Research on Controls and Strategies to Prevent Fraudulent Financial Reporting in Large-Sized Companies

Abstract

This research-based bachelor’s thesis analyses the concept of fraudulent financial reporting, the factors that influence fraud, and the role of internal controls, audit, technology, and other practices in mitigating its occurrence. The study aims to provide insights into the most efficient controls and strategies to detect and prevent fraudulent reporting within organizations. This was achieved by assessing the effectiveness of these practices while also pinpointing their limitations, which could potentially expose vulnerabilities to fraudulent activities. Additionally, this thesis provides practical guidance on implementing and continuously updating these controls, ensuring companies remain vigilant of the ever-evolving fraud risks.

The thesis comprises two sections: theoretical and empirical research. The theoretical framework provides an overview of the concept of fraudulent financial reporting. This includes theories discussing the determinants and motives for committing fraud, the most common types of financial statement fraud schemes, and real-world case studies illustrating these concepts.

The empirical section is based on qualitative methods and analyses the results of the data gathered from a series of surveys and interviews carried out over the course of the study. The surveys were divided into two parts: the first part was administered to external auditors, while the second part targeted professionals working in large-sized firms in Finland. Simultaneously, unstructured interviews were conducted with three participants, each possessing significant expertise in the field of finance and especially the concept of fraud. The data gathered were analyzed using statistical analysis for the surveys and thematic analysis for the interviews. The collected data were also compared to the theory framework to highlight the practical implications and real-world relevance of prior studies related to the subject.

The results from the research provided a step-by-step approach to recognizing and preventing the risks associated with financial statement fraud. These are based on the combination of previous studies and the recommendations from the professionals and experts who participated in this research. The results reveal that the first step is that a company should identify the possible motives behind fraud to recognize the warning signs and avoid the likelihood of it occurring already in the early stages. The second step is to classify the common types of financial statement fraud that could potentially arise given the nature of the firm’s business, as well as the gaps in the current prevention strategies employed by the firm. The last step is then evaluating which controls and measures would be the most effective. This approach allows a company to select and implement anti-fraud practices, as identified in the second step of the process, that align with its specific needs and address the gaps identified in its existing controls and measures.