Report: Location a Key Factor in Accounting Corrections

Accounting errors tucked away in footnotes may be less likely to draw the attention of auditors, says a new report authored by accounting professors from Cornell University and Bentley College. According to The Wall Street Journal, the report said that auditors are more likely to demand that clients correct errors and misstatements when the numbers in question for such things as stock options appear in the books, as opposed to footnotes. The study said that "information location influences reliability." As part of the research project, auditors were questioned as to how they how they would handle a client's underestimation of employee stock options with the client objecting to making an adjustment. One group was told that the client included the cost of stock options on its income statement; others were told that the cost was shown only in a footnote -- with the error being of identical size. The percentage of auditors demanding a correction when the mistake was on the books was far greater than when the error was recorded in a footnote.