IEE 454_ASSIGNMENT_2024_RISK MANAGEMENT EARLY DETECTION OF FRAUD PREVENTION EFFORTS

Students name : Scoots Bar

Course number and Name : IEE 454 - Risk Management

Instructors Name : Brittany Holloman

RISK MANAGEMENT: EARLY DETECTION OF FRAUD

PREVENTION EFFORTS

1.0 Introduction:

Fraud or better known as fraud, is still a phenomenal issue and is very interesting to

discuss and study various cases that currently occur frequently in society. The Association of

Certified Fraud Examiners (ACFE) defines fraud as the use of a position by someone to

enrich themselves through deliberate misuse or misuse of organizational assets or resources.

Or in other words, fraud is fraud regarding the benefits obtained by someone by presenting

something that is not in accordance with the actual situation. It includes elements of surprise /

unexpected, deceit, cunning, and dishonesty that harm other parties (ACFE, 2008). So fraud

can be interpreted as an act of fraud or error committed by a person or entity who knows that

the error can result in losses to other individuals or entities (Surjandari, 2015). Fraud creates

a misjudgment or maintains an existing false judgment to persuade someone to make a

contract. This is done because it involves enriching oneself intentionally by secretly reducing

the value of assets (Enofe, 2013).

Fraud includes intentional dishonesty, misrepresentation, manipulation and display of

facts that can harm others and organizations including banks. Fraud also includes theft,

appropriation, attempts to obtain something illegally, and errors in making financial

statements including the assets and liabilities of the organization (Gilbert & Wakefield,

2018). Thus, fraud is deception that includes the elements of: (a) a representation; (b) about

something material; (c) something that is not true; (d) and intentionally or gratuitously carried

out for later; (e) believed; (f) and acted upon by the victim; (g) so that in the end the victim

suffers losses (Zimbelmann, et. al, 2014).

Schematically, the ACFE describes occupational fraud in the form of a fraud tree.

This fraud tree depicts the branches of occupational fraud, along with their twigs and

branches. So the occupational fraud tree has three main branches, namely corruption, asset

misappropriation, and fraudulent statements (financial statement fraud) (Tuanakotta, 2010).

One theoretical explanation of the causes of someone committing fraud was first developed

by Donald Cressey with his theory known as the fraud triangle. In his theory, it is explained

that the fraud triangle is divided into three parts, namely pressure, opportunity, and

rationalization (Cressey, 1950). Pressure is the embezzlement of company money by a

perpetrator who starts from a pressure. The person has urgent financial needs, so that

personally individual needs are considered more important than organizational needs. The

second cause of fraud is opportunity, where fraud will be committed if there is an opportunity

where someone must have access to assets or have the authority to set control procedures that

allow fraud schemes to be carried out. The third cause is rationalization, meaning that fraud

is committed because there is a rationalization made by a person or group of people by

building justifications for the fraud committed. Fraud perpetrators usually look for reasons to

justify that what they are doing is not theft or fraud, but something that is indeed possible is

his or her right. However, some individuals are more prone to fraud than others. The

tendency to commit fraud depends on their ethical values and personal circumstances

(Abdullahi, et. al, 2015).

According to the Association of Certified Fraud Examiners (ACFE) report in 2020,

based on the frequency of fraud that occurs, asset misappropriation is the fraud that has the

highest frequency followed by corruption and the last is financial statement fraud. But

financial statement fraud is the type of fraud that has the most detrimental impact of fraud

among other types of fraud (ACFE, 2020).

Financial statement fraud is considered as management fraud that results in material

errors in the financial statements so that the financial statements contain misleading

information. The increase in various cases of accounting scandals in various countries around

the world has caused various parties to speculate that management has committed fraud in the

financial statements (Skousen & Wright, 2009).

Financial statement fraud is always related to corporate governance. According to

Dechow, et.el. (2012), the incidence of fraud is highest in companies with weak corporate

governance systems. The tendency to commit fraud is greater in companies with a

background dominated by insiders and most likely do not have an audit committee (Dechow,

et.al., 2012).

Prevention efforts against fraud will be more effective than repressive efforts.

