The economic crunch created a specific context for activity and profitability failing. The corruption is more and more common in our days. In the same time, the amount of money lost by businesses and the public sector to larger frauds increased last year to unthinkable limits. The shareholders expect the directors to take care to protect their company’s assets. This is why the financial controller has a very important role in each organization. The techniques to detect corruption or a fraud are developing every year. Thus, the introduction of computerized accounting has created the opportunities to conduct very comprehensive tests at relatively little cost. However, the fraudsters became more and more clever, and the controllers are responsible for the prevention and detection of fraud. The procedures that controllers should adopt with regard to fraud depend on the risk that fraud could occur and remain undetected and also the risk of that fraud impairing the truth and fairness of the statement.corruption; fraud; internal control; internal audit; business fraud

IONESCU, Luminiţa

English

Research Papers in Economics

123
CORRUPTION, FRAUD AND INTERNAL CONTROL
*
Luminiţa IONESCU
Romanian Academy 
Post-Doctoral Scool
Abstract
The  economic  crunch created  a  specific  context  for  activity  and 
profitability failing. The corruption is more and more common in our days. In 
the same time, the amount of money lost by businesses and the public sector 
to larger frauds increased last year to unthinkable limits. The shareholders 
expect the directors to take care to protect their company’s assets. This is 
why the financial controller has a very important role in each organization. 
The techniques to detect corruption or a fraud are developing every year. 
Thus,  the  introduction  of  computerized  accounting  has  created  the 
opportunities to  conduct  very  comprehensive  tests  at  relatively  little  cost. 
However, the fraudsters became more and more clever, and the controllers 
are responsible for the prevention and detection of fraud. The procedures 
that controllers should adopt with regard to fraud depend on the risk that 
fraud  could  occur  and  remain  undetected  and  also  the  risk  of  that fraud 
impairing the truth and fairness of the statement.
Key-words: corruption,  fraud,  internal  control,  internal  audit, 
business fraud
JEL Classification: H83, M41, M42
Introduction
We propose in this paper a survey of what it means corruption, fraud, how to 
detect a fraud and the consequences of the business fraud. In the last few years the 
corruption and frauds increased considerable with new techniques by Internet and 
email.  Corruption  is  lack  of  integrity  or  honesty  (especially  susceptibility  to 
bribery); use of a position of trust for dishonest gain. The act of corrupting or of 
impairing  integrity,  virtue,  or  moral  principle;  the  state  of  being  corrupted  or 
debased; loss of purity or integrity; depravity; wickedness; impurity; bribery.
Fraud is a crime, and also a civil law violation. Defrauding people or entities 
of money or valuables is a common purpose of fraud, but there have also been 
fraudulent  "discoveries"  in  science,  to  gain  prestige  rather  than  immediate 
monetary gain. Fraud can be committed through many media, including mail, wire, 
phone,  and  the  Internet  (computer  crime  and  Internet  fraud).  The  international 
                                                
