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June 25, 2014

Internal Control: Prevention of Fraud in Large Scale Companies


Fraud is a concept exploded with many related offenses (abuse of social goods, extortion, unlawful taking interest, embezzlement etc.). Fraud is a global phenomenon. It affects all areas of private and public business, at all stages of the formation of a public contract, either in the award or during execution, and for all countries whether emerging countries or developed. It is usually a transnational phenomenon, which must, therefore, be arrested and fought across the world by authorities. Prevention of fraud through internal control is also an important segment of creating an ethical business environment as it helps to improve the profile and quality of the profession (Kaufmann, 1999).
Fraud appears to be an obstacle that the managers of the organizations must fight to achieve effective competition, maximizing assistance and funding international growth and faster development. However, all the solutions are not good and some may perverse effects. The increase in complexity of standards and rules is a breeding ground for fraud. It is therefore necessary to consider the effectiveness of existing standards, the issue of monitoring and control and the possible solutions for the future, and to search for new tools and to improve existing ones.
In order to prevent fraud or identify it at early stages, firstly consideration should be given to harmonizing the regulatory regimes that apply to these similar products and businesses. Such coordination could give direction and benefit not only to the individual shareholder but also complete market by putting efforts and making a contribution to re-established market confidence. On a more detailed way, consideration should regularly be given to rather exact and particular steps that might help hold up or notice fraud.
In short, companies need to implement proper internal control within the organization in order to sustain an attitude and culture that mere compliance with the law, close vision, is not the main goal to which we hope, but the stand from which we start. All the big companies stress on implementing an effective control mechanism where those who work in it are responsible stewards of the treasures entrust to them.
This topic has been chosen for research because it not only related to my interest and area of study but it also becomes one of the most important issues of present business scenario.
 This topic is important because the series of financial scandals in recent years have re-launched the debate on the awareness of ethics among number of future professionals. Indeed, the scandals like Enron, Tyco and Parmalat have surfaced the obvious faults in the governance and accounting systems. At the same time, the scandals have also shown the inability of higher educational institutions to train managers and accountants and maintain their integrity. Thus, in this context the interest of organizations is required for instilling proper internal control in the organization in order to prevent fraud and corruption.
Although much research has been conducted in this issue but the topic is so vast that there is always space for more research on the topic. This research will clarify the importance of using internal control by large corporations in order to prevent fraud.
The basic purpose of this study is to determine how internal control is an effective strategy for preventing corporate fraud. This research study does not test a hypothesis but relies upon the data from pre-existing sources and tries to investigate the objective presented in the study through the conduction of qualitative research.
·         To discuss the frequency of occurrence of frauds in large corporations
·         To describe how internal control can help to prevent corporate frauds
·         To identify that Internal Control is an effective strategy to prevent corporate frauds
The remaining dissertation must follow the following format
Chapter 2 Background: It provides the background and the main points of the dissertation. 
Chapter 3, Review of Literatureis sources of information used in the document that includes but not limited to additional resources. The Sources used are literary publications, academic journals, magazines, newspapers, newsletters etc. The majority of the sources used are published sources to make certain that the information present is appropriately represented by its author.
Chapter 4, Research Methodology: this chapter will describe the research design of this study. The research design of this study is qualitative research method using secondary data. Data is also collected through a questionnaire.
Chapter 5, Results and Analysis: this chapter will present the findings of the research and critically analyse the data in order to ascertain the importance of internal control for preventing corporate fraud.
Chapter 6, Discussion:  This chapter will discuss the findings of the analysed data sources.
Conclusion:  This will present a summary of the project submission of conclusions from the findings.  The resources used to promote findings and support my suggested outcome will include publications, academic journals, magazines, newspapers, newsletters, and data from related healthcare agencies.












