Managers’ Use of an Omission Strategy to Perpetrate Fraud and Auditors’ Evaluations of the Resulting Misstatements

In this article, we provide a practitioner summary of our paper “Error or Fraud? The Effect of Omissions on Management’s Fraud Strategies and Auditors’ Evaluations of Identified Misstatements” (Hamilton and Smith 2021). In that study, we investigated (1) whether managers employ an “omission strategy” to reduce the perceived intentionality of their fraudulent misstatements and (2) whether auditors are prone to believe that such omissions are unintentional. We found that managers choose to perpetrate fraud by omitting transactions from the financial statements and by omitting critical information from supporting documents, rather than using more active forms of fraud (e.g., providing false information). We also found that auditors are less skeptical of misstatements when they involve omission, as opposed to more active forms of misrepresentation. Overall, our study identifies a concerning pattern, wherein the method of fraud chosen by managers—omission—is unlikely to be judged as intentional by auditors.