Article Sidebar

Download
PDF
Statistic
Read Counter : 459 Download : 256

Main Article Content

Abstract

Purpose: This study investigates the organizational and individual factors that contribute to the failure of corporate governance and internal controls in preventing fraud. It highlights the role of senior management, board oversight, and conflicts of interest in enabling fraudulent activities within organizations.


Research Design and Methodology: The research utilizes a systematic literature review (SLR) approach to analyze existing studies on corporate governance, internal controls, and fraud prevention. The study synthesizes findings from various disciplines, including governance theories, forensic accounting, and organizational behavior, to identify patterns and trends contributing to governance failures.


Findings and Discussion: The findings reveal that governance failures often arise from weak board oversight, a lack of commitment from senior management, and conflicts of interest within audit committees. Additionally, an overemphasis on regulatory compliance at the expense of ethical standards and short-term financial pressures exacerbates the risk of fraud. The study discusses how these structural and behavioral weaknesses create opportunities for fraud and how technologies like AI and blockchain, combined with ethical corporate culture, can strengthen internal controls and fraud detection systems.


Implications: The research emphasizes the need for companies to foster ethical values alongside technological advancements in internal controls. It provides practical recommendations for improving governance systems through substantial leadership commitment, independent board oversight, and integration of advanced technology to detect and prevent fraud.

Keywords

Corporate Governance Internal Controls Fraud Prevention Senior Management Audit Committees

Article Details

Creative Commons License

This work is licensed under a Creative Commons Attribution 4.0 International License.

How to Cite
Muslim, M. (2025). The Failure of Governance and Internal Controls in Preventing Fraud in the Company. Advances in Managerial Auditing Research, 3(1), 15–29. https://doi.org/10.60079/amar.v3i1.418
Download Citation
Endnote/Zotero/Mendeley (RIS)
BibTeX

