Corruption as distinct crime: the need to reconceptualise internal control on controlling bureaucratic occupational fraud

Published date27 July 2021
Date27 July 2021
Subject MatterAccounting & finance,Financial risk/company failure,Financial crime
AuthorAch Maulidi,Jake Ansell
Corruption as distinct crime: the
need to reconceptualise internal
control on controlling
bureaucratic occupational fraud
Ach Maulidi
Business School, The University of Edinburgh, Edinburgh, UK and
Department of Accounting, BINUS Graduate Program,
Bina Nusantara University, Jakarta Barat, Indonesia, and
Jake Ansell
School of Business, The University of Edinburgh, Edinburgh, UK
Purpose The purpose of this study is to provide theoreticalguidance that enables local governments to
deal with occupationalfraud.
Design/methodology/approach The quantitative approach is used to examine the eff‌icacy of the
Committee of SponsoringOrganisations of the Treadway Commission (COSO) internalcontrol framework in
tackling occupationalfraud in local government. To achieve the goals, the authors performed a survey of the
Indonesianauditor institutions.
Findings It is not appropriateto argue that all types of local government fraud can be deterred by a single
internal control. The study suggeststhat COSO internal controls are not effective for dealing with corruption
cases. However, the authors do f‌ind the eff‌icacy of those controls are obvious for controlling asset
misappropriation and f‌inancial statement fraud. This result indicates that if the COSO internal control
framework is only designed for routine f‌inancialcontrol and asset protection, it signif‌icantly and negatively
inf‌luences its eff‌icacy to deal with occupational fraud. This study has both theoretical and managerial
implications,discussed separately.
Originality/value In the f‌ield of prevention, the authors cannot make generalised theories and
approaches for dealing with occupational fraud. Whilst previous authors have offered fraud deterrents in
terms of internal controls,they have failed to realise the need to understand their effectiveness for particular
forms of fraud. This paper sheds light on theeffectiveness of internal controls in achieving their goals. This
has both practicalapplications and stimulates theoretical insights.
Keywords Local government, Internal control, COSO, Occupational fraud, Fraud deterrent
Paper type Research paper
Occupational fraud committed by respectable high social status individuals has attracted
many academic authors (Engdahl and Larsson, 2016;Goossen et al.,2016;Locker and
Godfrey, 2006) and professionals (ACFE, 2018b;PwC, 2018). Quantitative and qualitative
studies of how white collar criminality are perpetrated and how the organization, as well as
regulatory agencies, seekto control such offenses are the most illuminatingpart of the fraud
literature. One of the notions that receive considerable attention is about the preventive
strategies in dealing with white-collar criminality. For example, whilst many scholars
believe that their proposed frameworks (whichare associated with internal control, ethical
Journalof Financial Crime
Vol.29 No. 2, 2022
pp. 680-700
© Emerald Publishing Limited
DOI 10.1108/JFC-04-2021-0100
The current issue and full text archive of this journal is available on Emerald Insight at:
culture and management review) can deter any types of illegality, they, however, have
limited effectiveness in practice (Wurthmann, 2020;Bierstaker et al.,2006;Adams et al.,
2006). As explained by prior studies (Maulidi, 2020;Ormerod et al.,2012;Dai et al.,2017),
organisations needto further understand the context to control the risk of fraud.
Experimental research has helped to identify the situational correlates of fraud
behaviours, but lacks a theoretical framework for organising the phenomenon of
organisationalfraud operated by organisational leaders (Power, 2013).In addition, extensive
studies have shown that people engaging in misconduct is not because of the existence of
opportunities of doingso (Gneezy, 2005;Ariely et al.,2019;Knechel and Mintchik, 2021;fora
review about the concept of fraudtolerance). Taken together, those studies support the view
that the increase in the rate of organisational illegalities is not merely a function of the
increased opportunitiesfor doing such acts as well. Of course, it becomes a serious challenge
for organisations and regulatory agencies. As Maulidi (2020) have been explained,
organisation and regulatory agencies are required to understand fraud prevention beyond
the structural factorsthat motivate offenders to commit illegal acts.
In the wake of high-prof‌ile corporate scandals, some people argue that effective internal
control is becoming strategicallyimportant in many organisations because it is evidencedto
be a cost-eff‌icient way to manage the fraud risks in everyday operations (Shonhadji and
Maulidi, 2020;Skousen et al.,2009). Shonhadji and Maulidi (2020) mention, the most applied
internal control in both private and public organisations is the internal control framework
prescribed by the Committee of Sponsoring Organisations of the Treadway Commission
(COSO). The COSOs internal control framework, which is composed of integrated f‌ive
components, is viewed as the gold standard of internal control for many organisations
(Cendrowski et al., 2007). Flaherty and Maki (2004), as executives on the Treadway
Commission (COSO), promulgate that the COSO integrated framework is intended to deal
with f‌inancial reporting fraudand potential events that may establishmalicious risks, fraud
and, as well as external fraud.
Recent empirical research studies show the eff‌icacy of organisational internal control on
preventing opportunitiesto engage in fraud acts. For example, Al-Dhamari et al. (2018), who
examine the role of the internal audit function (IAF) in Malaysia acknowledge that the IAF
plays a vital role in controlling moral hazard and unethical behaviours. The study also
shows when internal corporate governance mechanisms are relatively weak, and the
enforcement of the legal system is low, f‌inancial reporting quality then would deteriorate.
Brokenshire et al. (2011), synthesise a wide range of fraudulent activities encompassing
f‌inancial crimes that occurred in the UKs local governments. They note that due to
sophisticated modus operandi and lack of effective internal control, government bodies
experience diff‌iculties in dealing with tangible or intangible conducts associated with
wrongdoings or frauds. Several contemporary studies (Laxman et al.,2014;Rezaee, 2005)
and existing literatures (Cendrowski et al.,2007;Hopwood et al.,2009;Taylor, 2011) point
out that COSO internal control system comprising f‌ive components has a signif‌icant
inf‌luence on the process of discovering the presence of a potential source of fraud
concealment. However, those academics references do not elucidate which fraudulent
activities can be prevented by internalcontrols. As mentioned by the Chartered Institute of
Management Accountants/CIMA (2008), types of fraud within the organisation have
different characteristicsand different opportunities.
Therefore, the position of the current studyis to contribute to those unexplored research
areas. We examine the eff‌icacy of the COSO framework which is claimed as a deterrent to
fraudulent activities (Corruption [CORPT], Asset misappropriation [AM], Financial
statement fraud [FSF]) in any type of organisations (Flaherty and Maki, 2004). To our
Corruption as
a distinct

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