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145
УДК 336
S.Zh. PRALIEVA.
Turan University,
candidate of Economics.
G.K. CHIMGENTBAYEVA. 
M.Kh. Dulaty Taraz State University,
candidate of Economics.
S.A. TLEUBAYEVA,
M.Kh. Dulaty Taraz State University,
candidate of Economics
INTERNAL  CONTROL  AND  THEORETICAL  FOUNDATIONS 
OF  ITS  MODERN  TRENDS
Abstract
This article reviews a new trend of services on investigation of financial fraud – Forensic . By researching this
topic we shall attempt to give a definition to the financial investigation from theoretical positions and an ability to
more deeply understand the signs of services on investigation of financial fraud – Forensic. Losses from fraudulent
actions can be significant, as the probability of detection is low, although the risk of losing their job is high, but in
many cases they remain unpunished. Many managers do not want to disclose the fraudulent actions of their employees,
they mostly only terminate the employment contracts. However, it must not be forgotten that indicators of fraud are
not proof of fraud, so the detection of indicators should always be followed by a detailed work to clarify the reasons
for any divergence. Actual problems of improving the analytical procedures to detect fraud, to assess the financial
information include: firstly, the lag of national regulatory framework governing, the use of analytical procedures for
financial investigation of international practice. Secondly, the lack of good practice for the application of analytical
procedures for this purpose. The concepts Forensic and fraud, of course, require further research. Thus, the role and
the value Forensic in enhancing the efficiency of organization management is evident. Especially it is important
for contemporary organizations operating in the conditions of constant growth. Forensic has been poorly studied
scientifically, it calls for further discussion and scientific polemic.
Key words: internal control, internal audit, forensic, financial investigation, fraud.
Transition to a market economy led to the emergence of a new branch of scientific knowledge
and practice in the direction of control of the organization. It is an internal audit. Internal audit is an
integral part of the internal control system. Internal audit plays an important role in the successful
organization of accounting in a company. It can be defined as an independent assessment of activities,
performed within a company as a provision of the service to it.
Currently, the auditing is strictly regulated. The European Communities’ Council issued a series
of guidelines that define the composition and structure of the financial statements of companies, as
well as the procedure for audits. These Guidelines provide strict qualified requirements to accountants-
auditors.
At the same time a review of different scientists’ opinions on the definition of «internal audit» has
been made. In the special literature, positions of scientists and practitioners (E.T. Gutzeit, V.V. Burtsev,
M.V. Melnik, V.D. Andreev and others) in the definition of internal audit differ. And thus currently there
is no clear unique understanding and interpretation of the term «internal audit». Scientists’ point of
view to the place of internal audit in a single internal control system is ambiguous: D.E. Kachanovsky
believes that internal audit is «an integral part of the financial control»; V.V. Burtsev refers it to the
«forms of control»; A.M. Bogomolov and N.A. Goloschapov consider it «an integral part of overall
audit»; according to R. Dodge – it is «an integral part of internal control»; V.D. Andreev – «one of the
control methods» [1].
In the context of economic integration, the internal control activity does not yet fully meet the
requirements made to it by modern conditions of development of a sustainable economy. Every time,
the theory and practice of internal audit and analysis of financial and economic activity are getting
improved. As we know, the result of financial and economic activity of a company is generate of
profits. The company’s profit can be derived not only from the sale of products, but also from the
sale of other property, formation of non-operating and operating income and expenses, as well as the
economy of domestic reserves.

