 19, 37-51.
Cates, W.M. (1985). A practical guide to educational research. Englewood Cliffs, NJ: Prentice Hall.
Chalaki, P., & Ghaderi, B. (2015). Forensic accounting and its role in prevention and detection of fraud. Journal of Accounting and Auditing, 16(2), 44-57 [In Persian].
Cohen, A., & Sayag, G. (2010). The effectiveness of internal auditing: an empirical examination of its determinants in organizations. Australian Accounting Review, 20(3), 296-307.
Committee of Sponsoring Organizations of the Treadway Commission (COSO) (2016). Fraud risk management guide-executive summary. https://www.coso.org/documents/coso-fraud-risk-management-guide-executive-summary.pdf.
Coram, P., Ferguson, C., & Moroney, R. (2008). Internal audit, alternative internal audit structures and the level of misappropriation of assets fraud. Accounting and Finance, 48(4), 543-559.
Dadashi, I., Kordmanjiri, S., & Baradaran, M. (2017), The effect of internal audit structure on the probability of fraud in the financial statements of companies listed on the Tehran Stock Exchange. Journal of Audit Science. 70(18), 159-178 [In Persian].
Demirović, L., Isaković-Kaplan, S., & Proho, M. (2021). Internal audit risk assessment in the function of fraud detection. Journal of Forensic Accounting Profession, 3(1), 63-78.
Drogalasa, G., Pazarskisb, M., Anagnostopouloua, E., & Papachristoub, A. (2017). The effect of internal audit effectiveness, auditor responsibility and training in fraud detection. Accounting and Management Information Systems, 16(4), 434-454.
El-Sayed Ebaid, I. (2011). Internal audit function: An exploratory study from Egyptian listed firms. International Journal of law and management, 53(2), 108-128.
Goldman, E., Peyer, U., & Stefanescu, I. (2012). Financial misrepresentation and its impact on rivals. Financial Management, 41(4), 915-945.
Goodwin, J., & Kent, P. (2004). Factors affecting the voluntary use of internal audit. Working Paper, Queensland University of Technology, 1-41.
Goosen, R. (2016). The development of an integrated IT risk assessment questionnaire for internal auditors’ use. Southern African Journal of Accountability and Auditing Research, 18(1), 63–71.
Hafeznia, M. (2008). Introduction to the research method in humanities, the organization for researching and composing university textbooks in the humanities (SAMT), 16TH edition [In Persian].
IIA, IACPA & ACFE. (2009). Managing the Business Risk of Fraud: A Practical Guide. Institute of Internal Auditors (IIA), The American Institute of Certified Public Accountants (AICPA), The Association of Certified Fraud Examiners (ACFE), www.acfe.com.
Institute of Internal Auditors (IIA), Technical and Standard Committee. (2017). Professional Standards. Revised 2017, 1th edition. [In Persian].
Institute of Internal Auditors (IIA). (2009). Internal Auditing and Fraud. www.theiia.org/guidance.
Institute of Internal Auditors Research Foundation (IIARF). (2015). The CBOK 2015 Global Internal Audit
Practitioner Survey Questions, available www.theiia.org/Research.
Institute of Internal Auditors (IIA). (2017). International standards for the professional practice of internal auditing (standards). https://doi.org/10.1016/S0022-0981(98)00154-3.
Law, P. (2011). Corporate governance and no fraud occurrence in organizations: Hong Kong evidence. Managerial Auditing Journal, 26(6), 501-518.
Lenz, R., & Sarens, G. (2012). Reflections on the internal auditing profession: What might have gone wrong? Managerial Auditing Journal, 27(6), 532–549.
Ma’ayan, Y., & Carmeli, A. (2016). Internal audits as a source of ethical behavior, efficiency, and effectiveness in work units. Journal of Business Ethics, 137, 347–363.
