JOURNAL OF CRITICAL REVIEWS

ISSN- 2394-5125 VOL 7, ISSUE 18, 2020

THE EFFECT OF EMPLOYEES’ PERCEPTIONS

ON INTERNAL CONTROL SYSTEM
MECHANISMS TOWARDS EMPLOYEE FRAUD
PREVENTION
1*
MazurinaMohd Ali, 2Nur FarhanahAyop, 3Erlane K Ghani, 4Suhaily Hasnan

Faculty of Accountancy, UniversitiTeknologi MARA Selangor, Malaysia

1
*Corresponding author: [email protected], [email protected], [email protected],
4
[email protected]

Received: 16 March 2020 Revised and Accepted: 16 June 2020

ABSTRACT
This study aims to examine the effect of employees’ perceptions on internal control systems
concerning employee fraud prevention.This study utilizes the questionnaire survey as the research
instrument. Specifically, the questionnaires had been distributed to 100 employees within information
technology companies, namely, Dell, HP and IBM in Malaysia. Using multiple regression analysis, the
results show that, employees’ perceptions towards information and communication systems and control
activities as internal control mechanisms are significant towards preventing employee fraud.The results
show that the other internal control mechanisms, such as control environment, risk assessment and
monitoring are not significant to influencing employees’ perceptions towards employee fraud
prevention. The findings of this study imply that the ability of the management to communicate the
policies and guidelines to the employees as well as taking appropriate measures to correct any
misfeasance within companies could significantly prevent employee fraud.The implication of these
findings is for the management to improve their efficiency in performing their tasks especially in terms
of communication and analytical skills.
Keywords:Internal control system, control environment, risk assessment, information and
communication system, control activities, monitoring, employee fraud prevention.

1. INTRODUCTION
According to the Association of Certified Fraud Examiners (ACFE), fraud entails any form of dubious
activities or deceptions in distorting the modus operandi of a company that is perpetuated for personal
gains. Recently, employee fraud has been on the increase among corporate organizations in Malaysia
(Mohd-Sanusiet al., 2015). A report from Malaysia Fraud, Bribery and Corruption Survey published by
KPMG, evidenced that 48% of the respondents claim that their organizations were the victims of
employee fraud. Meanwhile, a total of 62 separate fraud occurrences were reported during the survey
period. Moreover, reported fraud cases occurred within organizations more often compare to external
fraud cases. This can be substantiated by the reports from ACFE, PWC and KPMG which consistently
established that the occupational fraud or internal fraud affected an organization more often than the
external frauds.
Occupational fraud can be defined as the use of a person’s job for personal gain through
intentional misuse of organizational resources or assets (ACFE, 2018). This type of fraud occurs when
an employee commits fraud against his or her employer. According to Fraud, Bribery and Corruption
Survey 2013 conducted by KPMG Malaysia, 68% of total reported frauds were perpetrated by
individuals within the organization consisting of both the management and non-management
employees. This is a sharp increased as compared to the same survey conducted in 2009 in which the
results showed that only 40% of reported fraud was perpetrated internally, and a huge portion; which is
60% were perpetrated by outsiders, namely, customers, suppliers and service providers.
There are three (3) major categories of occupational fraud; (i) assets misappropriation; (ii)
bribery or corruption and (iii) financial statement fraud. The latest 2018 report by ACFE found that of
the three (3) major categories; asset misappropriations are by far the most common, occurring in 89%
of the cases (ACFE, 2018). Corruption schemes are the next most common form of occupational fraud;

