INTERNAL CONTROL

The role of Internal Control to Prevent Fraud in Accounting Information System

By
Hady Putranto
1410532002
International Accounting
Faculty of Economics
Andalas University

Abstract

This literature review has goal to shows the role of internal control to prevent fraud in
accounting information system. As we know that, the development of technology makes all
activity become easier and more practice. In accounting, one of characteristic of this
development is all activities that related to accounting cycle are recorded in computerized
system. Different with the past era before this development exist, all of activities that related to
accounting is recorded by manual system that conducted by human manually. As the result, there
will be possibility of fraud happen because of this system. Fraud is any intentional act or
omission designed to deceive others, resulting in the victim suffering a loss and / or the
perpetrator achieving a gain ( The Institute of Internal Auditor : 2007 ) . Even in accounting
system, fraud still possibly happen but it can be minimized and directly know what is going on.
One of the way to minimize the fraud is to conduct Internal control. Internal control is a process
put into place by management and the board of directors to ensure that objectives are achieved
in the areas of effectiveness and efficiency of operations, reliability of financial reporting, and
compliance with applicable laws and regulations ( Hansen and Mowen 8 th Edition : 2007 ).
Good internal control can decrease the fraud in accounting information system, so it will help
the company to achieve their goal.

Keywords : Internal Control, Fraud, Accounting Information System.

Introduction

Accounting information helps the external parties or external users to make decision making for
accounting information publisher in order to make investment, evaluate performance, monitoring
activity, and also to measure the effectiveness the operational of company. By using accounting
information, internal party would obtain information relating to the past and future, such as
forecasting which includes annual plans, strategic, and several alternatives decision (Azhar
Susanto, 2008, as cited in Mulyo Agung, 2015). The accounting information is useful or
qualified if the accounting information that can redirect the user to the action expected ( James
Hall : 2011 ). To provide the useful or qualified accounting information, one of the way is to
conduct system that called by accounting information system. By accounting information system
the information that needed by external users become easily to obtained. Conversely, if the
accounting information is not qualified, then the accounting system become useless. Accounting
information system gives benefit to the accounting information system user. One of the
advantage is reducing time on making financial statement, so it will give influence the decision
can be made faster. Conversely, if the system is not integrated, so it resulting in more and more
time is needed to process the data, and the decision making becomes slow and the growing of the
company restrained. Both the system ( manual and computerized ) fraud still possibly happen,
because fraud is part of risk that occur when we face with human conducted. Risk can not be
eliminated but can be decreased. Event fraud gave the realization that regulation and accounting
standards that have been designed strictly not been able to prevent accounting fraud. The quality
of the financial statement are not determined by the number of accounting standards governing,
but more important is the commitment and support of management and the parties concerned
( Healy and Palepu, 1993, as cited in Mulyo Agung, 2015 ). With good internal control, the
preventive action to prevent fraud can be effective.
Internal Control

Internal control is a process put into place by management and the board of directors to ensure
that objectives are achieved in the areas of effectiveness and efficiency of operations, reliability
of financial reporting, and compliance with applicable laws and regulations ( Hansen and Mowen
8th Edition : 2007 ). A system of internal control consists of policies and procedures designed to
provide management with reasonable assurance that its achieves company objectives and goals.
The system of internal control as a process that is influenced by the board of directors,
management, and employees that is designed to give assurance to ensure that organizations
objectives will be achieved (Azhar Susanto, 2008, as cited in Mulyo Agung, 2015) :

1. The efficiency and effectiveness of operation

2. Presentation of financial statements are to be believed
3. Adherence to laws and regulations

Another management goal of designing and making an effective internal control system
according to ( Elder et al, 2010 : 290, as cited Mulyo Agung, 2015 ) are as follows :

1. Reliability of financial reporting.

Both legal and professional responsibility that conducted by management is to ensure that the
information is fairly stated in accordance with the reporting requirements as generally accepted
accounting principles ( GAAP ). The purpose of effective internal control over financial
reporting is fulfilling its financial reporting responsibilities.

2. The efficiency and operational effectiveness.

Control of the company will encourage the use of resources efficiently and effectively to
optimize the companys suggestions. An important goal of internal control is to obtain financial
and non- financial information that is accurate about the companys operations for the purposes
of decision making.
 3. Compliance with laws and regulation.

All public companies are required to issue a report on the effectiveness of the implementation of
internal control over financial reporting. In addition to comply with the law, public organization,
non-public, and nonprofit organizations are required to comply with various laws and
regulations.

