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An examination of management's ability to bias the professional objectivity of internal auditors
Accounting. Organizations and Society, Vol. 14, No. 3, PP. 259--269, 1989. Printed in Great Britain
0361--3682/89 $3.00 +.00 ~ ) 1989 Pergamon Press plc
A N E X A M I N A T I O N O F M A N A G E M E N T ' S A B I L I T Y T O BIAS T H E P R O F E S S I O N A L OBJECTIVITY OF INTERNAL AUDITORS
ADRIAN HARRELL University o f South Carolina MARTIN TAYLOR University o f South Carolina
and EUGENE CHEWNING Arizona State University
Abstract Since internal auditors are subject to incentives and sanctions controlled by management, concern exists about their professional objectivity. A decision-making e x p e r i m e n t w h i c h employed 58 internal auditors from three banks as participants was performed to e x a m i n e the question: Can a firm's m a n a g e m e n t bias the professional objectivity o f the firm's internal auditors? The results indicate the internal control system evaluations reached by internal auditors w h o were not m e m b e r s o f the Institute of Internal Auditors (llA) were biased by knowledge of m a n a g e m e n t ' s desired evaluation outcomes. IIA members, however, resisted m a n a g e m e n r s efforts to bias their evaluations. This o u t c o m e suggests that llA m e m b e r s h i p may be an important determinant of internal auditors' professional objectivity, an issue w h i c h has not previously been identified in the accounting literature.
The professional objectivity of internal auditors is an important issue, for third parties often rely on the work of internal auditors. A firm's board of directors, for example, must often rely on the judgment of the firm's internal auditors as to the adequacy and effectiveness of the organization's system of internal control (Institute of Internal Auditors, 1981, p. 1). In addition, nearly all external auditors rely upon the work of internal auditors to some extent (Ward & Robertson, 1980). Since internal auditors are subject to incentives and sanctions controlled by their firm's management, concern exists about management's potential ability to bias their professional objectivity (American Institute of Certified Public Accountants [AICAP], 1986, AU 322.07). The Institute of Internal Auditors (IIA), the professional organization for internal auditors, recogonizes the importance of profes259
sional objectivity and conducts educational activities which emphasize this issue (IAA, 1981). Further, IIA professional standards require that members "... are not to subordinate their judgment on audit matters to that of others." (IIA, 1981, pp. 100-102). Members of the IIA may, therefore, resist any efforts by management to bias their professional objectivity. Accordingly, the research problem considered in this paper may be stated as follows: Can a firm's management bias the professional objectivity of the firm's internal auditors?
THEORETICAL BACKGROUND Internal auditors are members of the organizations which employ them and may, therefore, be influenced by incentives and sanctions con-
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trolled by their organization's management. A manager's ability to influence, persuade and motivate followers is thought to be derived from the p o w e r the manager is perceived to possess. French & Raven ( 1 9 6 0 ) identified five forms of managerial power: ( 1 ) coercive power, ( 2 ) reward power, ( 3 ) legitimate power, ( 4 ) expert power, and ( 5 ) referrent power, in their frequently referenced article. A manager's coercive p o w e r is based on fear, as w h e n a follower or subordinate believes that failing to comply with a manager's wishes might result in punishment or some other unattractive o u t c o m e at some later time. A manager's reward p o w e r is derived from the expectation a subordinate may receive rewards (e.g. praise, recognition or an increase in income) in return for compliance with a manager's wishes. The legitimate p o w e r of a manager is derived from the manager's position in the organizational hierarchy, e.g. the manager's position as an executive. A manager's expert p o w e r is derived from some special skill, expertise or knowledge which the manager is perceived to possess. A manager's referrent p o w e r is based on the manager's personal attractiveness or appeal. Admired managers are said to possess charisma, the ability to attract and inspire followers (French & Raven, 1960, pp. 6 0 7 623). In the related accounting literature (e.g. AICPA, 1986, AU 322.07; Brown, 1983; Gibbs & Schroeder, 1980; Schneider, 1985), it is emphasized that internal auditors should be insulated from the influence of their firm's management by providing the appropriate organizational status to the internal audit department. Such an approach aims at an organizational s t r u c t u r e that makes it inappropriate for the firm's management to exert legitimate p o w e r over the firm's internal auditors. Even if this approach is successful, however, it seems likely that a firm's management can still exert s o m e level of influence on the firm's internal auditors because the internal auditors perceive their firm's management to possess either coercive power, reward power, expert p o w e r or referrent power. Although internal auditors are m e m b e r s of the
organization by which they are employed, they must exhibit professional objectivity if their w o r k is to be relied upon by third parties outside their organization (Ward & Robertson, 1980; Brown, 1983; Gibbs & Schroeder, 1980; Schneider, 1985). The Institute of Internal Auditors (IIA) defines professional objectivity as % .. an independent mental attitude which internal auditors should maintain in performing audits" (IIA, 1981, pp. 100-102). Professional objectivity is associated with m e m b e r s h i p in a profession, which is frequently characterized by: ( 1 ) a belief in and acceptance of the goals and values of the profession, ( 2 ) a willingness to exert considerable effort on behalf of the profession, and ( 3 ) a desire to maintain m e m b e r s h i p in the profession (Aranya e t al., 1981; Sorensen & Sorensen, 1974). The Institute of Internal Auditors (IIA), the professional organization for internal auditors, was created in 1941 as an international Qrganization which emphasizes the d e v e l o p m e n t of internal auditing as a profession. Members of the IIA have agreed upon a code of ethics, a statement on internal auditors' responsibilities, a program of continuing education, a c o m m o n body of knowledge, a certification program and professional standards (IIA, 1981). Although internal auditors w h o are not IIA members may or may not perceive themselves to be m e m b e r s of a profession, it seems clear that internal auditors w h o are IIA m e m b e r s have, through their m e m b e r s h i p in this organization, indicated they consider themselves to be auditing professionals. A substantial b o d y of academic research has addressed the potential conflict that can exist b e t w e e n the requirements imposed by m e m b e r ship in an organization and the requirements imposed by m e m b e r s h i p in a profession (e.g. Shepard, 1961; Gouldner, 1958; Blau & Scott, 1962; Friedlander, 1971; Sorensen & Sorensen, 1974; Flango & Brnmbaugh, 1974; Aranya e t a l . , 1981; Norris & Niebuhr, 1984; Aranya & Ferris, 1984). Apparently, professionals w h o are members of commercial or industrial organizations are m o r e likely to experience conflict b e t w e e n the demands of their profession and the demands of their organization than are profes-
BIASINGOBJECTIVITYOF INTERNALAUDITORS sionals who are members of professional organizations. In a recent study of over 2000 CPAs and CAs, Aranya & Ferris ( 1 9 8 4 ) found that CPAs and CAs employed by commercial organizations perceived more conflict to exist between the demands of their organization and the demands of their profession than their contemporaries employed by public accounting firms. In explanation of these findings, Aranya & Ferris suggested that the goals of commercial or industrial organizations may often conflict with the professional requirements of CPAs and CAs, while the goals of public accounting firms probably coincide closely with the professional requirements of CPAs and CAs. With this in mind, one would expect the potential for conflict between the demands of internal auditors' organizations and the demands of their profession to be quite high, for internal auditors are usually members of commercial or industrial organizations. The potential conflict between the goals of their organizations and the demands of their profession can threaten the professional objectivity of internal auditors. Professional objectivity is of particular importance in situations which involve professional judgment. Professional judgment is involved when a trained individual makes decisions in situations where the "correct" decision either cannot be specified, i.e. where there is no normatively correct decision outcome, or where a decision is required currently and the "correct" decision o u t c o m e can't be determined until after the passage of time or the o c c u r r e n c e of subsequent events. ~One cannot, for example, determine the "correctness" of an internal auditor's evaluation of the adequacy of an intern~ control system at the time such a decision must be reached. Since the "correctness" of decisions which involve professional judgment is difficult to determine, great importance is placed on the objectivity of the decisionmaker. An objective decision-maker is one w h o
26 !
