INTERNAL CONTROL AND FRAUD PREVENTION: PRIOR RESEARCH ANALYSIS

Abstract

The focus of this study is to analyze prior research on fraud detection and prevention. Most researchers agree that strong internal controls are an influencing factor on fair financial reporting and fraud prevention and detection. Financial statement and employee fraud can be very expensive to businesses and the economy as a whole. The establishment and evaluation of the internal control methods and procedures can decrease fraudulent events and losses. Accounting professionals, CPA’s, and tax preparers are the first to detect “red flags” in business activities and must work together with boards of directors, CFO’s, and small business owners. Simple methods, such as ratio analyses can help to signal early signs of fraudulent events and prevent future damages. Implementation of fraud prevention measures are the most efficient deterrent. Some of the most effective controls like, job rotation, mandatory vacations, training, fraud hotlines, and surprise audits, need not be expensive and should be employed by all businesses. Unfortunately, the most important and effective fraud prevention techniques are seldom applied by businesses. Surprisingly, the least effective and most expensive measures, like external audits, are more frequently employed. As reported in this review of the literature, most businesses focus on fraud detection, while fraud prevention and implementing proper internal controls would result in better prevention of financial losses.