Occupational Fraud : Auditors’ Perceptions of Red Flags and Internal Control

Abstract: The overall purpose of this thesis is to increase the understanding of auditors’perceptions of occupational fraud. The focus is limited to red flags andinternal control, i.e. to the indications or symptoms of occupational fraud andthe internal control systems which are implemented in order to detect andprevent such actions from being carried out.The thesis is based on 33 interviews with auditors and experts. In order toincrease confidence, triangulation was applied which implied both aqualitative as well as a quantitative methodological approach. The collecteddata was in turn analysed through two models of analysis – an adjustedversion of the so called fraud triangle and the so called COSO-model. Theanalysis was carried out on the group of auditors as a whole (including subgroupsof auditors) as well as compared to a group of experts on fraud andoccupational fraud.The results from the study indicate several aspects of interest regardingauditors’ perceptions of occupational fraud. First, the results indicate a tendencyamong auditors to emphasise “harder” aspects stronger than “softer”aspects. Seen from the fraud triangle, this was manifested by an emphasis onopportunity; when concerning internal control of control activities in theCOSO model, this was emphasised relatively stronger. Second, the resultsindicate a rather strong heterogeneity among auditors in their perceptions ofoccupational fraud. Third, all subparts of the applied models were seldomcovered on an individual basis. Fourth, the interconnection between harderand softer sides, both concerning red flags and internal control, were not verystrongly emphasised. The results were given additional strength from thecomparison with the group of experts.The study also included a comparison among different subgroups of auditors.The subgroups were constructed based on accumulated working experience aswell as whether the respondents primarily audit larger or smaller companies.The results that were based on years of experience indicate a tendency amongolder auditors with more accumulated working experience to emphasise softeraspects relatively stronger, than auditors with less working experience. Thistendency was present for red flags as well as for internal control. More experienced auditors also demonstrated a tendency to emphasise a relativelylarger part of the two applied models of analysis. The division based on sizeof audited companies indicated similar tendencies as were found for bothmore and less experienced auditors. Hence, auditors who mainly audit largercompanies showed a tendency to emphasise softer aspects relatively strongercompared to auditors who mainly audit smaller companies.