Impact of Internal Control On Fraud Detection and Prevention in Microfinance Institutions

Yolanda Aji Abei
Impact of Internal Control on

Fraud Detection and Prevention
in Microfinance Institutions
Business administration
Master’s thesis
30ECT
Term: Spring 2021

Supervisors: Lazarus Fotoh,
Sven Siverbo
Acknowledgements
I would like to acknowledge and thank the Swedish Institute (SI) for granting
me a scholarship enabling me to pursue my master’s program and thesis with
ease.
I would also like to thank my supervisors Professor Sven Siverbo and Lazarus
Fotoh for guiding me through the entire thesis process.
I would also like to thank and appreciate all the respondents from the MFIs in
Cameroon for their collaboration and useful information that made my research
feasible.
Finally, I would like to thank my family and friends for their moral and
emotional support in encouraging me to get through.
Karlstad, June 2021
Yolanda Abei
3
Abstract
Microfinance institutions (MFIs) are an important tool of poverty reduction

which has gained grounds over the years and grown rapidly given the services
they provide. The rapid growth of the MFIs has had huge challenges on their
regulatory framework which in turn has resulted in the prevalence of fraudulent
cases. With the devasting effects of fraud on MFIs and the importance of MFIs
in many economies this thesis aims to examine how the design and use of
internal control impact fraud detection and prevention in MFIs. To achieve this
aim, a qualitative study was conducted with a case study on eight MFIs in
Cameroon. Primary data will be obtained from fourteen semi-structured
interviews. Data will be analysed manually using thematic analysis. The findings
revealed that internal control has a positive impact on fraud detection and
prevention in MFIs by reducing fraud incentive, opportunity, rationalization,
and capability. Further, findings revealed that the greatest causes of fraud in
MFIs are poor remuneration, weak monitoring, and a poor internal control
system. Therefore, for the purpose of future fraud prevention, MFIs should
ensure to improve their remuneration schemes, improve1 their monitoring
system and ensure regular internal control system updates in term of software
and design. The study also, suggests further research on this topic in MFIs with
a case study in other countries of the world. It will also be interesting for other
researchers to explore how the aspect of capability as a key determinant of fraud
can be reduced. This thesis contributes to academic literature as there is lack of
studies on the impact of internal control on fraud detection and prevention in
MFIs.
Keywords: Internal control, Fraud prevention, Fraud detection, Microfinance

Institution.
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Abbreviations
ACFE: Association of certified fraud examiners
AICPA: American Institute of Certified Public Accountants
COSO: Community of Sponsoring Organizations of the Treadway Commission
IAASB: International Auditing and Assurance Standard Board
MFI: Microfinance Institutions
MINFI: Ministry of Finance
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List of tables
Table 1: Summary of key findings of prior research…………….…………………...30
Table 2: Interview details……………..………………………………………34

Table 3: Classification of fraud……………………………...………….……35
Table 4: Classification of internal control……………...……………………35
Table 5: Summary of key empirical findings of the research ……….…………….46
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Table of Contents
1. Introduction ....................................................................................... 9
1.1. Background............................................................................................................. 9
1.2. Problematization .................................................................................................. 12
1.3. Aim ........................................................................................................................ 13
1.4. The structure of the study .................................................................................. 13
2. Theoretical framework ..................................................................... 14
2.1. Definition of fraud ................................................................................................... 14
2.2. Fraud detection and prevention..............................................................................16
2.2.1. Fraud triangle......................................................................................................17
2.2.2. Fraud diamond theory .......................................................................................... 19
2.3. Definition of internal control...................................................................................21
2.4. The COSO framework..............................................................................................22
2.4.1. Control environment........................................................................................ 22
2.4.2. Risk assessment..................................................................................................23
2.4.3. Control activities .............................................................................................. 23
2.4.4. Information and communication....................................................................24
2.4.5. Monitoring......................................................................................... .....24
2.5. Summary of internal control, fraud prevention and detection ..................... 25
2.6. The impact of internal control design and use on fraud prevention and
detection………………………………………………………….27
2.6.1. Internal control and incentive ................................................................... 26

2.6.2. Internal control and opportunity .............................................................. 27
2.6.3. Internal control and rationalization .......................................................... 28
2.6.4. Internal control and capability................................................................... 29
2.7. Summary of prior studies on the impact of internal control design and use
on fraud prevention and detection ................................................................................ 29
3. Method .............................................................................................. 31
3.1. Research Approach and Design ........................................................................ 31
3.2. Sample population ............................................................................................... 32
3.3. Data collection method ...................................................................................... 32
3.4. Data analysis process........................................................................................... 34
3.5. Trustworthiness ................................................................................................... 36
3.5.1. Credibility ..................................................................................................... 36
3.5.2. Transferability .............................................................................................. 36
3.5.3. Dependability ............................................................................................... 37
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3.5.4. Confirmability .............................................................................................. 37
3.6. Ethical consideration........................................................................................... 37
4. Empirical Findings ...........................................................................39
4.1. Background of findings ...................................................................................... 39
4.2. The impact of internal control design and use on fraud detection and
prevention ......................................................................................................................... 41
4.2.1. Internal control and incentive ................................................................... 41
4.2.2. Internal control and opportunity. ............................................................. 42
4.2.3. Internal control and rationalization .......................................................... 43
4.2.4. Internal control and capability................................................................... 45
4.3. Summary of empirical findings .......................................................................... 45
5. Analysis and Discussion of finding. .................................................47
5.1. General discussion............................................................................................... 47
5.2. The impact of interna control on fraud detection and prevention…...……...47
5.1.1. Internal control and fraud incentive ......................................................... 48
5.1.2. Internal control and fraud opportunity. ................................................... 49
5.1.3. Internal control and fraud rationalization................................................ 50
5.1.4. Internal control and fraud capability ........................................................ 51
6. Conclusion and Discussion of Contribution. ...................................53
6.1. Summary Conclusion .......................................................................................... 53
6.2. Significance of the study ..................................................................................... 54
6.3. Limitations ............................................................................................................ 55
6.4. Recommendation for further studies................................................................ 55
Reference list ...........................................................................................57
Appendixes ……………………………………………………………………...66
Appendix 1: Consent form……………………………………………………. ….66
Appendix 2: Interview questions...…………………………………………………67
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1. Introduction
This chapter presents the background, problem statement, the aim of the study, and the
structure of the study.
1.1. Background
This thesis aims to investigate how internal control design and use impact fraud
detection and prevention in microfinance institutions (MFIs).
MFIs are economic development approach created to benefit the low-income
population by providing financial services to low-income clients, including small
business owners (Legerwood, 1998). The MFIs sector has evolved as tools for
poverty reduction (Drašarová & Srnec, 2016; Gérard et al., 2018; Postelnicu &
Hermes, 2018; Khan et al., 2020) after the failure of the formal institutions to
provide financial services to the poor population (Jarvid & Abrar, 2015). The
microfinance sector has experienced rapid growth over the years (Yimga, 2018)
with over one million of them worldwide (Manan & Shafiai, 2015). This growth
of the MFIs can be traced to the quest for fostering financial inclusion of the
unbanked poor population around the world (Ho & Mallick, 2017). Similarly,
Postelnicu and Herm (2018) expand the reason for MFIs growth to be, linked
to the importance of financial access to consumption, generation of business
opportunities and improvement of the long run formal economic inclusion of
the poor. MFIs are an important part of the financial system of many countries
given their numerous activities which began with giving loans to people with
low incomes based on little more than a joint guarantee (Sainz‐Fernandez, et al.,
2015). Furthermore, MFIs have grown into a major institution offering a wide
range of financial products and services such as loans, transfers, deposits and
microinsurance (Sainz‐Fernandez, et al., 2015).
Although MFIs have registered success stories both at the client and entity level,
the issue of fraud is a serious threat to their sustainability (Kumar & Conteh,
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2015). This can be associated with the rapid growth of the MFIs which in turn
resulted in challenges in the regulatory and institutional framework of their
financial sector (Collins, 2014). Likewise, Ho & Mallick (2017) adds that fraud
in MFIs can occur in any institution and any country with weak institutions,
weak rule of law, and MFI officials with fraudulent behaviour for personal gain.
Furthermore, Conteh and Kumar (2015) argue that one of the key causes of
increased fraud cases in MFIs is a result of the Board’s inability to understand
internal control. And inadequate internal control in MFIs brings fraud, which is
a serious threat to their long-term sustainability (Kuma & Conteh, 2015).
Consequently, this creates hurdles and obstacles in achieving the objectives of
servicing the poor and expanding financial inclusion (Kuma & Conteh, 2015).
Therefore, internal control is very important to MFIs to ensure they remain
operational, produce quality accounting reports, and avoid low-quality accruals
resulting from intentional misstatements and unintentional accounting errors
(Nalukenge et al., 2017). Internal control in any institution is an effort made by
the institution to ensure its business activities are supervised to create secure
and successful entity-winning practices (Nugraha & Bayunitri, 2020). Hence,
internal control is important for MFIs to avoid the risk of fraud. This is because,
in the case of fraud, the MFIs stand to lose the most (Boateng et al., 2014).
Fraud involves all deceptive ways in which one individual acquires an advantage
over another by false representation (Albrecht et al., 2015). To show the extent
of fraud’s influence on a global scale, the Association of Certified Fraud
Examiners [ACFE] (2016) have estimated that in general business organisations
would in most cases lose 5% of their yearly revenue to fraud. Gee and Button
(2019) also pointed out that the global fraud losses are equivalent to 6.05% of
GDP, that is, $5.127 trillion, while related losses have increased by 56% in the
last decade. ACFE’s recently released “2020 Report to the Nations”, underlines
that the median cost of every incident of occupational fraud globally amounts
to $125,000 with a median period of 14 months. While the median loss for every
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incident of financial statement fraud is more severe, amounting to $954,000 with
a median period of 24 months (ACFE 2020).
Hence the devastating effects of fraud have resulted in internal control gaining
more grounds over the years. This can be traced to the corporate and accounting
scandals of the past like the Enron, WorldCom, and Tyco scandals in 2002,
costing investors to lose billions of dollars and resulting in the enactment of the
Sarbanes–Oxley Act, also known as SOX (Sarbanes & Oxley, 2002). The
legislative reason behind the internal control requirements in the Sarbanes-
Oxley Act of 2002 (SOX) was to reduce the possibility of corporate misconduct
and fraud and to curtail corporate insiders’ ability to do fraud (Gao & Jia, 2015).
The issue of fraud poses a general problem to organizations of all types and
sizes around the world (ACFE, 2018).
According to Suh et al., (2019), one of the contributing factors of the banking
crisis has been the issue of internal fraud. Suh et al. (2019) further gave examples
like the case of the USA where 355 commercial banks and 57 thrift institutions
went insolvent resulting in a cost of up to $90 billion. Furthermore, MFIs being
part of the banking sector have not been left out as there have been series of
fraudulent issues resulting from their growth. For example, COFINEST a major
microfinance player in Cameroon got liquidated because of fraud and
mismanagement leading to the arrest of major shareholders (Fotabong,
2012). Butcher and Galbraith (2019) also presented the issue of control fraud
in the case of Latin America which resulted from the rapid growth of MFIs.
This resulted in the diversion of interests meant to benefit the poor to those in
charge of control in the MFIs in the form of a microfinance Ponzi scheme
(Butcher & Galbraith, 2019). Lin et al., (2014) on the other hand add that there
are so many instances where managers are the ones who bridge to commit fraud
and, in these instances, there is very little internal control can do to prevent it.
Moreover, Tchakoute-Tchuigoua and Soumaré (2019) express that recent
studies have revealed that many MFIs allocate decision-making authority to the
loan officer giving them power over information and loan decisions. This
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creates an avenue for agency problems and consequently fraud in the long run.
This can be backed by Godfroid (2019) who explains that the main actors of
fraud crimes in MFIs are the loan officers who do it on relatively small amounts.
1.2. Problematization
There have been mixed findings on the role played by internal control in fraud
reduction which prior studies have presented in other firms. For instance;
Peltier-Rivest and Lanoue (2015) researched on cutting fraud losses in Canadian
banking organizations to analyze the effect of various internal controls in the
form of hotlines, regular ethics (fraud) training, surprise audits, internal and
external audits, and background checks, on reducing occupational fraud losses
by victim organizations. The findings revealed that internal control had a
positive effect on fraud loss reduction.
Similarly, Joseph et al. (2015) study on the effect of internal control on fraud
detection and prevention in district treasuries in Kakamega, revealed a
significant relationship between the adequacy of internal controls and fraud
prevention and detection. Also, the study of Othman et al., (2015) on identifying
the methods to detect and prevent fraud and corruption in the public sector in
Malaysia revealed that internal control is among the most effective ways to
detect and prevent fraud. Furthermore, Le and Tran’s (2018) study on
Vietnamese companies, revealed that internal control had a great impact on
fraud control but with some components having more impact than others.
Similarly, the study of Vu and Nguyen (2020) on public officials in Vietnamese
companies showed that the internal control system reduced law fraud in the
form of law violation but not the case of bribery. While the study of Shonhadji
and Maulidi (2020) on governmental organizations revealed that risk assessment
and monitoring activities (internal control) are efficient measures of fraud
detection fraud.
Despite some studies alluding to the significance of internal control in reducing
fraud within organizations, other studies point out weaknesses in internal
controls, resulting in more fraud. For instance;
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Spatacean’s (2012) study on the Romanian financial investment companies
revealed that ineffective internal control (control environment) increases the
rationalization of fraudulent financial reporting.
While the study of Nawawi and Salin (2018) on a company undertaking business
relating to designing, manufacturing, trading, installation, construction,
maintenance of sewerage treatment plant and solid waste management, revealed
that internal control on expenditure claims was weak which could result in
occupational fraud.
The contrasting viewpoints of prior research have been the main catalyst of this
study. Also, lack of prior studies on the impact of internal control on fraud
detection and prevention in MFIs despite their importance and their increasing
failure rates. Hence, a study in this area is important to ensure the long-term
fraud occurrence which in turn ensures the survival of MFIs which leads to the
aim of this thesis.
1.3. Aim
The thesis aims to examine how internal control design and use impact fraud
detection and prevention in MFIs.
1.4. The structure of the study
The remaining sections of this thesis will be as follows; chapter two will present
the theoretical framework. Chapter three will cover the research method.
Chapter four cover the findings of the research. Chapter five presents the
analysis and discussion of the findings, and chapter six the conclusion,
contributions, limitations, and recommendations for future research.
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2. Theoretical framework
This chapter presents the definition of fraud, fraud prevention and detection which will be
followed by fraud theories (fraud triangle theory, fraud diamond theory), the conceptual
framework of internal control which includes the definition of internal control will also be
looked at, the COSO framework of internal control which are control environment, risk
assessment, control activities, information and communication, and monitoring. This will be
followed by a summary of internal control and fraud and then empirical studies of prior
research.
2.1. Definition of fraud

