Home Accounting and Auditing How the evolution of language affects fraud risk

How the evolution of language affects fraud risk

Source: Journal of Accountancy. Authors: By D. Kip Holderness Jr., CPA, Ph.D.; Andi McNeal, CPA; Richard Riley, CPA/CFF, Ph.D.; and Joseph T. Wells, CPA

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Changes in the words we use and the ways we communicate may make it even trickier to ferret out financial malfeasance.

Near the end of a client engagement, Sally, the auditor, realizes she needs clarifying information about certain customer sales made on contract. She emails the client’s CFO, James, for additional details about the contract terms and underlying transactions. After two days, James has not responded, so Sally follows up with another email asking for the information. Shortly after, she receives a vague response laden with lots of doublespeak and technical jargon with which Sally is not familiar.

What Sally doesn’t realize is that James spent hours drafting and redrafting the reply to carefully word his response to answer enough of Sally’s questions while also not arousing her suspicions. In reality, the company had made verbal side agreements with the customer to modify the contractual terms, and the transactions were recognized prematurely on the books. However, in his response, James was able to obscure this fact and still provide enough information to appease Sally. By taking his time to reply, he also left Sally with less time to consider additional follow-up questions. James’s ploy worked; Sally documented James’s email response as a sufficient explanation and concluded the engagement with an unqualified opinion.

TECHNOLOGY’S EFFECT ON THE PACE OF CHANGE

Modern languages continually evolve. Some evolution comes from necessity. For example, we create words to describe new technology, such as texting or Wi-Fi. Other changes reflect evolving social or cultural norms. New generations devise new slang, and old phrasing fades away. Over time, these types of changes percolate into business communications. In many ways, the rise of technology has hastened this linguistic evolution, particularly in the business environment.

Evolutions in language and communication have several ramifications that affect the way auditors should approach their engagements and their consideration of fraud risk. While some research on related topics has been performed by academic scholars, much of how this evolution will affect fraud is still being examined. This article is informed by academic research conducted through the Institute for Fraud Prevention (jointly founded by the Association of Certified Fraud Examiners and the AICPA) and other organizations. Research insights from these and future studies can help inform the business community’s and auditing profession’s responses to change.

IT’S BOTH WHAT YOU SAY …

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