The Effect of Technology Use to Detect and Prevent on Financial Statement Fraud - Paper Example

Abstract

Various studies have been done to establish the role of technology in combating the financial statement fraud that has become so prevalent in the organization in UAE and other countries of Qatar, Malaysia, and parts of India which have accepted the Islam faith. Fraud has become a peg and causes significant losses in organizations resulting in conflicts in the business. There are so many studies which have unearthed the negative consequence of fraud to organization performance. Nevertheless, with the emergence of technology, studies shifted to understanding the link between the fraud prevention and technology use. This paper was based on studying the effects of technology used to prevent and detect financial statement fraud in UAE and other countries. The research involved a population sample of 1200 from the nations. The research found out that most organizations experienced positive effects of technology used to prevent and detect financial statement fraud. The regression model obtained from the study revealed that fraud prevention = 177.32 + 0.91 (Technology use).

Introduction

The dynamism and advancement of technology is a nightmare that has become apparent to many organizations in curbing financial fraud. The embracement of current technology in agencies has enabled the top management in a collusive manner to conceal any possibility of detecting the fraud within the organization. The term fraud has invited many definitions. However, for this research paper, cheating is the fraudulent misrepresentation of financial reporting inclusive of employee theft and embezzlement of the organization resources according to the auditing standards. The Treadway commission shares the same opinion on fraud. The Treadway defines fraud as the intentional reckless and fraudulent miscommunication of financial statements through omission or by an act.

Since the UAE/other countries are majorly Islamic countries, the regions had witnessed the emergence of Islamic banks and financial institutions since the 1970s at a prime time when the banking sector in the Islamic states was faced with fraud cases. The system of operations adopted by Islamic banks and financial institutions was unique and has managed to engineer the various studies pioneered by scholars on Islamic accounting which has incorporated technology.

Hoiand Robin (2009) asserted that the system of Islamic financial system is constituted of three interrelated situations of history, principle and practical aspect. The historical elements according to the Napier covers the previous ideas and practices used in the Islamic countries. The functional part tries to relate the issues of financial transactions and how they conduct related activities. Finally, the principal aspect of accounting and financial fraud is concerned with how the core concepts of financial fraud and methods form a solid foundation based on the Islamic religion.

The adoption of Islamic banking principles was prompted by the Universal fraud in both large and small organizations. The business organizations have become more concerned with the financial fraud cases in the agencies especially registered among the management. According to the Association of Certified Fraud Examiners (ACFE) 2008 survey, an estimated of 7% of the annual income of the United States companies are lost due to fraud accumulating to $995 billion losses. Alleyne et al., (2010) explicitly describes the embarrassing daily news of fraud in private and public entities resulting in declines in the net revenue achieved.

Many entities employ the use of computers to detect and prevent the fraud cases in the organization. The simple auditing system of the financial statement of the business entities involves an analysis of the output and inputs of the data. The advancement in computer technology had made it possible to be done through the computer unlike before when it was done around the machine. Byington et al., (2013) however, reminds the auditors on the need always to remember that the very technology used in prevention and detection of fraud are the very tools used in carrying the fraud cases.

The technology used in prevention and detection of frauds in organizations involves the evaluation of the client's control system effectiveness especially the automatic controls existing in complex IT systems. One of the commonly used methods is the Control objective for the Information and related technology (COBIT) version 5 currently being used since 2012 by the managers to provide a framework to connect with the risk associated issues of the organizations, the IT issues, and control requirements. The COBIT 5 was released by Information Systems Audit and Control Association (ISACA). The critical computer audit practices for financial statement through computer systems includes the technique of test data which is used majorly, parallel simulation, Integrated Test facility and embedded audit module.

Technique Description

Test Data Uses a set of possible transactions to audit the programmed checks and program logic in both operation and non-transactionprocessing programs. The test data approach requires only a modest investment in time to apply in practice and does not need an extensive background in information

Technology.

