Relationship between corporate governance and corporate roles in developing a framework for detecting asset misappropriation in an organization

Relationship between corporate governance and corporate roles in developing a framework for detecting asset misappropriation in an organization

[read more=”Click here to Read More” less=”Read Less”] 

Fraud refers to the deliberate presentation of wrong financial information for personal gains. In business, it is a major concern for regulators, investors and external auditors. Needless to say, fraud can be very costly to an organization. Indeed, the cost of fraud transcends beyond asset and financial losses because it can lead to insecurity and increased fear, low productivity and high turnover. Of particular concern in this paper is asset misappropriation. Asset misappropriation entails a situation where certain players in an organization abuse their position to steal from the organization via fraudulent activities. Consistent, this paper presents the relationship between corporate governance and corporate roles, identifying external auditors as crucial players in championing the interests of stakeholders by detecting asset misappropriation. This research is performed in a bid to aid the development of an appropriate and effective framework that can be used by external auditors in assessing the risk of asset misappropriation in an organization.


The discovery of severe challenges in accounting in the recent past in several established organizations including Tyco, Enron, HealthSouth and WorldCom have been watershed occurrences (Papa, Daniels & Spiker, 2014). In the wake of these scandals, various organizations have admitted to suffering accounting problems. As observed by Warren (2014), a number of organization including WorldCom and Enron have been forced into bankruptcy. More severe problems have occurred such as the subprime mortgage of 2008 and the financial institution meltdown (Mitchell & Wilmarth, 2010). Correspondingly, law makers have retaliated by establishing and championing the adoption of the 2002 Sarbanes-Oxley Act whose tough rules on corporate governance apply to a plethora of organizations especially those that possess stock listed in the U.S (Wulf, 2011). Furthermore, the American Stock Exchange (AMEX), Nasdaq and the New York Stock Exchange (NYSE) have adopted corporate governance rules as part of their listing (KRUS, 2005). In addition, a myriad of organizations have embarked on minimizing such occurrences by improving on the effectiveness of corporate governance in line with increasing awareness of red flags that indicate asset misappropriation and fraud. Consistent, Véron, Galichon & Autret (2006) state that financial scandals have generally led to profound changes in the audit sector.

Since corporate governance explains the ways an organization directs and controls its accounts, ethics and institutional systems, it focuses on promoting fairness and transparency within organizations (Jackson, Sawyers & Jenkins, 2008). This is achieved by monitoring the performance of various departments to ensure accountability. In that regard, external auditors perform as one of the chief protectors of corporate governance within a company (Vera-Munoz, 2005). These auditors facilitate a situation where organization leaders are compelled and encouraged to be more accountable. The argument that supports the use of external auditors is to perform non routine tasks based on the fact that non routine tasks are non-repetitive and require specialized knowledge that internal auditors do not have or may not be able to acquire in house. Also, the use of external auditors in performance of non-routine tasks may be quite more efficient (Desai, Gerard & Tripathy, 2011).

With the use of appropriate policies of accounting, external auditors could enable a situation where creative accounting practices and inflation of figures are discouraged. In agreement, Gray (2007) elucidate that performance of audit present reliable figures of the current state of an organization. In doing so, the audits present shareholders and investors’ confidence concerning the financial status of the organization and the effectiveness of decisions made within an organization (Holzhacker, Wittek & Woltjer, 2016).

Asset misappropriation, used interchangeably with financial statement fraud refers the falsification of financial reports and records (Nguyen, 2010). The common types of fraud occur with varying frequency. Alike, the average value of fraud also changes with the type of fraud. The figure below exhibits the relative frequency and median value of fraud as observed by a global survey conducted by ACFE. The figure elucidate that financial statement fraud and corruption are the leading types of fraud in organizations globally.


(Leuthner, 2016)

In line with the above literature, the purpose of this research is to establish the bearing corporate governance has on corporate roles and relationships in order to define a framework that better enables external auditors to detect asset misappropriation in an organization.

Literature review

As observed earlier, corporate governance describe a set of rules, processes and practices by which an organization is directed and controlled (Fernando, 2010). In essence, it involves balancing the interests of an organization with a plethora of stakeholders including shareholders, clients, suppliers, managements, governments, financiers, employees and the entire community (Iskander & Chamlou, 2000). Coyle (2005) explain that due to the fact that corporate governance offer a framework for attaining the objectives of an organization, it encompasses every management spheres ranging from internal controls and action plans, to corporate disclosure and performance measurement. Corporate governance is important because it analyzes how decision makers in an organization act, how they should be monitored and how they can be held accountable for the decisions and actions (Chandler & Werther, 2013).

