Journal
ACCOUNTING REVIEW
Volume 96, Issue 1, Pages 225-249Publisher
AMER ACCOUNTING ASSOC
DOI: 10.2308/tar-2017-0355
Keywords
audit evidence; audit quality; fraud detection; misstatement; omission bias; omission strategy
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Funding
- EY Faculty Fellowships at University of Nevada, Las Vegas
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Managers tend to use omission rather than commission for fraudulent activities, while auditors are more likely to perceive misstatements caused by omission as unintentional and are less skeptical of them.
Using experiments with 58 corporate managers and 215 auditors, we examine whether managers attempt to reduce the perceived intentionality of their fraudulent misstatements by perpetrating fraud via omission, as opposed to a more active form of commission, and how auditors evaluate the resulting misstatements. We find that managers choose to omit a transaction from the financial statements rather than record a transaction inappropriately. They also choose to omit critical information from supporting documents rather than provide misleading information. However, auditors generally believe misstatements involving omissions are unintentional. Specifically, we find auditors are less skeptical of an omitted transaction compared to a misrecorded transaction. They are also less skeptical of a misstatement that results from management omitting information from a supporting document compared to misrepresenting information. Overall, our studies identify a method of fraud-omission-that managers are likely to use, but that auditors are unlikely to judge as being intentional.
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