146
In the coming years the business will face intensifying competitive environment, where knowledge
shall be a power, and the ability to change and adapt shall play a major role. Since the difference in
prices is reduced, companies shall be forced to look for unique offers to stand out among competitors.
In addition, they shall have to make a more serious focus on the identification of business risks in the
global economy and preparation for them, as well as on continuously developing technologies. Being
in the center of this development, internal auditors shall most likely play a major role in helping senior
management to identify risks, search for solutions and prepare for what is waiting around the corner.
Introduction of modern technologies in the development of economic relations has increased the
negative growth in the number of cases of financial fraud, theft of material and intellectual property.
This has primarily affected banking institutions, in which the number of crimes has increased not
only quantitatively, but also qualitatively, including those committed using internet technologies. This
growing trend has revealed a real need for commercial and government organizations in the services
of qualified professionals, providing economic and information security and able to analyze, anticipate
and minimize the risks in this area. The same reason resulted in creating of new companies providing
services in the field of security, as the Forensic Services.
Every day, companies in the course of their activities, have to deal with different threats such
as theft, fraud, raider attacks, abuse of official duties, computer crimes, abuse of trust by company
management (borrowing money or assets and their appropriation, procurement and embezzlement of
bank loans, advances received for a work that an employee does not intend to fulfill, etc.), corruption,
attacks on intellectual property and others.
The theory and practice of the system of internal financial investigations allow to consider it
as a control system organized for the benefit of a company owners and management, and regulated
by internal documents. Taking into account a variety of definitions and criteria for classification of
control, which are offered by scientists in their works, in our study we rely on the «Forensic» category.
It is a process, organized and implemented by clients to provide reasonable confidence in achieving
the  company  objectives:  adequacy  and  reliability  of  financial  reporting;  rational  use  of  resources;
assets safety; risk management; fraud prevention.
Standards defining the concept «financial investigation», as in many countries, and in the Russian
legislation  do  not  exist.  However,  we  can  agree  with  the  scientific  definition  of  N.A.  Pimenov,
associate professor of the «Tax Police» department of the Finance Academy under the Government
of the Russian Federation: «Financial investigation as a procedural activity shall be understood to
mean  the  collection,  consolidation,  comprehensive  review,  study  of  essential  relevant  to  the  case
circumstances  of  a  committed  violation,  related  to  infringement  of  relations  on  the  generation,
distribution, redistribution and use of funds (financial resources) of entities of economic relations» [2].
The term «Forensic» comes from Latin «foren», which means «speech to the forum,» that is
public speaking before the court. Judicial debate was one of the favourite genres of ancient Rome,
known in particular for the works of Cicero. Since the mid-50s BC Cicero studied the theory of law
and the theory of rhetoric: «On the state», «On the orator», «On the Laws».
This word came to the Russian language from English. The term «forensics» is a shortened form of
«forensic science», literally «forensic science», that is the science of the study of evidences. Forensic is
also used in phrases as an adjective to refer to, for example, a judicial or a criminalistics examination,
and as a noun forensic expert – experts working in this field. These specialists are involved mainly
in the criminal justice and criminology as experts for research and evaluation of evidences. With the
extension of qualifying signs of financial offenses and economic crime, there is a need for experts who
can examine and evaluate evidences of prosecution and defence teams in a criminal proceeding, as
well as from the perspective of their competence determine whether a particular act is a crime or an
administrative offense or neither.
For different kind of reasons commercial organizations only in extreme cases seek help from
law  enforcement  authorities  in  solution  of  their  problems  related  to  a  fraud,  and  it  is  not  always
necessary to bring a case to court. The business community prefers to deal with such sensitive issues
on their own, sometimes through their regular security experts, and if such are not available, or their
qualification is not sufficient, they seek assistance from relevant companies.
Forensic, as already mentioned, did not appear instantly, but as a consequence of the historical
development of the world economy and in the process of formation of market mechanisms. For a more

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complete disclosure of substance of financial statements, the origins and preconditions of appearance
in  the  historical  perspective  has  been  examined  in  the  study,  as  well  ways  of  development  and  a
number of significant specific features at each stage of development have been highlighted.
The largest markets of the Forensic Service are the Great Britain and the United States. Even
before the beginning of the XXI century, more than 30 years ago Forensic consultants appeared in the
United States, Great Britain and other countries.
There is an international network of professionals in the Forensic field represented by more than
a thousand employees in 29 countries of the world. This occurs where a number of inspections and
investigations  on  compliance  with  laws  aimed  at  combating  bribery  and  corruption,  significantly
increases.
The  process  of  financial  investigation  begins  after  receipt  of  a  Forensic  application.  Figure  1
shows a simple chart of a financial investigation – Forensic.
Signing a contract for provision of services
↓
Gather the required information from an economic entity
↓
Drawing files
↓
Case submission to a client (customer)
Figure 1 – Forensic procedures flow chart
In a review of international practice some researchers tends towards the idea that it’s lawyers,
while others believe that forensic-experts are closer to auditors. In our view, the truth is in the middle;
more precisely, a forensic expert is a lawyer and an auditor at the same time. In addition, a forensic-
expert has to deal not only with accounting and law, he/she should also have deep knowledge in many
sectors of the economy, understand business processes of such sectors. Also, with the growing number
of cybercrimes, it has become necessary to attract for their investigation experts with deep knowledge
in the field of IT. It has resulted in emergence of a separate direction in the investigation of the financial
fraud – data forensic. Forensic Practice is at the intersection of audit and law, but still more inclined to
economics and accounting, rather than to legal services. If Forensic specialists provide facts, lawyers
draw conclusions on the basis of such facts.
Development of Forensic before 2008 can be referred to the first stage of development in the CIS
countries. After the 2008 crisis, the business community began to calculate money more carefully and
no longer perceived fraud as an inevitable charge. Now when management or business partners steal,
it is perceived as a kind of controlled costs, which can and should be reduced. As a result, two practical
tasks arose: how to get rid of a dishonest employee without creating problems for themselves, and
how to recover what was lost due to fraud. Solution of these tasks requires knowledge of employment,
criminal, civil, corporate law and procedural rules of the analytical account.
Forensic in the CIS countries focuses exclusively on fraud matters. Many law firms have a practice
in the corporate fraud, investigations and asset recovery. The singularity is as follows: if a professional
law firm hires accountants, engineers and other specialists to provide non- legal, but closely related
services – it is Forensic. If such professionals are not available in this law firm, the question is about
legal services in the field of combating fraud. Some projects that require Forensic skills, can be difficult
to be divided into legal and financial components, so often good Forensic specialists are generalists,
freely oriented both in legal and financial matters.
The goals of financial investigations are usually as follows:
 