Corruption and fraud appears to be an obstacle that the organizations must fight to achieve effective competition, maximizing assistance and funding international growth and faster development. However, all the solutions are not good and some may perverse effects. The increase in complexity of standards and rules is a breeding ground for corruption. It is therefore necessary to consider the effectiveness of existing standards, the issue of monitoring and control and the possible solutions for the future, and to search for new tools and to improve existing ones. To effectively fight against the phenomenon of corruption, the first step is to attempt to define the boundaries and limits (Punch, 1996). This is how the fight against corruption has been implemented and on what basis it rests.
Internal control has been used by men from the very beginning. The first prehistoric man who lit a fire at the entrance of his cave was to guard against a risk that the attack of wild beasts. And in doing so, he put in place a system of internal control. But that was then, of course, an instinctive intuitive of internal control without rationality or organization. Thus, at all times, it was the internal control without knowledge. If the discovery of internal control is not new, recent years have seen a significant legislative and regulatory movement in this area. Starting in 2002, by the Sarbanes-Oxley (SOX) in the United States, in response to the Enron scandal. It is certain that there is a formal building, with layers of legislation and additional disclosure of internal control.
These regulatory mechanisms seem to coexist with much more repressive measures. In fact, several studies (Baldwin, 2004; Almond, 2006) highlighted that the answers of fraud found in the entrepreneurial world are more punitive than the past. This turn can be explained by establishing mechanisms for greater collaboration between the criminal justice system and administrative agencies of scrutiny, which affects the professional culture of each. In large groups, service control and internal audit or risk management and insurance are either grouped in the same direction, or separated. Among the different actors involved in the internal control include among others the risk managers. The risk manager is the first to respond, because it's mission is to identify risks that may prevent the company from achieving its objectives.
To do this, including developing risk maps based on their impact and their occurrence. Internal control then helps them provide answers in the form of procedures and best practices, while internal audit examines the effectiveness of internal control. Many functions are involved in risk management at large today and there is a significant issue for large groups to ensure consistency between all the functions involved, also providing the means to measure their performance. This study will discuss how large companies escape corporate fraud with the help of effective internal control. To do this, this study analyzes, different transgressive practices as well as the role of the actors involved (auditors, managers etc.).  
Fraud schemes follow a three-step process: Committing of fraud, then hide and finally, if necessary, convert the non-monetary fruit of Fraud in cash. In general, certain clues or warning signs, allow detect internal fraud being committed or camouflaged. It may be, for example, missing assets, forged or counterfeit checks; nothing better to detect fraud than to keep an open eye for noticing the warning signs of the fraud (Scholz, 1997). It should also reflect these warning signals under the control design to prevent or mitigate the risk of internal fraud. It should not, however believe that discovery of a warning signal necessarily mean that fraud has been committed (Anand & Rosen, 2008). These signals simply indicate a high probability of internal fraud. If the company discovers warning signals, it must push the investigation to determine if there has indeed been a fraud or attempt of fraud occurred or not.
Most big companies do not recognize the warning signs or are too busy to see them. Even if they find a warning signal, it is not necessarily investigated, thus many frauds go unnoticed. This is a direct consequence of an environment of poor control. It is essential to establish an effective environment for employee awareness of control. Investigations of warning signals can allow the company to quickly detect fraud and to avoid the costs and deter fraud (Richard, 2004).
To control fraud, big companies must establish policies to mitigate or eliminate the risk of fraud. It is possible to prevent or mitigate the risk associated with specific types of fraudulent schemes by implementing specific internal controls that complicate the task of those who wish to commit or conceal fraud (Garland, 2001). It is also possible, to a lesser extent, to implement controls to prevent the conversion of non-cash assets.









