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Topics: Auditing, Internal audit, Audit Pages: 16 (8009 words) Published: November 4, 2014
Scientific Annals
of the „Alexandru Ioan Cuza” University of Iaşi
Economic Sciences
59 (1), 2012, 79-94
DOI 10.2478/v10316-012-0005-x

FRAUD, A GROWING PROBLEM - CAN WE MITIGATE IT?
Victoria STANCIU
Academy of Economic Studies of Bucharest
Bucharest, Romania
stanciuvictoria58@hotmail.com

Abstract
Over the past few years the companies had to face a difficult economic climate. In this instable and sometimes unpredictable environment, organizations have changed their strategies, building and applying new business models based on globalization and new technologies, understanding that traditional business approaches may not be effective in the new economic circumstances. The complexity of the activities performed determined the emergence of new risks. A particular characteristic for the crisis years is also a higher potential risk of fraud and fraudulent financial reporting. Fraud is a risk that should not be ignored and many companies have recognized that the impact of fraud is increased in the past years. Senior managers have become more concern on fraud risk and try to understand how their companies might be vulnerable to fraud.

The objective of this paper is to examine the fraud phenomenon and fraud vectors aiming at identifying appropriate prevention actions. The author focuses on the internal audit role in fraud prevention, identification and investigation. Our research results conclude on means of improving fraud risk monitor and prevention, providing suggestions for proactive approaches in control processes’ improvement. Keywords: fraud, fraudulent financial reporting, red flags, internal audit JEL classification: M42, G34

1. INTRODUCTION
Studies on accounting field have showed the seriousness of fraud problem and its increasing trends. Researches within this area have emphasized the fraud models and suggested how to prevent, detect and investigate frauds. Strong corporate governance and a solid corporate culture are important pillars for fraud prevention. The companies are facing this challenge being aware that the key stays in a robust fraud risk management culture and senior management endorsement for a strong approach to fraud management and ethical culture within the organization. Companies have to put in place robust systems and controls in order to prevent and detect fraud. Failure in fraud detection exposes companies to significant reputational and financial damage. In crisis years, fraudulent financial reporting represents another growing risk. The accounting and financial audit professional literature have analyzed in detail the well known

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Victoria STANCIU

cases such as Enron, WoldCom, Xerox in US and the European fraudulent reporting cases as for example Vivendi and Parmalat. The researches in accounting and forensic accounting have emphasized the nature of frauds and the causes that have facilitated them. The final objective of all those studies was to draw the professional framework for fraud prevention, detection and investigation and recommend how to recognize and react when alert signs arise.

Important results in the fraud research were publishes by Donald Cressey. Cressey explains the necessary frame for fraud: opportunity, pressure/incentive and rationalization. If any one of the three elements is missing, fraud may not occur. To succeed, the fraudster has to prove his ability and knowledge to commit fraud. Incentive (also called ― pressure‖) can

take various forms; but any of these determine the perpetrator to seek gains via financial fraud. It should be noticed that opportunity and incentive only exist or they don’t or, in other words, exists or they potential exists. In opposite, rationalization depends on the individual and the circumstances he/she is facing.

In periods with difficult financial and economic climate, the fraud risk is increasing and there is also a higher potential risk for registering fraudulent...

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