Corporate governance works to resolve challenges which arise from principal-agent relationship or agency theory, where the stakeholders are interested in maximizing the value of their input (shares) whereas leaders (managers) tend to be rather interested in the private use of resources of an organization for its growth (Musalem & Palacios, 2004). A measure that is adopted to contribute to corporate governance efforts is the involvement of auditors. Bara (2010) note that although in most organizations the financial performance is analyzed by internal auditors, it is often necessary to consider the input of external auditors. External Audit describes a periodic audit carried out by independent and qualified auditors with the aim of establishing whether the financial reports and records are complete and accurate (Bucher, 2006).

The misstatements that result from fraudulent reporting of financial information entail omissions of amounts or disclosure in financial statements to deceive investors, government and other key stakeholders (Pickett, 2013). According to Rezaee (2002), management and executives may also assume deliberate actions in order to meet the objectives of earnings that lead to fraudulent reporting of finances by misstating the financial statements. A lot of the research on misappropriation of assets has been conducted by professional organization (Gupta & Sharma, 2009). For instance the Association of Certified Fraud Examiners establishes the Report to the Nation on Occupational Fraud and Abuse once in every two years. Other organizations including KPMG and Deloitte LLP publish findings concerning fraud in bodies such as the Integrity Survey (KPMG, 2006).

As observed by the Report to the Nation on Occupation Fraud and Abuse (2008), the misappropriation of assets can be observed with regards to the different scheme types such as cash larceny, misuse, non-cash larceny and skimming (ACFE, 2008). The misappropriation of assets is a major challenge in organizations worldwide. Some studies have concluded that big corporations lose an estimated 7% of the annual profits to fraudulent activities including stolen cash and misappropriation of assets (ACFE, 2008). According to a study conducted by Global Fraud Study, as observed by Foote (2014), organizations in the real estate industry tend to suffer the most, followed by technology and the construction industry. Consider the figure below;


(Foote, 2014)

When asset misappropriation occur in an organization, there are usually no winners (Carmichael & Lynford, 2012). Often, perpetrators are caught and suffer the consequences which may be personal or professional. Some of them lose their jobs whereas others face legal consequences and may serve prison time. For the victims, the morale and culture of the firm is affected due to the loss of assets and the negative publicity that comes with the issue. Zack (2013) agree that this can result in reduced worker output. External auditors have a duty to assist with evaluation of control systems in order to prevent asset misappropriation and mitigate fraud, and present the correct figures for investors, government and other key stakeholders (Holtfreter, 2004).

Research methodology and methods

The research is an exploratory research that tries to identify what is happening in a given situation. This study aims at clarifying on the inner working of corporate governance world in order to detect asset misappropriation by engaging external auditors. This type of research is qualitative and will offer new insights gained through exploration in detail of the issue at hand.

The data will be collected by use of closed questionnaires. The individuals who can be participants are internal and external auditors. The question will try to help external auditors properly assess and respond to risks of asset misappropriation, fraud and financial misstatements.

Murthy & Bhojanna (2008) elucidate that questionnaire are instrument of data collection that consist of questions for the purpose of acquiring important information from a select group. Questionnaire are favorable compared to other forms of survey because they are cheap and do not demand a lot of effort from the questioner (May, 2010). They also allow for standardized answers which makes it simple to compile data. They allow collection of large amounts of data over a short period of time. Another important characteristic of questionnaires is that the results can be easily quantified by the research or by using software package (Klenke, 2008).

Questionnaires are argued to not be sufficient enough to some form of research. This is especially evident when the respondents are subject to emotional changes, feelings and behavior (Azzara, 2010).  The respondent may have forgotten critical details or may not be rational within the full context of the situation. Bryman & Bell (2015) add that it is also difficult to tell whether the respondent is telling the truth or otherwise. Individuals may perceive certain questions differently and as such, reply with regards to their comprehension.

(Once the participants fill the questionnaire, a final note on the questionnaire will request them to participate in an interview. They will indicate their willingness in the provided section).

Basically, an interview is a conversation where queries are presented to the subjects and answered accordingly. It may entails a one-on-one conversation with the interviewer asking the questions and the interview or the respondent offering their answers (Coldwell & Herbst, 2004). Interviews often involve the transfer of data from the respondent to the interviewer although exchange of information can happen both ways. Although interviews have been previously understood as face to face conversation, there has been advancement in technology and recently, interviews can be held when both the interviewer and the participants are in different locations. This has been made possible by the use internet in video conferencing, telephone interviews among other methods.

Armstrong (2007) explain that interviews are important in obtaining detailed conclusion about the perceptions and opinions of a group. They also allow for more detailed and planned questions to be asked and offer a high response rate. Interviews also allow for clarification of ambiguities and incomplete answers can be followed up (Covington, 2008). Unlike other data collection methods that can be interfered with, interviews are not influenced by other groups (Westenholz-Bless & Achola, 2007). However, they can be very time consuming and costly. Also, different interviewer may transcribe and understand interviews in different ways.