Prevention needs to be done to avoid greater losses and damage to the reputation of

institutions and individuals. In addition, fraud incidents that are not immediately handled and

revealed because The slow handling will increasingly provide opportunities for the

perpetrator to cover up his actions with other fraud. Therefore, it is necessary to make efforts

to prevent the occurrence of true and targeted fraud, so that all forms and efforts of fraudulent

practices can be anticipated as early as possible in order to avoid the risk of loss (Kurniasari,

2017).

Many efforts to prevent fraudulent practices have been made based on existing

theories and research, with the hope that fraudulent practices can be anticipated as early as

possible. One of them is preventing fraud by implementing risk management, which

describes that risk is a concept that describes an uncertainty, or an event on conditions related

to obstacles in achieving goals (Susilo & Victor, 2019). In an effort to prevent fraud,

management must carry out a process of managing its organizational resources to anticipate

risks that may occur which have previously been identified, measured and considered how to

handle them. Every organizational activity will always have uncertainties that are

synonymous with risk, including the risk of fraud, so management must be responsible for

managing the risks that will be faced (Karyono, 2013).

2.0 Literature Review:

The Institute of Internal Auditors (IIA), an organization of internal auditors in the

United States, defines fraud as a set of impermissible and unlawful actions characterized by

an element of intentional fraud. This means that fraud is a fraud that implies a deviation and

unlawful act committed intentionally for a specific purpose, such as deceiving or misleading

other parties, which is carried out by the IIA people from both inside and outside the

organization (Karyono, 2013).

Furthermore, the Chartered Institute of Public Finance and Accountancy (CIPFA)

states fraud as intentional misconduct and concealment of material facts, omission of

evidence to commit fraud and manipulation to the financial detriment of an individual or

organization. Fraud includes embezzlement, theft, forgery, misappropriation, and

deliberately removing evidence (CIPFA, 2013).

It can be generally defined that fraud is a general term, and encompasses any means

that can be used with a certain shrewdness, chosen by an individual, to gain an advantage

over others by making false representations. There is no fixed rule that can be issued as a

general proposition in defining fraud, including surprise, deceit, or cunning and unnatural

means used to commit fraud. The only limits to defining fraud are those that limit human

dishonesty (Zimbelman, et.al., 2014).

Fraud in corporate organizations generally comes from two directions, namely

internal and external. Internal fraud is fraud originating from parties within the corporate

organization itself, such as corruption, presentation of false reports, financial statement

engineering, double financial statements, covering or disguising embezzlement,

incompetence in accounting, theft or improper use of organizational assets by employees and

management for personal or group interests and use that is not in accordance with its

designation. While external fraud is fraud that comes from outside the company's

organization, such as bribery, increasing the value of invoices, double invoicing and quality

fraud such as goods transactions that are not in accordance with the company's policies

agreed presentation (Sayyid, 2014).

Fraudulent statements, namely fraud by presenting financial statements better than

they actually are (over statement) and worse than they actually are (under statement)

(Karyono, 2013), presenting assets or revenues higher than they actually are, or presenting

assets and revenues lower than they actually are (Tuanakotta, 2010), deliberate actions to

produce misleading financial statement material to deceive or misrepresent the organization's

financial position (Albashrawi, 2016), making the organization look more or less profitable

(Apostolou & Apostolou, 2012). While asset misappropriation fraud is the illegal "taking"

(unauthorized or against the law) committed by someone who is authorized to manage or

oversee these assets (Tuanakotta, 2010). And corruption is an act that harms the public

interest or the wider community for the benefit of certain individuals or groups. Corruption

can occur in private corporate organizations as well as in the public sector of government

(Karyono, 2013).

There are several things that motivate management to present financial statements that

contain elements of fraud: (a) provide support to keep stock prices high; (b) provide support

for bonds and shares; and (c) maximize bonuses for management (Zimbelman, et. al., 2014).

According to the Association of Certified Fraud Examiners (ACFE) in its third edition

manual, fraud axioms include: 1) Hidden, this fraud is carried out in a hidden manner and

tries to cover up its actions; 2) Reverse evidence, to prove that fraud has occurred, it must be

attempted so that the fraud does not occur, and vice versa; 3) Types of fraud, which consists

of internal fraud and system control fraud. Internal fraud occurs naturally which is inherent

in every form of activity. System control fraud occurs due to a weak internal control system

and usually the perpetrator has knowledge of the internal work system (Karyono, 2013).