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38% of the cases involved some forms of corrupt acts. The least common and most costly form of
occupational fraud is financial statement fraud, which occurred in 10% of the cases. The same report
also breakdown the reported fraud based on industries. One of the affected industries is the technology
industry with a median loss per cases of USD150,000.
According to the conceptual theory propounded by Cressey in the 1950s, the three (3) key
elements in the event of any types of fraud are opportunities, pressures, and rationalization.
Subsequently, many studies have tested the theory of Cressey (1950), which eventually had been
conceptualized as a fraud triangle. Based on the ACFE 2018 report, internal control weaknesses which
can be directly linked to the element of opportunity accounted for nearly half of the reported frauds. In
30% of cases, a simple lack of controls was the main factor that allowed the frauds to occur, while
another 19% of cases occurred because the perpetrator can override the controls that had been put in
place (ACFE, 2018). Hence, the effect of the internal control system in preventing occupational fraud
should not be taken lightly.
Internal control systems allow managers to evaluate how effectively an organization functions
and how its resources operate (Shannaket al., 2012). Additionally, the internal control system consists
of a set of variables which includes control environment, risk assessment, control activities,
information and communication as well as monitoring activities (COSO, 1992) that may contribute in
some way or the other to the success or failure of any organization. As such, by establishing a robust
and efficient internal control system, it is expected to prevent employee fraud within an organization.
The control environment is viewed as the basis for other internal control components by
providing structure and discipline against the occurrence of fraud(COSO, 2016). Meanwhile, risk
assessment is the process of assessing risks that are either inflicted by external or internal parties and
could jeopardise the achievement of organizational success. Therefore, management is expected to
predict and reduce risks. Information and communication focus on the nature and quality of
information to support the internal control of an organization and communicate relevant internal
control matters internally and externally. Another factor is control activities which include both manual
and automated measures that are implemented for controlling employees’ activities. This includes
helpingreduce risks to an acceptable level. Finally, monitoring activities are performed to evaluate the
events and transactions to measure the quality of the organization’s performance.
The prevention of employee frauds has been argued to be central to the effectiveness and
efficiency of the internal control systems (Saleh, 2016). Hence, when internal control systems are
effective, internal fraud occurrence is reduced to the barest minimum in an organization and the
organization can explore its potentials to achieve maximum success. As such, the effect of fraud
occurrences in an organization should not be taken lightly. This is because; each fraud cases are
detrimental not only to the performance and the success of an organization but also to a wider scope;
industry and the national economy at large. The Global Fraud Study for 2018 demonstrated the heavy
cost of fraud on organizations by estimating the median loss per case at USD130,000 and the 22% of
the reported cases caused losses of more than USD1million (ACFE, 2018).
Additionally, the Association of Certified Fraud Examiners 2014 Report to the Nations on
Occupational Fraud and Abuse suggested that companies may lose up to 5% of their revenue annually
to fraud. The report also suggested that Asia-Pacific is the third-largest region that had reported fraud
with 129 cases. Such statistics further corroborate academic empirics who have demonstrated the dire
consequences of fraud on organizations and recommended fraud prevention through effective internal
control systems. Therefore, in contrary to previous studies who have examined the effect of internal
control systems through a piecemeal approach, this study adopts a holistic approach to examine all five
internal control components, namely, control environment, risk assessment, control activities,
information and communication, and monitoring activities. This study looks into a different angle in
which the objective is to examine the employees’ perceptions of the internal control mechanisms
towards employee fraud prevention.
A company must prevent and detect employee fraud. Failure to do so will give grave
consequences for organizational development (Rae &Subramaniam, 2008). Hence, somemanagement
control procedures such as internal control systems were proffered to prevent and reduce the
occurrence of employee fraud (COSO, 2004). Given the inefficiency of internal control does not only
impair organizational development but also encourage frequent occurrences of fraud in an organization
which is detrimental to organizational performance. For instance, a survey conducted by KPMG
(2013), revealed that 68% of the respondents cited poor internal controls as the motives for fraud
occurrences in their companies. Similarly, a Global Fraud Survey reported by ACFE (2018) evidenced
that 30% of the fraud cases reported was motivated by the lack of controls, while another 19% of cases

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occurred because the perpetrator can override the controls that had been put in place. Despite the
continuous attention of academia on the role of internal control systems on employee fraud prevention,
there has been a less-convincing account from Malaysia on the effect of employees’ perceptions of
internal control systems on employee fraud prevention (Shanmugam, CheHaat& Ali, 2012).
Studies that have been conducted on the effectiveness of internal control systems in the
Malaysian context have based on indirect variables of fraud prevention such as; credit loss (Cho &
Chung 2016), higher loans and loss of backups (Cho & Chung 2016), the likelihood of fraud (Mohd-
Sanusi et al., 2015) and the disclosure of fake finances (Lokanan, 2014). As far as this study is
concerned, the influence of employees’ perceptions on internal control system towards employee fraud
prevention is still understudied among Malaysian companies (Shanmuganet al., 2012). Since previous
studies have only considered one or two internal control systems, this study provides a holistic
perspective by addressing all five (5) internal control components as proffered by COSO-ERM
Framework. Therefore, this study examines the effect of internal control systems on employee fraud
prevention.
Most of the previous studies on fraud preventions and fraud reduction have been based on
banking or financial-related companies (Ayagre, Appiah-Gyamerah&Nartey, 2014; Adetiloye,
Olokoyo&Taiwo, 2016; Omonyemen, Mary & Godwin, 2017). However, financial fraud and other
forms of employee frauds do not only occur among financial-related companies. Employee fraud
occurrences have continued to emerge in tandem with digitalization. Therefore, the continuous
emergence of sophisticated information communication technology makes fraud to become more
surreal and near impossible to prevent. In other words, the advancement in fraud has been a particular
problem among IT companies as the extensive use of sophisticated technologies by their employees
continues to reduce the efficiency of internal control systems against employee fraud prevention. As a
result, this study sets out to contribute to the current body of knowledge by examining the effects of
employees’ perceptions on the five (5) internal control components as described in the COSO-ERM
Framework in preventing employee fraud among employees of IT companies.
The broad objective of this study is to examine the influence of employees’ perceptions in
terms of the control environment, risk assessment, control activities, information and communication
and monitoring activities of internal control system on employee fraud prevention. The remainder of
this paper comprises of literature review, research method, results and discussion as well as conclusion
sections.