Fraud is a global problem that affects organizations all over the world (ACFE,
2020). Fraud has been defined differently by different studies because fraud is
seen differently by different individuals or organizations hence fraud for one
may be completely not for another (Baldock, 2016). Similarly, Lokanan (2015)
explains fraud as a multifaceted phenomenon, whose contextual factors are not
fixed to a particular framework. While Kurpierz and Smith (2020) point out that
“fraud is a colloquial and technical term that is used as an umbrella system to
describe a large number of dishonest and harmful behaviours” (p.1077).
Consequently, the harm caused by fraud goes beyond direct financial loss, to
the collateral damage that may include harm to external business relationships,
employee morale, firm reputation, and branding (Bierstaker et al., 2006). For this
study, the definition of fraud by Abetch et al. (2015) will be used. According to
Albretch et al. (2015), fraud begins when trust and confidence placed in an
individual is violated, hence fraud involves all the deceptive ways in which an
individual obtains an advantage over another by false representation. Kranacher
and Riley (2019) also present the components of fraud from a common law
perspective which encompasses: “(1) A material misstatement; (2) Knowledge
that the statement was false when it was spoken; (3) Reliance on the false
statement by the victim; (4) Damages resulting from victim's reliance on the
false statement” (p.4). Albrecht et al., (2015) add that fraud can be classified into
14
those committed against the organizations and those that are committed on
behalf of the organizations. On the other hand, ACFE (2020) looks at fraud
from the view of occupational fraud.
ACFE (2020) defines fraud as “fraud committed by individuals against the
organizations that employ them which is among the costliest forms of financial
crime in existence” (p.6). Suh et al. (2019) add that Occupational fraud is fraud
committed against an organization by its employees and sometimes
characterized as internal, insider or employee fraud or just fraud. Occupational
fraud goes undetected and is often never reported so determining the full extent
of its losses is usually very difficult (ACFE, 2020). According to Boateng et al.
(2014) the types of fraud common to MFIs includes: Cheque kiting, account
opening fraud, Cash theft/cash pilferage, collusion in the issuance of loans,
manipulation of financial data, inappropriate loan write-offs, ghost loans and
kickbacks. The fraud types boil down to three main types namely,
misappropriation, corruption, and financial statement fraud (ACFE, 2016;
Albrecht et al. 2015). Kranacher and Riley (2019) explain that asset
misappropriation entails the theft or misuse of an organization’s assets, such as
skimming cash, cheques, stealing inventory, and payroll fraud.
Corruption on the other hand can take different forms from bribery to theft to
misappropriation and favouritism (Baldock, 2016). Kranacher and Riley (2019)
further add that corruption involves the illegal or wrongful abuse of authority
in a business transaction to obtain personal benefits. This is contrary to an
individual’s obligation to his or her employer or the rights of another such as
accepting bribes and engaging in conflicts of interest (Kranacher & Riley, 2019).
While financial statement fraud and order fraudulent statements as explained by
Kranacher and Riley (2019) involves the deliberate misappropriation of financial
or non-financial information to deceive others who are relying on it to make
economic decisions. It includes acts such as overstating revenues, understating
liabilities, or expenses, or making false promises regarding the safety and
prospects of an investment.
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ACFE (2020) underscores that asset misappropriation has the highest level of
occurrence of 86% cases but with the smallest median loss effect of $100,000
per case. This is followed by corruption as the second-highest level of
occurrence of 43% cases amounting to a median loss of $200,000. Financial
statement fraud is the least occurrence with only 10% of scheme cases but this
scheme has the most devastating effect with a median loss of $954,000. The
interest figures presented by ACFE gives a clear glimpse of how great of an
effect fraud has on organizations. Therefore fraud, if not effectively prevented
and detected, can cause serious damage to an organization (Ghazili et al. 2014).
2.2. Fraud Detection and Prevention
According to Riney (2018), a combination of prevention and detection acts as a

good tool for making vulnerable organizations stronger and more resistant to
fraud. This is supported by Sow et al. (2018) who add that the most economical
way to manage financial loss through fraud is prevention. Hence fraud
prevention refers to practical measures established by an organisation to avoid
or stop fraud occurrence (ACFE, 2020). Furthermore, fraud prevention requires
a system of rules which when put together minimizes the likelihood of fraud
occurring while maximizing the possibility of detecting any fraudulent activity
that may emerge (Biegelman & Bartow, 2006). Fraud detection, on the other
hand, involves identifying fraud as fast as possible once it has been committed
and comes in after fraud has failed to be prevented (Othan et al., 2015). Hence,
fraud detection increases the perceived risk of getting caught thereby deterring
people from engaging in fraudulent behaviour (Jeppesen, 2019). Fraud detection
plays a vital role in fraud investigation and prevention because the speed and
way with which fraud is detected can have a significant impact on the fraud
magnitude which in turn may help curb future fraud occurrence (ACFE, 2020).
A major step to detecting and eventually preventing fraud is to identify the
factors that can lead to fraud (Ghazili et al., 2014, ACFE, 2018). Hence,
Cressey’s fraud triangle model was a model that was put forward to explain why
people commit fraud (Biegelman & Bartow, 2006; Riney 2018).
16
2.2.1. Fraud Triangle
According to Lokana and Sharma (2018), the fraud triangle theory is the most
widely used theory of fraud which was developed in 1953 by Donald Cressey.
This theory was developed as a fraud detection and prevention tool to explain
why people commit (Riney, 2018). Suh et al. (2019) add that according to
Cressey the three factors need to be present for people to commit fraud. These
factors are perceived pressure (non-shareable financial pressure), perceived
opportunity and perceived rationalization (the ability to adjust one’s self-
perception) making up the fraud triangle (Lokana & Sharma, 2018). The
relationship between can be seen graphically below (figure 1). Suh et al. (2019)
stress these three fraud components are linked and must exist simultaneously.
Nevertheless, even in the absence of one of the components, fraud can still be
avoided.
Figure 2: The Fraud Triangle
Source: ACFE
The first element of the fraud triangle is perceived pressure. Ghazali et al. (2014)
explained that perceived pressure from the non-shareable financial problem may
result from stigma or a sense of pride which motivates people to commit fraud.
This may only result because the individual is unable to communicate their
financial strain (Le et al., 2020). Hence, pressure could result from an
individual’s feeling to maintain his/her current lifestyle while he has limited
income (Zakaria et al., 2016). Other examples of fraud pressure include greed,
17
high debts, poor credits, investment losses and family pressure (Kranacher &
Riley, 2019). Furthermore, Butcher and Galbraith (2019) explained that
increased loan portfolio resulting from the growth of MFIs motivated control
fraud. This took the form of disguising interests through manipulation and high-
interest rate charges to clients. However, the pressure to commit fraud may not
only be financial but non-financial as well for example employee’s non-
satisfaction at work (Lokanan, 2018). This leads to the second element of fraud.
The second element of the fraud triangle is the perceived opportunity.