* This research was supported by the project ”Post-Doctoral Studies in Economies: 
training program for elite researchers – SPODE”, extract  no. POSDRU/89/1.5/S/61755, 
funded    from  the  European  Social  Fund  through  Human  Resources  Development 
Operational Programme 2007-2013.124
dimensions  of  the  web  and  ease  with  which  users  can  hide  their  location,  the 
difficulty of checking identity and legitimacy online, and the simplicity with which 
hackers can divert browsers to dishonest sites and steal credit card details have all 
contributed to the very rapid growth of Internet fraud.
There are many studies and articles on this subject, but the fraud became 
more complex then ever and the government witnesses soaring levels of business 
fraud. Computer crime or cybercrime refers to any crime that involves a computer 
and a network, where the computers may or may not have played an instrumental 
part in the commission of the crime (Moore 2000). Issues surrounding this type of 
crime have become high-profile, particularly those surrounding hacking, copyright 
infringement, child porn, and child grooming. There are also problems of privacy
when confidential information is lost or intercepted, lawfully or otherwise.
On the global level, both governments and non-state actors continue to grow 
in importance, with the ability to engage in such activities as espionage, financial 
theft, and other cross-border crimes sometimes referred to as cyber warfare. The 
international legal system is attempting to hold actors accountable for their actions, 
with the International Criminal Court among the few addressing this threat. 
Literature review
The paper has based its conclusions on the researches of the following persons:
Moore,  R.  (2005)  “Cybercrime:  Investigating  High-Technology  Computer 
Crime,” is presenting the conclusions of the fraud analyzes. Thus, the rapid expansion 
of computer connectivity has provided opportunities for criminals to exploit security 
vulnerabilities in the on-line environment. Computer crime or cybercrime refers to any 
crime that involves a computer and a network, where the computers may or may not 
have played an instrumental part in the commission of the crime.
Dunn, J. (1996) in “Auditing, theory and practice”, presented the professional 
guidance of the auditor’s responsibilities for the detection of fraud. Thus, auditors 
might have to report the fraud or other irregularity to a third party, possible the 
police. The auditor has a professional duty of confidence towards the company. 
The auditor must weigh the damage to the public interest which would be caused 
by a breach of this duty against the effects of suppressing the information about the 
fraud or irregularity.
Broadhurst,  R.(2006)  in  the  article  “Developments  in  the  global  law 
enforcement  of  cyber-crime”  published  in  An  International  Journal  of  Police 
Strategies and Management, is insisting that Cyber-crime is often traditional crime 
(e.g. fraud, identify theft, child pornography) albeit executed swiftly and to vast 
numbers  of  potential  victims,  as  well  as  unauthorized  access,  damage  and 
interference  to  computer  systems.  The  cross-national  nature  of  most  computer 
related crimes have rendered many time-honoured red methods of policing both 
domestically and in cross-border situations ineffective even in advanced nations, 
while the “digital divide” provides “safe havens” for cyber-criminals.
Roehl-Anderson, J.M. (2000) in the book The Controller’s Function, presents 
haw to detect a fraud and haw to watch employee lifestyles. 
Brunetti, A and Weder, B. (2003) in their article “A free press is bad news for 
corruption”  published  in  Journal  of  Public  Economics  87  (2003)  present  how 125
countries with a free press should, therefore, ceteris paribus, have less corruption 
than countries where the press is controlled and censored. They focus on focuses
on  the  role  of  internal  mechanisms  and  incentives  within  the  bureaucracy  in 
controlling corruption. 
Corruption and Internal Control
Corruption tends to be high in an administrative environment where there is a 
lack  of  explicit standards of performance which are  strictly  enforced and in an 
environment where the individual bureaucrat is poorly supervised (Brunetti  and 
Weder 2003). Forms of corruption vary, but include bribery, extortion, cronyism, 
nepotism,  patronage,  graft,  and  embezzlement.  While  corruption  may  facilitate 
criminal  enterprise  such  as  drug  trafficking,  money  laundering,  and  human 
trafficking,  it  is  not  restricted  to  these  activities.  Internal  controls  include  all 
systems and incentives that control corruption within the bureaucracy. It is argued 
that the following conditions are favourable for corruption: 
￿lack of government transparency;
￿lack of freedom information legislation;
￿lack of investigative reporting in the local media;
￿contempt for or negligence of exercising freedom of speech and freedom 
of the press;
￿weak accounting system;
￿lack of measurement of corruption. 
All  these  reasons  determine  the  importance  of  internal  control  for  any 
organization.
Fraud and Internal Control
From all the potential loss, fraud is the most complex and difficult to detect. 
Fraud represents intentional actions of the part of the client or its personnel to the 
client’s financial statements, assets or both. 
Fraud is an act of making money by making people to believe something 
