Internal Control and Compliance-Control as Effective Methods of Management, Detection and Prevention of Financial Statement Fraud

INTRODUCTIONFinancial statement fraud is one of the main problems of the economic world. External and internal users of the financial statements is increasingly cast doubt on the financial statement, and regulatory authorities can't claim with certainty that financial statement is reliable and prepared in accordance with all regulatory and ethical provisions of the activities of accountants and auditors.In the current economic conditions the cause of fraud is using of different methods to measure assets and liabilities. Thus the improvement of financial reporting quality which is the basic source for the conduction of enterprise's financial state and results of activity analysis is continuously connected to the efficiency of assets and liabilities, their quantification and classification (Kulikova, L.I., Grigoryeva, L.L., Gubaidullina, A.R., 2014, p.61). It's important to note the fact that the companies try to show the results of its business in the best light, increase the attractiveness to investors and the value of its own capitalization.The aim of the research is to describe the possibility of internal controls in improving the process of management in the company, to work out the model of compliance-control, which can improve the quality of the financial statement.METHODSince the beginning of the twentieth century the problem of falsification was actively studied by researchers. Among them are: Gerard M. Zack, Rezai Zabiholla, Joseph T. Wells, Sherr I.F. , Arinushkin N. S. and others. For example Ya.M. Galperin noted that falsification represents the distortion of balance sheet resulting in changes in the material contents of accounts and groups of balance sheet items (Galperin, 1925). I.F. Sherr claimed that falsification of the reporting is directed on distortion of a condition and a size of property and profitability of a company (Sherr, 1926). N. S. Arinushkin narrowed a falsification problem to balance sheet and the misstatement of its items (Arinushkin, 1927) (Kulikova, L.I., Gafieva, G.M., 2014, p.41). Financial statement fraud often starts with a small misstatement or earnings management of quarterly financial reports that presumes not to be material but eventually grows into fullblown fraud and producing materially misleading annual financial statements (Zabihollah Rezaee, 2002, p.336). It's important to note that there is no effective method to control the quality of financial statement nowadays. In our opinion among the tools that can detect and prevent falsification and manipulation of financial statement, can be consider internal control and compliance-control as one element of internal control system.Concerning the research of Association of Certified Fraud Examiners (ACFE), the typical organization loses 5% of revenues each year to fraud (Association of Certified Fraud Examiners, 2014). Next, examine the possibility of the internal control as the method of management, and compliance-control as the method of detection and prevention of financial statement fraudThe main method used in this study is the comparison method, the methods of analysis and synthesisRESULTInternal control originated in the United States after major scandals involving the falsification of financial statements.The Sarbanes-Oxley Act was enacted in 2002 after a number of corporate scandals in the United States, connected with disturbances in corporate governance and financial reporting in the cases of Enron, Tyco International, Peregrine Systems, and World-Com, which led to multimillion investors' losses (Tofeluc E., 2015, p. 57). The Sarbanes-Oxley Act (SOX) mandates management evaluation and independent audits of internal control effectiveness (Ashbaugh-Skaife, H., Collins, D., Kinney Jr., W., Lafond, R., 2009, p. 41). The law consists of eleven sections and applies to US and international companies whose securities are registered with the Securities and Exchange Commission (SEC). …