Malek Shirabadi, N., Darabi R., & Talebnia Gh. (2021). Identify and validate the factor affecting the risk assessment of fraud by auditors. Journal of Audit Science, 21(83), 5-33 [In Persian].
Massihabadi, A., & Sarchmi, M. (2018), Fuzzy approaches ability and their performance comparison to Fraud detection in financial reporting, Journal of Accounting Knowledge, 8(4), 161-190.
Mennati, V. (2017). Compliance between business sustainability, governance and internal audit unit. Iranian Association of Internal Auditors, Seminar, [In Persian].
Mennati, V., & Babaei, M. (2016). Internal audit and fraud. Journal of Internal Auditors, 5(1), 33-60 [In Persian].
Mennati, V., & Zaman, E. (2016). Anti-bribery and anti-corruption audit programs. Journal of Internal Auditors, 7(2), 78-99 [In Persian].
Moeller, R. (2009). Brink’s modern internal auditing: A common body of knowledge, 7th ed.
Muslimat, A., & Hamid, K.T. (2012). The role of internal audit unit in fraud prevention in government owned hospitals in a Nigerian setting. Journal of Business and Management, 2(7), 39-44.
Nestor, S. (2004). The impact of changing corporate governance norms on economic crime. Journal of Financial Crime, 11(4), 347-352.
Nikbakht M., Rezaee, Z., & Mennati, V., (2017). Internal audit quality improvement strategies. Empirical Studies in Financial Accounting, 55(14), 31-70 [In Persian].
Nikbakht, M., Mennati, V., Rezaee, Z., & Rahmani, A. (2018). Internal audit quality in Iran: Barriers & challenges. Journal of Management Accounting and Auditing Knowledge, 7(27), 1-28 [In Persian].
Norman, C.S., Rose, A.M., & Rose, J.M. (2010). Internal audit reporting lines, fraud risk decomposition, and assessments of fraud risk. Accounting, Organizations and Society, 35, 546–557.
Othmana, R., Abdul Aris, N., Mardziyah, A., Zainan, N., & Md Amin, N. (2015). Fraud detection and prevention methods in the Malaysian public sector: Accountants’ and internal auditors’ perceptions. Procedia Economics and Finance, 28, 59-67.
Petraşcua, D., Tieanu, A. (2014). The role of internal audit in fraud prevention and detection. 21st International Economic Conference, IECS 2014, 16-17 May 2014, Sibiu, Romania. Available online at www. sciencedirect.com.
Poorabdolahian, M. (2016). Internal audit functions in Iran. Master Thesis in Accounting. Alzahra University [In Persian].
Reding, K., Sobel, P., Head, M., Ramamoorti, S., Salamasick, M., & Riddle, C. (2009). Internal auditing: Assurance & consulting services, translated into Persian by: Kamalzadeh, A., Kasiri, H., Zandieh, B., second edition [In Persian].
Sobel, P. (2015). Who Owns Risk? A Look at Internal Audit’s Changing Role. The IIA Research Foundation, The Global Internal Audit Common Body of Knowledge, www.theiia.org/goto/CBOK.
Tsintzas, E. (2016). Lifelong learning for internal auditors; certification and training levels worldwide. The IIA Research Foundation, The global internal audit common body of knowledge, www.theiia.org/goto/CBOK.
Vona L.W. (2010). The fraud audit: Responding to the risk of fraud in core business systems. John Wiley and Sons, New York.
Wallace, W., & Kreutzfeldt, R. (1991). Distinctive characteristics of entities with an internal audit department and the association of the quality of such departments with errors. Contemporary Accounting Research, 7(2), 485-512.
Wen, C., Xue Ying, S.L., & Nair, R.K. (2019). The responsibility of internal auditors in preventing fraud in Malaysia listed companies. 2nd International Conference on E-Business, Information Management and Computer Science, 24(5), 1-15.

Files

History

  • Receive Date: 09 March 2022
  • Revise Date: 18 June 2022
  • Accept Date: 30 August 2022

Share

How to cite

Statistics