Role of Internal Auditors in Whistle Blowing Program to Reduce Corporate Fraud

According to Fraud Survey 2004 by KPMG Malaysia, 62 percent of respondents felt that fraud is a serious problem for Malaysian business. The survey finding also highlights the importance of implementing an independent communication channel for whistle blowing. Whistle blowing is one of the elements in corporate governance and it can play an important role in reducing fraud occurrence. Internal auditors can help Audit Committee in creating effective whistle blowing program that protect the employees and enable organisations to address fraud before they become public knowledge. This study examines the extent of whistle blowing complaints received by internal auditors based on survey responses from 213 Chief Audit Executive of Malaysian Public Listed Companies (PLC). Within the past two years, only 18 percent of Chief Audit Executive surveyed received genuine whistle-blowing complaints from internal whistle blower and only 14 percent of Chief Audit Executive surveyed received genuine whistle-blowing complaints from external whistle blower. The lack of whistle blowing program implementation in Malaysian companies is possibly due to absence of legislation in Malaysia that forces the establishment of whistle blowing program. Although the Securities Industry Act (1983) and Capital Market and Services Act 2007 (CMSA) provides the employees, independent auditors and key officers' protection when they whistle blow, the act does not compel a whistle blowing program. On the effectiveness of whistle blowing program, this study shows the CAE perception about the effectiveness of code of ethics in their organisation is negatively related to the fraud occurrence, that is the more the code is perceived as effective, the lesser fraud incidents will occur