There are several factors that cause someone to commit fraud. Because almost every

criminal act or crime is always driven or triggered by a condition and behavior that causes it.

In this discussion, researchers limit it to using only the Fraud Triangle Theory. According to

this theory, that fraud behavior is carried out or carried out because of three elements, namely

pressure, opportunity, and justification (rationalization). The theory, first formulated by

criminologist Donald R. Cressey (1950), concludes that fraud is generally divided into three

general characteristics. First, fraudsters who have the opportunity to commit fraud

(opportunity). Second, fraudsters have urgent financial needs that cannot be told to others

(pressure). Third, individuals involved in fraud rationalize their fraudulent actions consistent

with their personal code of ethics (rationalization) (Cressey, 1950). And the three fraud

factors are reinforced by the results of research by Skousen et. al. as "triangle fraud"

(Skousen et.al., 2009).

Fraud that occurs in many fields is inseparable from the desire to take other people's

rights for personal or group interests and then justify that fraud is a common thing that can be

done and also because of the opportunity to commit fraud. Fraud in the accounting field can

occur in the process of processing accounting data contained in accounting information in the

form of financial statements. If the fraud factor occurs in the preparation of financial

statements, it is certain that the financial statements presented are not fair. Fraud not only

damages the trust relationship between management and investors but will also harm the

values of accounting itself.

Financial statement fraud affects various market participants, including investors,

organizations, and employees. As previous research provides information related to indirect

organizational losses for fraud. In addition to the material losses borne by the organization,

the organization's reputation may also be questioned when fraud occurs. Investors' trust in the

organization will be lost and may withdraw all their deposits including investments and

pension funds (Perols, 2011; Ugrin & Odom, 2010). Fraud that occurs in an organization is a

classic manifestation of weak organizational governance. In private organizations, there is a

difference of interest between the principal and the agent. This problem arises because when

the owner (principal) authorizes the manager (agent) to act on their behalf. Which is

basically due to differences in interests and information asymmetry between managers and

owners. This problem can be eliminated if both parties have the same interests (Jensen &

William, 1976).

Unhealthy practices in corporate governance allow fraud to occur which is difficult to

detect by stakeholders. Corporate governance is a tool to ensure that directors and managers

(insiders) act in the best interests of investors. Capital market management bodies in many

countries state that the implementation of good corporate governance in public companies has

succeeded in preventing fraudulent practices on financial reports to interested parties (Chen,

et. al., 2005).

Many efforts to prevent fraudulent practices have been made based on existing

theories and research, with the hope that fraudulent practices can be anticipated as early as

possible. One of them is preventing fraud by implementing risk management, which

describes that risk is a concept that describes an uncertainty, or an event on conditions related

to obstacles in achieving goals (Susilo & Victor, 2019). In an effort to prevent fraud,

management must carry out a process of managing its organizational resources to anticipate

risks that may occur which have previously been identified, measured and considered how to

handle them (Karyono, 2013). Every organizational activity will always have uncertainties

that are synonymous with risk including the risk of fraud, so management must be

responsible for managing the risks that will be faced.

The main foundation in implementing an effective fraud prevention program in the

organization is to carry out a thorough risk assessment process. The basic concept of fraud

risk assessment is an assessment of the occurrence and impact of the risks that have been

identified. In the Committee of Sponsoring Organizations of the Threadway Commission,

there are several stages in the fraud risk assessment process including: (a) form a risk

assessment team involving the appropriate level of management; (b) identify potential

organizational fraud risks by assessing risks at all levels of the organization and those from

the internal and external environment, accommodating various types of fraud and considering

the occurrence of management override control; (c) assess the likelihood and significance of

each identified fraud risk; (d) determine employees and departments potentially involved

based on the fraud triangle; (d) identifying existing controls and assessing their effectiveness;

(e) assessing and responding to any residual fraud risks that need to be mitigated; (f)

identifying any controls in place and assessing their effectiveness mitigated; (f) document the

fraud risk assessment; (g) reassess fraud risk periodically (COSO, 2017). And Fraud Risk

Assessment (FRA) is a unique procedure for distinguishing and evaluating the risk of gaps in

the achievement of organizational goals (Huber, et. al., 2015).

