The Effects of Serving Two Masters and Using the Internal Audit Function as a Management Training Ground on Internal Auditors' Objectivity

33 Pages Posted: 22 Nov 2013 Last revised: 13 Jul 2014

See all articles by Florian Hoos

Florian Hoos

HEC Paris - Accounting and Management Control Department

William F. Messier, Jr.

NHH Norwegian School of Economics

Jason L. Smith

University of Nevada, Las Vegas

Paulette Tandy

University of Nevada, Las Vegas - Department of Accounting

Date Written: July 2014

Abstract

In this study, seventy-nine experienced internal auditors from the gaming industry participated in an experiment designed to investigate two factors that may affect internal auditors' objectivity: (1) reporting to two masters (management or audit committee) who have conflicting preferences and (2) whether or not the internal audit function (IAF) is used as a management training ground (MTG). The participants completed a case – developed with assistance from industry chief audit executives – wherein they were asked to evaluate business risks associated with a major gaming investment and to make a final recommendation. The results include three important findings. First, the internal auditors' risk assessments reveal an interaction effect between masters’ preferences (MP) and MTG. When the IAF is not used as a MTG, internal auditors' risks assessments do not significantly differ when the IAF reports to senior management versus the audit committee. However, when the IAF is used as a MTG, internal auditors' risk assessments are significantly lower when the IAF reports to senior management versus the audit committee. Second, the internal auditors' recommendations show that they provided more favorable recommendations regarding the investment to the audit committee than to management. Third, when the IAF is used as a MTG, the internal auditors provide more favorable recommendations than when the IAF is not a MTG. Overall our results highlight the interplay between MP and whether or not the IAF is being used as a MTG on internal auditors’ objectivity.

Keywords: Internal auditors, internal audit function, objectivity, management training ground

JEL Classification: M40, M41

Suggested Citation

Hoos, Florian and Messier Jr, William F. and Smith, Jason L. and Tandy, Paulette, The Effects of Serving Two Masters and Using the Internal Audit Function as a Management Training Ground on Internal Auditors' Objectivity (July 2014). Available at SSRN: https://ssrn.com/abstract=2358149 or http://dx.doi.org/10.2139/ssrn.2358149

Florian Hoos

HEC Paris - Accounting and Management Control Department ( email )

Jouy-en-Josas Cedex
France

William F. Messier Jr (Contact Author)

NHH Norwegian School of Economics ( email )

Helleveien 30
N-5045 Bergen
Norway
678-386-8634 (Phone)

Jason L. Smith

University of Nevada, Las Vegas ( email )

4505 S. Maryland Parkway
Las Vegas, NV 89154
United States

Paulette Tandy

University of Nevada, Las Vegas - Department of Accounting ( email )

Lee Business School
4505 Maryland Parkway
Las Vegas, NV 89154-6003
United States

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