Internal control and employees’ occupational fraud on expenditure claims
| Date | 02 July 2018 |
| Pages | 891-906 |
| Published date | 02 July 2018 |
| DOI | https://doi.org/10.1108/JFC-07-2017-0067 |
| Author | Anuar Nawawi,Ahmad Saiful Azlin Puteh Salin |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial crime |
Internal control and employees’
occupational fraud on
expenditure claims
Anuar Nawawi
Faculty of Accountancy, Universiti Teknologi MARA, Shah Alam, Malaysia, and
Ahmad Saiful Azlin Puteh Salin
Faculty of Accountancy, Universiti Teknologi MARA, Perak Branch,
Tapah Campus, Malaysia
Abstract
Purpose –The purpose of this study is to investigate the weaknesses of internal control in expenditure
claim procedure and to identify the opinionsof employees regarding an occupationalfraud. This study also
attempts to examine the most popular occupational fraud committed by the employee and whether a
company’sworking environment contributed to the fraud.
Design/methodology/approach –A case study approach was adoptedto investigate and analyse the
weaknesses of the internal control and occupational fraud incidents. A mixed method of data collection,
specifically,survey questionnaire and document analysiswere used.
Findings –This study found that the internal control of the expenditure claim procedure was weak and
needed improvement. Thisstudy also found that a strong internal control and a better remunerationpaid to
the employees could reduce the risk of the occupationalfraud committed in the company. In terms of fraud
types, this studydiscovered that claims on mileage, followed by petrol,accommodation and suppliers’invoice
were the most popular occupational frauds committed by the employees. Finally, employee dissatisfaction
and poor working-environmentculture influence occupationalfraud’s level in the organizations.
Research limitations/implications –The results provide further confirmation of the fraud triangle
theory on the causes of fraud, i.e. opportunity because of a weak internal control and financial pressure
because oflow andnon-standardized salary. This study,however, was conducted only on one company.
Practical implications –This study provides some recommendations to overcome the weak internal
control and improve employees’satisfaction which lead to better workingenvironment. Thus, opportunities
for fraudin the company can be reduced.
Originality/value –This study is original,as it focusses specifically on occupational fraudwhich is rare in
fraud literature, particularly for a study that is conducted indeveloping markets like Malaysia. It also has
examinedvarious related sensitive documents andreports of employee frauds that are generallydifficult to be
accessedby researchers.
Keywords Case study, Internal control, Malaysia, Fraud, Expenditure claims
Paper type Case study
Introduction
The collapse of big and prominent companies like Enron, WorldCom, Parmalat, Adelphia,
Arthur Andersen and HIH Insuranceindicates that fraud is not a small problem. Many cases
of corporate scandals and collapse provide evidences that moral misconducts may
contribute to financial disasterof a company (Khadijah et al.,2015). Businesses lose billions
of dollars every year because of fraud [Association of Certified Fraud Examiners (ACFE),
2016], and this malpractice does not shows any sign of decreasing. In China, if fraud also
Fraud on
expenditure
claims
891
Journalof Financial Crime
Vol.25 No. 3, 2018
pp. 891-906
© Emerald Publishing Limited
1359-0790
DOI 10.1108/JFC-07-2017-0067
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1359-0790.htm
involved a corruption,death penalty awaits (Cheng and Ma, 2009), showing how serious the
regulatory authoritiesare towards combating this malpractice.
The impact of fraud is worst in small companies, as theft and unethical practices by a
single person can lead to the failure of business. This is because a fraud proves to be very
costly to a company and for small business, as they usually do not have sufficient funds to
absorb the loss. In addition, when the news about the fraud is exposed,company will lose its
reputation and trust of the stakeholders. Customerswill not anymore buy the product from
the company, while vendors will bereluctant to supply the raw materials. Lenders also will
charge a very high interest for the loan obtained due to because of the higher risk of
solvency. Based on a fraud survey conducted by several global accounting firms such as
PWC (2016),KPMG (2013,2016) and Ernst & Young (2016), the major forms of employee
frauds include theft of cash, inventory and equipment, false invoicing, kickbacks and
bribery, fraudulent use of company’s credit card, diversion of sales to one’s own business,
fraudulent expense claim, siphoning of stock by third party vendors and theft of
information. However, fraud that is most frequently committed by the employees is an
occupational fraud.
Peltier-Rivest (2009)suggests that an occupational fraud usually occurs when a company
does not establish a dedicated unit of function to monitor this activity. The firm size also
influences the magnitudeof the loss experiencedby the company because of an occupational
fraud. Relatively, fraud loss worth is larger and the hit bigger for a small-size company.
Association of Certified Fraud Examiners (ACFE) (2012) documented that the loss due to
occupational fraud can exceedUS$3.5tn every year worldwide, while in the UK itself, every
single or individualcase may cost the company an average of £25,000 (Buttonet al.,2015).
Employees usually have limited insight into fraudulent activities, which they think the
existing mechanism of internal control and daily routine are efficient enough to combat
occupational crimes. There is no effort taken to upgrade the existing internal control
because of the need to focus on daily routines. Consequently, a fraudsterwill always create
an opportunity to commit a fraud once he or she sees any loophole in the existing company’s
standard of operating procedures.
To that end, this study attempts to advance the theoreticaland empirical understanding
of an occupational fraud that usually occur in a working environment about which,
sometimes, people are not aware. There are several purposes for this study. First, to
investigate the weaknesses of an internal control system and its effects on cash advance
management system. Second, to seek employees’opinions regarding an occupationalfraud.
Third, to examine the most popular occupational fraud committed by the employees, and
finally, to investigatewhether working environment like standardization of salary structure,
whistle-blower rewards,pre-employment screening and employees’benefit can significantly
reduce occupationalfrauds on expenditure claims.
A company was selected as a case study to examine and understand this phenomenon.
This company was incorporated in the middle 1980s in Klang Valley, Malaysia. The core
business of the company includes undertaking business relating to designing,
manufacturing, trading,installation, construction, maintenance of sewerage treatmentplant
and solid waste management. Its product provides full solution from manufacturing,
designing, constructing,testing and commissioning. This company did not own its internal
control department but hired an accounting firm to perform this task. The internal control
assessment is conducted onlyonce a year, and clearly, this is not sufficient. This case study
will help the company to detect or diagnose the possibility of financial crimes that occur
within its own walls.
JFC
25,3
892
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