Furthermore, Popoola argues that the implementation of fraud risk assessment (FRA)

requires change and an iterative cyclical process to be able to identify and assess the risk of

gaps in the achievement of organizational goals. Fraud risk assessment requires taking into

account changes in the external environment and their impact on the activity model, the

purpose of which is to control ineffective internal activities. Assessment of fraud risk is

considered an effective tool for fraud prevention and because this tool can increase auditor

competence in searching for, detecting and preventing fraud (Popoola, et.al., 2016).

Risk management theory states that risk treatment can be done in various ways,

namely:

1) avoid risk, meaning by deciding not to carry out activities that carry risk; 2) reduce risk,

which is to reduce the likelihood of occurrence and reduce its consequences or impact; 3)

transfer risk, which is to transfer risk to other parties to bear the risk; 4) accept risk, meaning

without taking further action to compensate for the risks that must be taken; and 5) exploit

risk, which is the action to take risks in other options which are the result of proactive

decisions and are carried out consciously to take new risks because they have superior areas

(Susilo & Victor, 2019). Steps or processes carried out in a systematic way to manage risk

threats are known as risk management (Siahaan, 2009).

While the risk management process based on ISO 31000 consists of three major

processes, which include: (1) context setting, aimed at identifying and expressing

organizational goals; (2) risk assessment, which consists of risk identification, risk analysis,

and risk evaluation; (3) risk handling, which consists of: risk avoidance, risk mitigation, risk

transfer, and risk acceptance. The three major processes are accompanied by two processes,

namely: (a) communication and consultation; and (b) monitoring and review (Susilo &

Victor, 2019; Suwanda, et. al., 2019).

3.0 Research Methods:

The methodology used in this research is through library research, which is a research

method carried out by studying literature and writings that have a close relationship with the

problems raised in the research (Baidan, 2016), through a qualitative approach, which is

research that emphasizes process analysis of deductive and inductive thinking processes

related to the dynamics of relationships between observed phenomena, and always uses

scientific logic (Kisworo & Iwan, 2017).

While the data source of this research is a secondary data source consisting of relevant

previous scientific research works, in the form of books and other scientific works with

various points of view. Meanwhile, the data used is a variety of quality-assured qualitative

data in the form of words, sentences, gestures, facial expressions, charts, drawings and

photographs (Sugiyono, 2011) derived from these various sources.

4.0 Results and Discussion:

As previously discussed, in an effort to prevent fraud, management must carry out a

process of managing its organizational resources to anticipate risks that may occur which

have previously been identified, measured and considered how to handle them. Every

organizational activity will always have uncertainties that are synonymous with risk,

including the risk of fraud, so management must be responsible for managing the risks that

will be faced (Karyono, 2013).

Risk management and internal control contribute to the implementation of good

corporate governance (GCG), especially in improving the success of achieving

organizational goals. Without risk management, the internal control system becomes less

effective. Meanwhile, without an internal control system, the control aspects of GCG are less

effective (Susilo & Victor, 2019).

Robert Moeller in his study of the Committee of Sponsoring Organizations (COSO)

internal control, provides a clear picture of the relationship between corporate governance -

risk management - internal control, as shown in the following figure. In the section entitled

"Clearing up a few misconceptions" it is emphasized that, enterprise risk management (ERM)

goes further than internal control. Internal control is an integrated part of ERM. Internal

control is an important part of enterprise risk management (Moeller, 2014).

Furthermore, Ovidiu-Constantin et. al. (2010) highlighted the importance of risk

management and its role in an organization's internal audit. The existence of a risk

management program means placing high confidence in the organization's financial

statements and better audit risk. The implementation of a risk management program, as with

previous research, explains the role of internal auditors in providing assurance on risk

management. An audit risk model is offered to external auditors based on and tailored to the

organization's risk management, the essence of which is that risk management as a solution to

the fraud crisis (Constantin, et. al., 2010).

While the previous research focused on a holistic approach to risk management, in his

research, Lister (2007) discussed the importance of antifraud programs. Organizations must

know the risks in order to mitigate them. This requires a comprehensive fraud risk

assessment, and corresponds to a holistic approach. Anti-fraud programs can increase

stakeholder confidence. However, Lister suggests the approach should be proactive and

reactive, by identifying risks and having an action plan in case of fraud. The three main plan

components include setting regulations through policy and communication, making risk

assessment and monitoring more proactive, and responding by designing a reactive plan.

