Ecuador Tackles Fraud Detection with Innovative Internal Control System

A Weak Internal Control System: The Principal Cause of Fraud

The Supreme Audit Institution of Ecuador has identified a significant cause of fraud to be a weak and limited internal control system. To combat this, the institution has incorporated the Balanced Scorecard method into its evaluation process to reduce audit complexity and facilitate fraud detection.

Understanding Corrupt Activities in Ecuador

According to Ecuador’s Organic Criminal Code (COIP), embezzlement, illicit enrichment, bribery, and influence peddling are among the primary forms of corrupt activities. These crimes are often discovered through audit interventions and complaints, highlighting the need for a robust internal control system.

National Agenda: Essential Internal Control Components

The national agenda (Agreement 39-CG2008) outlines necessary internal control components, including:

Control Environment: The setting in which internal controls operate.
Risk Evaluation: Identifying potential risks and assessing their likelihood and impact.
Control Activities: Implementing policies and procedures to mitigate risk.
Information and Communication: Providing relevant information and communication to stakeholders.
Supervision Activities: Monitoring and reviewing the effectiveness of internal controls.

Integrating Internal Control Components with Fraud Detection

To integrate these components with fraud detection, the institution has developed an internal control evaluation matrix combining the Balanced Scorecard method with audit and documentary forms. This tool:

Generates questions for organizational administrative and financial management.
Establishes importance levels and occurrence rates.
Defines key performance indicators to detect risk situations that can lead to fraud.

Benefits of the Matrix

The matrix also enables:

Information tabulation and processing to develop reports by component.
Measurement of risk and confidence levels.
Ranking components based on criticality, allowing for identification of essential factors to formulate improvement plans and strengthen internal control systems.

The Auditor’s Role in Detecting Fraud

Fraud detection raises questions about audit work’s responsibility and scope, as well as the auditor’s role in detecting fraud. Therefore, special attention must be paid to entity assessment methodologies and applied audit procedures.

Analyzing Financial and Non-Financial Indicators

The Balanced Scorecard method can help analyze financial and non-financial indicators, combined with evaluating internal control components to identify risk and detect fraud. Applying an internal control tool based on this method should be complemented by collecting sufficient evidence and adapting the matrix for each audited organization.

Assessment Results and Corrective Actions

Assessment results will provide reliable information regarding internal control effectiveness or weaknesses, allowing for adequate definition of recommendations and corrective actions. As preventive measures, top management must:

Promote integrity, honesty, and ethical behavior.
Design procedures and codes that reinforce transparency.
Execute effective internal controls.

Commitment to Innovative Fraud Detection Methods

The Supreme Audit Institution of Ecuador is committed to developing innovative fraud detection methods to combat corrupt activities and ensure the effectiveness of internal control systems in public institutions.