References

  1. Abbas, D. S., Ismail, T., Taqi, M., & Yazid, H. (2021). The influence of independent commissioners, audit committee and company size on the integrity of financial statements. Studies of Applied Economics, 39(10). https://doi.org/10.25115/eea.v39i10.5339
  2. Abouelghit, M. G. M., & Gan, S. (2024). Empirical research on the effects of mandatory auditing for SMEs on their internal control quality and management’s perceptions: Evidence from Egypt. Cogent Business & Management, 11(1), 2412738. https://doi.org/10.1080/23311975.2024.2412738
  3. Abu Khadra, H., & Delen, D. (2020). Nonprofit organization fraud reporting: does governance matter? International Journal of Accounting & Information Management, 28(3), 409–428. https://doi.org/10.1108/IJAIM-10-2019-0117
  4. Achmad, T., Ghozali, I., & Pamungkas, I. D. (2022). Hexagon fraud: Detection of fraudulent financial reporting in state-owned enterprises Indonesia. Economies, 10(1), 13. https://doi.org/10.3390/economies10010013
  5. Bellucci, M., Acuti, D., Simoni, L., & Manetti, G. (2021). Restoring an eroded legitimacy: the adaptation of nonfinancial disclosure after a scandal and the risk of hypocrisy. Accounting, Auditing & Accountability Journal, 34(9), 195–217. https://doi.org/10.1108/AAAJ-12-2019-4359
  6. Bosse, D. A., & Phillips, R. A. (2016). Agency theory and bounded self-interest. Academy of Management Review, 41(2), 276–297. https://doi.org/10.5465/amr.2013.0420
  7. Briand, L. (2022). Organizational Control BT - Global Encyclopedia of Public Administration, Public Policy, and Governance (A. Farazmand (ed.); pp. 8852–8856). Springer International Publishing. https://doi.org/10.1007/978-3-030-66252-3_116
  8. Buabeng, A. A. (2020). A comparative case study of internal controls and the impact of fraud on nonprofit organizations. Northcentral University.
  9. Cappelli, D. M., Moore, A. P., & Trzeciak, R. F. (2012). The CERT guide to insider threats: how to prevent, detect, and respond to information technology crimes (Theft, Sabotage, Fraud). Addison-Wesley.
  10. Christensen, S., & Latifa, R. A. (2021). The fraud in Wirecard-An oversight over the work and responsibility of the auditor and national regulators. uis. https://hdl.handle.net/11250/2823128
  11. Christopher, J. (2019). The failure of internal audit: Monitoring gaps and a case for a new focus. Journal of Management Inquiry, 28(4), 472–483. https://doi.org/10.1177/1056492618774852
  12. Cohen, J., Ding, Y., Lesage, C., & Stolowy, H. (2012). Corporate Fraud and Managers’ Behavior: Evidence from the Press BT - Entrepreneurship, Governance and Ethics (R. Cressy, D. Cumming, & C. Mallin (eds.); pp. 271–315). Springer Netherlands. https://doi.org/10.1007/978-94-007-2926-1_8
  13. Cressey, D. R. (1953). Other people’s money; a study of the social psychology of embezzlement. Patterson Smith.
  14. Daly, P., & Touron, P. (2022). Legitimation of accounting fraud: A micro-discursive analysis of Wirecard’s CEO. Available at SSRN 4169005. https://doi.org/10.2139/ssrn.4169005
  15. Danh, N. T. (2022). Research Using Blockchain to Strengthen Internal Control of the Companies. International Journal of Mechanical Engineering, 7(2).
  16. Efunniyi, C. P., Abhulimen, A. O., Obiki-Osafiele, A. N., Osundare, O. S., Agu, E. E., & Adeniran, I. A. (2024). Strengthening corporate governance and financial compliance: Enhancing accountability and transparency. Finance & Accounting Research Journal, 6(8), 1597–1616. https://doi.org/10.51594/farj.v6i8.1509
  17. Florid, M. I., Hendra, R. F., & Purnamasari, P. (2023). The Influence Of Accounting Information Systems, Internal Control Systems And The Implementation Of Good Corporate Governance In Efforts To Prevent FRAUD. Return: Study of Management, Economic and Bussines, 2(2), 106–117. https://doi.org/10.57096/return.v2i2.66
  18. Hald, E. J., Gillespie, A., & Reader, T. W. (2021). Causal and Corrective Organisational Culture: A Systematic Review of Case Studies of Institutional Failure. Journal of Business Ethics, 174(2), 457–483. https://doi.org/10.1007/s10551-020-04620-3
  19. Hass, S., Burnaby, P., & Nakashima, M. (2018). Toshiba Corporation—How could so much be so wrong? Journal of Forensic and Investigative Accounting, 10(2), 267–280. http://web.nacva.com.s3.amazonaws.com/JFIA/Issues/JFIA-2018-No2-8.pdf
  20. Hazaea, S. A., Zhu, J., Khatib, S. F. A., & Elamer, A. A. (2023). Mapping the literature of internal auditing in Europe: a systematic review and agenda for future research. Meditari Accountancy Research, 31(6), 1675–1706. https://doi.org/10.1108/medar-01-2022-1584
  21. Herawati, N., & Hernando, R. (2020). Analysis of Internal Control of Good Corporate Governance and Fraud Prevention (Study at the Regional Government of Jambi). Sriwijaya International Journal of Dynamic Economics and Business, 4(2), 103–118. https://doi.org/10.29259/sijdeb.v4i2.103-118
  22. Hightower, R. (2008). Internal controls policies and procedures. John Wiley & Sons.
  23. Jensen, M. C., & Meckling, W. H. (1976). Also published in Foundations of Organizational Strategy. Journal of Financial Economics, 4, 305–360. http://ssrn.com/abstract=94043Electroniccopyavailableat:http://ssrn.com/abstract=94043http://hupress.harvard.edu/catalog/JENTHF.html
