Assessment of investment fraud by internal audit: An empirical study on Turkish intermediary institutions

Financial markets are considered as the heart of the economy in developed and developing countries of today's complex and technology based world. Investment decisions are one of the major factors that define the outlook of the markets. Since financial sector is built on mutual trust, prevention of any disruptions in financial markets is paramount. The framework of this study defines the criteria for choosing the right investment firm according to the assessment of such companies by internal audit. This assessment is performed by evaluating compliance to Capital Markets Board (CMB) regulations and other related legislation. As the major actor in regulation of Turkish finance sector, CMB publishes and enforces compliance with its regulations that aim a secure investment environment and development of financial markets. Under this context, investment fraud in Turkish markets and sanctions imposed to Investment Firms (Banks and Brokerage Houses – previously defined as Intermediary Institutions) are investigated by different statistical tests and logistic regression analysis to explain the relationship between the causes related to sanctions imposed by CMB. While several aspects of Intermediary Institutions are evaluated in this study, fraud risk assessment of internal audit departments of such firms are not neglected. Since there isn't a definite template constructed for this purpose, existing templates of different sources (of regulatory authorities and related associations) are compared and a sector specific fraud risk assessment template in line with empirical analysis results mentioned above is constructed.