2. LITERATURE REVIEW
2.1 Employee Fraud
Employees are the main assets and the most crucial to the success of any organization, be it a private or
a public company. Employees comprise of the human force that renders skills and knowledge to attain
organizational objectives. Hence, achieving the objective of an organization is not impossible when
employees uphold positive conduct and aim for the success of the organization. On the contrary, when
employees engage in unfavourable conducts such as; stealing, canning or looting from coffers of the
organization or any action related to fraud, the organization is devoid of development and success.
Additionally, employee fraud can contribute to lack of profitability, and offenders’ maybe individuals
or employees or managers of an organization. Employee fraud can occur at any level within an
organization. Therefore, employee fraud has been the focus of both practitioners and theorists.
Employee fraud involves individuals or group of individuals’ falselyearning property or some
financial advantage through deception to others (Romney and Steinbart, 2018). Niehoff& Paul
(2000)explained that employees that are likely to engage in theft are generally young, emotionally
stable but face economic pressures. Besides, it is a behavioural response to unfair treatment. Many
employees are working hard, they extend their time to work but sometimes companies do not
appreciate employees’ effort thus leading them to think that they are not getting any,for fear that they
are treated unfairly. Employees who have high organizational commitment will not commit fraud to the
agencies (Manurung, Suhartadi, & Saefudin, 2015).
Additionally, Archibong (1992) added that fraud is any form of contemplated and well-
orchestrated process and efforts employed by an employee or a group of employees for obtaining
illegal and undeserved monetary or non-monetary advantages from their organization. According to
Archibong (1992), fraud takes various shapes and dimensions. The author itemizes some of the
common employee frauds as follows: (i) accounting records falsification or alteration; (ii) assets
misappropriation or theft; (iii) intentional suppression or omission of records of a transaction; (iv)
falsifying or recording non-existing transactions; (v) deliberate wrongful application of accounting

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policies; and (vi) intentional falsification of transactions of the entity’s state of affairs.
As such, any form of the above-listed activities has been viciously affecting various types of
organizations including private and public companies in Malaysia. Archibong (1992) suggests that the
increasing trend of fraud activities will lead to the company’sfailure. Therefore, what is the main
factors that can be efficient in curbing and annihilating employee fraud is a critical question in the mind
of management of many companies including the IT companies in Malaysia.Similarly, several
suggestions have been proffered for effectively preventing employee fraud mainly from two
disciplines. Prevention methods are mostly reported from studies in the criminology and business
ethics area (Collins et al., 2009). What is common among the two different areas of study is that they
are unanimous on the role of the employee in perpetrating fraud in organizations (Zyglidopoulos&
Fleming, 2008). Hence, the best way to annihilate fraud in an organization is to prevent fraudulent
employees.

2.2 Internal Control Systems and Employee Fraud

Enormous empirical efforts have been exerted to explain the influence of internal control systems in the
prevention and occurrence of fraud in companies. However, the body of literature on internal control
system has produced an inconsistent finding regarding the effects of internal control systems and the
likelihood of employee fraud occurrence (Beasley, 1996; Dechow et al., 1996; Joseph, Albert
&Byaruhaga, 2015). At one hand, studies such as Abbott et al. (2000) and Dunn (2004) reported a
positive influence of the internal control system on the likelihood of fraudulent financial fraud
occurrences. Other studies such as Sharma (2004) reported a negative relationship between internal
control systems and the likelihood of fraud occurrence. Additionally, the study conducted by Zhou and
Kapoor (2011) demonstrated that the availability of many fraud detection techniques is not enough to
prevent fraud occurrence as corrupt employees find it easy to outsmart internal control systems.
According to Singleton and Atkinson (2011), the most effective technique to reduce loss from
fraudulent activities was fraud hotlines, employee support programs, and adherence to the code of
conduct.
Subsequently, previous studies that have focused on the importance of employee perception of
internal control mechanisms in preventing fraudulent behaviour, specifically employee fraud have
provided constructive findings in this realm (O’Leary et al, 2006). In other words, when employees are
aware of the dire consequences of, the likelihood of fraud occurrence is reduced.Also, the efficiency of
procedures and policies incorporated by management could increase the auditors’ chance of detecting
fraud (Asare, Wright &Zimbelman, 2015; Gonzalez and Hoffman, 2018). Thus, when internal control
systems are effective and efficient it will not only prevent fraud it will also assist auditors to detect
fraud easily.
Ozigbo (2015) carried out a study to examine internal control and fraud prevention in
Nigerian business organizations. They concluded that internal control was a necessary safeguard,
proper accounting record should always be kept, and authorization and approval limits of jobs and
funds should be setup and communicated to all concerned interest groups. Oguda, Odhiambo and
Byaruhanga (2015)found that there was a statistically significant and positive relationship between the
adequacy of internal control systems and fraud prevention and detection in district treasuries in
Kakamega County.
Mukoro, Faboyede and Eziamaka (2014) in a study examined the effectiveness of forensic
accountants in strengthening internal control of business organizations in Nigeria.They found that
internal control and its components play a significant role in controlling fraud in business
organizations. Holmes et al (2002)suggest that employee frauds were less likely to occur if the top
management firmly supports internal control. Another study by Holtfreter (2004)found that losses due
to fraud may not be curbed by just having access to the various control mechanism.

