Corporate fraud has been a growing issue since Enron bankruptcy. The factors that contribute to the occurrence of corporate fraud are hard to control and methods used to prevent and detect fraud both by internal control and outside auditing have unavoidable weaknesses. Despite all the effort being made, it is highly unlikely that corporate fraud can be eliminated from the workplace.
After Enron scandal got revealed in 2001, an increasing number of corporate frauds have been discovered and studied. Fraud has a broad meaning. Corporate fraud, specifically, can be defined as “activities undertaken by an individual or company that are done in a dishonest or illegal manner, and are designed to give an advantage to the perpetrating individual or company”, according to Investopedia. It goes beyond the scope of an employee's stated position, and is marked by their complexity and economic impact on the business, other employees and outside parties. This paper will examine the causing factors of corporate fraud to reveal its unpredictability and the two major channels, internal control and external auditing, to fight fraud. Because corporate fraud has a complex set of causing factors that can only be managed but not removed and its prevention or detection methods by internal control and outside auditing have weaknesses within, it is highly unlikely that corporate fraudulent activities can hardly be eliminated from workplace.
Nature of Corporate Fraud and its occurrences
The classical fraud triangle theory categorizes three features embedded in fraudulent activities, namely incentive, opportunity and rationalization. If there is the incentive for fraudsters to commit fraud, the opportunity exists for them and the rationalization of the fraud makes the perpetrators not feel guilty about it, they will commit the fraud. The factors that contribute to the occurrences of fraud is high unpredictable and hard to control in most cases.
The incentives to commit fraud always exist for people with greedy nature, and furthermore, desperate situations such as financial difficulties can make decent people commit dishonest and illegal crimes. “People who commit fraud have been found to be below their average earning”, according to 2010 Global Fraud Study. ("ACFE the Association of Certified Fraud Examiners") Similarly, with the economic environment and high unemployment rate, employees and firms have the incentive to commit crime. There is incentive for the auditing firm to avoid filing for fraud in face of a major client, because it does not want to lose the business relationship. Lack of internal control at management level and lack of independence in outside auditing firm provides opportunity for fraudsters to commit crime. The risk factors exist throughout the business cycle that opens the loop for fraud. As for rationalization, the manager of a firm can rationalize that the intent of the fraud is to overturn a big loss of the firm, which makes them not feel guilty. Under certain situations that requires analysis case by case, fraudsters rationalize their behaviors without feeling guilty and continue to commit crime.
Methods used by internal control and their weaknesses
After understanding the causes of corporate fraud, now I would like to examine the common methods used to prevent and detect fraud and their weaknesses. Internal control is one of the most critical mechanisms in fight with fraud, which has advantages in preventing it before it happens and possessing in-depth inside information on the corporation. “Internal Control is not only the responsibility of the internal auditing department but of people at every level of the firm. According to the Institute of Internal Auditors (IIA), “responsibility for the system of internal control within a typical organization is a shared responsibility among all the executives, with...