Parallel

simulation

Attempts to simulate or duplicate the firms actual processing results. To employ this technique, the auditor writes a computer program, using an audit software package, or using packaged accounting software, such as BusinessWorks, Oracle Financials, PeopleSoft Financials, M.A.S. 90 Evolution2 and SAP R/3. The auditor's objective is to use the software to input the firm's actual data for a past period and generate the same output as the live production programs. The auditor's simulated results and the exact

processing results comparison, and variance noted, evaluated, and adjusted.

Integrated

test facility

(ITF)

Enables test data to be evaluated continuously when online systems process transactions. The auditor creates fictitious situations, such as a bogus department completing purchasing requisitions or purchase orders being sent to counterfeit vendors, and performs a broader variety of tests compared to the test data approach. The implementation of ITF is time-consuming and costly, requiring a high-level of computer expertise.

Embedded

audit

module

Is a programme module or segment that is inserted into an application program. Its purpose is to monitor and to collect data based on transactions, particularly those processed by online computer-based systems. The auditor in the tests of controls and the evaluation of control risk then uses the data. The utilization of this technique demands the auditor to have an excellent working knowledge of computer technology, including computer programming.

Source: Cerullo et al. 2003

According to PWC (2006), the Internal auditors continually utilize the continuous monitoring methodologies to achieve the stakeholder demands and needs of a high-quality financial statement audit. The framework of the standardized monitoring methodology is structured such that it can detect errors and misconducts in the presentation of the financial information early enough in the course of the transaction.

Source: Oversight Systems, Inc.

Theoretical background

The 20th-century dawn has seen many scholars trying to theorize the operations of Islamic banks and financial institutions which had been operational on ideas and policies. The principles and procedures adopted in the Islamic banks within the United Arab of Emirates are useful in fighting the fraud menace that is slowly choking the organizations. Moreover, the use of technology has proved to be a sure way of preventing the misreporting of financial information or detecting an intentional error within the documented reports.

Problems Statement

For a very long period of years, many banks and Islamic financial institutions in UAE, Qatar, and Malaysia have adopted the policies and ideas of Islamic banks to prevent and detect financial fraud in the various organizations. Nevertheless, there is a complete shift to the use of technology in preventing and detecting fraud. This paper will, therefore, attempt to analyze the various effects the use technology to prevent and detect financial statement fraud has yielded in countries like UAE, Qatar, Malaysia, and India.

Scope of the study

The research study on the effects of technology use in the prevention and detection of financial fraud in the UAE and other Islamic states that have accepted the Islam faith and cultures like Qatar, Malaysia, and parts of India has a broader scope. Due to the more comprehensive nature of its range, the study will use the data information details collected to represent the general Islamic community.

Research Questions

The constant dynamism of technology has brought with it many pros and cons to many organizations. The adoption of technology has commanded praises in many teams for managing to prevent and detect financial statement frauds. However, the same technology used has been the dominant contributing factor in aiding fraud activities within the organizations without realization more so from the top management. This research paper will thus address the following research Questions.

Does fraud consider major concern in united Arab emirate organization?

The role of information technology in dealing with financial statement fraud in UAE companies?

Are modern or traditional technology methods are usually used to detect and prevent financial statement fraud in UAE companies?

How can corporate internal control be improved using current technology to restrict financial statement fraud in UAE companies?

Will having a forensic accounting department enhance the prevention of accounting fraud in UAE?

Literature Review

Brief Historical Background

Fraud has been marked in this era of technology to be the most significant contributor to losses registered in various organizations financial statement reports in UAE and other countries (Qatar, Malaysia, and parts of India). As a result, agencies have maintained a plateau growth in performance or have a drawn a declining performance index. Fraud, therefore, calls for immediate attention in the organizations to be efficiently managed, controlled and monitored.

The technology facets of relation to crime and law enforcement tend to leapfrog each other with constant advancement in technology use (Rittenburge and Schwigier, 2005). Various studies have established that the use of internal control system is more effective and efficient in preventing financial statement fraud in UAE and other countries (Albrecht & Albrecht, 2002).

The fraud case in the organizations

Recently, the focus of many research has been shifted on the fraud emanating from the evil schemes of the management and the failure of the auditors to prevent and detect financial statement fraud in the various organizations within the UAE and other countries. According to Barra (2010), the UAE has recorded an increase in the number of scams by an approximately 38% by 1...