reaches decisions which are not biased in favor of the outcomes desired by a particular group or individual. Correspondingly, a decision-maker w h o reaches decisions which are biased in favor of the outcomes desired by some particular group or individual is not an objective decisionmaker. Relativly little accounting research has focused on management's ability to influence the professional decisions of members of the organization. In one of the few such studies, Hattell ( 1 9 7 7 ) examined h o w the management control decisions of middle managers can be influenced by senior management. His experiment involved 75 subjects who were randomly assigned to five groups, a control group and four experimental groups. The subjects completed a decision-making exercise which involved evaluating the performance of a number of hypothetical organizational subunits using five evaluation criteria. The evaluation policy preferred by senior management was initially communicated to the subjects in the four experimental groups by indicating the weights management desired to be placed upon the five evaluation criteria. The subjects in three of the four experimental groups were also provided with either consonant, dissonant or random outcome feedback. Senior management's influence was strongest in the group which received information indicating the weights senior management desired to be placed on the five evaluation criteria in conjunction with consonant feedback indicating the decision outcomes associated with using management's preferred weights. In Harrell's ( 1 9 7 7 ) experiment, it was appropriate for senior management to influence the management control decisions reached by the middle managers w h o served as subjects. The situation is, however, quite diferent when an organization's internal auditors, rather than the organization's middle managers, are involved. The
Most prior research of the professional judgment exercised by accounting professionals (e.g. Ashton, 1974; Ashton & Brown, 1980; Ashton & Kramer, 1980; Libby, 1981; Ashton, 1982) has focused on how external auditors integrate information cues into their professional decisions. Although this research employed a modification of Ashton's (1974) exercise to gather the data, the conceptual issue involved here, the professional objectivity of internal auditors, is fundamentallydifferent from the issues examined in prior studies of the professionaljudgment of external auditors.
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w o r k o f t h e firm's internal a u d i t o r s is often r e l i e d u p o n b y t h i r d parties, s u c h as t h e firm's b o a r d o f d i r e c t o r s (IIA, 1981, p. 1 ) a n d e x t e r n a l a u d i t o r s ( W a r d & R o b e r t s o n , 1980). A c c o r d i n g l y , t h e professional standards of the Institute of Internal A u d i t o r s r e q u i r e its m e m b e r s to r e a c h u n b i a s e d p r o f e s s i o n a l j u d g m e n t s (i.e. j u d g m e n t s that a r e n o t i n f l u e n c e d b y t h e i r firm's m a n a g e m e n t ) . Professional o b j e c t i v i t y is essential if internal aud i t o r s ' w o r k is to b e r e l i e d u p o n b y t h i r d p a r t i e s (AICPA, 1986, AU322.07; IAA, 1981, pp. 1 0 0 102). 2 T h e n e e d for p r o f e s s i o n a l o b j e c t i v i t y is especially g r e a t w h e n internal a u d i t o r s e v a l u a t e t h e a d e q u a c y o f t h e i r firm's internal c o n t r o l systems. T h e A m e r i c a n I n s t i t u t e o f Certified Public Acc o u n t a n t s ( A I C P A ) has r e c o g n i z e d t h e i m p o r t ant r o l e o f internal a u d i t o r s in e v a l u a t i n g t h e firm's s y s t e m o f internal c o n t r o l , n o t i n g that " . . . t h e y act as a separate, h i g h e r level o f c o n t r o l to d e t e r m i n e that the s y s t e m is f u n c t i o n i n g effectively" (AICPA, 1986, AU 322.03). If, therefore, internal a u d i t o r s ' internal c o n t r o l s y s t e m evaluations c a n b e significantly i n f l u e n c e d b y t h e i r firm's m a n a g e m e n t , t h e n internal a u d i t o r s lack p r o f e s s i o n a l objectivity, t h e " . . . i n d e p e n d e n t m e n t a l a t t i t u d e w h i c h internal a u d i t o r s s h o u l d m a i n t a i n in p e r f o r m i n g audits" (IIA, 1981, pp.
