Misleading the Auditor with Fractional Truths

Abstract

This descriptive study examines the nature and rationalization of deception by client management when communicating with the external auditor. We placed experienced financial reporting professionals in the role of a CFO responding to an auditor inquiry. Participants chose one of four responses: the complete truth, clear mistruth, or one of two “fractional truths” (i.e., a response that is technically true but omits or is vague about relevant information). More than half of the participants chose a deceptive response, with the most common type of deceptive response chosen being a fractional truth. Many participants rationalized their deceptive responses as strictly responding to the question asked and not speculating about the unknown. Most participants who responded deceptively preferred email for communication, whereas those who responded truthfully preferred in-person communication. We discuss the implications of client deception for audit firms and offer suggestions for future research. Data Availability: Data are available from the authors upon request. JEL Classifications: M4.