3. HYPOTHESES DEVELOPMENT
3.1 Control Environment
The control environment is the general mentality which influences how organizations established
strategies and activities. The components that influence control environment to incorporate
administration's philosophy and working style, respectability and moral qualities, the competence of
the management, organizational structure (i.e., vertical and horizontal), the task of power and duty, as
well as human capital arrangements and practices(Aldridge & Colbert, 1994). The control environment
sets the tone for the organization and influencesthe control awareness of its employees and
management. Control environment influences by the integrity and ethical values of management,

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managements’ style and philosophy as well as the culture of the organization itself. Despite the
significant level of inconsistency in the extant literature, there is a level of consensus with regards to
the influence of organizational environment in fraud occurrence including the perception of employees
to prevent employee fraud. In short, many studies have demonstrated that work climate or
environments are in most cases responsible for the occurrence of financial fraud. Based on this
argument, this study hypothesized that:
H1:The employees’ perceptions ofthe control environment as an internal control mechanism
significantly influence employee fraud prevention.

3.2 Risk Assessment

Risks involve uncertainty and can arise from many circumstances that will adversely affect the
achievement of the organizations’ objectives. Therefore, management needs to ensure that risks are
identified, assessed and managed properly to prevent its obstruction of the organizational goal
(Karagiorgoset al., 2009). It is the management’s responsibility to design internal control systems that
will safeguardthe organizations’ assets. Furthermore, the internal control system ensures reliability on
the financial reporting of the institution in line with regulatory and compliance requirements.Many
companies that have suffered major employee fraud often neglect the importance of assessing the risks
which include the likelihood of risk, its positive and negative impacts, individually or by category.
Davis and Pesch (2010) examined the dynamics and characteristics of fraud, considering fraud risk
assessment and fraud prevention strategies. They recommended future studies on fraud to focus on
individual factors of organizational environments in preventing and reducing the likelihood of
employee fraud occurrence. Every business is all about risk-taking especially IT-related business
because of its huge exposure to uncertainty and needs considerations of users’ acceptance of
innovations. Therefore, risk assessment is an essential practice to be used mainly among IT companies.
This is to obtain assurance that procedures being followed and the operations are reliable. In today’s
dynamic environment, many companies are exposed to many risks such as financial risk, operational
risk, strategic risk and environmental risk, among others, which may generate some source of threat for
the growth and successfulness of a company. Based on this argument, this study hypothesized that:
H2:The employees’ perceptions risk assessment as an internal control mechanism is significantly
influence employee fraud prevention.

3.3 Information and Communication System

Many information and communication systems are deployed to perpetrate fraud by employees and third
parties. Therefore, the control of information and communication is important. According to Aldridge
and Colbert (1994), internal control requires that all relevant informationbe captured and
communicated that enable people to conduct and manage their financial reporting responsibilities.
Effective communications should occur in a broad sense with information flowing down, across, and
up within all the sections of the organization (Theofaniset al., 2011). Recent literature on internal
control system frameworks has raised some concerns on information and communication within an
organization because it may affect the relations among workers at all levels (Amudo&Inanga, 2009).
Consequently, such information ought to be conveyed throughout the whole organization to allow
workers to carry out their responsibilities regarding objective achievement. The occurrence of
employee fraud in many organizations is often enabled by the lack of awareness and knowledge of
related policies and regulations by relevant employees. Based on this argument, this study hypothesized
that:
H3:The employees’ perceptions ofinformation and communication as an internal control mechanism is
significantly influence employee fraud prevention.

3.4 Control Activities

Control activities refer to the effective and efficient policies and procedures used to ensure that
necessary actions are taken to deal with the risks identified (Aikins,2011). This includesto name a few,
segregation of duties, change management controls and independent check on performance. Internal
control activities occur in the organization such as approvals, authorizations, verifications,
reconciliations, and reviews of operating performance and security of asset (Rezaee&Sharbatoghlie,
2001). When controls are viewed as an addition to the day-to-day activities, they are often seen as less
important and may not be performed in situations where individuals feel pressured to complete
activities in a limited amount of time. It is not sufficient for management to simply establish
appropriate policies and procedures for the various activities and divisions of the company. Instead,

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they have to ensure that the operations must comply with such policies and procedures. Based on this
argument, this study hypothesized that:
H4:The employees’ perceptions ofcontrol activities as an internal control mechanism are significantly
influence employee fraud prevention.

3.5 Monitoring
The motivation behind monitoring is to determine whether the four internal control systems (Control
Environment, Risk Assessment, Information and Communication and Control Activities) have the
quality to efficiently prevent fraud attacks from employees. It is important to monitor internal control
and do separate evaluations of monitoring to determine whether it is operating as intended and whether
any modifications are necessary. Monitoring includes management’s procedure for following up and
checking on performance to ensure that controls are complied with. Based on this fact, this study
hypothesized that:
H5:The employees’ perceptions ofmonitoring activities as an internal control mechanism are
significantly influence employee fraud prevention.

4. RESEARCH METHOD AND DESIGN

This study employed a cross-sectional survey research design as this approach helps to provide
standardized information to describe variables or to study the relationships between variables
(Malhotra, 1999). Thus, a survey research design is used for collecting data from the respondents,
which are then used to study the relationships between the internal control systems variables, namely,
control environment, risk assessment, information and communication system, control activities,
monitoring and employee fraud.

