An experimental investigation of the interaction effect of management training ground and reporting lines on internal auditors’ objectivity

• Date: 01 July 2018
• Published date: 01 July 2018
• Author: Paulette R. Tandy,William F. Messier,Florian Hoos,Jason L. Smith
• DOI: http://doi.org/10.1111/ijau.12110

ORIGINAL ARTICLE

An experimental investigation of the interaction effect of

management training ground and reporting lines on internal

auditors’objectivity

Florian Hoos

1

|William F. Messier Jr

2,3

|Jason L. Smith

2

|Paulette R. Tandy

2

1

Department of Accounting and Management

Control, HEC Paris, France

2

Department of Accounting, University of

Nevada, Las Vegas, NV, USA

3

Department of Accounting, Auditing and

Law, Norwegian School of Economics, Bergen,

Norway

Correspondence

Jason L. Smith, Department of Accounting,

University of Nevada, Las Vegas, 4505 South

Maryland Parkway, Box 456003, Las Vegas,

NV 89154‐6003, USA.

Email: jason.smith@unlv.edu

Seventy‐nine experienced internal auditors participated in an experiment investigating two

factors that may affect internal auditors’objectivity: (1) whether the internal audit function is

used as a management training ground, and (2) whether the internal auditors’reporting line is

to management or the audit committee. Participants completed a case wherein management

and the audit committee hold conflicting preferences regarding a major corporate investment

opportunity. Participants evaluated relevant business risks and made an overall recommendation

concerning the investment. The results include three important findings. First, we observe an

interaction effect between management training ground and reporting line. When the internal

audit function is not used as a management training ground, internal auditors’risks assessments

do not significantly differ by reporting line. However, when the internal audit function is used as a

management training ground, internal auditors’risk assessments align with management's

preferences when auditors report to senior management versus the audit committee. Second,

when the internal audit function is a management training ground, internal auditors provide more

favorable investment recommendations (i.e., consistent with management's preferences). Third,

internal auditors unexpectedly provided more favorable recommendations to the audit

committee than to management.

KEYWORDS

Internal Audit Function, InternalAuditors, Management Training Ground, objectivity

1|INTRODUCTION

Objective judgments by internal auditors represent a precondition for

the internal audit function's (IA Function's) contribution to high quality

corporate governance (Institute of Internal Auditors [IIA], 2017b;

Public Company Accounting Oversight Board, 2007). As internal

auditors expand their role in governance, risk management, and

management consulting activities, additional challenges arise regarding

their independence and objectivity.

1

In this study, we employ 79 expe-

rienced internal auditors from the gaming industry to experimentally

investigate the interaction of two factors that may affect internal

auditors’objectivity: (1) whether or not the IA Function is used as a

management training ground (MTG), and (2) the IA Function's

reporting line when performing consulting services (i.e., reports to

management or the audit committee). Companies make organizational

decisions about using the IA Function as an MTG (or not), and whether

internal auditors report to management and/or the audit committee

for a variety of tasks. Limited evidence from prior research suggests

that each of the two factors (MTG and reporting line) can indepen-

dently affect the IA Function's objectivity. Looking at the interaction

of both factors helps to clarify potentially unintended effects of the

design choices that companies make for the use of the IA Function.

Previous research on the use of the IA Function as an MTG shows

that this approach can lead external auditors to perceive internal

auditors as being less objective, resulting in less reliance on the IA

Function's work (Messier, Reynolds, Simon, & Wood, 2011).

2

Rose,

Rose, and Norman (2013) also examined this issue by manipulating

the use of the IA Function as an MTG and the level of control that

the board of directors has over the promotion of internal auditors to

senior management positions.

3

They find that internal auditors are less

objective when they expect to move into senior management

positions, relative to when the IA Function is not used as an MTG;

and adding power to the audit committee also decreases objectivity.

Christ, Masli, Sharp, and Wood (2015) conducted interviews with chief

Received: 3 October 2016 Revised: 21 September 2017 Accepted: 16 November 2017

DOI: 10.1111/ijau.12110

150 © 2018 John Wiley & Sons Ltd Int J Audit. 2018;22:150–163.wileyonlinelibrary.com/journal/ijau