Explaining Away Intentional Misstatements: Do Management-Provided Excuses Decrease Auditor Skepticism?

Abstract

SUMMARY When auditors identify a misstatement, they typically engage in client inquiry to understand the misstatement’s cause (e.g., whether due to error or fraud). If a misstatement was caused intentionally, client management may attempt to reduce auditor skepticism by making their behavior seem unintentional (an excuse) or appropriate (a justification). Using two experiments, we examine the type of explanation managers use to conceal their fraudulent intent and its effectiveness in reducing auditor skepticism. We predict and find managers use excuses (e.g., “I forgot”), rather than justifications, to “explain away” fraud caused by omission/inaction (omitting information from a source document) as opposed to active misrepresentation (providing misleading information). When these same excuses are provided to auditors, we find they have a skepticism-decreasing effect, particularly when used to explain misstatements resulting from omission. Together, our findings suggest managers’ ability to conceal fraud may persist even after the auditors have identified an intentional misstatement.