4.1Sample Selection
The population of this study is made up of IT companies in Malaysia. According to the Malaysia
Business Link Directory, there are more than 69 IT companies dealing with Software, Hardware and
Computer Accessories Services. Therefore, the entire list of IT companies is the population of this
study in which the sample of this study will be drawn from and subsequently the findings of this study
will be generalized on.Researchers have indicated that there may be circumstances where it is not
feasible or realistic to adopt a sampling technique (Trochim, 2006). This is due to the lack of a
sampling frame (Sien, 2015; Trochim, 2006). A similar situation applies to the case of studying the
perception of employees’ perception towards internal control systems, it is near impossible to obtain
the list of employees from any company considering the confidentiality of such information. Hence, a
snowball technique is employed for the selection of sample in this study (Creswell, 2012).Specifically,
this study adopted a snowballing technique to target employees from three IT companies in Malaysia
namely; Dell Global Center, IBM Malaysia and HP Global Center who are willing to participate in the
survey. Snowballing was employed by imploring respondents to help invite any of their colleagues to
participate in the survey.

4.2 Research Instrument

The design of the instrument used in this study is arranged in seven (7) sections. Meanwhile, the
questionnaire is appended with general information where the research is briefly introduced as well as
the broad objective of the research was explained. Following this, Section A of this questionnaire
presents questions on demographic details of the respondents including their age, gender, company and
the highest level of education. Subsequently, Section B until Section G includes questions regarding
the measurement of the entire variables under study. This section is designed to measure the six (6)
constructs: (1) Control Environment, (2) Risk Assessment, (3) Information and Communication
System, (4) Control Activities, (5) Monitoring, and (6) Employee Fraud Prevention.

4.3 Data Collection

The data were collected from the employees within three IT companies. The questionnaires were
prepared using Google Form and were distributed through an email database of the three sampled
companies. The survey was initiated on December 28, 2018,and ended on January 8, 2019. This study
applies the five-point likert scale. Respondents were asked to select the appropriate response from 1 (I
strongly disagree) to 5 (I strongly agree). The five-point likert scale provides an appropriate number of
alternatives for the respondent while providing a distribution of acceptable skewness (Bilton, 2016).
The questionnaire survey restricted respondents to respond only one time to avoid redundancy. The

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online survey was halted the moment the responses amount to the minimum required sample size
which is 100 for this study.

5. RESULTS
5.1 Demographic Profile
Table 1 presents the descriptive statistics of the respondents’ demographic profile. The results show
that majority of the respondents (74%) is female and there are only 26% male respondents. The table
also shows that majority of the respondents in this study (47%) are between the ages of 20 to 29 years.
This is followed by 40% respondents that are between the ages of 30 to 39 and 13% respondents are
between the ages of 40 and 49 years. This distribution implies that the respondents in this study are all
young adults.
Table 1 also shows the descriptive statistics of the respondents’ educational qualification. The
table shows that 69% of the respondents have a Bachelor’s Degree qualification. This is followed by
19% of respondents who have professional certificate qualification. Only 3% of respondents in this
study have a master’s degree as their highest educational qualification and finally, 9% of the
respondents acquire other qualifications. This distribution meets the logical expectation, as the
respondents in this study are professionals; it is thus expected for them to be well-educated.

Table 1. Gender Profile

Frequency Valid Percent
Gender Male 26 26.0
Female 74 74.0
Age 20-29 47 47.0
30-39 40 40.0
40-49 13 13.0
Educational Qualification Professional Certificate 19 19.0
Degree 69 69.0
Masters 3 3.0
Others 9 9.0

5.2 Employees Perceptions of Internal Control Mechanisms towards Employee Fraud Prevention
5.2.1 Employee Fraud Prevention
The descriptive analysis of employee fraud prevention is presented in Table 2. The mean
scores obtained for the statements were sorted from highest to smallest value as shown in Table 2 to
determine the level agreement among respondents towards those statements. The mean for all
statements is between 3.55 and 3.84. Looking at the mean values, it can be seen that the respondents
almost agree to the statements “I think stern measures are taken by the management towards violation
of any regulations”and “I think adherence to set regulations positively minimizes fraud occurrence in
our organization”. However, the lowest two means indicate that respondents have an almost neutral
agreement that the internal control systems are adhered to and fraudulent activities could be prevented
by setting internal control systems.

Table 2.The Rank of Statements for Employee Fraud Prevention

Rank Code Statement Mean Std.
Deviation
1 EFP3 I think stern measures are taken by the management 3.84 .896
towards violation of any regulations.
2 EFP4 I think adherence to set regulations positively minimizes 3.69 .975
fraud occurrence in our organization
3 EFP1 I think the set regulations set through internal control 3.59 .900
systems are strictly adhered to.
4 EFP2 I think fraudulent activities are prevented due to the 3.55 .866
regulations set through internal control systems.
N = 100. Scale: 1 Strongly Disagree - 5 Strongly Agree.

5.2.2 Control Environment

The descriptive result of control environment is presented in Table 3. The mean scores for all
the statements measuring employees’ perception ofthe control environment are between the values of

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2.99 and 3.65. The highest mean score for statement CE5 with the mean of 3.65 followed by CE1 with
the mean of 3.45. This implies that employees perceived that audit matters are important in influencing
the accounting system. However, employees perceived that fraudulent activities are hard to control.
The lowest mean, 2.99 for CE4 shows that respondents almost disagree with the statement “I think the
management is committed to the ethical values in the operation of our accounting & finance
management system”. This may indicate that employees’ perceived that ethical values in the
organization are low.