So, we can conclude that internal control is methods, policies, and procedures designed and
influenced by the board of directors, management and employees to provide reasonable
assurance that activities and facilities accounting information systems function naturally to
organize the activity of the inputs, processes and activities in order to produce quality accounting
information and storage activities

Components and sub-components of internal control are as follows :

1. Control Environment
Consisting of actions, policies, and procedures that reflect the attitude of top
management, directors, and owners of the entity as a whole regarding the internal control
and its importance for the entity. To asses the control environment is to understand the
sub-subcomponent of the environment as follows :
Integrity and ethical values
Commitment to competence
Philosophy and style of management operations organizational structure
Participations of BOC or audit committee
Manner of assigning authority and responsibility
Human resources procedures

2. The process of risk assessment entity is an action by management to identify and analyze
the risks relevant to the preparation of financial statements in accordance with standards
3. Control activities is a policy or procedure, other than those already included in the other
four components, which helps ensure that the necessary measures have been taken to
address the risks in order to achieve the objective of the entity
 4. The information and communication system. The purpose of information and
communication systems of the entities of the entities, record, process, and report entity
transaction done it as well as maintain accountability of the related asset.
5. Monitoring. Monitoring activities related to the quality assessment of internal controls on
an ongoing basis or periodically by management to determine that the control has
operated as expected, and has been modified in accordance with changing conditions.

Based on the above, the components of internal control in the context of this study refers to the
components and sub-components as described above :

Control environment
Risk Assessment
Control activities
Information and communications systems
Monitoring

FRAUD

Fraud denotes a false representation of a material fact made by one party to another party with
the intent to deceive and induce the other party to justifiably rely on the fact to his or her
detriment. According to common law, a fraudulent act must meet the following five conditions
( James Hall : 2011 ) :

1. False representation. There must be a false statement or a nondisclosure.

2. Material fact. A fact must be a substantial factor in inducing someone to act.
3. Intent. There must be the intent to deceive or the knowledge that ones statement is false.
4. Justifiable reliance. The misrepresentation must have been a substantial factor on which
the injured party relied.
5. Injury or loss. The deception must have caused injury or loss to the victim of the fraud.

Factors that Contribute to Fraud :

According to one study, people engage in fraudulent activity as a result of an interactionof forces
both within an individuals personality and the external environment. Theseforces are classified
into three major categories:

Situational pressures
Opportunities
Personal characteristics (ethics).
 Source : Wells ( 2005 :13 )

These three factors driving the occur of fraud can be explained as follows :

1. Opportunity. Fraud action depending on the position of the object of fraud perpetartors.
The opportunity to commit fraud is always there at every position, there are small and
have a chance anyone has a great opportunity. In general, the management of an
organization / company has a greater opportunity to commit fraud as compared to its
employees.
2. Pressure. The action more fraud depends on individual circumstances, concerning the
financial stress and bad habits as well as other harmful habits, such as excessive
employment targets.
3. Rationalization. Fraud occur when someone builds a justification for fraud does. The
offender will be looking for an excuse or justification that the fraud which does not act of
fraud

PREVENTION OF FRAUD

( Albrecht, 2004, as cited on Mulyo Agung, 2015 ) Fraud prevention programs in organization
that is as follows :

1. Create a culture of honesty, openness, and program support personnel include :

Hiring and always provide training on fraud awareness
Creating a positive work environment
Creating a code of conduct or code of ethics
 Provide assistance to the personnel program
2. Remove opportunity fraud include :
Creating a good internal control
Reduce the potential for collusion
Provide information to vendors regarding company policy
Create a special line of reporting fraud
Creates expectations of law
Proactive fraud auditing

CONCLUSION

Control functions, have an important role in the prevention fraud. In order to make prevention
and detection fraud, known as the antifraud program management and control, company must
considered the potential of human resources to conduct fraud in accounting information system.
In conclusion company must consider some elements to conduct internal control :

Recruitment of staff carefully

Cultural integrity and the prevention of losses in the organization
Auditing regularly against fraud transaction by internal audit
The increasing technology by using computerized system known as Accounting Information
System in order to maximized daily operation but still possibility of fraud happen in the
company because the user of this system is human that has potential to do fraud. The risk can not
be omit, but can be minimized. So, with good internal control system, we can maximized the role
of internal control to prevent fraud.

REFERENCES

James A Hall 2011 6th edition. Accounting Information System. South Western Cengage Learning

The Institute of Internal Auditor. Managing Business Risk of Fraud : A Practical Guide 2007

Mulyo Agung 2015. Internal Control Part of Fraud Prevention in Accounting Information
System.

Wells ( 2005 :13 ). Available at https://algaonline.org/index.aspx?NID=417

Hansen and Mowen 8th edition 2007. Managerial Accounting

Nomsa Menzbele 2010. The Usage of Accounting Information System for Effective Internal
Control in Hotels

Marshall and Paul 12th edition 2012. Accounting Information System.