Fraud is a major cause of poverty in various parts of the world. Economic resources are being swindled by powerful politicians, bureaucrats and industrialists in one form or the other, leaving the economies of countries poorer. The corporate sector is not far behind. World over, accounting fraud in corporate balance sheets is continuously increasing in numbers and magnitude. This has also brought great burden on public resources and on the economy of the world and ultimately on public at large. The government and regulatory authorities are continuously revisiting this area to modify and introduce new legislation to check this menace. This paper discusses the effectiveness of internal auditor to contain, detect and prevent the accounting frauds and thus fight this plague in the corporate sector. The paper introduces the concept of appointment of internal auditor by outside stakeholders to strengthen his independence and consequently his effectiveness to detect and prevent fraud.

Financial fraud is the “deliberate fraud committed by management that injures investors and creditors through materially misleading financial statements” (Elliot and Willingham, 1980). According to Sawyer (1988), fraud is a false representation or concealment of material fact to persuade someone to part with something valuable. The National Commission on Fraudulent Financial Reporting (1987) defines fraudulent financial reporting as an “intentional or reckless conduct, whether by act or omission, that results in materially misleading financial statements.” The Institute of Internal Auditors (1985), in its SIAS No. 3, has described fraud as “an array of irregularities and illegal acts characterized by intentional deceptions. It can be perpetrated for the benefit or the detriment of the organization.” The Institute of Chartered Accountants of India, in its SIA 11 has described fraud as “an intentional act by one or more individuals among management, those charged with governance, or third parties, involving the use of deception to obtain unjust or illegal advantage. A fraud could take form of misstatement of an information (financial or otherwise) or misappropriation of the assets of the entity” (ICAI, 2006d). The American Institute of Certified Public Accountants (AICPA, 1988), in its SAS No. 3, has described the irregularities as intentional misstatement of financial statements (management fraud) and theft of assets (employee fraud). Internal audit can play an important role in detecting and preventing fraud.

Accounting Research and Audit Practices, Internal Auditor, Accounting Fraud Buster, The American Institute of Certified Public Accountants (AICPA), management fraud, employee fraud, drug trafficking, smuggling, tax defaults and theft, murder, rapes, FEMA violations.