Lister evaluates planning and implementation using the fraud triangle, and includes third-

party assessments in designing the program (Lister, 2007).

Research conducted by Crockford (2005) discusses risk as a function of change. The

article was originally published in the Geneva Papers in 1976. It explained that risk

management as the ability to cope with change. Rapid change puts pressure on risk

management, this results in difficulties for the organization to adapt. As with Mehr and

Forbes (1973), Crockford recommends that risk management should function by all

managers, not just one department in the organization (Crockford, 2005).

Snider (1990) has also discussed risk management objectives and the importance of

clear risk management objectives. Snider (1990) highlights the steps in developing risk

management objectives. The creation of risk management policies should come from risk

managers or management consultants. A clear policy can generally provide guidance in

decision-making. When identified, there are several things that influence goal setting,

including organizational structure, reporting systems, and short- or long-term goals. Too

much focus on short-term goals in the past can lead to losses due to neglect of controls and

prevention (Snider, 1990).

As with previous research, Snider (1991) recognized the need to expand the risk

management function beyond insurance, and the need for risk management education. In

addition to discussing the concept of risk management, this study also covers the history and

development of risk management, including recognition by academics, the first academic

book on risk management, and the position of risk managers in organizations. He highlights

the initial resistance by senior management, citing the idea that change equals uncertainty.

Snider also discusses the crisis in the early 1970s, related to insurance, which led to the

acceptance of the concept of risk management. And in 1973, the Geneva Association was

founded, thus encouraging research on risk management, and publishing many conceptual

papers on this topic (Snider, 1991).

Aggarwal, Erel, Stulz, and Williamson (2009) studied the effect of a country's

economic and financial development on investment levels in relation to corporate

governance. The findings show that favorable development results in higher investment, and

less investment in firms with poor governance resulting in lower firm value. His research also

provides minimum governance standards for audits: (1) consulting fees are lower than audit

fees; (2) the audit committee consists of independent outsiders; and (3) the auditor must be

authorized at the annual meeting (Aggarwal, et.al., 2009). This is reinforced by Robu's

research (2015) providing an analysis of the relevance of IFRS (International Financial

Reporting Standars) adoption for trust in financial statement information. Researchers took a

sample of 59 companies before and after IFRS adoption. The results showed that there was an

increase in value relevance after IFRS adoption. The research methodology includes to

determine the effect of IFRS adoption on stock prices, and provides recommendations that

standardized reporting and transparency as a solution for a trusted financial market (Robu,

2015).

Previous research conducted by Kang (2008), provides an analysis from another point

of view in the fraud literature, namely the study of reputational penalties associated with

financial fraud and reputation as a penalty for the companies involved. The findings show an

increase in reputational penalties (decrease) for the companies involved. A decrease in market

value is one of the negative effects. The researcher used signalling theory and attribution

theory to explain the related company relationship. The study sampled 244 related firms and

30 suspect firms, from 1998 to 2002. The findings also show that an increase in uncertainty

leads to a negative effect decrease in investor confidence. However, good governance can

increase investor confidence. The implications of his findings recommend the need for

governance reform (Kang, 2008).

Still on financial statement fraud. Fleming, Riley Jr, Hermanson, and Kranacher

(2016) extended the fraud aspect of research with a study of the most fundamental differences

in financial statement fraud between public and private companies. The researchers found a

lack of data available for private companies by using data sources provided by the

Association of Certified Fraud Examiners (ACFE). Fleming et al. (2016) cite that financial

statement fraud is one of the most costly forms of fraud, with an average loss of $1.5 billion.

$1 million per incident. This is in addition to additional reputational impacts, such as

bankruptcy and loss of market value. Some of the other findings of this study are that the

increasing controls on publicly traded companies indicate the use of less obvious methods of

reporting fraud, such as differences in the timing of reporting. And it will usually continue to

grow if the existing controls continue to be improved. The main purpose of this study is for

audit purposes for its concern in highlighting the difference in treatment between public

companies and private companies (Fleming, et. al., 2016).

