Evaluating the Effectiveness of Information Systems Audits in Detecting and Preventing Financial Fraud in Banks

Posted: Oct 15, 2015

• Hamza Shahbaz Ahmad
  University of Missouri Kansas City
• Hassan Raza
  Lahore University of Management Sciences (LUMS)
• Mahnoor Rasheed
  Institute of Business Administration (IBA)

Abstract

This comprehensive study examines the effectiveness of Information Systems (IS) audits in detecting and preventing financial fraud within commercial banking institutions. Through analysis of 285 documented fraud cases across 42 U.S. banks from 2010-2014, coupled with survey data from 180 IS auditors, this research develops a predictive model for fraud detection effectiveness. The findings demonstrate that organizations with robust IS audit functions detect fraudulent activities 3.2 times faster and prevent 67% more potential fraud incidents compared to those with basic audit capabilities. The research introduces the Fraud Detection Capability Maturity Model (FDC-MM), which identifies five critical dimensions influencing audit effectiveness: data analytics integration, control environment assessment, forensic capabilities, organizational independence, and continuous monitoring. Statistical analysis reveals strong correlation (r=0.79, p<0.001) between FDC-MM scores and actual fraud prevention outcomes. The study provides empirical evidence supporting strategic investments in IS audit functions as a cost-effective fraud mitigation strategy, with an estimated return on investment of 4.3:1 for mature audit programs. These findings have significant implications for banking regulators, audit committees, and security professionals seeking to enhance financial system integrity.