Title: Internal controls: lessons to be learned from fire

Authors: Roberta Ann Barra, Kenneth Griggs

Addresses: University of Hawai'i at Hilo, 200 W. Kawili Street, Hilo, HI 96720, USA. ' Professor of Management, Orfalea College of Business, CalPoly, San Luis Obispo, CA 93407, USA

Abstract: This paper is an analytical investigation of practices related to business fraud prevention and detection and employs the analogy of fire control and safety as a model for accounting control. As in fire control where fire counter measures must match fire type, anti-fraud activities must match fraud characteristics. The paper contains a historical literature review of accounting fraud, an account of internal control research, and a report of a game theoretical model used to explain the behaviour of the players in accounting fraud. The model described in the paper includes factors such as perpetrator category, detection probabilities, collusion, the cost of controls, and the value of rewards. The model postulates a set of perpetrator types based on the level of commitment to fraud and employs a game tree to describe movements and outcomes with varying rewards and control environments. In addition, the model is used to show the interplay among a variety of fraud and counter-fraud factors. Historical evidence suggests that what is known about internal control activities is based on anecdotal evidence and therefore, a game theoretic approach may have merit.

Keywords: accounting history; accounting fraud; internal controls; Sarbanes-Oxley; services; standards; fire control; safety; accounting control; game theory.

DOI: 10.1504/IJSS.2007.015222

International Journal of Services and Standards, 2007 Vol.3 No.4, pp.375 - 389

Published online: 28 Sep 2007 *

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