which is not true.  Fraud is a deliberate deception perpetrated for unlawful or unfair 
gain. Fraud is not an unintentional mistake, such as incorrect accounting estimate, 
the application of a cost to an incorrect account or a lost inventory tag during a 
physical count. 
There are many types of fraud and some of them are very difficult to detect 
and very difficult to prove. In order to detect some frauds, the controller could 
spend  a  lot  of  time  and  effort.  Sometimes  in  fraud  situation  are  many  people 
involved  and  the  controller  must  to  do  a  real  investigation,  to  question  several 
people many times and to observe their behaviour. Practice proves that in smaller 
firms are smaller frauds and in bigger firms are bigger frauds. This is why in big 
organizations should be enforce a strong internal control. 
Types of criminal fraud include:
• bait and switch; 
• bankruptcy fraud; 126
• benefit fraud, committing fraud to get government benefits; 
• counterfeit; 
• charlatanism (psychic and occult); 
• confidence tricks such as the 419 fraud and Spanish Prisoner; 
• selling  counterfeit  goods  which  are  not  what  they  claim  to  be,  e.g., 
designer clothing, fake works of art, archaeological objects, etc.; 
• creation of false companies or “long firms”; 
• embezzlement, taking money which one has been entrusted with on behalf 
of another party; 
• false advertising; 
• false billing; 
• false insurance claims; 
• forgery of documents or signatures; 
• Government Fraud; 
• health fraud, for example selling of products known not to be effective, 
such as quack medicines; 
• identity theft; 
• investment frauds, such as Ponzi schemes and Pyramid schemes; 
• Religious fraud; 
• marriage fraud to obtain immigration rights without entitlement; 
• rigged gambling games such as the shell game; 
• securities frauds such as pump and dump; 
• taking payment for goods ordered with no intention of delivering them; 
• tax fraud, not reporting revenue or illegally avoiding taxes (tax evasion). In 
some countries tax fraud is also prosecuted under false billing or tax forgery.
Fraud is hard to recognize even when we are looking at it. Common people 
are trying to obtain small advantages like food or other supplies, educated people 
are  trying  to  obtain  significant  advantages,  especially  those  involved  in  cash 
handling. More educated people, more sophisticated frauds. Sometimes, the reason 
for missing documentation may be simple misfiling, but it may also be deliberate 
misplacement to cover a fraud situation.
How to detect a fraud?
It is difficult to detect a fraud, but in the same time could be very simple. 
Here are a few methods to help us to detect a fraud, no matter its size or type:
– watch the environment;
– watch the controls;
– watch employee lifestyles;
– be available.
Watch the environment
Management philosophy and operation style are important elements, because 
management should be a model for the staff. It management uses the company for 
personal gain and then other employees may feel that it is acceptable for them to do 
so as well. 127
Watch the controls
Sometimes some employee’s job is object of internal control much often than 
others.  In  this  case  we  should  split  the  responsibilities  in  order  to  remove 
temptation. A good example is separation of the authorization of transactions from 
custody of any related assets. The person,  who authorizes the payment for any 
invoice, should not be the same who signs the check or payment order to pay the 
invoice.  Or, the person authorizing the payment to purchase an item should be not 
involved in physical control over the assets. 
Watch employee lifestyles
The employees have different lifestyle and in order to satisfy their need could 
think to be a part of fraud. Also, individuals are different in ways that matter in the 
workplace. This is why for controller is important to observe employee’s behaviour 
during his work. Sometimes accountants could be involved in activities facilitating 
fraud in exchange of benefits. Sooner or later these benefits will be shown: new 
cars or new apartments. Also other details could be important, like big parties, long 
vacations in luxurious locations, expensive schools for children, etc. 
“Manage by walking around”. It is a good policy to go into the work area and 
to talk to the accountants about their concerns. Always a good controller will use 
the informal channels, because only the informal relationships could provide the 
lubricant to make the organization work smoothly.
Be available
Fraud  can  be  surprisingly  well-known  among  employees.  This  is  why 
availability is vital. Controller’s office is close to the accounting department and 
usually  it  is  an  open-door  policy.  The  controller  is  involved  in  day-to-day 
operations and also in reviewing them. Finally, the controller will take time for 
informal drop-in visits with employees and also for informal discussions during 
brief, unscheduled visits. The controller will collect a lot of information and will 
protect his sources.   
Finally, we could say that internal control is imperative to any organization, 
especially to an accountancy firm. Some professional accountants are empowered 
to handle the funds of their clients and to manage their assets. 
Auditors  are  evaluating  the  results  of  the  internal  control.  The  auditors’ 
responsibility  for  the  detection  of  fraud  is  not  clearly  defined.  The  size  and 
complexity  of  an  audit  and  the  need  to  rely  on  the  judgment  of  the  various 