  24. Kakade, S., & Haber, M. (2020). Detecting Corporate Environmental Cheating. Ecology Law Quarterly, 47(3), 771–822. https://www.jstor.org/stable/27069928
  25. Kalia, A., & Gill, S. (2023). Corporate governance and risk management: a systematic review and synthesis for future research. Journal of Advances in Management Research, 20(3), 409–461. https://doi.org/10.1108/JAMR-07-2022-0151
  26. Kano, L., Simoes, S., & Verbeke, A. (2023). Governance failure and firm-level crises: The case of the Volkswagen emissions scandal. In Research Handbook on International Corporate Social Responsibility (pp. 168–186). Edward Elgar Publishing. https://doi.org/10.4337/9781802207040.00018
  27. Kashona, S. (2019). The effectiveness of internal control and internal audit in fraud detection and prevention: A case study of Ministry of Finance-Namibia. University of Namibia. http://hdl.handle.net/11070/2823
  28. Kassem, R. (2022). Elucidating corporate governance’s impact and role in countering fraud. Corporate Governance: The International Journal of Business in Society, 22(7), 1523–1546. https://doi.org/10.1108/CG-08-2021-0279
  29. Khusnah, H., & Soewarno, N. (2022). Mediation Effects of Moral Reasoning And Integrity In Organizational Ethical Culture on Accounting Fraud Prevention. Abac Journal, 42(4), 78–93. http://repository.unair.ac.id/id/eprint/118846
  30. Laroiya, C., Saxena, D., & Komalavalli, C. (2020). Chapter 9 - Applications of Blockchain Technology (S. Krishnan, V. E. Balas, E. G. Julie, Y. H. Robinson, S. Balaji, & R. B. T.-H. of R. on B. T. Kumar (eds.); pp. 213–243). Academic Press. https://doi.org/https://doi.org/10.1016/B978-0-12-819816-2.00009-5
  31. Mamaysky, I. (2021). Understanding Ethics and Compliance: A Practitioner’s Guide to Effective Corporate Compliance Programs. Loy. U. Chi. J. Reg. Compl., 6, 58. https://heinonline.org/HOL/LandingPage?handle=hein.journals/lausyco6&div=8&id=&page=
  32. Ngcobo, S., & Reddy, C. D. (2024). Exploring the link between organisational performance pressures and the factors that compromise ethical leadership. Athens Journal of Business & Economics, 10(2), 139–158. https://doi.org/10.30958/ajbe.10-2-4
  33. Orth, C. de O., Marrone, D. D., & Macagnan, C. B. (2023). Accounting fraud in light of organismic integration theory. Journal of Financial Crime, 30(5), 1323–1341. https://doi.org/10.1108/JFC-08-2022-0198
  34. Potla, R. T. (2023). AI in Fraud Detection: Leveraging Real-Time Machine Learning for Financial Security. Journal of Artificial Intelligence Research and Applications, 3(2 SE-Articles), 534–549. https://aimlstudies.co.uk/index.php/jaira/article/view/189
  35. Rikhardsson, P., & Dull, R. (2016). An exploratory study of the adoption, application and impacts of continuous auditing technologies in small businesses. International Journal of Accounting Information Systems, 20, 26–37. https://doi.org/https://doi.org/10.1016/j.accinf.2016.01.003
  36. Root, S. J. (2000). Beyond COSO: internal control to enhance corporate governance. John Wiley & Sons.
  37. Roszkowska, P. (2021). Fintech in financial reporting and audit for fraud prevention and safeguarding equity investments. Journal of Accounting & Organizational Change, 17(2), 164–196. https://doi.org/10.1108/JAOC-09-2019-0098
  38. Sdiri, B., Rigaud, L., Jemmali, R., & Abdelhedi, F. (2023). The Difficult Path to Become Data-Driven. SN Computer Science, 4(4), 385. https://doi.org/10.1007/s42979-023-01789-y
  39. Shahana, T., Lavanya, V., & Bhat, A. R. (2023). State of the art in financial statement fraud detection: A systematic review. Technological Forecasting and Social Change, 192, 122527. https://doi.org/10.1016/j.techfore.2023.122527
  40. Solomon, J. (2020). Corporate governance and accountability. John Wiley & Sons.
  41. Tladi, M. J. (2021). Corporate governance compliance within south African regulatory agencies: Towards an implementation framework. North-West University (South Africa). https://repository.nwu.ac.za/bitstream/handle/10394/38197/Tladi_MJ.pdf?sequence=1
  42. Winner Olabiyi, E. F., & Joseph, O. (2024). Real-Time Transaction Analysis: The Importance of Analyzing Transactions to Detect Fraud Quickly. https://www.researchgate.net/profile/Winner-Olabiyi/publication/383982767_Real-Time_Transaction_Analysis_The_Importance_of_Analyzing_Transactions_to_Detect_Fraud_Quickly/links/66e347cbfa5e11512cb6e70d/Real-Time-Transaction-Analysis-The-Importance-of-Analyzing-Transactions-to-Detect-Fraud-Quickly.pdf
  43. Young, M. R. (2013). Financial fraud prevention and detection: Governance and effective practices. John Wiley & Sons.
  44. Zahra, S. A., Priem, R. L., & Rasheed, A. A. (2007). Understanding the causes and effects of top management fraud. Organizational Dynamics, 36(2), 122–139. https://doi.org/10.1016/j.orgdyn.2007.03.002
  45. Zakaria, K. M., Nawawi, A., & Salin, A. S. A. P. (2016). Internal controls and fraud – empirical evidence from oil and gas company. Journal of Financial Crime, 23(4), 1154–1168. https://doi.org/10.1108/JFC-04-2016-0021