Research context

The research design that will be employed in this research is positivist research design by collecting information from different individuals via closed questionnaire and structured interviews. Convenience sampling will be used because participants (auditors) will be from nearby corporations or have their offices in nearby towns.

Samples refers to units that are to be included to represent a population statistically. The sampling methods describes how the unit is chosen. The sampling method to be employed in this research is stratified random sample achieved from a defined group. The group consists of auditors working for various organizations or who have previously worked in organizations.


Problems anticipated:

  • Participants fear providing critical information.
  • Lack of willingness to participate due to lack of time.
  • Unavailable for interviews.

Methods for data analysis

Qualitative – use of questionnaires/interviews

Ensure participants understand the importance of their input: Informing participants that their answers are essential in building an accurate picture of the most effective audit procedures that external auditors might use to effectively assess and respond to risks of asset misappropriation. This will thereby help in designing the suggested framework by the current study to detect material misstatement arising from asset misappropriation. Thus, your cooperation will be highly appreciated.

Confidentiality: Informing participants that personal data will only be accessible to me for research purposes and will not be shared with any other party without your consent. All personal data collected during the current research will be anonymised and participants will be assigned a reference number or code. Data will be stored against this number/code rather than against the names of participants.


The various questions that the research will ask whether respondents agree that certain red flags such a s high level of discounts are effective in detecting asset misappropriation. The researchers will also ask whether the red flags carry equal importance within asset misappropriation categories. In acquiring answers of the above identified questions, among others, the researchers will develop an appreciation of effective framework in audit procedures in order to mitigate corporate fraud and asset misappropriation. Harmoniously, the research will be essential in the formulation of frameworks to detect asset misappropriation and corporate fraud.

Research limitations and direction for future research

The anticipated research limitations include the lack of willingness by participants to share information concerning the inner working of their organizations especially when it comes to financial matters: asset misappropriation/corporate fraud. There may also be the limitations of time since the research is rather extensive. Finding individuals who are willing to participate may also be also be time consuming. In performing the research, there might be a lot of expenses in incurred especially if the researcher is going to visit various organization in different regions as they see for participants. Similarly, a lot of interviews required in order to improve the reliability of findings and conclusions. This may be another reason the expenses might increase.

Other areas for further research development include corruption and bribery within orgnaization. Some audit firms may be corruptible and accepts bribes aand in return present false information in order for the performance of the organization to appeal to key stakeholders. There should be more reaserch in this area in order to devise strategies to ensure that audit firms or external auditors are not bribed by the firms they are auditing.


Provisional work schedule

Timetable for completing the research indicating the tasks necessary

Stage of the research writing process Section/s covered/what to do  

Materials needed

Number of days needed
  STAGE ONE: Reading and research
a) Seek to identify an original, manageable topic Topic on area of interest chosen Work covered in institution/Books on topic used in institution considered  


b) Reading and research into chosen topic Look for literature Books/Credible materials online including journals, peer reviewed articles etc. 3
  STAGE TWO: The detailed plan
a) Construct a detailed plan of the proposal Ensure every section is in the plan: Introduction, Literature review, Methodology/Methods, Research context, Procedure, Methods of data collection, Discussion, Research limitations/Direction for future research  













  STAGE THREE: Initial writing
a) Draft the various sections of the research Draft materials into each section Writing book or paper/ PC/Microsoft word  


b) Undertake additional research where necessary Further research on topic to enrich introduction and literature review etc. Books on topic, journals, peer reviewed articles etc.  


  STAGE FOUR: The first draft
a) Compile and collate sections into first draft After further research, ensure each section has sufficient literature  




b) check the flow of the research Check the flow of literature  





c) Check the length of the research Ensure length is as required by prompt  





d) Undertake any additional editing and research Editing stage/ensure grammar is perfect: pronunciation, spelling, in text citations are good etc.  






  STAGE FIVE: Final draft
a) Check for errors Check for any errors with flow, spelling, order of sections is in line with TOC  




b) Prepare for submission Ensure no issue of plagiarism before submission Books/Articles and correct citations  


c) Final proof-read (by a friend or yourself) and final editing Seek assistance from teacher or friend for proof-reading  


Friend/spouse or teacher




d) Compile bibliography Ensure references are in line and are enough  




e) Get the research bound    

File/Stapler and other binding materials for hardcopy




f) Submit your research    

Email for soft copy/hand in physical copy is requested












ARMSTRONG, M. (2007). A handbook of human resource management practice. London [u.a.], Kogan Page.

Association of Certified Fraud Examiners, 2008, Report to the Nation on Occupational Fraud and Abuse, Austin, TX.

AZZARA, C. V. (2010). Questionnaire design for business research: beyond linear thinking– an interactive approach. Mustang, OK, Tate Pub & Enterprises Llc.

