Internal Controls Weakness and Financial Reporting Fraud Likelihood

Abstract

The purpose of this study was to investigate the relationship between weaknesses in internal controls and the risk of fraud in financial reporting. There are two perspectives on the effectiveness of internal controls as an important part of the governance system for non-fraudulent conduct. According to the first view, the strengthening of internal controls reduces the occurrence of fraud, and according to the second view, because of the ability of managers to override internal controls, internal controls do not have the necessary effectiveness in terms of fraud. In order to achieve the research purpose, using sample data from 152 companies listed in Tehran Stock Exchange during the period 2012 to 2017 and Logit regression approach to test the research hypotheses were studied. Benish's (1999) model was used to measure the risk of fraud in financial reporting. The findings suggest that, despite weaknesses in internal control and weaknesses in internal control, the risk of fraud in financial reporting increases. These findings are in line with the first view.

Keywords

• financial reporting fraud
• internal controls weakness
• stock exchange