100-102). HYPOTHESES W i t h t h e d i s c u s s i o n p r e s e n t e d a b o v e in mind, it is p r o p o s e d that m a n a g e m e n t has t h e ability to i n f l u e n c e t h e i n t e r n a l c o n t r o l s y s t e m evaluations r e a c h e d b y t h e firm's i n t e r n a l auditors. Further, it is p r o p o s e d that, b e c a u s e o f t h e training a n d p r o f e s s i o n a l socialization p r o v i d e d b y this organization, i n t e r n a l a u d i t o r s w h o a r e members of the Institute of Internal Auditors ( I I A ) will resist efforts b y t h e i r firm's managem e n t to i n f l u e n c e t h e i r internal c o n t r o l s y s t e m
evaluations. T w o h y p o t h e s e s a r e e m p l o y e d to examine these proposals. HI: Internal auditors who have knowledge of management's desired internal control system evaluation outcomes will reach internal control system evaluations which are more in consonance with management's desired outcomes than those of their contemporaries without such knowledge. H2: Among those internal auditors who have knowledge of management's desired internal control system evaluation outcomes, internal auditors who are ILA members will reach internal control system evaluations which are less in agreement with management's preferred outcomes than those of non-members. Various c o m b i n a t i o n s o f s u p p o r t o r lack o f s u p p o r t for t h e t w o h y p o t h e s e s have different implications about the professional objectivity o f internal auditors. S u p p o r t for b o t h H1 a n d H 2 w o u l d i m p l y that, a l t h o u g h internal a u d i t o r s as a group may reach biased internal control system evaluations, t h o s e w h o are IIA m e m b e r s will resist m a n a g e m e n t ' s efforts t o bias t h e i r professional o b j e c t i v i t y . S u p p o r t for H1 w i t h o u t supp o r t for H 2 w o u l d i m p l y that internal a u d i t o r s as a g r o u p m a y r e a c h b i a s e d evaluations, w i t h n o d i s t i n c t i o n b e i n g a p p a r e n t b e t w e e n IIA m e m b e r s a n d IIA n o n - m e m b e r s . A lack o f s u p p o r t for H I c o m b i n e d w i t h s u p p o r t for H 2 w o u l d i m p l y that, a l t h o u g h b o t h IIA m e m b e r s a n d IIA nonm e m b e r s m a y r e a c h u n b i a s e d evaluations, IIA m e m b e r s a n d IIA n o n - m e m b e r s will differ in t h e e x t e n t to w h i c h t h e y c a n b e i n f l u e n c e d b y m a n a g e m e n t ' s a t t e m p t s to bias t h e i r p r o f e s s i o n o b j e c t i v i t y . A lack o f s u p p o r t for b o t h H1 a n d H 2 w o u l d i m p l y that, internal a u d i t o r s as a g r o u p m a y r e a c h u n b i a s e d evaluations, w i t h n o distinction b e i n g a p p a r e n t b e t w e e n IIA m e m b e r s and IIA n o n - m e m b e r s .
METHOD It w o u l d b e d e s i r a b l e to e x a m i n e internal
ZArelated body of research (e.g. Brown. 1983; Brown & Karma, 1985; Abdei-khalik et aL, 1983; Clark e t aL, 1979; Gibbs & Schroeder, 1980; Schneider, 1984, ! 985 ) examines how external auditors weight various factors when determining the level of reliance to place on the work of internal auditors. Since these studies focus upon external auditors' judgment processes, they are only indirectly related to the issues considered in this paper.
BIASINGOBJECTIVITYOF INTERNALAUDITORS a u d i t o r s ' p r o f e s s i o n a l o b j e c t i v i t y in a natural w o r k e n v i r o n m e n t . Unfortunately, t h e m e a s u r e ment of internal auditors' professional objectivity in a n a t u r a l w o r k s e t t i n g p o s e s substantial difficulties. For e x a m p l e , w o u l d a firm's managem e n t b e w i l l i n g to a c k n o w l e d g e an a t t e m p t to bias t h e p r o f e s s i o n a l o b j e c t i v i t y o f t h e firm's internal auditors? If s u c h an a t t e m p t w a s m a d e a n d was successful, w o u l d t h e firm's internal aud i t o r s b e w i l l i n g to a c k n o w l e d g e that t h e i r p r o fessional o b j e c t i v i t y h a d b e e n biased? As n o t e d by Swieringa & Weick (1982), the experimental a p p r o a c h aims at o v e r c o m i n g s u c h m e a s u r e m e n t difficulties, s i n c e an e x p e r i m e n t a t t e m p t s b y its v e r y n a t u r e to simplify t h e r e a l - w o r l d envir o n m e n t in o r d e r to focus u p o n p a r t i c u l a r relevant factors. T h e e x p e r i m e n t a l a p p r o a c h a l l o w s r e l e v a n t factors to b e m a n i p u l a t e d a c c o r d i n g to t h e r e s e a r c h e r s ' .plan, so c o m p a r i s o n s can b e m a d e w h i c h w o u l d n o t b e feasible in a naturalistic setting. T h e p r a c t i c a l difficulties a s s o c i a t e d with measuring internal auditors' professional o b j e c t i v i t y in a naturalistic s e t t i n g l e d to t h e use o f t h e e x p e r i m e n t a l a p p r o a c h for this study.
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1. Are the tasks of both timekeepingand payment of employees adequately separated from the task of payroll preparation? .................................................... No 2.
Are the tasks of both payroll preparation and payment of employees adequately separated from the task of payroll bank account reconcilliation? ............................................................. Yes
3.
Are the names on the payroll checked
periodicallyagainst the active employee file of the personnel department? .......................................Yes 4. Are formal procedures establishedfor changing names on the payroll, pay rates and deductions? .Yes 5. is the payroll audited periodicallyby internal auditors? .......................................................................... No 6. Was the internal control over payroll found to be satisfactory during the previous audit? ..................Yes
1
2
3
4
5
6
Circle the response which most closely indicates your evaluation of this payroll internal control subsystem. Fig. 1. Sample case from the decision-making exercise.
The decision-making exercise The decision-making exercise developed by Ashton (1974), with minor modifications which r e l a t e t h e d e c i s i o n - m a k i n g task to i n t e r n a l auditors instead of the external auditors Ashton u s e d as subjects, w a s e m p l o y e d to g a t h e r t h e data. This d e c i s i o n - m a k i n g e x e r c i s e focuses o n t h e e v a l u a t i o n o f p a y r o l l i n t e r n a l c o n t r o l subsystems, w h i c h was an a p p r o p r i a t e task for t h e s t u d y p a r t i c i p a n t s , w h o w e r e i n t e r n a l a u d i t o r s in banks w h i c h h a d s u b s t a n t i a l p a y r o l l activities. A 26 x I/2 factoral d e s i g n w a s i n c o r p o r a t e d into t h e p r e s e n t a t i o n o f t h e d e c i s i o n c u e i n f o r m a t i o n in t h e e x e r c i s e , so e a c h p a r t i c i p a n t r e a c h e d 32 different i n t e r n a l c o n t r o l s y s t e m e v a l u a t i o n s in c o m p l e t i n g t h e 32 cases in t h e e x e r c i s e . T h e cases w e r e p r e s e n t e d in r a n d o m o r d e r . Figure 1 p r e s e n t s an e x a m p l e c a s e from t h e e x e r c i s e .