According to Biegelman and Bartow (2012), the opportunity is defined by the
ease with which fraud is committed. Hence, perceived opportunity occurs where
the internal control system is weak (Peltier-Rivest & Nicole, 2015; Lokana, 2018,
Riney, 2018; ACFE, 2020). Furthermore, Godfroid (2019) explains that the
position of an individual can also create an opportunity for fraud as is the case
of loan officers in MFIs who are the main actors of fraud crimes in MFIs. This
is because decision making power in most MFIs is given to the loan officers
giving (Soumaré, 2019). Hence, Biegel and Batow (2012) explain that an
institution can eliminate fraud by preventing fraud opportunity with internal
control.
Finally, the third driver of the fraud triangle is the ability of the perpetrator to
find a way to rationalize their actions as acceptable. According to Chiezey and
Onu (2013), rationalization refers to people's perception about their work
performance and contribution and expectations of what they should derive
from the company for delivering value. Ghazali et al. (2014) refer to
rationalization as a fraud perpetrator’s justification of his fraudulent actions by
considering his dilemma as a special exception rather than as a trust violator.
Also, Biegelman and Bartow (2012) add that fraud perpetrators always see
themselves as victims hence justifying the reasons for them for instance “they
owe me” or “everyone is doing it” (p. 35). Hence managing rationalization will
contribute to reducing fraud.
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In as much as the fraud triangle has acted as a very important tool for fraud
detection and initial prevention, there have been significant criticisms about the
fraud theory’s ability to address fraud issues. Kassem (2020) argued that the
fraud triangle is not suitable for the assessment of financial fraud reporting.
Kassem (2020) explains that without understanding the motivation and level of
integrity of managers as well as consideration of capability financial statement
fraud may not be detected. Lokanan (2015) on the other hand argues that the
fraud triangle is not an adequate tool for fraud detection. By this, Lokanan
(2015) emphasizes that the fraud triangle supports a body of knowledge that
lacks the objective criteria required to adequately address all fraud occurrences.
Besides, Biegelman and Bartow (2012), explains as a criticism of the fraud
triangle that even in the presence of opportunity and pressure/incentive some
people may not commit fraud. Hence Albrecht et al. in 1984 suggested the fraud
scale theory which puts personal integrity in place of rationalization since by their
assumption fraud was difficult to profile (Dorminey et al., 2012). Therefore, this will
particularly apply to financial reporting fraud where pressure such as meeting
expectation analysts, deadlines, and qualifying for bonuses are more observed
(Kranacher & Riley, 2019).
2.2.3 Fraud diamond theory
The fraud diamond was established in 2004 as an extension of the fraud triangle
(Wolfe and Herman, 2004). Wolfe and Hermanson (2004), argue that the fraud
triangle is not complete without the fourth element of capability which makes
up the fraud diamond theory. This is because, without the capability to exploit
the shortcomings of control, it may be impossible to commit and conceal fraud
(Dorminey et al., 2012). Therefore, the fraud diamond comes as an
enhancement of the fraud triangle by adding the fourth element of capability
Wolfe and Herman, 2004). Furthermore, in the context of the Fraud Triangle,
capability modifies the opportunity construct by limiting the opportunity to
those who have the necessary capability (Dorminey et al., 2012).
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Hence, Wolfe and Herman (2004) explain that for fraud to occur, four elements
of incentive, opportunity, rationalization, and individual’s capability must be
present. For this thesis, the fraud diamond will be used as a tool for detection
and prevention in this thesis. This is represented graphically below.
Figure 3: The fraud diamond

Source: Wolfe and Hermanson (2004)
Therefore, Wolfe and Herman (2004) explain that the opportunity to commit
fraud in an organisation may occur in the presence of weak internal controls or
oversight. However, without the right person with the right capabilities to
realize that opportunity and be able to exploit it and with the rationale, fraud
may never take place. Hence Wolfe and Herman (2004) give observable traits
for committing fraud as (1) The person’s position in the organisation may
provide the ability to create or exploit the opportunity to commit fraud (2) The
person must be smart enough to understand and exploit the internal control
weaknesses (3) The right person has a strong ego and great confidence (4)
He/she can coerce others to commit or conceal the fraud, a person with a very
persuasive personality (5) He/she can lie effectively and consistently and can
deal very well with stress.
2.3. Definition of internal control
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There is no right way to define internal control as there are diverse internal
control functions that are used differently in different institutions. More
generally, internal control systems start as internal processes with the positive
aim of helping institutions meet their set objectives (Kabuye et al., 2019).
According to the American Institute of Certified Public Accountants [AICPA]
(2014) “Internal control is a process effected by those charged with governance,
management and other personnel designed to provide reasonable assurance
about the achievement of the entity's objectives with regard to the reliability of
financial reporting, effectiveness and efficiency of operations, and compliance
with applicable laws and regulations” (p.4). On the other hand, the International
Auditing and Assurance Standard Board [IAASB] (2018a), defines internal
control as “a process designed, implemented, and maintained by those in charge
with governance, management, and other personnel to provide reasonable
assurance about the achievement of an entity's objectives with regards to the
reliability of financial reporting, effectiveness, and efficiency of operations, and
compliance with applicable laws and regulations” (p.24). While COSO (2013)
defines internal control as “A process, effected by an entity’s board of directors,
management, and other personnel, designed to provide reasonable assurance
regarding the achievement of objectives in the following categories:
• Effectiveness and efficiencies of operations
• Reliability of financial reporting
• Compliance with applicable laws and regulations” (p.3).
Hence, internal control according to the argument of Länsiluoto et al., (2016) is

aimed at detecting and managing business risks. Therefore, effective internal
control decreases the risk of asset loss and promotes reasonable assurance of an
entity achieving its financial reporting objectives (AICPA, 2014). The COSO
framework was created for the designing, implementing, and conducting
internal control and evaluation of the effectiveness of internal control.
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2.4. The COSO Framework
The COSO integrated framework was released in 1992 as a framework for
designing, implementing and conduction internal control as well as assessing its
effectiveness (COSO, 2013). Hence, COSO (2013) points out that for an
institution’s management to conclude that it has an effective internal control
system, it needs to meet up with all the five components of internal control
proposed. Furthermore, these five components need to be fully “present” and
“functional” within their internal control system. COSO (2013) explains further
that being “present” means the components exist with the institution’s internal
control design and being “functional” implies that components continue to
remain in existence in the institution’s operations and conduct of their control
system. These five components which are control environment, risk assessment,
control activities, information and communication, and monitoring should work
together in an integrated manner for the internal control to be effective.
2.4.1. Control environment
The control environment as explained by COSO (2013), sets the foundation on

which internal control is carried out with regards to the standards, processes,
and structure of the organization’s internal control system. Furthermore, Collins
(2014) argues that the control environment shapes the consciousness of its
employees by embracing all the other four components of internal control. For
this reason, Zakaria, Nawawi, and Salin, (2016) argue that the control
environment is the most important. Hence, COSO (2013) explains that
effectiveness entails an organization’s commitment to integrity and ethical
values of the institution, independence of the board of directors who are key in
the control environment. Furthermore, management with the supervision of the
board should establish structures, reporting lines, and responsibilities to meet
objectives. Also, the organization should demonstrate commitment to attract,
develop, and retain competent individuals in line with objectives. And
22
individuals should be held accountable for their internal control responsibilities
to meet set objectives.
2.4.2. Risk assessment
Risk assessment involves a dynamic and iterative process through which

management identifies and assesses risks to the realization of its set goals
(COSO, 2013). Furthermore, IAASB (2018a) adds that risk assessment
establishes how management identifies business risks that are derived from its
use of financial statements. Hence, disclosure of risk assessment role enables
investors to make decisions on whether to invest in the institution (Ashfaq &
Rui, 2019). Therefore, for financial reporting purposes, the entity’s risk
assessment process incorporates how management identifies business risks
relevant to the preparation of financial statements (Al-Thuneibat et a.,2015).
According to Ashfaq and Rui (2019), risk assessment involves a two-step
approach for risk management. First, to identify key risks related to the firm and
then come up with strategies to manage those risks. Therefore, for organizations
to achieve effective risk assessment according to COSO (2013), they should set
clear goals enabling the identification and evaluation of risks related to the
objectives. Furthermore, the source of the risk should be examined to know
how to assess it and consider potential fraud in risk assessment.
2.4.3. Control activities
Control activities are the measures established through policies and procedures
that help guarantee the management's orders to mitigate risks and achieve its
goals (COSO, 2013). Furthermore, this is achieved where organizations have
clear policies stating what is expected alongside procedures that put policies into
actions (COSO, 2013). This is supported by Zakaria et al. (2016) who argues
that control activities ensure that risks are reduced through preventive and
detective activities features and can be performed manually and automatically.
Chen et al. (2017) on the other hand argues that segregation of duties and other
23
controls are an important aspect of control activities that reduce the likelihood
of manipulation of earnings. Dawson (2015) adds that control activities are
represented by actual checks and balances that exist within the institution, it is
specific, and the most common form is bank reconciliation. In other words,
according to Ashfaq and Rui (2018) control activities also ensure that
management of risks is controlled using a two-step approach. That is selecting
an appropriate internal control framework and designing strategies to manage
those risks identified after assessment.
2.4.4. Information and Communication
Information and communication are systems that allow people in a firm to

