Opinion
The Patterns of Fraud and Internal Controls
By Professor Jun-Hwa Noh
(Chungnam National University, CPA, Washington State, USA)
1. From Management Fraud to Employee Fraud
The patterns of corporate fraud in Korea have changed significantly over time. In the past, management often orchestrated large-scale schemes, creating slush funds or engaging in unlawful practices. However, with changes in social awareness and regulatory reforms, such large-scale organizational fraud has relatively decreased.
Instead, cases of employees with authority siphoning off small amounts over long periods have increased. This shift highlights once again the importance of internal controls and presents new challenges for the corporate control environment.
2. Recent Patterns and Characteristics of Fraud
A study by the Korea Listed Companies Association (2025), which analyzed 300 court precedents and a survey of managers at listed companies over the past three years, demonstrates key characteristics of recent fraud. Over half of the perpetrators were employees within their first year of employment. While 86% were first-time offenders, a significant number reoffended after receiving leniency. Rather than single, large-scale incidents, fraud often took the form of repeated small embezzlements connected to personal needs—covering living expenses, paying off debts, or speculative investments such as gambling and stock trading. In other words, it has become common practice to embezzle small amounts over a long period to meet daily needs or financial burdens.
3. Pathways and Limitations in Uncovering Fraud
Fraud was primarily exposed through internal whistleblowing, followed by routine inspections and internal audits. However, it was rarely detected through external audits. This is because external audits are primarily focused on the fair presentation of financial statements, which has limitations in uncovering day-to-day fraudulent activities by individual employee. This reality highlights that the practical operation of the system, ICFR, is far more important than its mere existence.
4. Human Behavior and the Meaning of Internal Control
Behavioral economics explains the role of internal control through the metaphor of a lock: even a flimsy lock can deter theft simply by being locked. Internal control works in a similar way. It creates a small moment of “cognitive friction” when an employee is tempted to commit fraud, prompting them to reconsider their actions. For most otherwise honest employees, this serves as a safeguard against succumbing to temporary temptation. Internal controls also reinforce corporate culture and ethical climate, acting as a mechanism that strengthens integrity across the organization.
5. Conclusion
Today’s corporate fraud occurs not so much because controls do not exist, but because existing controls are not enforced effectively. This vulnerability is especially prominent in smaller companies. For sustain growth of the business, it is essential to move beyond declarative slogans toward genuinely functioning internal controls, supported by a strong organizational culture. Global leading companies maintain market leadership by advancing their internal control over financial reporting (ICFR) so that it functions as a practical risk management system. This direction is equally relevant to all companies and contributes broadly to enhancing the overall credibility of our economy.
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