The participants T h e 58 s t u d y p a r t i c i p a n t s w e r e all i n t e r n a l a u d i t o r s w h o w e r e e m p l o y e d b y t h r e e banks in a
m i d d l e - s i z e d s o u t h e a s t e r n city. T h i r t y - t w o part i c i p a n t s w e r e m a l e s a n d 26 w e r e females. T h e a v e r a g e p a r t i c i p a n t h a d w o r k e d for a b o u t s e v e n y e a r s as an i n t e r n a l auditor, r a n g i n g f r o m a m i n i m u m o f less than o n e y e a r to a m a x i m u m o f 28 years. In addition, t h e a v e r a g e p a r t i c i p a n t had w o r k e d for a b o u t s e v e n y e a r s for t h e c u r r e n t e m p l o y e r , r a n g i n g from a m i n i m u m o f less than o n e y e a r to a m a x i m u m o f 35 years. T h r e e part i c i p a n t s w e r e c e r t i f i e d p u b l i c a c c o u n t a n t s , 14 w e r e c e r t i f i e d i n t e r n a l a u d i t o r s a n d 35 w e r e members of the Institute of Internal Auditors (IIA). T h e d a t a w e r e c o l l e c t e d b y o n e o f t h e researchers who provided each participant with an e x e r c i s e a n d s u b s e q u e n t l y c o l l e c t e d t h e c o m p l e t e d e x e r c i s e s f r o m t h e participants. T h e e x e r cise i n s t r u c t i o n s a s k e d t h e s u b j e c t s n o t to discuss t h e e x e r c i s e w i t h o t h e r s until after t h e d a t e w h e n all d a t a w e r e c o l l e c t e d . Each c o m p l e t e d e x e r c i s e w a s s e a l e d in an a t t a c h e d e n v e l o p e to e n s u r e that p a r t i c i p a n t s ' r e s p o n s e s r e m a i n e d anonymous.
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E x p e r i m e n t a l design
The post-test-only control group experimental design, which is described in detail by Campbell & Stanley ( 1963, p. 8 and pp. 2 5 - 2 6 ) and Kerlinger (1973, pp. 330-332), was employed in the experiment. The internal auditors who participated in the study were randomly assigned to two groups, the control group ( n = 28) and the experimental group (n = 30). Since the participants were employed by three different banks, the employees of each bank were randomly assigned to each of the two groups in order to control for any possible organizational effects. As noted earlier, the data gathering instruments were personally distributed by one of the researchers to 67 individuals and 58 individuals voluntarily provided responses. The initial explanations, instructions, etc., provided to members of the two groups were exactly the same and the data were collected from both groups of participants at the same time. In order to simulate circumstances in which the firm's management made a deliberate attempt to bias the professional objectivity of the firm's internal auditors, the participants assigned to the experimental group were provided information which their contemporaries in the control group did not receive. The additional information included a statement that their firm's management desired that equal weights be placed upon each of the six factors used to evaluate internal control systems (see Fig. 1 ) and consonant o u t c o m e feedback indicating the evaluations that would result from employing these weights (see Fig. 2). The weight to be placed on these factors when evaluating an internal control system is clearly a matter of professional judgment (Ashton, 1974). Accordingly, management's attempt to specify, the weights to be placed on these factors therefore represents an effort by management to bias the professional objectivity of the firm's internal auditors.
RESULTS The
first hypothesis (H1)
predicts
that
I
1
2
3
O
5
6
Following management's preferred internal control system evaluation approach would result in the evaluation shown above for the preceding case. Fig.2. Exampleofoutcomefeedbackprovidedto participants.
internal auditors w h o have knowledge of management's desired internal control system evaluation outcomes will reach evaluations which are more in consonance with management's desired outcomes than those of their contemporaries without such knowledge. Within the context of the experiment, H1 implies the participants in the experimental group will reach evaluations which differ less from the outcomes preferred by management than those reached by their contemporaries in the control group. The second hypothesis (H2) predicts that, among internal auditors w h o have knowledge of management's desired internal control system evaluation outcomes, IIA members will reach evaluations which are less in agreement with management's desired outcomes than IIA non-members. H2 implies that the participants w h o are IIA members will reach evaluations which differ from the outcomes preferred by management than their contemporaries w h o are not IIA members. H2 applies only to individuals in the experimental group, for the subjects in the control group were not aware that management had specified preferred evaluation outcomes. Since each participant reached 32 internal control system evaluations, the repeated measures analysis of variance model was initially employed to examine the hypotheses. The results are summarized in Table 1. The significant MGMT main effect (F = 6.87,p -- 0.0088) in Table 1 implies that, as predicted by H1, the participants in the experimental group reached different internal control system evaluations than their contemporaries in the control group. The significant CASE main effect (F -- 113.72, p
BIASINGOBJECTIVITY OF INTERNALAUDITORS TABLE 1. Repeated measures analysis of variance results Source
d.f.
F
p
MGMT CASE MGMT x CASE IIA MGMT x IIA CASEx iIA MGMT x CASEx IIA
I 31 31 1 1 31 31
6.87 113.72 0.93 0.05 6.03 1.14 0.98
0.0088 0.0001 0.5783 0.8211 0.0142 0.2696 0.5056
The overall repeated measures analysis of variance model was significant (F = 28.61,p -- 0.000!, R-square = 0.68). MGMT -- the effect due to providing the participants in the experimental group with information about the decision policy preferred by the firm's management. Significant results imply the participants in the experimental group reached different internal control evaluations than those of the control group (HI). CASE -- the within-person effect due to manipulating the decision cue values (see Fig. 1) so that 32 different decision cases were provided to each participant. Significant results imply the individual participants reached different internal control system evaluations when presented with different CaSes.