capture and exchange information needed to perform their duties (Chen et al.,
2016). Hence, Communication takes place both internally and externally, and it
offers the organization the information needed to perform its internal control
activities and achieve its objectives (COSO, 2013). Through Communication,
members of staff can understand internal control responsibilities and their
importance in the achievement of objectives (Le et al., 2020). Therefore,
relevant quality information is generated and obtained by organizations to
support the functioning of internal controls. Hence, COSO (2013) lay down
that organizations need to communicate clear objectives and responsibilities for
internal control both internally and externally for the smooth running of internal
control.
2.4.5. Monitoring
Monitoring is the procedure through which the quality of internal control is
assessed which can be ongoing evaluation and separate evaluation (Le & Tran,
2018; COSO, 2013). Similarly, IAASB (2018a) describes monitoring as activities
designed to detect and correct weaknesses in the effectiveness of controls over
transactions for financial instruments. Furthermore, IAASB (2018a) continues
that monitoring includes supervision and review procedures designed to detect
and correct any flaws in the design or operating effectiveness of
24
controls. Therefore, effective monitoring ensures the internal control of an
organization continues to protect it (AICPA, 2014). Hence COSO (2013) lays
down that effective internal control entails organizations performing an ongoing
and separate assessment of their internal control. From the assessment, they
should communicate internal control efficiency to those parties responsible for
taking corrective actions.
The COSO framework can be summarized graphically as shown below.
Figure 3: COSO Framework

Source: COSO 2013.
2.5. Summary of internal control, fraud prevention and detection
The theoretical review above points out the devasting effects fraud has on any
organization which has made it very vital to utilize internal control as a tool to
combat fraud. The COSO framework forms the necessary criteria for
organizations to implement the best internal control practices by building a well-
structured internal control design. The COSO framework establishes the
necessary criteria for an effective internal control system. This includes
involving all five elements of the control environment, risk assessment, control
activities, information and communication, and monitoring. However, to
understand why fraud occurs to enable internal control to achieve its goals, the
fraud theories are presented to explain the reasons why people commit fraud.
Therefore, for internal control to achieve its goal of detecting and preventing
25
fraud, the fraud diamond is used as a lens to understand why people commit
fraud.
2.6. The impact of internal control design and use on fraud

prevention and detection
Here this research explores prior research on the link between internal control
and the components of the fraud diamond in fraud detection and prevention.
To get an understanding of how internal control influences incentive,
opportunity, rationalization, and capability in detecting and preventing fraud.
2.6.1. Internal control and incentive
Rae and Subramaniam (2008) carried out a study on “the quality of internal
control procedures antecedents and moderating effect on organisational justice
and employee fraud”. The research aimed to combine theoretical concepts from
the organizational justice, internal control, and fraud literature to create two
distinct models relating to employee fraud and the quality of internal control
procedures. Findings from the research revealed that internal control through
performance evaluation and fair reward schemes would reduce fraud incentives.
Similarly, Nawawi and Salin (2018) supported the study with their finding which
revealed that better remuneration paid to the employees could minimize
occupational fraud incentive. Furthermore, Peltier-Rivest and Lanoue (2015)
analysed the effect of various internal controls in the form of hotlines, regular
ethics (fraud) training, surprise audits, internal and external audits, and
background checks on reducing occupational fraud losses, by victim banking
organisations of Société Générale. Findings from the study revealed that
implementing internal control in the form of hotlines and surprise audits
significantly reduce the incentive to commit fraud. This was supported by the
recommendation of Othman et al. (2015) from their findings which explains
that hotlines provide secure and discrete ways for a whistle-blower to give out
26
information in an anonymous way and hence reducing fraud incentive.
Moreover, Nawawi and Salin (2018) also made findings that there is a need for
managers to monitor staff’s claim submission to keep employees alert and
reduce the incentive to commit fraud.
Le et al. (2020) on the other hand, examined the use of internal control system
and code of conduct as a more specific element of internal control, in the
reduction of fraud (corruption) to the public officials of Vietnamese firms. This
study was based on an argument that the use of internal control and code of
conduct helps to mitigate motivation, opportunity, and rationalization. The
findings from the study revealed that internal control elements such as clear
structure and authorities as well as clear mechanisms for risk assessment,
monitoring and reporting would reduce fraud incentive.
2.6.2. Internal control and opportunity
The investigation of Othman et al. (2015) on identifying the methods to detect

and prevent fraud and corruption in the public sector in Malaysia, made findings
that internal control was very important. Their findings revealed that through
cash reviews, fraud reporting policy, and staff rotation policies which creates
staff awareness, fraud opportunity is reduced.
While a study conducted by Zakaria et al. (2016) on internal controls and fraud
through empirical evidence from the oil and gas company, revealed that internal
control weaknesses result in the form of poor supervision and improper
documentation process, provide fraud opportunity. Furthermore, Baker et al.
(2017) conducted a study on breakdowns in internal controls in bank trading
information systems with the case of the fraud at Société Générale. To examine
the events uncovered at Société Générale, a large French bank, in January 2008.
Findings from the study revealed that there was a heavy reliance on manual
processing by back-office operating staff which meant that the internal control
had some flaws creating room for fraud opportunity. The flaws included the
27
desk manager’s negligence of operational checks, poor communication of
specification of functions, lack of fraud risk awareness, and poor supervision.
All these flaws reduce internal control effectiveness and result in fraud
opportunity.
Nawawi and Salin (2018) on the other hand, investigated the weaknesses of
internal control in the expenditure claim process. To explore employees’
opinions regarding occupational fraud and whether a company’s working
environment contributes to employee fraud. The study findings revealed lack of
effort taken by the company to update their internal control system resulted in
weak internal control on the expenditure claim procedure hence, resulting in
occupational fraud opportunity. Hence constant update is necessary to prevent
fraud opportunity.
This was supported by the study of Suh et al., (2019) which focused on
compliance on how to detect and prevent occupational fraud. This study made
finding that risk assessment can prevent fraud opportunity, however because of
the Achilles hill of collusion and overrides irrespective of internal controls, fraud
may never be completely eradicated. On the other hand, Maulidi and Shonhadji
(2020) argue from their findings that poor monitoring results in the opportunity
for individuals to commit fraud and this fraud may go undetected.
2.6.3. Internal control and rationalization
The study of Rae and Subramaniam (2008) revealed that employees rationalize
fraud when they feel unfairly treated and hence suggests that to reduce this fraud
rationalization, the control environment should ensure fairness of the
distributive and procedural policies at the workplace. Futher, Spatacean (2012)
carried out a study on addressing fraud risk by testing the effectiveness of
internal control over financial reporting with a case of the Romanian financial
investment companies. This study aimed to identify and assess risk factors
related to fraudulent financial reporting. The findings of the study revealed that
through integrity and upholding good values in the control environment, the
28
rationalization of fraudulent practices can be reduced. Similarly, Peltier- Rivest
and Lanoue (2015) add that regular ethics training fraud rationalization is
reduced.
2.6.4. Internal control and capability

Maulidi and Shonhadji (2020) made an investigation examining the efficacy of
COSO internal control in governmental organisations in reducing opportunities
to commit fraud. And made finding that control systems can support managers
to align employee capabilities, activities and performance with the organisation’s
goals and missions. Hence, risk assessment and monitoring should be
performed continuously if organisations want to prevent fraud capability.
The prior studies described above shows the impact of internal control design
and use on fraud prevention and detection. Some of the studies (Maulidi and
Shonhadji, 2020; Le et al., 2020; Othman et al., 2015; Peltier-Rwest & Lanoue
2015) revealed that internal control played an important role in reducing fraud.
While contrary to these, other studies (Nawawi and Salin, 2018; Baker et al.,
2017; Zakaria et al. 2016; Spatecean, 2012) revealed that weak or non-existing
internal control procedures increased the chances of fraud occurrence.
2.7. Summary of prior studies on the impact of internal control
design and use on fraud prevention and detection
The variation in the findings from prior research is a clear indication that
internal control systems are designed and are used differently by different
organizations to detect and prevent fraud. Findings from previous research
above revealed that internal control impacts fraud detection and prevention
through its design and use by reducing fraud incentive, opportunity,
rationalization, and capability. The findings can be summarized in a table as
shown below.
29
Table 1: Summary of key findings of prior research
Main areas Findings
Internal control and Fraud incentive can be reduced through performance

fraud incentive evaluation and fair reward schemes, hotlines, surprise
audits, secure and discrete whistleblowing, and monitoring
staff claims on submission.
Internal control and Ineffective internal control in the form of heavy reliance on
fraud opportunity manual operations, poor supervision, improper
documentation, the manager’s negligence of operational
checks, poor communication of specification of functions,
and poor systems update results in fraud opportunity.
However, to reduce fraud opportunity include cash
reviews, fraud reporting policy, staff rotation policies,
constant modification of internal control are necessary.
Internal control and Internal control through fairness of the distributive and
fraud rationalization procedural policies at the workplace, integrity and
upholding values as well as ethical training, fraud
rationalization can be reduced.
Internal control and Internal control through constant control and risk
fraud capability assessment would reduce fraud capability.
From the prior studies above there is true that some knowledge exists on the
issue of internal control and fraud incentive, opportunity, rationalization, and
capability. However, prior research only focuses on some factors. Research on
the impact of internal control design and use on the fraud incentive,
opportunity, rationalization, and capability as a whole is scarce. This research,
therefore, attempts to fill this research gap by answering the following research
question:
• How can internal control design and use impact the reduction of fraud
incentive, opportunity, rationalization, and capability?
30
3. Method
This chapter presents an outline of the research methodology which is designed to achieve the
objectives of this study. It starts with the research approach and design, the sample population,
data collection method, and data analysis process. This shall be concluded by looking at the
trust worthiness and the ethical considerations of the research.
3.1. Research Approach and Design
According to Gray (2017), the choice of a research strategy is determined by the

