An Integrated Framework of Fraud Risk Assessment in ICOFR Implementation to Enhance Internal Controls Against Fraud Risks

Abstract

The increasing prevalence of financial statement manipulation, corruption, and asset misappropriation within the Indonesian business community has necessitated the implementation of Internal Control over Financial Reporting (ICOFR) as a critical mechanism for ensuring financial reliability and safeguarding organizational stability against fraudulent activities. This paper examines the integration of fraud risk assessment (FRA) into the ICOFR framework to strengthen internal controls against fraud risks. Using a qualitative descriptive case study approach at an Indonesian energy SOE subsidiary, this research provides implementation recommendations for organizations. The study utilized focus group discussions (FGDs) and interviews to gather insights from 18 selected participants involved in ICOFR execution, ensuring data triangulation through the review of historical audit and investigation reports. Findings suggest that ICOFR, while traditionally focused on operational risk, appears to be more effective when a fraud risk assessment framework is integrated into its design. This process involves identifying specific fraud schemes within business operations, aligning them with the existing Risk Control Matrix (RCM), and performing inherent and residual risk assessments. The study confirms that such integration is feasible and appears to be effective; by utilizing the COSO Framework as a theoretical anchor, the organization successfully lowered its residual fraud risk across all business segments. Notably, the assessment validated a reduction in risk scores across ten critical business processes, effectively transitioning the company from a state of general operational control to a specialized, fraud-resilient reporting environment.