IIA -- the effect due to membership in the Institute of Internal Auditors (IIA). MGMT x CASE = interaction effect of MGMT and CASE variables. MGMT × IIA = interaction effect of MGMTand IIAvariables. Significant results imply IIA members in the experimental group reached different internal control system evaluations than their contemporaries who were not IIAmembers. Since the IIA variable alone was not significant, significant results imply the evaluations of IIA members and IIA non-members differed in response to the MGMTvariable (H2). CASE x IIA = interaction effect of CASEand IIA variables. MGMT x CASE x IIA ----interaction effect of MGMT. CASE and IIA variables.
= 0 . 0 0 0 1 ) in Ta b l e 1 implies that, as has b e e n d e m o n s t r a t e d in a large b o d y o f p r i o r r e s e a r c h (e.g. Ashton, 1974; A s h t o n & B r o w n , 1980; A s h t o n & Kramer, 1980; Libby, 1981; Ashton, 1982), t h e m a n i p u l a t i o n o f t h e six d e c i s i o n c u e s ( s e e Fig. 1 ) r e s u l t e d in t h e p a r t i c i p a n t s r e a c h i n g different e v a l u a t i o n s for t h e 32 different cases w h i c h e a c h p a r t i c i p a n t c o m p l e t e d . T h e significant M G M T X IIA i n t e r a c t i o n t e r m ( F ---- 6 . 0 3 ; p = 0 . 0 1 4 2 ) in T a b l e 1 i m p l ie s that, as p r e d i c t e d b y H2, IIA m e m b e r s in t h e e x p e r i m e n t a l g r o u p r e a c h e d different e v a l u a t i o n s than IIA n o n - m e m ber's in t h e e x p e r i m e n t a l group. T h e s e results c l e a r l y p r o v i d e s u p p o r t for t h e d i f f e r e n c e s ira.
265
p l i e d by t h e h y p o t h e s e s . Next, individual differe n c e s c o r e s w e r e e m p l o y e d to e x a m i n e t h e dir e c t i o n a l asp ect s o f t h e t w o h y p o t h e s e s . Individual d i f f e r e n c e s c o r e s h a v e b e e n e m p l o y e d p r e v i o u s l y b y Barefield ( 1 9 7 2 ) E i n h o r n et al. (1977) and Polk ( 1 9 7 7 ) . Initially, t h e a b s o l u t e d i f f e r e n c e b e t w e e n t h e internal c o n t r o l s y s t e m e v a l u a t i o n e a c h individual actually r e a c h e d for e a c h o f t h e internal c o n t r o l syst e m cases ( s e e Fig. 1) and t h e e v a l u a t i o n e a c h s u b j e c t w o u l d h a v e r e a c h e d by p e r f e c t l y employing management's desired equal weights a p p r o a c h ( s e e Fig. 2 ) w as c o m p u t e d . N ex t , t h e s e a b s o l u t e d i f f e r e n c e values w e r e s u m m e d to o b t a i n a d i f f e r e n c e s c o r e for e a c h participant. T h e size o f e a c h p a r t i c i p a n t ' s d i f f e r e n c e s c o r e ind i c a t e s t h e e x t e n t to w h i c h t h e individual's internal c o n t r o l s y s t e m e v a l u a t i o n s differed f r o m t h e o u t c o m e s d e s i r e d by m a n a g e m e n t . A relatively large d i f f e r e n c e s c o r e i n d i cat es that t h e individual's actual e v a l u a t i o n s differed substantially f r o m t h e o u t c o m e s d e s i r e d by managem e n t . A r e l a t i v e l y small d i f f e r e n c e s c o r e indicat es that t h e individual's actual ev al u at i o n s diff e r e d o n l y slightly f r o m t h e o u t c o m e s d e s i r e d by management. As n o t e d earlier, H1 p r e d i c t s that t h e differe n c e s c o r e s o f t h e p a r t i c i p a n t s in t h e e x p e r i m e n tal g r o u p will b e s m a l l e r than t h o s e o f t h e i r cont e m p o r a r i e s in t h e c o n t r o l group. As i n d i c a t e d in T a b l e 2, t h e results o f t h e e x p e r i m e n t s u p p o r t this a s p e c t o f H 1 ( t = 2 . 8 5 , p = 0.003). Further, H 2 p r e d i c t s that, w i t h i n t h e e x p e r i m e n t a l group, t h e d i f f e r e n c e s c o r e s o f t h e participants w h o are TABLE2. Difference scores of the control group and experimental group participant Difference scores
X'(s.d.) Control group
18.1 (5.9) ( n = 28)
Experimentalgroup
11.6 (6.7) (n =
3o)
Hypothesized comparison: the difference scores of the par. tictpants in the experimental group were smaller than those of the participants in the experimental group (X = 11.6 vs .,~'= 18.1;t--- 2.8,p = 0.003).