Furthermore, Ng, White, Lee, and Moneta (2009) examined the focus on developing

instruments to detect managers' fraud tendencies in managing income. Researchers used an

ethical scenario survey method to collect information to design fraud detection instruments

and factor analysis used as a response. Researchers also used the moral intensity construct to

determine managers' intention to act specifically. The construct consists of six characteristics

Moral intensity includes the magnitude of consequences and social consensus. The findings

suggest that the proposed instrument could be operationalized to measure moral intensity in

future studies (Ng, et. al, 2009).

Previously, Shafer (2002) also examined the role of morals. Shafer analyzed financial

statement fraud in the context of an ethical model of decision making. The ANOVA results

show that materiality and risk are significant factors that affect the likelihood of committing

fraud, while the morality factor is not significant. The researcher used Jones' theory of moral

intensity to explain the prevalence of earnings management. The findings mention the

materiality effect with a note of rationalization when the amount is not material, and a more

than 50% probability of committing fraud when the amount is not material. The key indicator

of the absence of ethical behavior is about the perception of what his friend is doing (Shafer,

2002).

Some researchers focus on auditor responsibility. Kostova (2013) revealed a

relationship between fraud characteristics and audit procedures. Kostova describes the

auditor's responsibility to disclose errors and fraud. Auditors are expected to provide opinions

and conclusions about the reliability of financial statements. Furthermore, the researcher also

revealed the existence of economic factors that cause fraud, also identifies its characteristics.

Researchers mention the economic environment as the main factor that leads to fraud. For

example, organizations are under pressure to achieve financial targets (Kostova, 2013).

In contrast to Kostova (2013) who focused on economic factors, Love (2012)

examined auditor responsibility for fraud detection related to reporting standards. It should be

noted that the GAAS (Generally Accepted Auditing Standars) standard recognizes the

absence of the ability to provide absolute assurance, but rather provides reasonable assurance

and reduces the risk of material misstatement. Auditor discovery of questionable information

requires re-evaluation of all audit areas. Fraudsters may conceal their actions through false

statements and documents during the audit process. Love noted the difference between

conducting a GAAS audit and a fraud examination. A GAAS audit results in an auditor's

opinion on the fairness of the financial statement presentation. Regarding auditor perceptions,

Johnson, Kuhn, Apostolou, and Hassell (2013) examined auditors' fraud risk assessment of

management attitudes. The researchers tested whether observable indicators of narcissism by

auditors are indicators of increased risk. The findings of this study indicate a link between

narcissism and fraud, consistently with the behaviors observed in recent fraud. Researchers

evaluated the ability of auditors to recognize fraud, which requires auditors with higher

abilities and experience. This study also concluded that managerial narcissism is an

observable action and recommended improving the assessment guidelines for fraud (Johnson,

et. al., 2013).

Philmore and Michael (2005) conducted a necessary study on the perceived

responsibility of auditors to detect Enron fraud. The study was to determine the nature and

extent of fraud in Barbados. The researchers used a mixed methods design for the exploratory

study. By conducting a survey of 43 respondents about perceptions and experiences in fraud.

The purpose of The qualitative approach was to support the quantitative survey in fully

understanding the research question. The researcher conducted face-to-face interviews to gain

multiple sources of insight. This article is useful for investors, auditors, and regulators, and

contributes to the understanding of the auditor's role in detecting fraud. The researchers

provided historical background on the role of the auditor, and a review of related literature,

but found there is still a lack of consensus on the role of the auditor. There are several

findings presented in this research study. The majority of respondents stated that fraud

detection is the responsibility of the auditor, while others stated that detection is the

responsibility of management. In particular, those respondents with an accounting

background assume that management is responsible for detecting fraud (Philmore and

Michael, 2005).

In contrast to previous research, Nicolaescu (2013) focuses on the role of internal

audit in detecting fraud. The size of the audit firm affects the quality of the audit report.

Researchers found that rigor can improve the ability to detect fraud. The ability to detect

fraud can also be enhanced by the presence of internal auditors. One finding suggested that

brainstorming can be used as a means for internal auditors to respond to risk assessment. This

study also concluded that internal audit is an important part of corporate governance

(Nicolaescu, 2013).