BARA, C. (2010). Corporate Social Responsibility & International Development.

BRYMAN, A., & BELL, E. (2015). Business research methods. Oxford, Oxford Univ. Press.

BUCHER, J. L. (2006). The quality calibration handbook: developing and managing a calibration program. Milwaukee, Wis, ASQ Quality Pr.

CARMICHAEL, D.R., & GRAHAM, LYNFORD. (2012). Accountants’ Handbook, Special Industries and Special Topics. John Wiley & Sons Inc.

CHANDLER, D. B., & WERTHER, W. B., JR. (2013). Strategic Corporate Social Responsibility: Stakeholders, Globalization, and Sustainable Value Creation.

COLDWELL, D., & HERBST, F. J. (2004). Business research. New York, Juta Academic.

COVINGTON, P. (2008). Success in sociology AS for AQA. Haddenham, Folens.

COYLE, B. (2005). Risk awareness and corporate governance. Canterbury, Institute of Financial Services.

Desai, N.K., Gerard, G.J. and Tripathy, A., 2011. Internal audit sourcing arrangements and reliance by external auditors. Auditing: A Journal of Practice & Theory, 30(1), pp.149-171.

FERNANDO, A. C. (2010). Business ethics and corporate governance. Delhi, Dorling Kindersley (India), licensees of Pearson Education in South Asia.

Foote, B. (2014). Embezzlement Archives – Aronson Nonprofit Report. [online] Available at:

GRAY, I. (2007). The audit process: principles, practice and cases. London, Thomson Learning.

GUPTA, J. N. D., & SHARMA, S. K. (2009). Handbook of research on information security and assurance. Hershey, PA, Information Science Reference.

Holtfreter, Kristy, 2004, Fraud in US Organizations: An Examination of Control Mechanisms, Volume 12, Issue 1, pages 88 – 95.

HOLZHACKER, R., WITTEK, R., & WOLTJER, J. (2016). Decentralization and governance in Indonesia.

Institute of Internal Auditors, 2007, “Internal Audit Facts,” About-the-Profession, Available at

ISKANDER, M. R., & CHAMLOU, N. (2000). Corporate governance: a framework for implementation. Washington, DC, World bank group.

JACKSON, S., SAWYERS, R., & JENKINS, J. G. (2008). Managerial accounting: a focus on ethical decision making. Mason, OH, Thomson/South-Western.

KLENKE, K. (2008). Qualitative research in the study of leadership. Bingley, UK, Emerald Group Pub.

KPMG, 2006, Integrity Survey 2005 – 2006, NJ, USA.

KRUS, C. M. (2005). Corporate secretary’s answer book. New York, Aspen Publishers.

Leuthner, Michael. “The Fraud Matrix: Corruption, Asset Misappropriation And Financial Statement Fraud | Crosswater Job Guide”. N.p., 2016. Web. 2 May 2017.

MAY, T. (2010). Social Research. Maidenhead, McGraw-Hill International (UK) Ltd.

MITCHELL, L. E., & WILMARTH, A. E. (2010). The panic of 2008: causes, consequences and implications for reform. Cheltenham, Edward Elgar.

MURTHY, S. N., & BHOJANNA, U. (2008). Business research methods. New Delhi, Excel Books.

MUSALEM, A. R., & PALACIOS, R. J. (2004). Public pension fund management: governance, accountability, and investment policies ; proceedings of the Second Public Pension Fund Management Conference, May 2003.

Nguyen, K., 2010. Financial statement fraud: Motives, methods, cases and detection. Universal-Publishers.

PAPA, M. J., DANIELS, T. D., & SPIKER, B. K. (2014). Organizational communication: perspectives and trends.

PICKETT, K. H. S. (2013). The internal auditing handbook. Hoboken, N.J., Wiley.

REZAEE, Z. (2002). Financial statement fraud: prevention and detection. New York, Wiley.

Vera-Munoz, S.C., 2005. Corporate governance reforms: Redefined expectations of audit committee responsibilities and effectiveness. Journal of Business Ethics, 62(2), pp.115-127.

VÉRON, N., GALICHON, A., & AUTRET, M. (2006). Smoke & Mirrors Inc: Accounting for capitalism. Ithaca N.Y., Cornell University Press.

WARREN, C. S. (2014). Survey of accounting.

WESTENHOLZ-BLESS, C., & ACHOLA, P. P. W. (2007). Fundamentals of social research methods: an African perspective. Cape Town, South Africa, Juta Legal and Academic Publishers.

WULF, K. (2011). From codes of conduct to ethics and compliance programs recent developments in the United States. Berlin, Logos-Verl.

ZACK, G. M. (2013). Financial statement fraud: strategies for detection and investigation. Hoboken, N.J., John Wiley & Sons.