Abstract | Corporate fraud can be classified into asset misappropriation and fraudulent financial reporting. But corporate fraud significantly harms the transparency of financial reporting, regardless of types of fraud. Even a single incident of corporate fraud can shake the public’s confidence in the credibility of financial reporting, which may ultimately dismantle effective functioning of the financial market. The loss of public’s confidence will, in turn, increase the cost of capital even to those companies not involved in the fraud. In economic downturn, many companies face challenges to meet the target revenue or income, loan covenants, or analyst’s expectations. Personal greed, pay cuts, diminished morale, and inadequate internal control aggravate the situation for corporate fraud. Most of fraud occurrences go undetected and their magnitude cannot be determined for certain. A preventive measure to lessen the tempting opportunities is regarded as the best approach to manage risks arising from fraud. ACFE (2008) reports the lack of internal controls as the main cause for corporate fraud. Internal control purports to provide reasonable assurance about safeguarding assets and reliable financial information along with other features. But the organization’s tone at the top provides the ground upon which internal control system can be built and operated as planned.
Key Words:corporate fraud, financial crime, fraudulent financial reporting, audit committee |