Role of Internal Auditors in Fraud Detection

The processes, systems and principles used to govern an organization are called corporate governance. It provides guidelines to control and direct company’s operations in order to achieve its objectives and goals. In recent years, good corporate governance has gained huge importance as it speaks about organization’s ethos.   Internal Audit plays a very crucial role in establishing a culture that embraces honesty, ethics and integrity in the organization. 

Effect of frauds on Organizations

Frauds results in financial losses, negative reputation and psychological effect on organizations. Downturn in many organization start with major fraud detection. Organizations initiate prevention and awareness programs for detecting frauds to minimize the risks associated with misappropriations.

Characteristic of Frauds

Employees have a tendency to commit frauds when they have access to confidential information and internal controls are inadequate. Frauds have following three characteristic:

1) Fraud for incentive or under pressure: The fraudster tries to satisfy some of his needs through fraud.

2) Fraud due to opportunity: The fraudster has the ability and opportunity to conduct fraud.

3) Fraud Rationalization: The fraudster can justify the fraud in his mind and thinks it is correct to    do so. 

Propensity to detect fraud with Internal Audit Function

Organizations with a strong internal audit team are more likely to detect frauds than organizations that hire external auditors for fraud detection. An Internal auditor can evaluate internal controls to investigate and detect frauds more efficiently than any external body. Over a period of time internal audit develops knowledge of organizations risk areas that can later lead to misappropriation, frauds or corruption. Internal auditor jobs include checking the effectiveness of internal controls set by management to avoid fraud or misappropriation in any function.

Responsibility and pro-activeness on the part of officers and directors can help in combating frauds. Instances where employee becomes secretive about his work or spends lavishly or is reluctant to take vacation, a red flag should be raised; as these are some indications of frauds. Organizations cannot eliminate frauds but internal audit jobs can help in detecting and preventing frauds at early stage. A combined effort can not only combat fraud but also instill a strong ethical culture.