266
ADRIANHARRELLet aL
IIA m e m b e r s will b e larger t h a n those of the participants in the e x p e r i m e n t a l g r o u p w h o are n o t IIA m e m b e r s . As i n d i c a t e d in Table 3, the empirical data s u p p o r t the d i r e c t i o n a l aspects of H 2 ( t -- 2 . 0 , p = 0.03). T h e results of the e x p e r i m e n t , therefore, i m p l y that, although i n t e r n a l auditors as a g r o u p m a y b e i n f l u e n c e d b y m a n a g e m e n t to reach biased i n t e r n a l c o n t r o l system evaluations, those w h o are IIA m e m b e r s will resist m a n a g e m e n t ' s efforts to bias their professional objectivity. TABLE3. Difference scores for IIA non-members and IIA members
Controlgroup Experimentalgroup
IIAnon-members )~(s.d)
IlAmembers J~(s.d)
20.2 (6.4)
16.7 (5.6)
(n= 11)
(n= 17)
8.2 (6.7) (n = 12)
13.2 (6.8) (n = 18)
Hypothesized comparison: (H2)The difference scores oflIA non-members (X -- 8.2) in the experimental group were smaller than those of iIA members (X = 13.2) in the experimental group (t -- 2.0,p -- 0.03). Post hoc comparisons [Scheffe's t.test (Hayes, 1973, pp. 605-607)]: In the control group, the difference scores of IIA nonmembers (~" -- 20.2) and IIA members (7~ = 16.7) did not differ (p > 0.05). The difference scores of IIA non-members in the experimental group (X" = 8.2) were smaller than those of IIA nonmembers in the control group ()~ = 20.2) (p < 0.05). The difference scores of IIAmembers in the experimental group (X -- 13.2) did not differ from those of IIAmembers in the control group ()~ -- 16.7) (p > 0.05). T h e results s u m m a r i z e d a b o v e suggest m a n a g e m e n t may have b e e n successful in biasing the professional o b j e c t i v i t y of the participants w h o w e r e IIA n o n - m e m b e r s , b u t may have b e e n u n s u c c e s s f u l in biasing the professional objectivity o f the participants w h o w e r e IIA m e m bers. ( T h e significant MGMT m a i n effect in the r e p e a t e d m e a s u r e s analysis o f variance in Table 1 m a y reflect m a n a g e m e n t ' s ability to i n f l u e n c e the evaluations of o n l y IIA n o n - m e m b e r s . ) With this in mind, s o m e additional analysis was perf o r m e d to d e t e r m i n e w h e t h e r the participants
w h o w e r e IIA m e m b e r s successfully resisted m a n a g e m e n t ' s efforts to bias their i n t e r n a l control system evaluations. Scheffe's t-test (Hayes, 1973, pp. 6 0 5 - - 6 0 7 ) was e m p l o y e d for these p o s t h o c c o m p a r i s o n s , 3 w h i c h are p r e s e n t e d in T a b l e 3. In the c o n t r o l group, the difference scores o f IIA n o n - m e m b e r s a n d IIA m e m b e r s did n o t differ significantly (Scheffe's t-test, p > 0.05). As n o t e d earlier in the e x a m i n a t i o n of H2, h o w e v e r , in the e x p e r i m e n t a l g r o u p the differe n c e scores o f IIA n o n - m e m b e r s w e r e significantly smaller than those of IIA m e m b e r s . In addition, the difference scores of IIA m e m b e r s in the c o n t r o l g r o u p did n o t differ from those o f IIA m e m b e r s in the e x p e r i m e n t a l g r o u p (Scheffe's ttest, p > 0.05). Further, the difference scores of IIA n o n - m e m b e r s in the e x p e r i m e n t a l g r o u p w e r e significantly smaller than those of IIA n o n m e m b e r s in the c o n t r o l g r o u p (Scheffe's t-test,p
< 0.05). T h e results of the additional analysis may b e s u m m a r i z e d as follows: IIA n o n - m e m b e r s in the e x p e r i m e n t a l g r o u p r e a c h e d evaluations w h i c h w e r e m o r e in a g r e e m e n t with m a n a g e m e n t ' s p r e f e r r e d o u t c o m e s than did their c o n t e m poraries in the c o n t r o l group; u n d e r the same c i r c u m s t a n c e s , IIA m e m b e r s in the e x p e r i m e n tal g r o u p r e a c h e d evaluations w h i c h w e r e n o m o r e in a g r e e m e n t with m a n a g e m e n t ' s preferred o u t c o m e s than w e r e those of their c o n t e m ° poraries in the c o n t r o l group. T h e evaluations r e a c h e d b y the IIA n o n - m e m b e r s were, therefore, i n f l u e n c e d b y k n o w l e d g e of m a n a g e m e n t ' s p r e f e r r e d o u t c o m e s w h i l e the evaluations r e a c h e d b y the IIA m e m b e r s w e r e n o t influe n c e d b y k n o w l e d g e of m a n a g e m e n t ' s preferred outcomes. Accordingly, the overall results of the experim e n t ( s e e Tables 1, 2 and 3) imply that managem e n t was able to bias the professional objectivity of the i n t e r n a l auditors w h o w e r e n o t IIA m e m b e r s . M a n a g e m e n t was not, h o w e v e r , able to bias the professional objectivity of the i n t e r n a l auditors w h o w e r e IIA m e m b e r s . Apparently, the IIA m e m b e r s successfully resisted m a n a g e m e n t ' s efforts to bias their i n t e r n a l con-
-"Theuse of Student's t-test, which is appropriate for apr/or/hypotheses, would not change the reported results.
BIASINGOBJECTIVITYOF INTERNALAUDITORS
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external auditors use to judge h o w m u c h reliance to place on internal auditors (e.g. Brown, 1983; Brown & Karan, 1985; Abdel-khalig etaL, 1983; Clark et al., 1979; Gibbs & Schroeder, 1980; Schneider, 1984, 1985). None of these SUMMARY AND DISCUSSION studies identified IIA m e m b e r s h i p as a factor to be considered w h e n judging internal autitors' Since internal auditors are subject to incen- professional objectivity. The results of this tives and sanctions controlled by management, study, however, imply that IIA m e m b e r s h i p may concern exists about management's potential be an important determinant of internal auability to bias their professional objectivity. To ditors' professional objectivity. Accordingly, the examine this issue, internal auditors from three extent to which a firm's internal auditors are acbanks participated in a decision-making experi- t i v e m e m b e r s o f t h e l l A should be considered by m e n t which examined two proposals. First, it third parties w h e n determining the level of rewas proposed that a firm's management has the liance to place on the w o r k of internal auditors. ability to influence the internal control system Some limitations and strengths of this study evaluations reached by the firm's internal should be mentioned. The study participants auditors. A second proposal was that, among w e r e selected based on their availability, so it is those internal auditors w h o had knowledge of not known whether they are representative of management's desired evaluation outcomes, in- the larger population to which it would be desirternal auditors w h o w e r e IIA m e m b e r s would re- able to generalize results. Some strengths of this sist management's efforts to influence their in- research include the use of real internal auditors ternal control system evaluations. as participants and the use of an experimental Both proposals w e r e supported by the results design that provides the high internal validity of the decision-making experiment. Accord- necessary for the examination of the relatively ingiy, the research findings imply that although abstract construct of internal auditors' profesmanagement has the ability to bias the profes- sional objectivity. sional objectivity of internal auditors w h o are Several issues for further research may be not IIA members, internal auditors w h o are IIA mentioned. It is not known h o w frequently in m e m b e r s will resist such efforts by their firm's practice a firm's management might attempt to management. This o u t c o m e suggests that the bias internal auditors' professional objectivity Institute of Internal Auditors has b e e n successful and this issue warrants further inquiry. Another in its efforts to educate its m e m b e r s on the issue w o r t h y of investigation is w h e t h e r efforts necessity for maintaining professional objec- by m a n a g e m e n t to bias internal auditors' profestivity. sional objectivity would result in "whistle blowThe findings have implications for third ing" behavior by some internal auditors. It is parties, such as external auditors, w h o would h o p e d this research will stimulate accounting rely upon the w o r k of internal auditors. A num- researchers to a further examination of these ber of studies have examined the factors which issues.
trol system evaluations towards the o u t c o m e s preferred by management.