Table 3.Descriptive Statistics of Control Environment Mechanism

Code Statement Mean Std.
Deviation
CE1 I think fraudulent activities are difficult to be detected in our 3.45 .821
organization
CE2 I think measures that can enhance the efficacy of auditors are 3.22 .836
important for effective fraud detection
CE3 I think there are honest and fair dealings with all stakeholders for the 3.03 .881
benefit of the organization
CE4 I think the management is committed to the ethical values in the 2.99 .937
operation of our accounting &finance management system
CE5 I think the standards for audits and audit-related services influence 3.65 .744
the performance of our accounting &finance management system
CE6 I think internal audit contributes to the improvement of risk 3.12 .769
management, control and corporate governance
N = 100. Scale: 1 Strongly Disagree - 5 Strongly Agree.

5.2.3 Risk Assessment

Table 4 shows the descriptive analysis of the risk assessment from the employees’
perspectives. The table shows that the mean scores range from 2.82 to 3.38. This indicates that, on
average, the respondents majorly agree to the statements under the risk assessment variable. However,
the lowest two means, 2.82 and 2.91 for RA5 and RA3, respectively, may indicate that employees
perceived that there is no frequent reporting and no specific criteria to assess fraud-related risks within
the organization. However, the highest mean for RA1 with the mean value of 3.38 may suggest that
employees perceived that the management has set up the objective for the organization.

Table 4.Descriptive Statistics of Risk Assessment Mechanism

Code Statement Mean Std.
Deviation
RA1 I think management has defined appropriate objectives for the 3.38 .763
organization.
RA2 I think management identifies risks that affect the achievement of the 3.13 .872
objectives.
RA3 I think management has criteria for the ascertainment of which 2.91 .954
fraud-related risks to the organization are most critical.
RA4 I think management has put in place mechanisms for mitigation of 3.11 .920
critical risks that may result from fraud.
RA5 I think there are frequent escalation and reporting of fraud-related 2.82 .809
risks to the management
N = 100. Scale: 1 Strongly Disagree - 5 Strongly Agree

5.2.4 Information and Communication System

The descriptive analysis of employees’ perceptions ofthe information communication system is
presented in Table 5. Four statements were used to measure the respondents’ agreement on information
and communication system. The mean for all statements is between 2.78 and 3.23. The highest mean is
for ICS3 with the mean value of 3.23. This indicates the presence of information and communication
system strengthens the efficiency of the internal control system. However, the lowest mean score of
2.78 for ICS1 suggests that employees perceived that management is not able to identify individuals
that can be responsible to coordinate various activities within the organization.

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Table 5.Descriptive Statistics of Information and Communication System Mechanism

Code Item Mean Std.
Deviation
ICS1 I think management has identified individuals who are responsible 2.78 .675
for coordinating the various activities within the entity.
ICS2 I think all employees understand the concept and importance of 3.14 .725
internal controls including the division of responsibility.
ICS3 I think communication helps to evaluate how well guidelines and 3.23 .920
policies of the organization are working and being implemented.
ICS4 I think the reporting system on organizational structures spells out all 3.02 .864
the responsibilities of each section/unit in the organization.
N = 100. Scale: 1 Strongly Disagree - 5 Strongly Agree

5.2.5 Control Activities

Table 6 presents a descriptive analysis of the perceptions of employees on control activities. Eight
statements were used to measure the respondents’ perceptions of control activities. The table shows the
mean scores range from 2.82 to 4.03. The result shows that, on average, the majority of the respondents
agree to statement CA1 with a mean value of 4.03. This suggests that employees perceived that
management has taken corrective actions in the operation. The statement with the code CA3 has the
lowest mean of 2.82. It may suggest that employees almost disagree that access to the accounting
record is strict to the authorized personnel.

Table 6Descriptive Statistics of Control Activities Mechanism

Code Statement Mean Std.
Deviation
CA1 I think appropriate measures are taken to correct misfeasance in the 4.03 .171
operation of our Accounting & Finance Management System.
CA2 I think access to our accounting &finance management system is 3.01 1.000
only allowed to authorized personnel.
CA3 I think accounting records in our organization are limited to 2.82 .796
employees with designated responsibility for such records.
CA4 I think the reconciliation of fraud-related risk is done daily. 3.40 .752
CA5 I think our organization has a well-developed chart of accounts. 3.19 .720
CA6 I thinkone staff cannot have access to all valuable information 3.41 .818
without the consent of senior staff.
CA7 I think departments have budget reviews where actual expenditure is 3.26 .960
compared with budgeted expenditure and explanations for the
variances given.
CA8 I think our security system identifies and safeguard organizational 3.34 .924
assets.
N = 100. Scale: 1 Strongly Disagree - 5 Strongly Agree

5.2.6 Monitoring
The descriptive analysis of the perceptions of employees on the monitoring mechanism is presented in
Table 7. Four statements were used to measure the employees’ perceptions ofthe monitoring
mechanism. The mean for all statements ranges from 2.78 to 3.28. The highest mean is 3.28 for
statement MO3 may suggest that employees perceived that monitoring is useful to assess the
organization’s performance. Meanwhile, statements MO2 and MO4 with mean scores of 3.14 and 3.06,
respectively, may suggest that majority of the respondents have almost neutral perceptions that the
management implements periodic internal control review and timely review of audit reports.