research question. Given that this research is aimed at examining how internal
control design and use impact fraud incentive, opportunity, rationalization, and
capability, both the qualitative and quantitative research strategy apply to this
study. However, given its aim, a descriptive qualitative research method is
considered most appropriate. A qualitative research method is implemented to
get an understanding of the underlying pattern of the field research and answers
the questions of “how” and “why” (Gray, 2017). Corbin and Strauss (2015) add
that qualitative research gives a more in-depth understanding of the context
under study as opposed to the qualitative research methods. This will help the
research to understand why and how people think, feel, and react the way they
do as regards fraud detection and preventions in MFIs.
A research design gives a framework for how data will be collected (Bryman &
Bell (2015). Given the purpose of the study which is to examine the impact
internal control has on fraud detection and prevention through the view of the
fraud diamond, a case study design seemed most appropriate. A case study
involves a concentrated and in-depth study and exploratory interaction between
the case and the context under study (Marshall & Rossman, 2014). Therefore a
case study design is the best method of obtaining data on the thoughts of those
in charge of the internal control.
31
3.2. Sample population
To put the theories in a practical context, data was collected from eight MFIs in
Cameroon. The internal control department of the MFIs was chosen as a
suitable department for the study based on the main interest of the study.
Intentionally focussing on specific areas and employees of the MFIs, the
research focussed its findings on a practical case to prove feasibility. Hence the
target population of the study will be managers, internal controllers, and
auditors of MFIs in Cameroon. The managers, internal controller, and auditors
were chosen because they have a good foundation of internal control and are
involved in its running and implementation and can hence provide the right
information needed to answer the aim and research question mentioned above.
Cameroon is relevant for the context of this study given that MFIs are a very
important part of its economy and these MFIs have been threatened and
scandalized by several incidences of fraud. Given that more than 40% of the
population of Cameroon are living below the poverty line (Akanga, 2017)
fraudulent incidences are detrimental to the economy of Cameroon. Besides,
because of the issue of corruption and embezzlement causing unequal
distribution of wealth, this poor population have turned to the banks for
financial aid (Shu & Oney, 2014). Therefore, in this case, the financial aid has
come from the MFIs, which has boosted the importance of this sector to
Cameroon. Hence investigation on MFIs in Cameroon will be of great
importance.
3.3. Data collection method
Primary data collection was employed in this study with the use of semi-
structured interviews as the main instrument of data collection. Given this study
aims to explore the lived experiences, opinions, and ideas of people to get an
understanding of this research, the semi-structured interviews are adopted to
allow the researcher to keep an open mind as to what is considered important
in the process of data collection (Bryman & Bell, 2015). Furthermore, Bryman
32
and Bell (2015) explain that interviews make the researcher familiar with the
data and ease its further assessment. The interviews were formulated from the
theorization of prior studies.
The interview stage was made up of one-on-one, semi-structured interview of

managers and auditors that lasted a range of 20–45 minutes. The structure
allowed respondents to provide their perceptions to open-ended questions (see
Appendix 2). The open-ended questions provide potentials for rich responses,
some of which may be unpredicted (Gray, 2015). The semi-structured interview
approach is preferable due to its flexible and adaptative nature of the questions,
suitable for the exploratory objectives of this research (Bryman & Bell 2015).
The interviews were conducted on a cross-section of eight MFIs in Cameroon,
with a purposeful sampling of managers, internal controllers, and auditors. The
interviews were conducted through WhatsApp because is the most commonly
used social media communication tool in Cameroon and also as a result of the
Covid-19 pandemic restricting one physical meeting. Further, the need to
maintain social distance and to ensure the safety of both the researcher and the
respondent online interviews was the best option to adopt.
The initial invitation for the interviews was sent to thirty potential respondents
and at the end eighteen of them responded, two of whom failed to attend the
interview and two left just the start of the interview due to bad connection.
Finally, the interviews were conducted in eight MFIs with a total of fourteen
participants of which were six managers, five internal controllers and three
auditors. Twelve semi-structured interview questions were developed to ensure
the smooth flow of the interview (see appendix 2). Before the interviews, a
consent form (see appendix 1) was constructed and sent to the respondents
ensuring their informed consent. This was done to give the respondents a view
of what the research is about and a chance to give their informed consent on
whether to take part in the research. Gray (2017) explains that consent gives the
respondent a sense of assurance against exploitation or harm. While the
interviews were conducted, recordings were done and significant points were
33
jotted that ensured that the data collected was adequate and avoid the
redundancy of data collected (Gray, 2017). The detail of the interviews is
summarized in the table below.
Table 2: Interviews details

Respondent Position Work Dates
experience Duration of interview
(Central African time)
R1 Manager 8 years 03-04-2021 37 minutes (9:15-9:42)
R6 Internal 8 years 22-04-2021 27 minutes (19:15-20:42)
controller
controller
R8 Auditor 8 years 23-04-2021 42 minutes (19:30-20:12)
controller
R12 Internal 4 years 25- 04-2021 25 minutes (8:00-8:25)
controller
controller
3.4. Data analysis process
Data analysis refers to the process of critical assessment and simplification of

data to obtain understanding which facilitates the presentation of findings
(Gray, 2017). Data collected from the interview were transcribed manually to
ease understanding by the researcher and to give meaning to the information.
Given that the interview involved interaction and discussion with the
respondents, the research included some aspect of personal reflexivity in line
with the explanation of Gray (2017). The data was analysed using thematic
34
analysis. The thematic analysis identifies, analyses and reports patterns (themes)
within data (Braun & Clarke, 2006).
The analysis process began with the transcription of the interviews using simple
and clear English, which was then read thoroughly to gain more data familiarity.
The transcribed data was cumbersome which is one of the problems of
qualitative research explained by Gray (2019) and hence needed to be simplified
to enable a clear and compelling argument. Therefore, there was a need for
coding. Coding involves breaking down data into parts which are then labelled
(Bryman & Bell, 2015).
The initial codes were obtained directly from the transcripts. Then the codes
were collated into themes to create a form of a map to aid the analysis. Some of
the themes include “reasons why fraud is an important risk”, “causes of fraud”,
“common MFIs fraud types”, “measures taken to handle the fraud cases”,
“effectiveness of internal control”, “consideration for internal control design.”
These themes were selected to fit the codes and in line with the theoretical
framework to ensure that it is relevant towards the achievement of the set aim
and objectives. Finally, the themes were broken down into two main sections
which are fraud and internal control to ease the answering of the research
questions. The themes and codes were summarized in the tables below.
Table 3: Classification for fraud
Theme Sub-theme Codes
Incentive Low remuneration, delay in payment, greed, and
family/staff pressure
FRAUD Opportunity Poor work environment, poor monitoring, poor
facilities, negligence and poor employee recruitment.
Rationalization Bias, low remuneration, and incentive for hard work
Capability Lack of job rotation, and duplication of functions
Table 4: Classification of internal control

Theme Sub-theme Codes
Control
Policies
environment
Ethical values and considerations
Integrity
INTERNAL Use and update the software.
CONTROL Responsibility assignment
Risk assessment Assessment process
35
Control Segregation of duties
activities Job Rotation
Information Communicating clear objectives
and
communication
Monitoring Ongoing Assessment, surprise audits
3.5. Trustworthiness
The trustworthiness of a study involves the integrity of the conclusions drawn

from the research (Bryman & Bell 2015). Hence to obtain trustworthiness in
this thesis there are four criteria of credibility, transferability, dependability, and
confirmability applied (Bryman & Bell, 2015; Gray, 2017).
3.5.1. Credibility
According to Gray (2017) credibility of a study is established by building

certainty in the accuracy of data collection and interpretation. This is achieved
through the continuous assessment of empirical findings and matching them to
the existing literature. To further increase credibility, the transcriptions of the
data collected were sent to the respondents for confirmation that the researcher
fully understood the information that was given which is in line with Bryman &
Bell (2015). This was productive because the researcher ensured that only
relevant candidates for the study with the right information were selected. This
is important respondent selection was confirmed by the background questions
at the beginning of the interview. Also, the use of recordings ensured that all
information given was received and rightly taken down, so no important
information is left out.
3.5.2. Transferability
Transferability involves the applicability of the findings of the study to other

contexts (Gray, 2017). This can be achieved by providing thick descriptions that
36
will enable other researchers to make judgements on whether the results can be
applied to their context (Bryman & Bell, 2015). This is achieved in this study by
providing adequate step by step details about how data was collected and
analysed.
3.5.3. Dependability
To ensure dependability, all the steps taken in the research were described in an
orderly manner. From the problem formulation to the selection of research
participants to the interviews and transcriptions to the analysis of data and
finally the conclusion in an assessable manner (Bryman & Bell, 2015). Also,
sending the transcribed information back to the respondents for confirmation
made sure that all data collected was accurate and reliable. Also having the thesis
being reviewed and scrutinized by research supervisors increased the
dependability.
3.5.4. Confirmability
According to Gray (2017), confirmability addresses the extent to which the steps
of the study can be audited, confirmed, or replicated. Furthermore, Bryman and
Bell (2015) add that confirmability ensures that the researcher carries out a bias-
free conclusion. This was achieved by giving respondents the chance to confirm
the interpretation of the findings from interviews in line with their actual
intended opinions. Also having a purposeful sample of respondents who are
fully aware and informed about the context under study increased the
confirmability of the data obtained from the research.
3.6. Ethical consideration
In a qualitative study that involves individuals as part of the research, it is

important to consider ethical issues. As explained by Bryman and Bell (2015)
ethical issues involve concerns about how potential respondents should be
treated and what activities they should be involved in. In the case of this
research, the respondents were taken into serious consideration by making sure
37
that they were comfortable with the entire research process. This was achieved
by informing the respondents about the research far ahead of time to give them
time to decide on whether to be part of the research. Then a consent form was
made (see appendix 1) and sent to all respondents. This form contained the
main aim and purpose behind the research and what is expected of them to
prepare their minds before the research. The respondents were also guaranteed
the confidentially of all information they provide, and that the participation was
completely voluntary (Gray, 2017). And considering the safety and wellbeing of
the respondents, the study was conducted from a distance considering the
current Covid-19 pandemic. This led to an agreement of using WhatsApp as a
medium for conducting the interviews. Furthermore, the respondents asked that
they and their MFIs remain anonymous for safety which the researcher made
sure of as no names were mentioned during the research. Finally, as an ethical
consideration, the transcribed data from interviews were sent to the respondents
to confirm their responses and opinions were clearly understood (Bryman &
Bell, 2015). Hence no information bias.
38
4. Empirical Findings
This chapter presents the empirical findings of the research. These findings are from the
interviews carried out.
4.1. Background of findings
Fourteen respondents comprising of six managers, five internal controllers and

