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THE VALUE OF INTERNAL AUDIT IN FRAUD DETECTION
In recent years the importance of good corporate governance has received significant public and regulatory attention. A crucial part of an entity’s corporate governance is its internal audit function. In association with this, there has also been significant public concern about the level of fraud within organizations. This study aims to assess whether organizations with an internal audit function are more likely to detect fraud than those without. In this study we use a unique self-reported measure of fraud primarily relating to misappropriation of assets for the first time. The fraud data are from the 2004 KPMG Fraud Survey. The internal audit data are from a separate mail survey sent to the respondents of the KPMG Fraud Survey.
We find that organizations with an internal audit function are more likely than those without such a function to detect fraud within their organizations. Further, organizations that rely solely on outsourcing for their internal audit function are less likely to detect fraud than those that undertake at least part of their internal audit function themselves. This provides evidence that internal audit adds value through improving the control and monitoring environment within organizations to detect fraud. These results also suggest that keeping the internal audit function within the organization is more effective than completely outsourcing that function.
Key words: Internal audit, Fraud, Misappropriation of assets