What is the difference between fraud and error in terms of an audit?

Answer 1

Proven Intent.
Fraud is intentional; error is accidental.

An auditor can discover items which are not correct, usually financial matters. The incorrect items may be matters of omission, or figures which are incorrect, or reports of things which did not occur at all.

As an example, consider a person's expense report. The person reporting might have omitted that he received cash from people sharing a meal, for their portion, and stated only that he paid the entire cost of the meal. That would be fraud, deliberately seeking reimbursement for an expenditure that was already reimbursed by others. Or a person may report that he spent $25.00 for a meal, when in fact the cost was only $15.00. (Both of these are called "padding" one's expense account.) That would also be fraud, the deliberate misrepresentation of an expenditure to get an unwarranted reimbursement.

The expense report might also include, say, claim for a taxi fare when in fact the individual walked, or took a bus, or rode in taxi with another person who actually paid the fare. That would be fraud, by claiming an expenditure which did not occur at all.

Suppose instead that the individual attached a credit card receipt to his expense form, showing a charge of $35.00; but instead he transposed the figure to $53.00 by making a typing error. Or, suppose he added a column of figures incorrectly, inadvertently increasing his total expenses by $20.00. Those are simple errors, which an auditor will readily spot, and make the appropriate changes.

In the first set of examples, the individual filing an expense report was intentionally trying to be reimbursed more than he was entitled to. That is fraud. When fraud is detected, the company may demand reimbursement, or may penalize the offender (e.g., by a temporary suspension), or may seek criminal prosecution of the offender (for very large amounts). Or, if a pattern of repeated though small frauds is discovered, the individual may be reprimanded, demoted, transferred, or even fired.

Some people show a pattern of repeated errors, either because they have some handicap (e.g., dyslexia) or are merely inattentive or sloppy. When an auditor discovers such a pattern, the individual may receive a remonstration

("be more careful"), or his reports may be more carefully scrutinized in the future. One who repeatedly makes errors, regardless of intent, may be transferred to another type of work.

Obviously, fraud and/or errors are not limited to expense reports. They may occur in any type of reporting, not just financial. For example, inventory reports, time reporting, attendance reporting, and so on.

For the company, either fraud or errors can be very costly. One of the main purposes of audits is to protect the company from such unwarranted costs, and to lead the company toward obtaining reimbursement when possible.

For the individual, errors are simply unwise. They can make a person more subject to scrutiny or rebuke, and can reduce the confidence that management has in that person or his work. Fraud, however, is not only unwise (and unethical), but is downright dangerous. It can lead to loss of position, loss of employment, and loss of freedom.

Errors and fraud are not limited to employees, of course. They can involve customers, or they can be exclusively done by customers (or other outsideers). For example, a clerk can make an error by giving a customer the wrong change; or the clerk can commit fraud, by intentionally giving a customer (his freind) too much change. Or a customer can attempt to return a product to a store different from where he bought it (an error) or he can switch price tags between two products (a fraud).

Auditing is very diffucult, because there are virutally infinite types of errors, and also virtually infinite types of frauds. Some can be quite subtle, and difficult to detect. And there are many "grey areas", where an incorrect statement may be either error or fraud. It may not be important to determine which, but it is always important that an auditor finds the mistake, and corrects it.