three auditors in total were interviewed to give their perspectives on internal
control and its impact on fraud in their MFIs. Based on the data collected, the
following results presented below were obtained by the researcher. The work
experience of respondents ranges from five to eight years maximum. The results
were explained in two sections to answer the research question: how can internal
control design and use impact the reduction of fraud incentive, opportunity,
rationalization, and capability? The first part explains the background of the
findings from questions related to fraud in MFIs, questions related to internal
control consideration and internal control effectiveness, and how internal
control can be improved. The second section reveals results of how internal
control reduces fraud incentive, opportunity, rationalization, and capability.
At the beginning of the interview, the respondents were asked about their view
on fraud as an important risk to be treated with much attention. The
respondents unanimously agreed that fraud was an important risk factor in
MFIs which can result in losses, bad reputation, and eventually stagnation and
dissolution of MFI.
According to the respondents, several reasons could account for fraud within
the MFI. These factors include Low remuneration, delay in payment, greed, and
family/staff pressure all of which create fraud incentive. Furthermore, poor
work environment, poor monitoring, poor facilities, management
incompetence, negligence and poor employee recruitment create fraud
opportunity. While poor remuneration and lack of incentive for hard work cause
rationalization. Also, duplications of functions and poor job rotation result in
39
fraud capability. Respondents reveal that low remuneration is a major cause of
fraud in MFIs.
In most cases the staff work too much but are underpaid and so this motivates them to
exploit every available opportunity to extort money from members […] (R3).
Generally, this result implies that, for MFIs to combat employee fraud, strong
policies protecting employee and remuneration schemes should be crafted. This
will motivate them and thus keep them in positive check.
Furthermore, a question was asked on fraud-related cases in the MFIs to get the
frauds common to MFIs and how they handle such situations. Most
respondents agreed and gave some instances of fraud-related cases in their
various MFIs.
[…] I recall the former manager was discovered to have withdrawn money from several
dormant accounts of diseased clients who had no family show up to claim the assets
(R4).
Also,
[…] Cash conversion by a field agent “Acao.” The agent collected a certain amount
from the small business clients and recorded something different in their books and this
was discovered during payday when the client complained that his account balance did
not match the records of his transactions (R8).
Other forms of fraud mentioned included forging of signatures, illegal
withdrawal of customer money, illegal granting of loans, falsification of records,
hacking of password and computer system. Generally, this result indicates, cases
of fraud scandals are similar despite the variation in MFIs. Consequently, where
fraud was identified, the respondents said investigations were carried out and
the perpetrators were sanctioned in line with the policies and regulations of the
MFI. For example, after conducting an internal audit to detect fraud, the culprits
were held to repay the shortages. In some cases, the collateral security of the
offender was ceased by the MFI as punishment for fraud. Cases of fraud after
investigations and legal proceedings often resulted in the accused being
investigated, suspended, dismissed, and even imprisoned in serious cases.
Hence, all the respondents in agreement that fraud was a major cause for
40
concern in MFIs and hence suggested that internal control is important in any
institution for fraud to be detected and prevented.
4.2. The impact of internal control design and use on fraud detection
and prevention
Findings from the interviews reveal the importance of internal control in fraud
detection and prevention. From the view of the respondents, the COSO
framework five components are very important and considered in the
implementation of MFI internal control design.
All the five components of internal control are considered within our internal design
from the control environment we ensure that we have a stable work environment to
carry the rest of the internal system. We implement risk assessment because of the
delicate nature of the financing of MFIs, control activities ensure that the right activities
back the risk assessment of the institution ensuring free flow of communication and
information which encourages team building and monitoring the affair of the MFI
internal control system ensures it is running smoothly (R2).
Similarly, one of the auditors explained:
We take into consideration the five COSO components of internal control and map out
which applies to which objective or goal […] (R10).
This result indicates generally that the COSO framework of internal control is
vital for fraud detection and prevention in MFIs hence rather than spread
resources for the development of new a framework, resources should be
concentrated on the maintenance of the COSO framework.
Furthermore, respondents pointed out that though all components of internal
control are important, however, respondents revealed the control environment,
monitoring, and control activities are the most important components of
internal control to prevent fraud.
[…] The control environment is the most important because it forms the base of the
entire functioning of the institution. If an institution has a control environment govern
by good ethics and integrity, it is bound to have an internal control system that works
well. If there is a problem at the top management, the rest of the institution will be
affected (R8).
In line with the importance of internal control, the findings revealed that MFIs
are governed by good internal control practices based on regulations from
41
COBAC, MINFI, and CAMCCUL who are the regulatory authorities of MFIs
in Cameroon. Software such as Alpha was being used by most of the MFIs to
ease control. This result implies great reliance on the government regulatory
system.
Most of the respondents sampled for this research revealed that internal control
design and how it is used would reduce fraud in MFIs. Below is an excerpt of
respondent 1.
[…] Irrespective of all other measures which might be in place, internal control design
is the major determinant of how much fraud can be committed in the organisation […]
(R1).
In general, the findings reveal that a good internal control design and how it is
used would reduce fraud incentive, opportunity, rationalization, and capability.
This implies that generally if institutions want to draft policies on fraud
detection and prevention, great consideration should be given to internal
control design.
4.2.1. Internal control and incentive

Respondents stressed that for MFIs to reduce fraud incentive they need to re-
enforce their reward policies. They explained existing policies on incentives for
hard work and promotion are either not put into practice or compromised
hence, encouraging fraud. Furthermore, proper remuneration should be
considered by the control environment so that staff are not wanting, that way
motivation to commit fraud is reduced. The result also revealed if staff are not
well paid, regardless of the internal control effectiveness employees will design
new methods to commit fraud. Added to this, implementing staff collateral
policies will ensure that the MFIs do not make losses and dissuade the staff
from fraud for fear of property loss.
[…] Every staff in our is expected to bring collateral security on the signing of an
employment contract. That way the employee must think twice before committing a
crime as in case of any default, the collateral of the staff is seized as a sanction (R1).
42
Similarly, the respondent (R10) added that implementing a whistle-blower policy
could be a great way to reduce fraud incentive. Furthermore, the respondent
(R3) added that if there is adequate communication and enforcement of the
consequences of misconduct and fraud, people’s fraud incentive would reduce.
In addition, the respondent (R5) emphasized that a surprise audit on both
managers and other employees reduces fraud incentive. This result implied that
if the organization want to minimize fraud incentive to a very large extent,
policies that protect remuneration schemes and promotion should be given due
consideration.
4.2.2. Internal control and opportunity.

The respondents pointed out that fraud opportunity occurs because of
loopholes in internal control systems of MFIs. These loopholes include irregular
monitoring, poor working environment, the use of manual operations, poor
recruitment practices. From the interviews, some of the respondents pointed
out that their MFIs were not governed by the best internal control practices.
Below are excerpts from the interview.
[…] The working condition of the internal controller is not the best which in turn
affects the way they perform their duties. […] assessment is done manually which takes
a long time and is very tiring which in turn may result in negligence hence giving room
for fraud. (R9).
Further,
[…] The recruitment of internal controllers is not based on know-how but rather as a
position to sanction staff or staff that are being considered redundant in other
departments and services. […] some employees are recruited based on familiar ties and
not by merits (R6).
The respondents unanimously agreed that constant monitoring will reduce fraud
opportunity. Respondent (R2) added that fraud training of the staff and proper
background checks of the staff would increase staff skills and reduce fraud
opportunity. Respondent (R3) also suggested stepping up the control game
through surveillance cameras, fraud opportunity will be reduced. Meanwhile
43
respondent (R7) also suggested an independent internal supervisory board as a
solution to management fraud opportunity. Respondents stressed that risk
assessment is considered greatly in their internal control design to reduce fraud
opportunity. For instance, one of the internal controllers (R6) explained:
[…] We operate with the risk cartography to bring out the possible risk such as the
operational risk, credit risk, financial risk and as well as their likelihood of occurrence
(R6).
Moreover, one respondent (R5) emphasized that through reconciling cash at the
end of each day and controlling the transaction journals of the previous day,
fraud opportunity can be prevented. These results imply fraud opportunities
only exist because of loopholes in the internal control. Therefore, it is imperative
for managers to develop and maintain policies that check against such
loopholes.
4.2.3. Internal control and rationalization

For fraud rationalization, respondents emphasized proper remuneration and
reward scheme will reduce employee’s justification for committing fraud.
[…] A good control environment with the right policies and right energy i.e., the right
ethical values will influence people’s consciousness and hence reduce their
rationalization (R13).
Further, the respondent (R1) suggested implementing ethical training programs

and developing an ethical organizational culture alongside transformational
leadership will reduce fraud rationalization. Similarly, the respondent (R3)
explained that in some MFIs, those at the top compel their lower-level staff to
make their institutions look better by manipulating their statements of accounts
to gain more customers. This in the long run affects these MFIs, because the
same employees that were used to make the institution look good, begin to
rationalize their fraudulent activities. This result implies that if MFIs implement
ethical training for new employees, replace the old corrupt minds and build a
more ethical organizational culture, fraud rationalization will be minimized.
44
Furthermore, setting achievable goals for employees will reduce work pressure
and hence a reduction in fraud rationalization.
4.2.4. Internal control and capability

