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Corporate fraud: Preventive Controls which Lower Fraud Risk
Jose R Hernandez,
Vrije Universiteit Amsterdam
Tom Groot, Vrije Universiteit Amsterdam
ABSTRACT. This study examines auditor perspectives on the most important mitigating controls which may be necessary in order to prevent fraud, using the conditions (opportunities), motivations (incentives), and attitudes model of Loebbecke et al. (1989) and belief function formulas suggested by Srivastava et al. (2005). The use of incentive systems, unethical management attitudes, and opportunities for fraudulent reporting are associated with higher fraud risk assessments. These relationships do not remain stable across different fraud risk levels. Fraud-inducing incentive systems and opportunities for fraudulent reporting (provided by the governance and accounting control environment) were perceived by auditors to be important only at the lower fraud propensity levels, but had no influence on fraud risk at the highest fraud propensity levels. Auditors do not attribute past indications or observations of fraud to neither internal control nor compensation issues.
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