Proceedings

HOW CAN CORPORATE GOVERNANCE MITIGATE
FRAUD?
Victoria STANCIU 1 , Ali EDEN & Veronica IVANCENCO
Bucharest Academy of Economic Studies, Romania
ABSTRACT
Fraud is a risk that should not be ignored. Studies on accounting field have showed the
seriousness of fraud problem and the nature of fraud. Researches within this area have
emphasized the fraud models and suggested how to prevent, detect and investigate frauds.
Strong corporate governance and a solid corporate culture are important pillars for fraud
prevention. Important professional communities and professional bodies have analyzed the
causes of the actual crisis, and all the surveys emphasized weaknesses in corporate
governance and risk management. That is why important improvements are expected in
corporate governance field. In crisis time, there is also a potential higher risk of fraudulent
financial reporting. Whether is using a simple or sophisticate scheme fraud might affect
people, processes and companies’ or individuals reputation.
The objective of this paper is to examine the fraud phenomenon and fraud vectors aiming at
identifying appropriate prevention actions. The authors focus on the link between strong
corporate governance, a solid internal audit function and the role of external auditors in the
fight against fraud.
KEYWORDS: fraud, fraudulent financial statement, internal audit, corporate governance
INTRODUCTION
The accounting and audit professional literature have analyzed in detail the well
known cases such as Enron, WoldCom, Xerox in US and the European fraudulent
reporting cases as for example Vivendi, Parmalat. The researches in accounting and
forensic accounting have emphasized the nature of frauds and the causes that have
facilitated them. The final objective of all those studies was to reveal the professional
framework for fraud prevention, detection and investigation.
Important results in the fraud research were publishes by Donald Cressey in the mid-
20th century. Cressey is the author of the “classic theory” of fraud that identifies the
well known “fraud triangle”. The fraud triangle seeks to explain the necessary frame
for fraud to occur: opportunity, pressure/incentive and rationalization. In Cressey’s
opinion, if any one of the three elements is missing, fraud may not occur. In order for
fraud to occur, there has to be an ability to commit fraud. Incentive has also been
called “pressure” and can be materialized in various forms but any of these determine
the perpetrator to seek gains via financial fraud. If we analyze the three elements
defining the fraud triangle one characteristic can be emphasize: opportunity and
1
Correspondence address: Victoria Stanciu, Academy of Economic Studies, Bucharest Romania;
email: stanciuvictoria58@hotmail.com
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