Finally for fraud capability as explained by the respondents, results when there
is duplication of functions and poor job rotation in MFIs. Further, respondents
explained that these make some employees very conversant with duties hence,
giving them the opportunity and capability to manipulate record and commit
fraud. Therefore, as a solution, respondents emphasized on job rotation and
segregation of duties are elements of the control activities that can reduce fraud
capability. Though not stopped as people may always discover new ways to
increase their capability.
Segregation of duties and job rotation restricts an employee’s opportunity of mastery

enough to build capability […] (R2).
Similarly, respondents added that constant monitoring and risk assessment will
reduce people's capability to carry out fraud.
[…] It takes the ability to exploit opportunity and the success of fraud operation to
build capability. Hence, with the constant monitoring and risk assessment to ensure
instant detection of error, fraud capability can be reduced (R5).
4.3. Summary of empirical findings
The empirical findings from the interviews revealed that fraud is an important
risk that needs to be treated with much attention as its effects are detrimental to
MFIs. Responses revealed that fraud occurs due to incentive, opportunity,
rationalization, and capability to do fraud which has made it imperative to be
minimized with the aid of internal control. The respondents highlighted that
these four factors of fraud can be reduced with the use of internal control
system. Therefore, respondents confirmed this by pointing out that the five
COSO components are important in internal control design given the different
roles these components play in deterring fraud within the MFIs. The findings
45
of the relationship between internal control design and use and fraud are hence
summarised in the table below.
Table 5: Summary of key empirical findings of the research
Main areas Findings
Internal control and Internal control through re-enforcement of reward policies,

fraud incentive proper remuneration and reward policies, whistleblowing
policies, instituting employee collateral requirement on the
signing of employment contract, enforcing, and
communicating clear consequences for misconduct and
fraud, and surprise audits, would reduce fraud incentive.
Internal control and Fraud opportunity results from loopholes in internal

fraud opportunity control like poor work environment, poor monitoring,
poor facilities, negligence of operations and poor employee
recruitment practices. Hence internal control practices like
Constant monitoring, fraud training, risk assessment, cash
reconciliation, and use of passwords, would reduce fraud
Opportunity
Internal control and Internal control through ethical training programs,

fraud rationalization developing ethical organizational culture and setting
reasonable tasks for the employee.
Internal control and Internal control through job rotation, segregation of duties,
fraud capability constant monitoring, and risk assessment, will reduce fraud
capability.
46
5. Analysis and Discussion of finding.
This chapter gives an analysis of the results of the respondents. The results are discussed in line
with the research questions, theory, and previous studies. The analysis of the findings is going
to be based on the fraud diamond theory and the COSO framework for internal control as the
main theories of the study as from chapter two. Hence fraud can be reduced through the lens of
the fraud diamond and with the use of internal control. The analysis is segmented into two
sections, namely: general discussion and internal control design and use on fraud detection and
prevention.
5.1. General discussion
From the empirical findings in chapter four above, it is evident that fraud
remains one of the major risks affecting MFIs which if not treated with care
could result in damages like losses, bad reputation, and consequently stagnation
and dissolution of the MFIs. This confirmed the research of Bierstaker et al.
(2006) who argued that fraud damages go beyond direct financial loss to
collateral damage. Consequently, the respondents presented a series of fraud
that are common to MFIs which confirmed MFIs common fraud types
presented by Boateng et al. (2014). The common MFI frauds included forging
of signatures, illegal withdrawal of customer money, illegal granting of loans,
falsification of records, hacking of password and computer system. Further, the
empirical findings revealed that internal control design and use had an impact
on fraud detection and prevention by answering the research question of “How
can internally control design and use impact the reduction of incentive,
opportunity, rationalization, and capability to commit fraud?” However, Suh et
al. (2019) noted irrespective of the internal control design and use in place fraud,
fraud is inevitable because it overrides, and fraud may never be completely
eradicated. Notwithstanding, results revealed that internal control serves as a
vital tool to minimize fraud risk.
47
5.2. The impact of internal control on fraud detection and prevention
The impact of internal control on fraud detection and prevention in this study
was viewed under four themes which will be discussed in the subsequent
paragraphs (incentive, opportunity, rationalization, and capability).
5.2.1. Internal control and fraud incentive

Previous research like Othman et al., (2015); Nawawi & Salin (2018); and Rae &
Subramaniam (2008) highlight fraud incentives are reduced because of internal
control practices such as performance evaluation and fair reward schemes,
surprise audits, secure and discrete whistleblowing, and monitoring staff claims
on submission. This study confirms the findings of Othman et al., (2015) on
secure and discreet whistleblowing and Nawawi and Salin (2018) on monitoring
of staff claims on submission as means to reduce fraud incentive. This is by
explaining that through whistle-blowing policies and surprise audits
(monitoring) fraud perpetrators are in constant fear of been caught hence
reducing fraud incentive. Further, this study also confirms the finding of Rae
and Subramaniam (2008) on performance evaluation and fair reward schemes
as ways to reduce fraud incentive by emphasizing the importance of proper
remuneration and incentive for hard work of employees to deter fraud incentive.
Generally, it can be said that if MFIs focus on internal control practices such as
performance evaluation, fair reward schemes, surprise audits, secure and
discreet whistleblowing and monitoring, fraud incentives will be minimized.
Given this result aligns to prior research as indicated above, this should be taken
into consideration.
However, this study did not identify hotlines as a fraud mitigating tool in MFIs
contrary to prior findings of Peltier-Rivest and Lanoue (2015) and Othman et
al. (2015) on hotlines as a means of reducing fraud incentive. Despite the
contradiction, this study revealed a new internal control strategy which is the
use of employee collateral policy upon the signing of an employment contract
to discourage fraud incentive. When employees are made to bring valuable
48
collaterals upon employment, they are deterred from fraud incentive in order
not to lose their collateral as punishment for fraud. This means that this study
does not only contribute to previous studies as revealed by the resulting
alignment above but also adds a new strategy to prior studies of Othman et al.,
(2015); Nawawi & Salin (2018); and Rae & Subramaniam (2008). This result
obtains imply the need for variation in strategies to eradicate fraud incentive. An
organisation needs to consider the application of all revealed strategies to
minimize the weaknesses of either of the strategies. Added to this,
communication, and enforcement of the consequences of misconduct and
fraudulent actions will also minimize fraud incentive. When employees through
rules and organisational culture understand the consequences of their actions
like loss of job, suspension, and detention, it will reduce their incentive to
commit fraud.
5.2.2. Internal control and fraud opportunity.

Previous research like Othman et al., (2015); Zakaria et al. (2016); Nawawi and
Salin (2018), show that fraud opportunities are consequences of ineffective
internal control practices such as heavy reliance on manual operations, poor
supervision, improper documentation, the manager’s negligence of operational
checks, poor communication of specification of functions, and poor systems
update. Therefore, to reduce fraud opportunities, previous research points out
internal control practices like cash reviews, fraud reporting policies, staff
rotation policies, and constant modification of internal control systems is
necessary. This study confirms the findings of Baker et al. (2017) that fraud
opportunity results from heavy reliance on manual operations, manager’s
negligence of operational checks, poor communication of specification of
functions, lack of fraud risk awareness, and poor supervision. This study
revealed that some MFIs rely on manual operations which reduced the efficiency
of their internal control given that manual operations are not only exhausting
but also time-consuming. This has resulted in negligence of operations.
Furthermore, this study confirms the research of Zakaria et al. (2016) who
49
noted that weak internal control in the form of poor supervision and improper
documentation process creates fraud opportunity. The findings of this research
noted that fraud opportunity results from loopholes in internal control systems.
This study also confirms the findings of Nawawi and Salin (2018) who noted
that outdated internal control systems result in fraud opportunity. Based on our
results, improving the working environment, and using updated internal control
software systems, will increase its efficiency and reduce fraud opportunities.
Added to this, the findings of this research findings reaffirm the results of Suh
et al. (2019) who emphasized that risk assessment can prevent fraud
opportunity. This study explains that through risk assessment in the form of
risk cartography possible risk like operational risk, credit risk, financial risk and
predict the possibility of re-occurrence can also prevent future fraud
opportunity. Given that fraud opportunities are a result of weaknesses within
the internal systems, it is very important to draft policies that allow for constant
updates on the internal control within an organisation. Moreover, for an
organisation to minimize the weaknesses from their implemented internal
control system, resources should be allocated for the hiring of highly skilled
technical personnel that can maintain and update the software systems
frequently. This will not only help the organisation eradicate fraudulent practices
but also minimize risk in her major operations. This will further lead to an
expanded profit margin and goodwill of the organisation since scandals on
fraud are unlikely to be heard by the public.
5.2.3. Internal control and fraud rationalization.

Previous research by Rae and Subramaniam (2008); Spatacean (2012) and
Peltier-Rivest and Lanoue (2015) emphasized fraud rationalization is reduced
through internal control practices like the fairness of distributive and procedural
policies, integrity, upholding good values in the control environment, and
regular ethics training. Nawawi and Salin (2018), also noted that company
culture and environment within companies affected the likelihood of fraud.
This study confirms the results of Rae and Subramaniam (2008) on the fairness
50
of distributive and procedural policies. It also confirms Spatacean (2012) who
emphasized integrity and upholding good values in the control environment.
Furthermore, Peltier-Rivest and Lanoue (2015) highlighted the importance of
regular ethics training. All these were considered as good internal control
measures towards reducing fraud rationalization. Generally, an organisation
needs to craft policies that encourage ethical training and a strong inbuilt
organisational culture. This will lead to the development and maintenance of
high standard morals, positive values, and well-coordinated employee behaviour.
Given that these values are expected from all employees, it will positively affect
all stakeholders and the various managerial positions. This will result in the
development of transformational leadership. Added to this, top managers will
be able to enhance good working conditions that prioritize employee welfare.
Moreover, there will be an unbiased division of labour as goals are set within
specific jurisdictions within the organisation. Consequentially, good
remuneration and incentives schemes will be developed and maintained in the
organisation. This mitigates the rate of fraudulent practices and boosts ethical
consciousness in the control environment.
5.2.4. Internal control and fraud capability

