Internal control and corporate governance issues have been the main theme in accounting researches since the enactment of Sarbanes-Oxley Act. This study empirically examines the relation among internal control, corporate governance and fraud. To be specific, fraud is measured on the basis of occurrence of asset misappropriation and audit review, and internal control is measured with limits to internal accounting control that refers to the characteristics of human resources (the total number of personnel in internal accounting control, the ratio of CPAs to total number of personnel in internal accounting control, years of experience of personnel in internal accounting control). Corporate governance is measured in corporate governance index that was comprised of ownership structure (the ratio of CEO’s share holdings, the ratio of largest share-holder’s share holdings, the ratio of foreign shareholder’s share holdings) and characteristic of outside directors (independence, expertise, activity).
Results of this research using KOSPI and KOSDAQ firms that were listed on KRX through 2006 to 2011 are as follows. First, the total number of human resources in internal accounting control has negative effect on probability of audit review, but corporate governance index has non-significant effect on that. However, the ratio of CEO’s share holdings and the ratio of largest share-holder’s share holdings that make up corporate governance index have negative effect on the probability of audit review.
Second, years of experience of personnel in internal accounting control and the ratio of CPAs to total number of personnel in internal accounting control have negative effect on the possibility of asset misappropriation. It means that an increase in quantity of human resources on internal accounting control cannot control the probability of asset misappropriation, but an increase in quality of expertise and learning effect regarding fraud detection can properly control asset misappropriation. Additionally, corporate governance index has negative effect on the possibility of asset misappropriation. the ratio of CEO’s share holdings and largest share-holder’s share holdings that make up corporate governance have the same effect on that.
Third, the ratio of CPAs to total number of personnel in internal accounting control and corporate governance are effective to decrease asset misappropriation by upper level such as CEOs and the largest shareholders. Because the upper level ignores internal accounting control or they are likely to commit misappropriation indirectly, so are likely to take place asset misappropriation in firms with strong internal accounting control. In this case, when corporate governance improves, it causes intensified monitoring on CEO and other upper level, and it supplements the effect of asset safeguarding program, that can effectively control the upper level''s asset misappropriation.
Fourth, years of experience of personnel in internal accounting control, corporate governance and the ratio of CEO’s share holdings have negative effect on the amount of asset misappropriation.
Fifth, in the case of using asset misappropriation samples that were classified by manufacturing industry & non-manufacturing industry and large & small amount of asset misappropriation, most of variables to measure characteristics of human resources in internal accounting control have non-significant effect on asset misappropriation. However, corporate governance index and the ratio of CEO’s share holdings have still negative effect on that.
Recently, asset misappropriation scandals have been frequently taking place in firms. The damages caused by asset misappropriation brings enormous loss for firm''s inside and outside stake holders. This research provides empirical evidence on the way to reduce not only fraudulent financial reporting which was measured in audit review but also asset misappropriation. Using the results of this research, the necessity of strengthening internal control for reducing fraud is more needed.