A recent study published in Contemporary Accounting Research has uncovered a simple yet effective method for auditors to ward off fraudulent financial reporting. The study, spearheaded by Chezham L. Sealy of the University of Alabama and Chad A. Simon from the Jon M. Huntsman School of Business at Utah State University suggests that the mere signals auditors emit about their audit approach can act as a deterrent to fraud.
According to the study, not only does this approach appear to reduce the likelihood of fraud occurring, but managers caught in the act expect to exert more effort in concealing their misdeeds when auditors are strategic. This implies the fraud is both less likely to occur in the first place and substantially more challenging to execute successfully. Simply put, a heads-up on the audit strategy seems to alter the entire game.
As obtained by USU Today, the research highlights that "when managers know auditors are thinking strategically, anticipating management’s incentives or even staying two steps ahead, they perceive a greater risk of being caught and are less likely to commit fraud." The undervalued power of reputational signals is at the core of these findings; auditors can effectively change management's risk calculation just by communicating their audit plan's strategic nature.