members  of  the  audit  team  have  suggested  that  audit  firms  should  implement 
quality  control  procedures  to  ensure  that  all  of  their  work  is  of an  appropriate 
standard.  
Levels of business fraud
The amount of money lost by businesses and the public sector in Scotland to 
larger  frauds  increased  last  year  by  670  percent,  according  to  ICAS  Magazine 
February 2010. The specialists predict that the rise is a precursor of things to come 
and warn that annual reported corporate fraud treble within the next three years. 128
This will be the result of management uncovering fraud as the recession sharpens 
their focus on questioning costs and tighter cash flow and credit making frauds 
harder to hide. Thus, Judith Scott, director of forensic accounting at BDO Scotland, 
said: “Businesses are often cavalier with regard to risk during boom times, and then 
wonder where it all went wrong when the rug is pulled from under their feet by a 
recession.” “However, this is by far the steepest increase in fraud levels since our 
report began seven years ago. Then, the average value of each fraud was around the 
GBP 1.8m mark. Now it’s closer to GBP 5m. We warned businesses this time last 
year that fraud levels were set to rocket, largely due to the recession. Our mid-year 
figures pointed to a 400 per cent increase, but the final total is staggering”. ”The 
bad news is that experience tells us we’ve yet to hit a peak. There has always been 
a lag effect during periods of economic crises, with reported fraud continuing to 
rise long after the economy has pulled itself out of recession.”
Computer crime
Broadhurst examines the role of digital and information technologies in the 
generation of national wealth that now means that the new risks associated with 
these  changes  require  continued  attention  on  all  fronts:  national,  regional  and 
international. “While the economic crunch continues to accelerate, a fully global 
response to the problems of security in the digital age has yet to emerge and efforts 
to secure cyberspace has been reactive rather than proactive. Developments in the 
trans-national policing of ‘cyberspace’ so essential in addressing cyber-crime are 
the  focus  of  this  paper  and  it  outlines  what  the  international  community  has 
achieved  so  far.”  Thus,  “controlling  crime  involving  digital  technology  and 
computer networks will also require a variety of new networks: networks between 
police and other agencies within government, networks between police and private 
institutions, and networks of police across national borders. Over the past decade, 
considerable progress has been made within and between nations to develop the 
capacity of police to respond to cybercrime and there is now growing awareness 
amongst computer users of the need for basic security on-line.” Mullin and Snyder 
discuss  securities  fraud,  a  violation  of  a  public  corporation’s  duty  to  report 
mandated  financial  information  that  has  been  audited  according  to  accepted 
accounting principles.
Conclusions
Corruption became a strong phenomenon during the economic crunch. At the 
end of year 2010, fraud is complex and very different from the previous years. 
Errors occur in a random manner, but fraud is deliberate. Fraud can be committed 
through many media, including mail, wire, phone, and the Internet (computer crime
and Internet fraud). The international dimensions of the web and ease with which 
users  can  hide  their  location,  the  difficulty  of checking  identity  and  legitimacy 
online, and the simplicity with which hackers can divert browsers to dishonest sites 
and steal credit card details have all contributed to the very rapid growth of Internet 
fraud.129
The  role  of  internal  control  is  to  provide  and  maintain  a  working 
environment, to effectively manage risks of fraud and corruption incidents. The 
controllers and auditors will normally report any fraud and corruption incidents to 
the management of the company. If it appears that the fraud has been committed by 
the management itself, then the controllers and auditors ought to seek legal advice 
as to the most appropriate action to take. Controllers and auditors have to report the 
fraud or other irregularity to a third party or possible the police.
REFERENCES
Broadhurst,  R.,  Developments  in  the  global  law  enforcement  of  cyber-crime,
Policing:  An  International  Journal  of  Police  Strategies  and  Management 
(2006): 408-433.
Brunetti,  A  and  Weder,  B.  (2003),  A  free  press  is  bad  new  for  corruption,  in 
“Journal of Public Economics”, 87, 2003.
Dunn,  J.,  Auditing,  Theory  and  Practice,  second  edition,  Prentice  Hall  (1996). 
ICAS Magazine, February, 2010.
Ionescu, L., The Political Dynamics of Corporate Crime Legislation, Economics, 
Management,  and  Financial  Markets,  volume  4(3),  Addleton  Academic 
Publishers, NY (2009).
Moore,  R.,  Cybercrime:  Investigating  High-Technology  Computer  Crime, 
Cleveland, Mississippi: Anderson Publishing (2005).
Roehl-Anderson J.M., Bragg S.M., The Controller’s Function, John Wiley&Sons, 
Inc (2000).

A free press is bad new for corruption,

Auditing, Theory and Practice,

Cybercrime: Investigating High-Technology Computer Crime,

Developments in the global law enforcement of cyber-crime, Policing:

The Controller’s Function,

The Political Dynamics of Corporate Crime Legislation,

CORRUPTION, FRAUD AND INTERNAL CONTROL

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