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Corporate Culture, Internal Controls, and Fraud: Literature Review

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Accounting scandals and cases of fraud are becoming perpetual in nature and currently one of the greatest challenges in the modern business world. Fraud in the corporate realm may be characterized as the “intentional misstatements including omissions of amount or disclosures in financial statements, to deceive financial statement users” (Gullkvist and Jokipii, 2013, pg. 45) Despite intense efforts over the last few decades, to eradicate the misappropriation of assets, and fraudulent financial reporting, it appears that fraud in its various forms is a substantive matter increasing in both frequency and severity. (Whitehill, 2017) The impact of corporate culture on an organisation’s risk profile and occurrence of fraud has been evidenced over the last several decades by a range of corporate collapses. (Lukmanjaya, 2019) There are multitudinous studies regarding the occurrence of corporate fraud and its implications on companies. Yet the paradox of the relationship between these two factors still exists, that there is a greater occurrence of fraudulent behavior in larger more developed economies as illustrated in EY’s global fraud survey in 2016. (EY, 2016) This stems from the constant need for exceeding growth and profitability targets as economies are rapidly expanding. Thus, further research is required into the linkages of corporate culture and fraud in larger developed economies as tendencies to circumvent regulation have been unveiled throughout the decades. Consequently, the purpose of this study is to investigate the relationship between corporate culture and fraud, analyzing cases in Japan. The aim of the literature review is to analyze the underpinnings relevant of corporate culture and fraud. It will critically explore a plethora of journals and seminal papers in order to establish a profound understanding of existing relevant academic literature in this particular field. This will then be compared in light of the research question sustaining the path of this study.

Literature review

Prior to investigating the relationship between corporate culture and fraud in Japan, it is imperative to delve into the existing literature and fundamental themes in order to supplement this literature and guide the research. Themes that are commonly explored within this literature include corporate culture, internal controls, fraud as well as ethical culture.

Corporate culture, Internal Controls, and Fraud

One of the common themes emanating from the fraud literature pertains to the fact that corporate culture has considerable ramifications on fraudulent practices. Corporate culture, therefore, has over the years become a major discussion topic and increasingly recognized as a contributor to corporate misdeeds. Campbell & Göritz’ study clarifies corporate culture as “underlying assumptions that are employees’ shared beliefs of an organization and its environment and serve as a guide for the employees’ thoughts and behaviors”. (Campbell & Göritz, 2014) Their study is particularly centered on linkages between organizational culture in Germany, reflective of the more developed economies in the world. Prior research has suggested that corporations with a weak corporate culture and generally weaker internal controls are particularly susceptible to fraudulent activity and asset misappropriation, thereby sustaining the significance of corporate culture. (Zakaria, Nawawi and Puteh Salin, 2016)

Similarly, Lukmanjaya, (2019) explores the role of corporate culture in Australia and its contributing effect to occurrences of fraud and corruption. This theory has its limitations as the relationship between corporate culture and corporate misdeeds may be better understood by looking at the events leading to the misconduct and through a first-person perspective, interviewing the preparators. This establishes a more profound understanding of an organization’s culture and how it contributes to fraud.

Many studies, a fundamental one being Albrecht, (2015) have found that overriding existing internal controls creates the greatest opportunity for asset misappropriation and fraudulent behavior. Internal controls are a form of corporate governance. Corporate governance is related to culture as culture influences the structure as well as the execution of governance in organizations. (Lukmanjaya, 2019)

Organizations have different corporate cultures in which they deal with internal and external issues differently. One of the major discussions regarding corporate culture and reasons as to why it continues to be apparent in society is due to its difficulty to address in companies. Accordingly, Omar, Johari, and Hasnan, (2015) stress the magnitude of corporate culture stating although it is difficult to address, neglecting it may deepen the trajectory of the matter. Thus, it is vital for corporations to implement an effective ethical culture to mitigate the potential surge in financial statement fraud. Nonetheless, in a more recent survey with primary focus on fraud, PwC (2018) recommended organizations improve employees’ behavior through assessing the strengths and weaknesses of their culture as well as promoting an honest and open culture throughout the firm from top to bottom.

