The Role of Internal Control in Fraud Prevention

By

Chris Etim Nyong, CFE

eing lecture presented at the meeting of the Association of Cert

raud Examiners, Port Harcourt Chapter held in Uyo on 25 th July, 2

The Role of Internal Control in Fraud Prevention

OUTLINE
1.
2.
3.
4.

Introduction
Overview of Internal Control Framework
Overview of Fraud Prevention Programmes
Conclusion

e Role of Internal Control in Fraud Prevention

roduction

nsiderable effort should be made at preventing fraud than detecting it.

art from the loss suffered when fraud occurs, which may not be recovere
e cost of fraud detection could be substantial. If adequate controls are pu
ce to prevent fraud, the risk of fraud occurrence could be minimized.
ghtower (2009) has maintained that internal controls are more than rule
ey embody a companys principles, trust, values and culture.

this paper we shall examine the relevance of internal controls in creating

vironment that would mitigate fraud occurrence: prevention and detecti
s would include discussing the key fraud prevention programmes.

es of Control

re are basically two types of control: Primary controls and ancillary contr

mary controls are designed to prevent control breaches from occurring.

of authorisation, primary control would be exercised whereby a supervi
ews a key aspect of a transaction before it is completed, or corrective, s
error is spotted at or close to source and fixed immediately.

illary controls are meant to provide additional layer of security. Examp

llary controls include detective and verification controls. Detective contr
designed to find errors after they have occurred while verification contro
supplemental in nature.

Internal Control Framework

We are familiar with the Internal Control Integrated Framework
issued by the
Committee of Sponsoring Organizations of the Treadway
Commission(COSO ) in
1992. The COSO is comprised of five components, namely;
1993.Control Environment which is an indicator of the level of
control consciousness of the company. It is the basis for all the
other components
providing direction, discipline, and structure. Hightower(2009).
Bragg (2009) has identified five elements of control
environment:
1. The enforcement of ethical standard
2. The operating style of management
3. Structure of the organization
4. Assignment of control responsibility
5. Experience and expertise of employees.
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3.

Control Activities are embedded in the operational and

financial
processes and ensure that necessary actions are taken.
4.
Information and Communication identifies, captures, and
communicates upstream and downstream data and information.
5. Monitoring refers to the process that assesses and
evaluates process effectiveness, efficiency and compliance in addressing the internal
control objectives.
Included within the monitor component of COSO is the
responsibility to report
on the companys internal control posture.
Monitoring challenges in Attaining Cost-Effective
Internal Controls:
Managers often view control as an administrative burden to be
added onto
existing business systems, rather than recognizing the business
need and benefit
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for effective internal control that is integrated with core processes.

3.
Recruiting individuals with requisite financial reporting and
other expertise to
serve effectively on the board of directors and audit
committees.
4. Recruiting and retaining personnel with sufficient experience
and skill in
accounting and financial reporting.
5. Taking management attention from running the business in
order to provide
sufficient focus on accounting and financial reporting.
6. Maintaining appropriate control over computer information
systems with limited technical resources.

Overview of Fraud Prevention Programme

An African proverb has it that prevention is better than cure. It
is much more
true in financial management.
Fraud Management is concerned with the sum total of ways
and methods a
company can work to prevent, detect and investigate fraud.
Fraud prevention is
at the foundation of this cycle. It is necessary to emphasize that
just everyone can be dishonest.
Fraud examiners have justified two major ways to prevent fraud:
(1.) Create a culture of honesty, openness, and assistance and;
(2.) Eliminate opportunities for fraud. W. S. Albrecht, Albrecht &
Zimbelman,
M. F. (2009)
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CREATING A CULTURE OF HONESTY, OPENNESS, AND

ASSISTANCE
1. Hiring honest people and providing fraud awareness
training
2. Creating a positive work environment
3. Implementing employee assistance programmes
ELIMINATING OPPORTUNITIES FOR FRAUD TO OCCUR
4. Having good internal controls.
5. Discouraging collusion between employees and
customers or vendors.
- clearly informing vendors and other outside contacts of
the companys
policies against fraud.
3. Monitoring employees and providing a hotline for
anonymous tips.
4. Creating an expectation of punishment.
5. Conducting proactive auditing.
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NCLUSION

effective internal control system is a significant ingredient in fraud preve

ud prevention programme can be potent if is underlined by a good syste
controls.

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References

Albrecht, W. S., Albrecht, C. C., Albrecht, C. O. & Zimbelman (2009).

Fraud examination. Mason, USA: South Western Cengage Learning.

Bragg, S. M. (2009) Accounting control best practices (2nd ed). New Jerse
John Wiley & Sons Inc.

Hightower, R. (2009). Internal controls policies and procedures. New Jers

John Wiley & Sons Inc.

pencer-Pickette, K. H. (2006). Audit planning: A risk-based approach.

New Jersey: John Wiley & Sons Inc.

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