A manager who cheats on financial statements will try to hide his fraud. If the auditor discovers the associated misstatement, what does the manager say to avoid being labeled a fraudster? The most likely scenario is that the manager will present the deviation as a mistake that was made inadvertently. And it is not unlikely that the auditor will subsequently agree with this statement, with all its consequences. So be careful.
But how does a manager get the auditor to do so? The answer is so obvious that it has been underestimated for a long time: the manager prefers to omit rather than to make up a number.
A manager’s error statement is more plausible if a transaction was ignored (an omission), compared to the incorrect entry of a transaction (an action). The auditor is, therefore, more likely to see an omission as an unintentional error than as a fraud.
But, statistics would support the idea that mistakes are much more common than actual fraud. Are these statistics wrong?
Recent research by Erin Hamilton and Jason Smith calls into question this very question. They investigate whether omissions of transactions are a fraud method that has successfully stayed under the (auditor’s) radar.
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