‘Tone from the top

‘Tone at the top’ is another requisite factor prevalent in many studies surrounding fraud that interlinks with the corporate culture. It is the manner in which the company’s board and senior leadership perceive their responsibilities in ‘setting the tone of an organization. The organization in turn influences the control consciousness of the employees as employees take their cue from the top management. (Soltani, 2014) (Biggerstaff, Cicero, and Puckett 2014)

Lail, MacGregor, Stuebs, and Thomasson (2015) discussed the role of a strong tone from the top in promoting a resilient anti-fraud corporate culture.

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Furthermore, Schwartz (2013) provides a differing approach in his study, arguing that three essential elements must be present to minimize unethical activities by maintaining an ethical corporate culture. The three elements entail; the existence of core ethical values embedded in its policies, process, and practices; the establishment of a formal ethics program; the continuous presence of ethical leadership. In addition to the three elements, it is crucial for a company to establish a transparent and honest culture from top management downwards.

Many well-established corporations have throughout the years explored this issue by conducting surveys. A global fraud corruption survey by EY in 2016 concluded that by increasing focus on individual accountability, company leadership needs to set the right tone from the top. It is only by taking such steps that boards will be able to mitigate the impact of fraud. (EY, 2016)

Ethical culture

There is an inherent link between both the corporate and the ethical culture of corporations in the occurrences of fraud. The concept of ethical climate is a multidimensional construct which concerns the ethical culture, tone at the top, and ethical leadership and has come up in common characteristics. Murphy et al. (2012) build on this as their study examined the role of ethical climate within organizations when fraud is present. Using the appropriate measures capturing motives, attitudes, and rationalization for fraud, they showed that ethical climate plays a significant role when fraud is present within an organization. It is associated with motives such as pressure from senior management and other rationalizations. Shin (2012) conducted firm-level analyses regarding the relationship between CEO leadership and ethical climate. The overall outcome of the study showed that CEOs’ self-rated leadership was positively associated with employees’ aggregated perceptions of the ethical climate of the firm. In another survey study, Kaptein (2010) raises the question of whether organizational ethics has improved in recent years. He claimed that the ethical culture of organizations improved in the period between 1999 and 2004. Between 2004 and 2008, however, unethical behavior and its consequences declined, and the scope of ethics programs expanded.

Studies argue that unethical corporate activity is highly considered as one of the most substantial issues faced by corporate boardrooms in terms of its difficulty and detrimental impact. As a result, Mark S. Schwartz, (2013) assumes in his study that once an ethical corporate culture is developed and sustained, the extent of crime, fraud, and misappropriation of assets will be minimized. (Schwartz, 2013)

On the other hand, Hofstede, (2010) provides a different perspective and argues in his study that there are two aspects that influence corporate culture, power distance, and uncertainty avoidance. His study on corporate culture within different countries unveiled that most companies in Asian countries have a high power distance and moderate in terms of uncertainty avoidance while most in European countries are vice versa.

A lack of consistent ethical and corporate culture fails any attempt to address the statute of corporate misdeeds in the business sphere. Ocansey and Ganu, (2017) in their article similarly contend that corporate culture plays a critical role in managing the risks of fraudulent acts. Particularly, when ethics is solidly implanted in corporate culture, and exemplified by top leadership, an organization is more likely to minimize internal scams.

It is widely acknowledged that most organizations that remain successful in the long run have leaders who include ethical values as part of the formal policies and cultures of their companies. (Daft, 2015)

A company that puts the focus on ethics, integrity, and accountability, is less subject to fraud risk, as internals have been educated on principles contained in the code of ethics. (Ocansey and Ganu, 2017) (Miller, 2016)

There have been many global surveys conducted by well-established organizations on the subject. A case in point is EY’s global fraud and corruption survey in 2016 which evidenced that a significant minority of executives continue to justify unethical acts. When presented with a series of options, more than one-third would be willing to justify inappropriate conduct in an economic downturn, while almost half would justify such conduct purely to meet financial targets. (EY, 2016).

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Corporate Culture, Internal Controls, and Fraud: Literature Review. (2022, September 27). Edubirdie. Retrieved January 31, 2023, from
“Corporate Culture, Internal Controls, and Fraud: Literature Review.” Edubirdie, 27 Sept. 2022,
Corporate Culture, Internal Controls, and Fraud: Literature Review. [online]. Available at: <> [Accessed 31 Jan. 2023].
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