Š
Proof that a crime or incident has taken place;
 
Š
Reconstruction of the event surrounding the incident;
 
Š
Identification of offenders;
 
Š
Proof of involvement and responsibility of offenders;
 
Š
Proof of fraudulent intention of offenders.

148
In  the  Western  practice,  and  now  in  many  Russian  companies,  the  most  important  issue  for
shareholders  is  the  company’s  value,  which  directly  depends  on  the  credibility  of  the  leadership.
Instance of fraud undermines this credibility. Confirmation of this is various major scandals in Western
companies. In Russia, instance of fraud and theft by employees against companies rarely become
public.
In case of detection of such, most managers prefer to «quietly» dismiss an offender, rather than
refer the case to the competent authorities, as the most common instances of corporate fraud, such
as «kickbacks», bribery and sale of insider information are difficult to prove. Many fraudsters feel
impunity. However, the legislation getting is improved.
Misappropriation of assets at all times has been the most common economic crime. At the same
time, in relation to bribery and corruption, the statistics is directly contrary. Bribery and corruption
continue to pose a serious problem for Russian companies. For example, 58% of Russian respondents
admitted that they faced bribery and corruption; across the world this percentage is 27%. So this figure
is twice the world average and demonstrates what a difficult task the Russian government and business
faces in the fight against corruption. In 2014, the most common types of fraud were cybercrimes in
Russia and around the world – 25% and 24%, and misstatements in financial statements (accounting
data manipulation), 25% and 22% accordingly. The significant increase in this type of crime can be
attributed to failures in the control systems, which occur as a result of cost reduction [3].
According to the PricewaterhouseCoopers (PwC) transnational audit company study «The Global
Economic Crime Survey» in 2011 the indicator «reporting data manipulation» ranked third in the
overall structure of economic crime in the world and in Russia. At that, the RF data is within the
world trend in this direction, worldwide it is 24%, in Russia – 23%. Growth of the negative impact
of economic crime on the moral and psychological climate in the team can be linked to the general
trend of increasing business transparency and strengthening intolerance of the business community to
the manifestations of corruption, since a more severe and intolerant attitude of a company to illegal
actions generates an appropriate moral message to employees. Below is the percentage of respondents
who  say  that  economic  crime  has  a  significant  negative  impact  on  the  following  aspects  of  their
activities. Despite the fact that non-financial damage from fraud is difficult to quantify, it can represent
a significant loss for business. 31% of respondents in Russia and 27% worldwide state that economic
crimes they faced had a significant negative impact on the moral environment among their employees.
In 2014, 16% of companies reported that they had become victims of economic crime, as a result of
which they suffered direct financial losses of over $1 million that was significantly higher than the
worldwide index (12%). This witnesses that the damage from fraud is still high. At the same time we
can see that cases with extremely high losses (in excess of $100 million) occur less frequently. Despite
the fact that in 2014 only 3% of respondents experienced such high losses, this percentage in Russia
is still higher than the world figure (2%) [4].
$100 thousand – $1 million is the most common size of the damage caused by economic crime
among the Russian companies (Table 1).
All mentioned below revealed the most typical methods of fraud. As a consequence, the negative
perception and impact on moral environment, in case of illegal actions, show up more tangibly.
Table 1 – Analysis of financial losses as a result of economic crime in 2014, %
Amount of financial losses
Worldwide
In Russia
Financial losses less than $ 50,000 
32
21
Financial losses in the amount of $ 50,000 – $100,000
15
7
Financial losses in the amount of $100,000 – $1 million
26
30
Financial losses in the amount $1 million – $5 million
12
16
Financial losses in the amount of $5 million – $100 million
6
13
Financial losses over $100 million
2
3
Despite the positive trends, Russian companies still face problems with bribery and corruption.
As acknowledged by 41% of respondents, over the past two years their company were offered to give
a bribe. This result is significantly higher than the figures in the world (18%) and in eastern Europe

