Increasing Client Fraud Risk Disclosure with Minimization Techniques

Abstract

Auditing standards require auditors to conduct fraud inquiries as part of their risk assessment process. During fraud inquiries, auditors frequently ask client personnel directly about “fraud, alleged fraud, or suspected fraud,” using standard language taken from AS 2110. However, guidance from the Center for Audit Quality (CAQ) suggests that avoiding the word “fraud” results in greater disclosure regarding fraud risk. Although untested, the CAQ’s conjecture is supported by literature in psychology and criminology, which suggests that minimizing the seriousness of the offense (i.e., minimization) increases disclosure. This study examines two minimization strategies. The first involves replacing the word “fraud” with “questionable behavior.” The second employs social comparison to increase the perceived frequency that clients report misconduct to auditors. Experimental results suggest that either strategy increases client reporting intentions relative to a control condition using the language prescribed by AS 2110. Our findings may help auditors conduct more effective fraud inquiries.