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Establishing Rules

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Despite the presence of all the stated rules and regulations, we noted several cases of lack of governance, ignoring present and future risk, lack of adherence to specific rules, over-taking business risk, etc. For the past few years, a number of well established corporations were experiencing crises. In fact despite my long experience, it was shocking to me to see more than one organization falling down on the same day or week.
The corporate crises raised several questions that we may not find a good answer for them. For example:

1) Could the internal auditor predict the problems at their infancy before they get bigger and take the company and all employees down to bankruptcy?

2) Was internal audit qualified to uncover lack of the application of the established rules?

3) Was the cause of each of the crises unpredictable?

4) Was management hiding information from internal auditors?

5) Was internal audit forced to be silent, etc?

6) Were the established rules "pragmatic"?

7) What should the internal auditors have done differently to prevent the crises?

Select one of the companies that collapsed during the past two or three years. Based on your readings, the questions stated above, and your personal researches, in your opinion, what are the lessons learned that you may offer corporate internal auditors?

Please include your source of information and cite them as per each discussion question. There must be adequate support to the research.

Also citing textbooks and adequate websites is very much needed, as I need help in finding information from textbooks as well as web pages.

THANKS!!!!

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Establishing Rules versus Applying and Enforcing them

Despite the presence of all the stated rules and regulations, we noted several cases of lack of governance, ignoring present and future risk, lack of adherence to specific rules, over-taking business risk, etc. For the past few years, a number of well established corporations were experiencing crises. In fact despite my long experience, it was shocking to me to see more than one organization falling down on the same day or week.

The corporate crises raised several questions that we may not find a good answer for them. For example:

1) Could the internal auditor predict the problems at their infancy before they get bigger and take the company and all employees down to bankruptcy?

Yes, in each of the cases of corporate fraud the internal auditors could have predicted the problems at their infancy. The internal auditor has to use the 3 Cs model to predict if there will be a fraud in the company. The first C is conditions. If the internal auditor perceives that there are pressures and motivations to involve in financial fraud, the pressures may actually lead to a fraud. The recent frauds had one factor in common the executive indulged in illegal action to misrepresent the financial situation to the users of the financial statements. The second C is the corporate structure. The firms' structure is such that an environment prone of fraudulent financial reporting is created. The corporate structure usually alerts the auditor to the possibility that corporate governance will fail. Usually the auditor will look to blind trust, control, ineffectiveness, gamesmanship, and loyalty to individuals. These increase the likelihood of corporate fraud. The third C is choice wherein the management chooses ethical business strategies to gain continuous improvement or uses unethical means to show earnings increases. The management is more likely to do a fraud when its earnings and wealth is related to company performance, the company is willing to take personal risk, opportunities for committing fraud are present, and there is high pressure to increase shareholder value (1).

2) Was internal audit qualified to uncover lack of the ...

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