149
(23%). Approximately the same number of respondents (42%; worldwide – 22%) claimed they had
lost business opportunities, losing out to competitors, which, according to them, had been bribing.
According to the Russian business community «financial losses» are the most serious consequence
of bribery and corruption (28%). «Damage to reputation» is the most significant consequence of bribery
and corruption, according to chief executives around the world (36%). It should be noted that Russian
companies do not consider the damage to the business reputation as the most serious consequence, like
in other countries (in Russia – 19%, in the world – 36%, in Eastern Europe – 34%) [5].
In case of an offense by external fraudsters, the most popular methods of response in Russia are
termination of business relations (70%, significantly higher than in 2011), filing civil suits, including
those for recovery of damages (60%), and informing law enforcement bodies (60%). Interestingly,
that termination of business relations all over the world (37%) or in Eastern Europe (50%) is not as
popular as in Russia (70%). This means that Russian companies want to «start with a clean slate «,
even if a conflict was settled, and a damage was recovered.
These principles could be useful for any company in order to improve existing anti-corruption
policies and procedures.
To develop anti-fraud measures the business community is ready to invite independent Forensic
consultants, to identify threats of financial fraud at an earlier stage, which operate in accordance with
the rules  of  conspiracy: penetrate into the corporate structure, study  documents, and  use  the staff
survey method.
The Forensic Service pursues several key objectives:
 
Š
Achievement of efficient and economical use of the company’s resources;
 
Š
Timely detection of violations and their elimination;
 
Š
Ensuring compliance with legal acts of the Republic of Kazakhstan, decisions of the company
management bodies.
The Forensic Service performs the following tasks:
 
Š
assessment of the reliability and efficiency of the internal audit system;
 
Š
preparation of recommendations to improve performance;
 
Š
internal audit and informing the company management of the detected risks.
It should be noted that the area of financial investigation of fraud – forensic is evolving to meet
the growing requirements to disclosure of financial information and to fully meet the customer needs.
One of the most effective indicators, which is used for detection of financial statements fraud,
has been proposed by Messod Beneish. Messod Beneish analyzed financial information of companies
that manipulated their accounting figures and did not, and calculated eight factors. He included these
factors with a certain weight in the equation, which was named the Beneish M-score [6].
The value of the equation greater than –2,22 indicates a high probability that a company shows
signs of fraud.
The values of calculated factors are substituted into the Beneish M-score equation:
M = –4,84 + 0,92*DSRI + 0,528*GMI + +0,404*AQI + 0,892*SGI +
0,115*DEPI –0,172*SGAI + 4,679*TATA – 0,327*LVGI,
(1)
where DSRI is Days’ Sales in Receivables Index;
GMI – gross margin index;
AQI – asset quality index;
SGI – sales growth index;
DEPI – depreciation index;
SGAI –Sales, general and administrative expenses index;
TATA – total accruals to total assets;
LVGI – financial leverage index.
The factors involved in this formula are calculated as follows:
1. DSRI (Days’ Sales in Receivables Index) is calculated as the ratio of receivables to sales of the
current year to the ratio of receivables to sales of the previous year:
 
DSRI = (R
t
/S
t
) / (R
t-1
/S
t-1
)
(2)
Any significant increase in this index may indicate fictitious sales.