Table 7.Descriptive Statistics of Monitoring Mechanism

Code Statement Mean Std.
Deviation
MO1 I think there are independent process checks and evaluations of 2.78 .690
controls activities on an ongoing basis.
MO2 I think internal reviews of the implementation of internal controls in 3.14 .636
units are conducted periodically.

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MO3 I think monitoring has helped in assessing the quality of performance 3.28 .817
of the organization over time.
MO4 I think management has assigned responsibilities for the timely 3.06 .789
review of audit reports and resolution of any non-compliance items
noted in those audit reports.
N = 100. Scale: 1 Strongly Disagree - 5 Strongly Agree.

5.3 Reliability Analysis

Table 8 presents the reliability analysis for all the variables. This study shows that the
reliability analysis is significantly better as the value is above the minimum threshold of 0.5 as
suggested by Hair et al (2010).

Table 8.Reliability Analysis

Code Variable Reliability Value
CE Control Environment 0.820
RA Risk assessment 0.860
CA Control Activities 0.889
ICS Information and Communication System 0.853
MO Monitoring 0.696
EFP Employee Fraud Prevention 0.892

5.4 Correlation Analysis

The result of the correlations among the variables including the independent variables, and the
dependent variable are presented in Table 9. The result is interpreted with regards to the strength of the
independent variables on the dependent variable in Table 9.

Table 9.Correlation Summary

Variables CE RA ICS CA MO EFP
Control Environment 1
Risk Assessment .477** 1
Information and Communication System .484** .631** 1
Control Activities .477** .559** .528** 1
Monitoring .246 -.126 -.127 .038 1
Employee Fraud Prevention .376** .441** .502** .491** -.066 1
**Correlation is significant at the 0.01 level (2-tailed)

The findings presented in Table 10shows that there is a medium and significant relationship between
the perceptions of employees on the control environment and employee fraud prevention. The findings
also demonstrated a significant and medium relationship between risk activities and employee fraud
prevention. It is also revealed that there are a high correlation and significant relationship between
information and communication system and employee fraud prevention. Besides, the result depicts a
significant and medium relationship between control activities and employee fraud prevention.
However, the result proved a non-significant relationship between monitoring and employee fraud
prevention.

Table 10.Correlations among Independent and Dependent Variables

Relationships Correlations Strength
CE and EFP .376** Medium
RA and EFP .441** Medium
ICS and EFP .502** Large
CA and EFP .491** Medium
MO and EFP -.066 Large
**Correlation is significant at the 0.01 level (2-tailed)

5.5 Regression Analysis

The result presented in Table 11 reveals the result of multiple regression which can be represented by
(F= 9.449, P < 0.05). This indicates that the model is statistically significant. Furthermore, the R2 value
(R2 = 0.334) also indicates that the model is fit and acceptable with regards to the argument proffered

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by Hair et al.(2010) which assert that a model with R squared value greater than 0.10 is considered fit.
The result also implies that the independent variables (Control Environment, Risk Assessment,
Information and Communication System, Control Activities and Monitoring) collectively explain
33.4% of the variation of the dependent variable (Employee Fraud Prevention). The results of the
multiple regressions are discussed concerning the hypotheses proposed in the following subsections.

Table 11.Multiple Regressions between Internal Control System Mechanisms and Employee Fraud
Prevention
Model B Std. Beta t Sig
Error (b)
(Constant) -.822 .708 -1.161 .249
Control Environment .139 .165 .088 .841 .402
Risk Assessment .108 .164 .078 .660 .511
Control Activities .540 .219 .268 2.461 .016
Information and Communication System .366 .162 .263 2.263 .026
Monitoring -.068 .139 -.043 -.490 .625
R2 .334
Adjusted R2 .299
F Change 9.449****
**** P < 0.001, *** P < 0.01, ** P < 0.05, *P < 0.10.

The result presented in Table 11 above revealed that there is a positive but insignificant effect
of employees’ perceptions towards control environment on employee fraud prevention (β = 0.088, p >
0.05). This implies that the variance in the understanding of employee fraud is not explained by the
variance in the control environment (t = .841). As such,H1is not supported.
The result presented in Table 11 showed that there is a positive but insignificant effect of the
risk assessment process on employee fraud prevention (β = 0.108, P > 0.05). Thus, the variance in
employee fraud prevention is not explained by the variance in risk assessment (t = -0.660). Therefore,
H2 is not supported.
The result depicted in Table 11 demonstrates that control activities have a positive and
significant effect on employee fraud prevention (β = 0.268, p < 0.05). This result indicates that the
variance in employee fraud prevention is explained by the variance in employees’ perceptions of
control activities (t = 2.461). As such, this finding provides evidence that control activities are a
significant internal control system for preventing the occurrence of employee fraud thus, H3 is
supported.
The result presented in Table 11 revealed that information and communication system has a
positive and significant influence on employee fraud prevention (β= 0.263, p < 0.05). This result
indicates that 26% of the variance in employee fraud prevention is explained by variance in
information and communication system (t = 2.263). Therefore, H4 is supported. This result suggests
that employees’ perceptions of information and communication components of internal control are
important to prevent employee fraud from occurring. This study suggests that it is vital to give
necessary training to the staff especially in accounting and financial management system as this is one
of the best ways to convey important information, especially regarding the employee fraud to the
employees in the organization.
The result depicted in Table 11 reveals that monitoring has a negative and insignificant
influence on employees’ perceptions of employee fraud prevention (β = -0.043, p > 0.05). This result
indicates that monitoring is not perceived as an important factor in preventing employee fraud
prevention (t = -490). Therefore, this result provides the basis for rejecting the above hypothesis.