BIBLIOGRAPHY Abdel-khalik, R., Snowball, D. & Wragge,J., The Effectsof Certain Internal Audit Variableso n of External Audit Progrmns, TheAccountin&Reuiew(April 1983) pp. 215-227.
the
Planning
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ADRIAN HARP,ELL et al. American Institute of Certified Public Accountants (AICPA), The Effect on an Internal Audit Function of the Scope of the Independent Auditors" Examination, AIC.PAProfessional Standards (AU Section 322) (AICPA, 1986). Arany-a, N. & Ferris, K., A Reexamination of Accountants' Organizational--Professional Conflict, The Accounting Rev/ew (January 1984) pp. 1-15. Aranya, N., Pollock, J. & Amernic, J., An Examination of Professional Commitment in Public Accounting, Accountin~ Organizations and Society ( 1981 ) pp. 271-280. Ashton, R., An Experimental Study of Internal Control Judgments Journal of Accounting Research ( Spring 1974) pp. 143-157. Ashton, R., Human Information Processing in Accounting (Sarasota, FL: American Accounting Association, 1982). Ashton, IZ & Brown, P., Descriptive Modeling of Auditor's Internal Control Judgments: A Replication and Extension,Journal of Accounting Research (Spring 1980 ) pp. 269-277. Ashton, R. & Kramer, S., Students as Surrogates in Behavioral Accounting Research,Journal of Accounting Research(Spring 1980)pp. 1-15. Barefield, R., The Effect of Aggregation on Decision Making Success: A Laboratory Study, Journal of Accounting Research (Autumn 1972) pp. 229-242. Brown, P., Independent Auditor Judgment in the Evaluation of Internal Audit Functions, Journal of Accounting Research (Autumn 1983) pp. 444---455. Blau, P. & Scott, W., Formal Organization (San Francisco: Chandler, 1962). Brown, P. & Karan, V., The Operational Nature of Auditing Standards: An Analysis of SAS 9, Auditing: A Journal of Ttmory and Practice (Fall 1986) pp. 134-146. Campbell, D. & Stanley, J., Expen'mental and QuaM.experimental Designs for Research (Chicago: Rand McNally, 1963). Clark, M., Gibbs, T. & Schrocder, R., Evaluating the Objectivity of Internal Audit Departments, Proceedings of the Southeast American Accounting Association Meeting (1979). Einhorn, H., Hogarth, R. & Klemper, E., Quality of Group Judgment, PsychologicalButiettn (January 1977) pp. 158-172. Fiango, V. & Brumbaugh, R., The Dimensionality of the Cosmopolitan-Local Construct, Administrative Science Quarterly (March 1974) pp. 198-210. French, J. & Raven, B., The Bases of Social Power, in Cartwright, D. and Zander, A. (eds)Group Dynamics pp. 607-623 (Evanston, IL: Row, Petersen, 1960). Friedlander, F., Performance and Orientation Structure of Research Scientists, Organizational Behavior andHuman Performance (March 1971 ) pp. 169-183. Gibbs, T. & Schroeder, R., External Auditor Criteria for Evaluating Internal Audit Departments, Thelnternal Auditor(December 1980) pp. 34-42. Gouldner, A., Cosmopolitans and Locals: Toward an Analysis of Latent Social Roles,AdministrativeScience Quarterly (December 1957) pp. 281-306, and (March 1958) pp. 444---480. Harrell, A., The Decision-making Behavior of Air Force Officers and the Management Control Process, The Accounting Review (October 1977). Hayes, W., Statistics for the Social Sciences ( New York: Holt, Rinehart & Winston, 1973 ). Institute of Internal Auditors, Standards of the Profession oflnternal Auditing ( Altamonte Springs, FL:The Institute of Internal Auditors, 1981 ). Kerlinger, F., Foundations of Behavioral Research (New York: Holt, Rinehart & Winston, 1973). Libby, IC,Accounting and Human Information Processing: Theory and Applications (Englewood Cliffs, NJ: Prentice-Hall, 1981 ). Norris, D. & Niebuhr, R., Professionalism, Organizational Commitment and Job Satisfaction in an Accounting Organization, Accountin~ Organizations and Society (1983) pp. 49-59. Polk, S., A Social Learning Theory Investigation into the Reciprocal Influence Between Leaders and Followers, unpublished doctoral dissertation, University of Nebraska,, Lincoln, Nebraska (1979). Schneider, A., Modeling External Auditors' Evaluations of Internal Auditoring,Journal of Accounting Research (Autumn 1984 ) pp. 657-678. Schneider, A., The Reliance of External Auditors on the Internal Audit Function,Journal of Accounting Research (Autumn 1985) pp. 911-919. Shepard, C., Orientations of Scientists and Engineers, Pacific Sociological Review ( Fall 1961 ) pp. 79-83. Sorensen, J. & Sorensen, T., The Conflict of Professionals in Bureaucratic Organizations, Administrative Science Quarterly (March 1974) pp. 98-106.
BIASING OBJECTMTY OF INTERNALAUDITORS Swieringa, R. & Weick, IC, An Assessmentof Laboratory Experiments in AccountingJournal of Accounting Researh (Supplement 1982) pp. 56-101. Uecker, W., Brief, A. & Kinney, W., Perception of the Internal and External Auditor as a Deterrent to Corporate Irregularities, TheAcccountingReuiew (,July 1981 ) pp. 465--478.