Internal Control and Governance raises broader debate among the world these days. In the United Kingdom and the United States, people are interested in frauds in corporations occurred due to lack of internal control and inefficiency of corporate governance (Collier, Berry & Burke, 2007) ; while in other European countries the main concern is that whether internal control and corporate governance hinders innovation or growth or not. Despite all these discussions, the observations on the effects of different control systems remain fragmented because mostly the facts have swept the judgments (Collier, Berry & Burke, 2007).
Fraud in big corporations is a universal problem; a massive financial scandal took place in Parmalat, Italy's largest food company as of 2004 resulting due to the embezzlement of more than $10 billion from company’s assets (Claudio, 2004). Parmalat is accused of having used dozens of offshore financing vehicles to manipulate its balance sheet and defraud investors. The board of this dairy giant of course was responsible for the scandal owing to the lack of monitoring transparency in bond market and out of controlling use of offshore financing vehicles. Corporate governance is also falling into dire straits in other countries. Economic value added (EVA) can be seen as a tool to create shareholder value creation which also includes the cost of equity capital when measuring profitability. In the UK, the government-sponsored Higgs Review and the Smith Report have introduced recommendations as changes to the Combined Code, aiming to increase board accountability in UK listed companies (Alessandra et al, 2003).
Internal Control is the process by which the governing body of the organization regulates its activities to accomplish its mission, effectiveness and efficiency. Internal control should not be considered as a separate system; instead, it should be recognized as an integral part of any system used by the managers to guide their operations (Doyle, Ge & McVay, 2007). The establishment of an effective internal control involves evaluating the risks the organization faces both from the outside and from within. A prerequisite for risk assessment is formulation, organization, clear objectives and consistency, which are the goals or the desired outcome. Risk assessment is identification and analysis of relevant risk inherent in achieving the objectives (Doyle, Ge & McVay, 2007).
Internal control methods (such as procedures, process of the physical organization, organizational structure and the allocation of responsibility and authority) should then be developed and implemented to achieve the goals. Similarly, in order to make managers more efficient and to make them take more ethical decisions, it is necessary that the relevant information must be communicated to them. Monitoring of internal control should be to assess the quality of results in time and to ensure that the findings made during audits and other controls are prompt solutions. New legal obligations imposed by different new legislations induce a change in the definition and organization instead of the internal control (Hawkins, 2010). Internal control is of more global ambitions.
Few studies (Adams, 2006; Taylor& O’Prien, 1998; Tombs & Whyte, 2010)  have highlighted in a convergent manner the extreme heterogeneity of disseminated published reports on internal control. They also show that many reports do not include the signature of the officers, which could suggest a refusal on their part to engage their responsibility to the contents of these reports are almost exclusively descriptive and would focus on the concept of risk. It is conceivable that listed companies do not want to decide and communicate the state of their internal controls to the extent that they fear a negative market reaction.
 However, some studies (Charles, O'Kelle & Robert, 2006; Clair, 2008) reported an improvement in the quality of reports between 2003 and 2004. While the 2003 reports were purely descriptive reports in 2004 were characterized by a shift towards a more evaluative approach. Without specifying concretely the analysis method used, the thickness of the reports have increased between 2003 and 2004, from 5.5 to 6.8 pages on average for companies in the SBF 120. Apart from these studies rather prescriptive, there is no work to our knowledge of systematic content analysis of the reports. This work could well herald a longitudinal content analysis research.
If the legislature has taken the precaution not to engage in too precise definition of the concept of internal control, the academic and professional literature contains many definitions. Internal control can be represented as a synergy of five dimensions: environment, risk assessment, control activities, information and communication and monitoring (Bronson, Carcello & Raghunandan, 2006). Each of these dimensions is declining on each activity and function of the company. This framework coexists with other competing designs such as COBIT (Control Objectives for Information and related Technology) or SAC (System of Auditability and Control).
Some (McBarnet, 2006) emphasize the delegated nature of internal control is to ensure the proper implementation of the decisions taken earlier. Internal control ensures that hierarchical coordination, formal and informal working properly and ensure effective coordination between individuals. It ensures that decisions taken by leaders are implemented by all employees of the enterprise. Such a design is obviously very broad, and we note in passing that it does not immediately grant a specific role in financial or accounting dimension. Found another body design with Victor & Cullen (1997), which incorporates the expensive Anthony triptych: strategic control, management control, operational control (or running). Internal control is the sum of these three segments, which also refers to a hierarchical conceptualization and delegate control system. Ouchi (1979) like Victor & Cullen also speaks of "organizational control" which "can be reinforced through informal mechanisms such as corporate culture. In this sense, one can wonder about the limits of internal control. Control is a tool to reduce transaction costs, a tool that would tend to strengthen naturally in a highly integrated company, but whose boundaries become blurred when the outsourcing operations lead to inter-organizational business models. This confrontation of definitions allows us to think that a careful reading of the reports written by the leaders, would reveal diversity of approaches related to the co-existence of conceptual frameworks.
Basically, it is the manager who makes the internal control and defines the controls that allow it to manage the achievement of its objectives. Therefore, the internal control exists everywhere. Large corporations are themselves affected by the internal control requirements, such as having a compliance officer as well as very specific levels of internal control. If listed institutions and sectors heavily regulated in this area, have a highly structured internal control, it is relevant in any kind of company, regardless of its size or activity. But there is for any business a double issue of performance and security processes, because none is immune to error, fraud, be abused by others, internal risk external. The challenge is to find the right balance, depending on the size, culture and especially of business risk.
Having effective internal control is not necessarily needs big, heavy and costly bureaucracy because more the internal control procedures are simple, known and accepted, more internal control is effective. Stack layers of control or have cumbersome procedures are inherently antithetical to the purpose of internal control, which is a matter of efficiency and performance. If the company does not have a culture of control, the risk is that the procedures are not followed and they are perceived as bureaucratic.

Thus, the recipe lies in the right dosage but that is not always easy to achieve. It is to believe that there are good practices everywhere. But this is far from proven. Moreover, the requirements of internal control aimed at the sincerity of the image performance than the latter. The law also does not pretend to make companies more efficient, it seeks to influence the quality of financial reporting. Nevertheless, despite all the laws, regulations and formal layers of control frauds are far from extinct. Without informality - value management, ethics, the "tone at the top" - the internal control may not work quite correctly. However, if the two sides work together, it can be a true bulwark against fraud.

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