6. DISCUSSION
This study finds the insignificant effect of employees’ perception on control environment towards
employee fraud prevention. In furtherance, the implication of the insignificant effect of the employees’
perceptions on control environment towards employee fraud prevention explains that the current
control environment among IT companies in Malaysia is not perceived effective enough to curb or
annihilate employee fraud. In other words, the mechanisms of control environment such as; accounting
and financial management systems, the commitment of IT companies towards the operations of
accounting and financial management system and the readiness of the management to correct errors are
all seeming insignificant from the employees’ point of view. This study suggests that the employees’

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perception of control environment such as the philosophy, operating style, integrity and ethical values,
commitment and competenceamong IT companies in Malaysia is not enough to control to prevent
employee fraud (Aldridge and Colbert, 1994).
The insignificant relationship between the employees’ perception of risk assessment towards
employee fraud prevention indicates the importance of risk assessment in abating employee fraud
among IT companies in Malaysia could not be established. In other words, this result shows that
employees of IT companies in Malaysia perceived that the level of risk assessment techniques such as;
defining appropriate objectives for the company, identifying potential risks and possessing the criteria
for discerning detrimental risks is not efficient in preventing employee fraud among IT companies in
Malaysia.The findings of this study with regards to the effect of the employees’ perception on control
activities towards employee fraud prevention reveal that employees in IT companies in Malaysia
perceived control activities including specifying specific roles, corrective actions, staff training on
accounting and financial management system usage and availability of security systems for
organizational assets are effective in preventing employee fraud among IT companies. The findings of
this study can be interpreted as thus, employees of the IT companies in Malaysia believe that the
management of their companies is taking enough measures such as implementing engaging and
implementing preventive mechanism which can curb employee fraud.
This study found that the information and communication system is a significant internal
control mechanism towards the employees’ perceptions of employee fraud prevention. The implication
is that, information communication system which revolves around the management of a company
establishing clear communication of responsibilities to their employees. This result, therefore,
demonstrates that when the management of IT companies in Malaysia communicates clearly and
effectively on the guidelines and policies guiding the roles and responsibilities with the employees it
will help give the understanding about employee fraud. Effective communication is also an important
factor for preventing employee fraud as corrupt employees would have no excuse of innocence as the
reason to involve in frauds. Therefore, this study demonstrates the importance of information and
communication systems as an important element of the internal control system for preventing employee
fraud. For the employees’ perception of the monitoring mechanism shows that the independent process
of checks and evaluations of control activities, internal reviews of implementation of internal control
activities, assessing the quality of performance and assigning the timely review of audit reports and
resolutions are not important for preventing employee fraud as perceived by employees of IT
companies in Malaysia.

7. CONCLUSION
The findings reported in this study offer several contributions. Firstly, it provides an extension of the
reliability theory which proffers that internal control systems are primarily set up for assessment and
control of risks (Kinney, 2000). By revealing the importance of information and communication system
and control activities in preventing employee fraud provides empirical evidence of the theoretical
perspectives of the reliability theory. Impliedly, this study, therefore, provides insight into the
management of IT companies in Malaysia to enhance the accuracy and efficiency of the internal
control systems in their organizations. Secondly, it extends the potential literature on employee fraud
prevention and internal control systems by revealing the role of internal control systems on employee
fraud prevention from the context of IT companies in Malaysia. As against many previous studies
which mainly emerged from developed economies, this study provides an uncommon account of a
transiting economy of Malaysia and reveal the importance of information and communication system
and monitoring activities in preventing employee fraud.
The findings presented in this study have some practical importance. Importantly, this study
provides insight to the management of IT companies in Malaysia and by extension other corporate
organizations in Malaysia to focus on establishing and implementing relevant and reliable means of
disseminating clear and effective communication among their employees to prevent the detriment of
employee fraud in their companies. Additionally, the findings of this study inform the management of
IT companies in Malaysia on the importance of conducting periodic evaluations and routine audits and
other monitoring activities to prevent employees from engaging in employee fraud. The findings of this
study demonstrate that the presence of the monitoring system for the operation of employees is critical
for the success, effective operation and efficient performance of IT companies as it prevents against
employee fraud. In other words, internal controls need to be adequately monitored to assess the quality
and effectiveness of the system’s performance over time. Hence, the management of IT companies
must have policies that facilitate adherence to the provisions of their budget and ensuring that controls

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are in place to exclude incurring expenditure over-budgeted funds.

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