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Study asserts link between control weaknesses, fraud

Tammy Whitehouse | September 6, 2017

Authors of a new academic study say they have identified a link between material weaknesses in internal control over financial reporting and later revelations of fraud, lending fresh support to key provisions of the Sarbanes-Oxley Act.

The study out of the University of Texas and Texas A&M finds the issuance by an auditor of an adverse opinion on internal control is a red flag for fraud. The authors say the study finds “a statistically and economically significant association” between material weaknesses in controls and subsequent fraud discoveries. The association is driven by instances where problems with internal control reflect “a general opportunity to commit fraud,” rather than account-specific or process-specific control deficiencies.

Where companies have been found to have material weaknesses in internal control, the research says the incidence of subsequent discovery of fraud is approximately 80 percent to 90 percent greater than across firms generally....

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