150
2. GMI (Gross Margin Index) is calculated as the ratio of the gross margin of the previous year to
the ratio of the gross margin of the current year:
 
GMI = ((ВР
t-1
– С/с
t-1
)/ВР
t-1
)/(ВР
t
– С/с
t
)/ВР
t
)  
(3)
When this index is greater than 1, this means that the gross margin has deteriorated.
3. AQI (Asset Quality Index) is calculated as the ratio of asset quality of the current year versus
previous year:
 
AQI = (1 – ((ОбА
t
+ ЧСОС
t
)/∑А
t
))/(1 – ((ОбА
t-1
+ ЧСОС
t-1
)/ )/∑А
t-1
))
(4)
The net value of fixed assets (ЧСОСt) is the original value of fixed assets, net of accumulated
depreciation.
4. SGI (Sales Growth Index) is calculated as the ratio of the current year sales versus previous
year:
 
SGI = ВР
t
/ВР
t-1
(5)
Sales Revenue is not an indication of manipulation, but in a stage of growth companies are usually
under a certain pressure, which may cause them to resort to falsification of indicators.
5. DEPI (Depreciation Index) is calculated as the ratio of the depreciation rate of the previous year
to the current year depreciation rate:
 
DEPI = (Ам-я
t-1
/ПСОС
t-2
)/(Ам-я
t
/ПСОС
t-1
)  
(6)
Depreciation index greater than 1 means that the fixed assets are depreciated more slowly, that
is, the depreciation costs of the current period are reduced. This may be a sign of the revision of
depreciation rates in order to influence the level of net profit towards its increase.
6. SGAI (Sales, General and Administrative expenses Index) is calculated as the ratio of sales,
general and administrative expenses of the current year to the same charges of the previous year:
 
SGAI = (КР
t
+ УР
t
)/(КР
t-1
+ УРt-1)  
(7)
7. TATA (Total Accruals to Total Assets) is calculated as the ratio of total accruals to total assets:
 
TATA = (∆ОбА – ∆КО – ∆ДС – ∆НУ – Ам-я)/ ∑А  
(8)
Total accruals are calculated as a change in the working capital (excluding cash) minus depreciation.
Working capital is the difference between current assets and short-term liabilities.
8. LVGI (Leverage Index) is calculated as the ratio of credits and loans to total assets of the
current year to the ratio of credits and loans to total assets of the previous year:
 
LVGI = (КЗ
t
/∑А
t
)/(КЗ
t-1
/∑А
t-1
)
(9)
If this factor is greater than 1, it means an increase in financial leverage. Exploring the real state of
a company, the original data on fraudulent financial statements could have been obtained by calculating
the Beneish factors. Using the horizontal and vertical analysis in conjunction with the calculation of
the Beneish factors in most cases allows finding indicators of fraud. But we should remember that
indicators of fraud are not proof of fraud, so the detection of indicators should always be followed by
a detailed work to clarify the reasons for any divergence.
In conclusion I would like to note that losses from fraud may be significant, because the probability
of detection is low, although fraudsters risk losing their jobs, but in many cases they remain unpunished.
Many chief executives do not want to disclose fraudulent actions of their employees, only terminate
employment relations.
Actual problems of improvement of analytical procedures for the detection of fraud to assess
financial  information  include:  firstly,  the  lag  of  the  domestic  regulatory  framework  governing  the

151
use of analytical procedures in financial investigations, behind the international regulatory practice.
Secondly,  the  lack  in  practice  of  sufficient  appropriate  guidelines  on  the  application  of  analytical
procedures for this purpose. The concepts of Forensic and fraud are complicated, certainly requiring
scientific research. Thus, the role and importance of Forensic in improving effectiveness of management
is  increasing. A  fortiori,  this  is  important  for  contemporary  companies  operating  in  conditions  of
constant growth.
LIST OF LITERATURE
1  The Global Economic Crime Survey (2014): / http://www.pwc.ru/.
2  Pankratova  L.A.  (2012).  Internal  audit  in  the  modern  system  of  management  of  the  organization  //
Auditor, № 6. P. 25–33 (In Russian).
3  Pimenov  N.A.  (2005).  Financial  Investigation:  Basic  Approaches  //  Vestnik  Finansovoi  Akademii.
№ 1(25). Moscow, Finance and statistics. P. 25–31. (In Russian).
4  Cicero (2014). Mark TullijCiceron (2014): / Ru.wikiquote.org/wiki/.
5  MSA 610 (2005). Consideration of work of internal audit. – M.: MCRCBU. P. 122 (In Russian).
6  Messod D. Beneish. The Detection of Earnings Manipulation, 55 FIN.ANALYSTS J. № 5 (Sept. / Oct.
1999).

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