Previous research like Maulidi and Shonhadji (2020) noted that fraud capability
can be reduced through internal control practices like continuous monitoring
and risk assessment. This study confirms this finding of Maulidi and Shonhadji
(2020) by explaining that through continuous risk assessment and evaluation of
past fraud cases, patterns in fraud practices can be discovered, hence enabling
the development of new risk assessment strategies that can be put in place to
reduce capability. Furthermore, MFIs need to develop monitoring control
systems that are flexible and easy to check. This will not only reduce fraud
capability but enhance changes that might have resulted from globalization.
Moreover, building a monitoring system equally helps organizations to easily
adapt to changes from the global market and thus a competitive advantage.
51
However, this study reveals that fraud capability can be reduced through
segregation of duties and job rotation, which limit fraud perpetrator's ability to
exploit fraud opportunities. This aligns with the argument of Chen et al. (2017)
which explains that segregation of duties and other controls are fundamental
aspects of control activities that reduce the possibility of manipulation of
earnings. Therefore, this study contributes by reaffirming the findings of
Maulidi and Shonhadji (2020) and bringing to light the important role of
segregation of duties and job rotation in mitigating fraud occurrence in an
organization.
52
6. Conclusion and Discussion of Contribution.
This chapter presents the summary of findings. It revisits the purpose of the study and the
contributions made. It will also present the implications of the study. This chapter wraps up
this research by presenting the limitations of this study and suggests further research.
6.1. Summary Conclusion
The purpose of this study is to examine how internal control design and use
impact fraud detection and prevention in MFIs. This study reveals that internal
control design and use positively impacts fraud detection and prevention. This
research proves that internal control mitigates fraud incentive, fraud
opportunity, rationalization, and fraud capability. Generally, organizations are
involved in some sought of internal control design and use either at a formal or
at an informal level. Hence it is important since it is used as a tool to check
against fraud. Most times organisations function by hiring personnel who in
most cases are not usually the owners or investors of that institution. As a result,
these personnel sometimes turn to override organisational policies and engage
in selfish practices such as fraud. This further makes it vital for the
implementation of a good internal control system and use. As proven by the
results of this study, internal control positively impacts fraud detection and
prevention. Therefore, organisations like banks, MFIs, small and medium
enterprises, local businesses operating without a good internal control policy,
stand a higher risk of being exposed to fraud. The absence of a control and
monitoring system increase fraud incentive, fraud opportunity, rationalization,
and fraud capability. Furthermore, organisations with poor remuneration
schemes and policies sometimes think being less concerned about employee
welfare has no major effect on them. However, it has a grievous effect on
employee attitude towards fraudulent activities. Hence, organisations with
healthy employee welfare services like good remuneration, do not only do away
with fraud but also enjoy quality employee performance. Since new forms of
fraud are being invented around the world, it will be in the best interest of every
53
organization or financial institutions to constantly improve their internal control
systems. This can be done by employing frequent software updates. Added to
this, monitoring an organization against fraud solely depend on the internal
control system put in place. So, it is very important to consider developing a
monitoring system that best fit the transactions of the organisation. This means
an internal control design and use of one institution may not necessarily be the
best for another institution. Hence, the choice of an internal control design and
use is subjective.
6.2. Contribution of the study
Given the aim of this thesis, the findings resulted in varying benefits.
The main purpose of internal control is to safeguard an entity’s assets. Broadly

internal controls function to minimize risks and protect assets, ensure accuracy
of records, promote operational efficiency, and encourage adherence to policies,
rules, regulations, and laws. The findings of this study can be used be used by
the management of MFIs to gain insights into areas within their internal control
that needs enhancement, enabling them to build a better internal control design
that can better detect and prevent future fraud occurrence.
Also, this study highlights the significant role of internal control in ensuring the
long-term sustainability of MFIs. Therefore, MFIs regulatory bodies can use
these findings as a basis to craft enhanced internal control regulations.
Further, this study also contributes to the existing body of knowledge on the
impact of internal control on fraud detection and prevention in MFIs which has
not been explored.
Finally, given that this area of studies has not been explored in the microfinance
sector, this study serves as a base for future research particularly on an in-depth
examination of the impact of internal control on fraud detection and prevention
in MFIs.
54
6.3. Limitations
A major limitation of the study was the issue of Covid-19 that distorted the
initial plan of how the research was intended to be carried out. The initial plan
for the interview was a face-to-face meeting to get the aspect of social
interaction and facial and body communication. But given the need for social
distancing and considering the health of both the respondents and the research,
WhatsApp was considered as the communication medium. The interviews had
to be done through audio WhatsApp because this was the only medium
accepted by the respondents. This medium was good but given that the
WhatsApp calls were audio-based the facial expression of the respondents
could not be seen and interpreted which makes it difficult to tell they were telling
the truth or not.
Another limitation of the study was the issue of the limited sample size which
may not favour generalization. This is because a larger sample would have been
more helpful to generalize. Due to this limitation, the results of this study
cannot be generalized as there are possible omissions of valid information that
can alter the results presented.
Another limitation was the time and resources allocated for the research. There
limited time to conduct proper research that can explore every detail.
Furthermore, this research is on just the case of Cameroon MFIs. This implies
we cannot rely only on its findings to generalize for the rest of the world. This
is because what might apply or work well for one part of the world might not
be the case for another part of the world.
6.4. Recommendation for further studies
Given the importance of MFIs to low-income economies and the world at large
and the increasing threat of fraud in MFIs, carrying out further research on
MFIs is very important. Also given that MFIs Cameroon is only a single case
55
and may have different rules, regulations, policies, norms, and organizational
cultures, what governs MFIs in Cameroon may not be applicable for MFIs in
other countries. It is therefore imperative that this topic should be explored in
MFIs with a case study in other countries of the world. Also given that this
study’s findings revolved around poor remuneration as one of the major causes
of fraud in MFIs, research on the extent to which employee remuneration and
employee welfare would influence fraud deterrence.
It will also be interesting to explore how the aspect of capability as a key

determinant of fraud can be reduced. This is because capability greatly
influences fraud behaviour and how it is managed and given the findings of how
this aspect of fraud can be reduced. It is very important for future research to
explore how internal control is a tool of fraud detection and prevention because
the effect that results from failing to reduce fraud capability is grievous to any
organization.
56
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Appendix 1.
Consent Form
The purpose of this data collection process is to aid my investigation on how

the design and use of internal control impact fraud detection and prevention in
microfinance institutions (MFIs). The main objective of the study is to get an
increased understanding of the internal control design of MFIs, the component
of internal control which is considered most important in the detection and
prevention of fraud. This brings me to my main interest, which is to get your
experience and opinion on what types of internal controls MFIs use in fraud
detection and prevention. Also, to get your opinion on what types of internal
control you feel is most appropriate and effective in detecting and preventing
fraud. On this note, I want to assure you that this process is completely
voluntary. Therefore, you have the right to decide whether to be part of this
research process. If at any point in time you do not feel the need to continue,
you have the right to withdraw without any explanation. Given the current
Covid-19 pandemic, this interview will be conducted on Zoom or WhatsApp at
your convenience. I also want to assure you that every piece of information
collected during this process will be treated with utmost confidentiality and
anonymity is guaranteed. All data collected will be processed confidentially in
such a way that this information does not get into the wrong hands. The data
processing will continue until the end of the thesis which will be in June 2021.
On the completion of this thesis, all collected data will be deleted.
After reading through the information describing the purpose of the research, I
agree to take part in this research. I am now fully aware that my participation is
completely voluntary and that I can at any point in the interview cancel my
participation in the study without stating any reason.
For any further questions contact:
Yolanda Aji Abei: Student; [email protected]
Sven Siverbo: Supervisor; [email protected]
Lazarus Fotoh: Supervisor; [email protected]
66
Appendix 2
Interview Questions
Biographical questions
1. What is your job description in your institution?
2. How long have you been working in this institution?
3. Are you directly involved in the internal control system of your
institution?
Specific, regarding fraud:
4. Do you consider fraud an important risk to be treated with
much attention in your MFI? And why?
5. In your opinion, what is the major cause of fraud in MFIs?
6. Do you recall any fraud-related case in your institution either

before or during your stay in the institution? If yes, what
measures were used to handle the situation?
Specific, regarding internal control:

7. Are any specific factors your MFI takes into consideration in the
implementation of the internal control system? (like the
consideration of fraud)
8. Do you feel your internal control system is governed based on
best-recommended practices? If yes, what are the policies and
measures in place against fraud?
Internal control and fraud detection and prevention:
9. Does your MFI have an internal control software for fraud
detection or is everything done manually?
10. Which component(s) of internal control do you consider most
important if MFIs are to prevent fraud? Why?
11. How in your opinion can MFIs improve their internal control to
prevent fraud?
67
12. In your opinion, do you think it is possible to have internal
control design and use it in a way that reduces the fraud
perpetrators:
• motivation to commit fraud.
• Opportunity to commit fraud.
• Justification for fraudulent actions.
• Capability
Any final remark?
68

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Yolanda Aji Abei

Impact of Internal Control on

Term: Spring 2021

Karlstad, June 2021

Microfinance institutions (MFIs) are an important tool of poverty reduction

Keywords: Internal control, Fraud prevention, Fraud detection, Microfinance

ACFE: Association of certified fraud examiners

AICPA: American Institute of Certified Public Accountants

COSO: Community of Sponsoring Organizations of the Treadway Commission

IAASB: International Auditing and Assurance Standard Board

MFI: Microfinance Institutions

MINFI: Ministry of Finance

Table 2: Interview details……………..………………………………………34

2.6.1. Internal control and incentive ................................................................... 26

1.4. The structure of the study

2.1. Definition of fraud

According to Riney (2018), a combination of prevention and detection acts as a

Figure 2: The Fraud Triangle

The second element of the fraud triangle is the perceived opportunity.

Figure 3: The fraud diamond

• Effectiveness and efficiencies of operations

• Reliability of financial reporting

• Compliance with applicable laws and regulations” (p.3).

Hence, internal control according to the argument of Länsiluoto et al., (2016) is

2.4.1. Control environment

The control environment as explained by COSO (2013), sets the foundation on

2.4.2. Risk assessment

Risk assessment involves a dynamic and iterative process through which

2.4.3. Control activities

2.4.4. Information and Communication

Information and communication are systems that allow people in a firm to

The COSO framework can be summarized graphically as shown below.

Figure 3: COSO Framework

2.5. Summary of internal control, fraud prevention and detection

2.6. The impact of internal control design and use on fraud

2.6.1. Internal control and incentive

2.6.2. Internal control and opportunity

The investigation of Othman et al. (2015) on identifying the methods to detect

2.6.3. Internal control and rationalization

2.6.4. Internal control and capability

Main areas Findings

Internal control and Fraud incentive can be reduced through performance

3.1. Research Approach and Design

According to Gray (2017), the choice of a research strategy is determined by the

3.3. Data collection method

The interview stage was made up of one-on-one, semi-structured interview of

Table 2: Interviews details

3.4. Data analysis process

Data analysis refers to the process of critical assessment and simplification of

Table 4: Classification of internal control

The trustworthiness of a study involves the integrity of the conclusions drawn

According to Gray (2017) credibility of a study is established by building

Transferability involves the applicability of the findings of the study to other

3.6. Ethical consideration

In a qualitative study that involves individuals as part of the research, it is

4.1. Background of findings

Fourteen respondents comprising of six managers, five internal controllers and

4.2.1. Internal control and incentive