Previously, Kranacher and Stern (2004) provided suggestions for improving fraud

detection. According to a COSO (Committee of Sponsoring Organization) study, CEOs

commit 75% of all fraud. Meanwhile, Klarskov Jeppesen and Leder (2016) state the need for

auditors to question the integrity of managers, Kranacher and Stern (2004) note a potential

conflict of interest between the auditor and the hiring department executive. Legislation

serves as a deterrent to fraudulent behavior, as auditors must actively detect fraud.

Furthermore, researchers recommend that auditor education should be improved to include

behavioral understanding, investigative skills and deeper analysis (Kranacher and Stern,

2004).

Furthermore, Simha and Satyanarayan (2016) examined the perception of fraud

detection and prevention methods, using qualitative forensic auditor interviews. The

researchers also considered the role of technology in fraud detection and prevention. This

research is a response to the lack of qualitative articles, and the use of forensic auditors by

conducting qualitative interviews to expand the knowledge base. The researcher used a

literature review on the accounting context of fraud, coupled with other detection and

prevention methods. The literature review also included information related to the use of

technology to commit and combat fraud. The aim was to understand the phenomenon of

fraud from the perspective of forensic auditors, utilizing their experience. The researchers

described their methodology, which included the researcher as an instrument in the research

process. Simha and Satyanarayan found that forensic auditors are currently inadequate in

detecting fraud, so a method is needed to supplement, and increase the use of other

prevention methods. The researchers also recognized the role of technology in fraud. Other

findings included security concerns from respondents, and the need for auditors to receive

training in criminal profiling, technology, and behavioral finance. The researchers concluded

the discussion by encouraging further research in the future (Simha and Satyanarayan, 2016).

Other researchers conducted research on automated methods of detecting fraud.

Simeunović, Grubor, and Ristic (2016) examined the use of digital forensic analysis to detect

fraud. Specific cases were examined and researched related to employee fraud, the result of

which was that the introduced concept proved effective for investigating accounting fraud

and detecting evidence of digital fraud. The researchers noted that of the overall 65%

detected fraud, 10% were detected by auditors and 23% were detected by proactive internal

controls. Simeunović et al. added that proactive prevention requires adequate controls and

creating a culture of honesty and integrity in the workplace. In today's era of big data,

technology, and complexity, the authors recommend a combined approach of digital analytics

and audit skills for fraud prevention (Simeunović, et al., 2016).

5.0 Conclusions and Suggestions:

To explore and understand the relevant patterns and themes of early detection of

financial statement fraud, the relevant literature is on the topics of motivation, intention,

responsibility, and fraud prevention. Most of the literature focuses on the fraud triangle as a

consequence of previous fraud cases.

Much of the literature focuses on internal controls and corporate governance in

relation to the audit process, including the need for planned reviews of internal controls and

risk assessments as part of the audit process. Some researchers studied the ability of auditors

to recognize fraud and determined that more training is needed for auditors to determine the

motivation of someone committing fraud. So that further research is needed related to fraud

prevention in the audit process proactive prevention requires adequate controls and a good

ethical culture within the company.

It was found that current fraud detection methods are still inadequate. In addition to

focusing on the audit process, research was also conducted on internal control and corporate

governance. Another focus is on the ethical and behavioral aspects of corporate culture, for

the development of fraud detection models and some recommended prevention strategies.

This includes the extent of audit responsibility for detection in auditors' perceptions of fraud

prevention. And another recommendation is the lack of consensus on the role of auditors in

detecting and preventing fraud, and the limited qualitative research related to it.

Although there is a lot of literature on fraud on financial statements, there are still

gaps related to proactive prevention. That is, there is a gap in the concept of risk management

in current practice to detect and prevent fraud, as well as how auditors' perspectives on

detecting fraud and creating proactive models to detect and prevent fraud. In addition,

practitioners can also use this information in developing proactive risk management

procedures for fraud prevention, and auditors may be able to develop guidelines for early

fraud detection in risk monitoring.

Fraud includes intentional dishonesty, misrepresentation, manipulation and display of

facts that can harm others and organizations including banks. Fraud also includes theft,

appropriation, attempts to obtain something illegally, and errors in making financial

statements including the assets and liabilities of the organization (Gilbert & Wakefield,