How to Find The “Fractional Truth”

by FEI Weekly Staff

Auditors may need to change the way they search for fraud by understanding the motivation of fraud.

A new study says that the auditor/client relationship may need to adapt in order to focus on smaller “deceptions” that can snowball into larger financial failures.
The research, released last month, says that auditors need to focus on so-called “fractional truths” that can snowball and increase the likelihood of larger fraud, especially in a remote work world.
“Our study highlights the need for research on the “art” of questioning clients – including the word choice and the format of the question(s) the auditor asks to avoid technically true but incomplete or vague responses from the client,” the study says.
Fractional truths, as described by authors, are responses that either partially omit important details or are strategically crafted to provide what the study terms as "defensible deception."
“Fractional truths are more defensible than outright lies because they are technically true and, if challenged, one can claim, for example, that they did not realize that a more complete response was expected, nothing said was untrue, or the question was not sufficiently specific,” the report states.
This study was based on a hypothetical case setting using industry professionals involved in the audit process. Participants were asked to assume the role of CFO of the audit client and were told that a pending acquisition by another company was dependent “impressive numbers for asset and income accounts” while the company was experiencing inventory issues,
The study said that few participants opted for outright lies and a majority favored fractional truths to avoid the inventory discussion and put the best face forward for the pending deal.
In particular, 60 percent of participants responded to the auditor with one of the three deceptive messages, most often choosing a fractional truth that contained truthful information about the company but was either unrelated to the current inventory valuation issues or provided insufficient detail.
Moreover, the authors said that the participants knew what they were doing when skirting the truth.
“[Our] participants are experienced managers who routinely deal with auditors. Based on their responses to follow up questions, participants who chose deceptive responses were aware of the deception and the related implications.” they said.
According the the research, auditors need to refine their questioning techniques by understanding the common rationalizations for deception and can craft their inquiries more carefully to reduce the likelihood of being misled. For instance, direct questions are less likely to be met with omissions, and framing questions in a certain manner can influence the honesty of responses.
In addition, the the study added the preference among participants for communicating deceptive responses via email or video conference suggests a need for auditors to be wary of a quickly deveoping common practice.
“Given that remote communication is more likely in the business environment after the COVID-19 pandemic and employees’ preferences for working from home, our results suggest that auditors should be made aware of this additional risk,” the study says.