Financial fraud from missing data may be more common than we think
New research suggests that how auditors see errors caused by missing financial information may be hiding the most preferred type of financial fraud
Although 2021 is not even half-way through, the year has already provided us with several high-profile corporate fraud stories to follow, many with the typical analysis of how auditors failed to spot the fraud when they had the chance. The headlines these stories generate can obscure the fact that most corporate fraud happens not in giant cases but in countless small events that occur across companies of all sizes. Time and again, an auditor finds something that is incorrect and must then decide if that error was a simple mistake or an intent to commit fraud. In this situation, auditing standards say that there is only one key difference between an unintended error and fraud: the intent of the person whose actions led to the mistake.
Of course, knowing a manager’s intent can be a challenging task, and all auditors will tell you that not all mistakes are created equal. Indeed, auditing tends to find two classes of errors: errors caused where someone records incorrect information and errors caused when someone leaves out correct information. Interestingly, new research from Erin L. Hamilton and Jason L. Smith shows that both managers and auditors share quite different views of these two types of errors.
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