Comparative analysis of the relationship between internal control weakness and different types of auditor opinions in fraudulent and non-fraudulent firms
| DOI | https://doi.org/10.1108/JFC-01-2021-0005 |
| Published date | 03 June 2021 |
| Date | 03 June 2021 |
| Pages | 325-341 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial crime |
| Author | Mahmoud Lari Dashtbayaz,Mahdi Salehi,Mahdi Hedayatzadeh |
Comparative analysis of
the relationship between
internal control weakness and
different types of auditor
opinions in fraudulent and
non-fraudulent firms
Mahmoud Lari Dashtbayaz
Department of Economics and Administrative Sciences,
Ferdowsi University of Mashhad, Mashhad, Iran
Mahdi Salehi
Department of Economics and Management, Ferdowsi University of Mashhad,
Mashhad, Iran, and
Mahdi Hedayatzadeh
Department of Economics and Administrative Sciences,
Ferdowsi University of Mashhad, Mashhad, Iran
Abstract
Purpose –This study aims to assessthe relationship between internal control weakness and differenttypes
of auditor opinionsin fraudulent and non-fraudulent firms. The study’s main objectiveis to investigate fraud
in business firms and analyze internal controls and types of proposed opinions by the auditor about his
desired firm. The outbreak of fraud in firms is of utmost importanceto a broad spectrum of society. Internal
controlsand the auditor’s role in preventing and detecting fraudsshould not be taken for granted.
Design/methodology/approach –The present study’s statistical population includes 179 listed
firms on the Stock Exchange selected as the study sample using the systematicelimination method during
2012–2019. As the study’s dependent variable (the type of auditor’s opinion), research hypotheses were
analyzedusing the Logit regression model.
Findings –The results show that the relationship betweeninternal control weakness and opinion type is
significantly different in fraudulent and non-fraudulent firms. Moreover, the relationship between internal
control weaknessand type of auditor opinion in fraudulent firms and the relationshipbetween internal control
weaknessand type of auditor opinion in non-fraudulent firms are significant.
Originality/value –By assessing therelated literature, the authors have found no studyto directly assess
the comparativerelationship between internal control weaknessand the type of auditor opinion, which can be
named as the main objectiveof the study.
Keywords Internal control weakness, Type of auditor opinion, Fraudulent and non-fraudulent firms
Paper type Research paper
Introduction
The topic of fraud in business firms has always been of great concern for related
practitioners, including auditors and professional institutions. An excessive increase in
Internal
control
weakness
325
Journalof Financial Crime
Vol.29 No. 1, 2022
pp. 325-341
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-01-2021-0005
The current issue and full text archive of this journal is available on Emerald Insight at:
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fraudulent financial reporting in business firms and the collapse of large global
corporations, like Enron and WorldCom in America and Parmalat and Ahold in Europe,
arouses some concerns about the quality and reliability of financial reports for the users of
financial statements. Hence, some mechanisms should be defined to reduce the chance of
fraud and fraudulent presentation of financial reports. We can refer to auditing and
establishing efficient internal controls in business firms. Internal controls and weakness in
them are significantly associated with fraud and fraudulent financial reporting in business
firms (De chow et al.,2011;Rice and Weber, 2012;Ge et al., 2014;Bhaskar et al.,2016).
Besides, auditors’opinionplays an effective role in declining fraud and fraudulent financial
reporting (Ansar,2012;Darmawan and Oktoria Saragih, 2017).
From the auditors’side, the auditingprofession and the proposed opinion make financial
reports reliable and credit them. In general, as defined in auditing standards, the auditor’s
responsibility is to be sensibly (notabsolutely) confident of, based on collected evidence, the
absence of significant fraud-based (intentional or random) distortion or error in financial
statements of business firms. When the auditor concludes that financial statements are
presented flawlessly, from all aspects, per the accounting standards, he should voice an
unadjusted (sensible) opinion; otherwise, he should give an adjusted opinion (including
conditional, rejected and no opinion). Moreover, according to internal control guidelines of
the Stock Exchange Organization (effective on May 5, 2012, by the board of directors of
Stock and Exchange Organization),the auditor is obliged to establish and apply appropriate
and effective internal controls in business firms,the responsibility of which is by the board
of directors (Articles 12 and 17 of the guideline).
By reviewing the conducted studies on fraud in accounting and auditing in the existing
national and international literature, we picked up few articles on therelationship between
internal control weaknessesand type of auditor opinion in the business firms and financial,
managerial frauds and fraudulent financial reporting. There was no record in the related
literature directly assess the relationshipbetween internal control weaknesses and the type
of auditor’s opinion in fraudulent and non-fraudulent firms, comparatively. Hence,
regarding the significance range of fraud in businessfirms, the role of internal controls and
auditors’opinions, the present study aims to assess the relationship between internal
control weaknessesand the type of auditor’s opinion in fraudulent and non-fraudulent firms.
Theoretical principles and hypothesis development
Type of auditor opinion
The significance ofauditing as one of the mechanisms of corporate governancehas attracted
the attention of scholars. In general, according to what is stipulated in auditing standards,
different types of auditors’opinionsare divided into two general groups:
(1) unadjusted opinion (accepted); and
(2) adjusted opinion (including conditional, rejected and no-opinion).
By unadjusted opinion, we mean accepted opinion. The auditor voices unadjusted opinion
when based on the collected evidence and follow-ups conclude that financial statements
from all significant aspects are appropriately in line with the auditing standards. The
adjusted opinion includes three types of opinions named conditional, rejected and no-
opinion. The auditorpresents one of the adjusted opinions when:
concludes based on the collected data that financial statements are deprived of any
type of significant distortion (due to fraud or error); or
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