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0361--3682/89 $3.00 +.00 ~ ) 1989 Pergamon Press plc
A N E X A M I N A T I O N O F M A N A G E M E N T ' S A B I L I T Y T O BIAS T H E P R O F E S S I O N A L OBJECTIVITY OF INTERNAL AUDITORS
ADRIAN HARRELL University o f South Carolina MARTIN TAYLOR University o f South Carolina
and EUGENE CHEWNING Arizona State University
Abstract Since internal auditors are subject to incentives and sanctions controlled by management, concern exists about their professional objectivity. A decision-making e x p e r i m e n t w h i c h employed 58 internal auditors from three banks as participants was performed to e x a m i n e the question: Can a firm's m a n a g e m e n t bias the professional objectivity o f the firm's internal auditors? The results indicate the internal control system evaluations reached by internal auditors w h o were not m e m b e r s o f the Institute of Internal Auditors (llA) were biased by knowledge of m a n a g e m e n t ' s desired evaluation outcomes. IIA members, however, resisted m a n a g e m e n r s efforts to bias their evaluations. This o u t c o m e suggests that llA m e m b e r s h i p may be an important determinant of internal auditors' professional objectivity, an issue w h i c h has not previously been identified in the accounting literature.
The professional objectivity of internal auditors is an important issue, for third parties often rely on the work of internal auditors. A firm's board of directors, for example, must often rely on the judgment of the firm's internal auditors as to the adequacy and effectiveness of the organization's system of internal control (Institute of Internal Auditors, 1981, p. 1). In addition, nearly all external auditors rely upon the work of internal auditors to some extent (Ward & Robertson, 1980). Since internal auditors are subject to incentives and sanctions controlled by their firm's management, concern exists about management's potential ability to bias their professional objectivity (American Institute of Certified Public Accountants [AICAP], 1986, AU 322.07). The Institute of Internal Auditors (IIA), the professional organization for internal auditors, recogonizes the importance of profes259
sional objectivity and conducts educational activities which emphasize this issue (IAA, 1981). Further, IIA professional standards require that members "... are not to subordinate their judgment on audit matters to that of others." (IIA, 1981, pp. 100-102). Members of the IIA may, therefore, resist any efforts by management to bias their professional objectivity. Accordingly, the research problem considered in this paper may be stated as follows: Can a firm's management bias the professional objectivity of the firm's internal auditors?
THEORETICAL BACKGROUND Internal auditors are members of the organizations which employ them and may, therefore, be influenced by incentives and sanctions con-
260
ADRIAN HARRELL et al.
trolled by their organization's management. A manager's ability to influence, persuade and motivate followers is thought to be derived from the p o w e r the manager is perceived to possess. French & Raven ( 1 9 6 0 ) identified five forms of managerial power: ( 1 ) coercive power, ( 2 ) reward power, ( 3 ) legitimate power, ( 4 ) expert power, and ( 5 ) referrent power, in their frequently referenced article. A manager's coercive p o w e r is based on fear, as w h e n a follower or subordinate believes that failing to comply with a manager's wishes might result in punishment or some other unattractive o u t c o m e at some later time. A manager's reward p o w e r is derived from the expectation a subordinate may receive rewards (e.g. praise, recognition or an increase in income) in return for compliance with a manager's wishes. The legitimate p o w e r of a manager is derived from the manager's position in the organizational hierarchy, e.g. the manager's position as an executive. A manager's expert p o w e r is derived from some special skill, expertise or knowledge which the manager is perceived to possess. A manager's referrent p o w e r is based on the manager's personal attractiveness or appeal. Admired managers are said to possess charisma, the ability to attract and inspire followers (French & Raven, 1960, pp. 6 0 7 623). In the related accounting literature (e.g. AICPA, 1986, AU 322.07; Brown, 1983; Gibbs & Schroeder, 1980; Schneider, 1985), it is emphasized that internal auditors should be insulated from the influence of their firm's management by providing the appropriate organizational status to the internal audit department. Such an approach aims at an organizational s t r u c t u r e that makes it inappropriate for the firm's management to exert legitimate p o w e r over the firm's internal auditors. Even if this approach is successful, however, it seems likely that a firm's management can still exert s o m e level of influence on the firm's internal auditors because the internal auditors perceive their firm's management to possess either coercive power, reward power, expert p o w e r or referrent power. Although internal auditors are m e m b e r s of the
organization by which they are employed, they must exhibit professional objectivity if their w o r k is to be relied upon by third parties outside their organization (Ward & Robertson, 1980; Brown, 1983; Gibbs & Schroeder, 1980; Schneider, 1985). The Institute of Internal Auditors (IIA) defines professional objectivity as % .. an independent mental attitude which internal auditors should maintain in performing audits" (IIA, 1981, pp. 100-102). Professional objectivity is associated with m e m b e r s h i p in a profession, which is frequently characterized by: ( 1 ) a belief in and acceptance of the goals and values of the profession, ( 2 ) a willingness to exert considerable effort on behalf of the profession, and ( 3 ) a desire to maintain m e m b e r s h i p in the profession (Aranya e t al., 1981; Sorensen & Sorensen, 1974). The Institute of Internal Auditors (IIA), the professional organization for internal auditors, was created in 1941 as an international Qrganization which emphasizes the d e v e l o p m e n t of internal auditing as a profession. Members of the IIA have agreed upon a code of ethics, a statement on internal auditors' responsibilities, a program of continuing education, a c o m m o n body of knowledge, a certification program and professional standards (IIA, 1981). Although internal auditors w h o are not IIA members may or may not perceive themselves to be m e m b e r s of a profession, it seems clear that internal auditors w h o are IIA m e m b e r s have, through their m e m b e r s h i p in this organization, indicated they consider themselves to be auditing professionals. A substantial b o d y of academic research has addressed the potential conflict that can exist b e t w e e n the requirements imposed by m e m b e r ship in an organization and the requirements imposed by m e m b e r s h i p in a profession (e.g. Shepard, 1961; Gouldner, 1958; Blau & Scott, 1962; Friedlander, 1971; Sorensen & Sorensen, 1974; Flango & Brnmbaugh, 1974; Aranya e t a l . , 1981; Norris & Niebuhr, 1984; Aranya & Ferris, 1984). Apparently, professionals w h o are members of commercial or industrial organizations are m o r e likely to experience conflict b e t w e e n the demands of their profession and the demands of their organization than are profes-
BIASINGOBJECTIVITYOF INTERNALAUDITORS sionals who are members of professional organizations. In a recent study of over 2000 CPAs and CAs, Aranya & Ferris ( 1 9 8 4 ) found that CPAs and CAs employed by commercial organizations perceived more conflict to exist between the demands of their organization and the demands of their profession than their contemporaries employed by public accounting firms. In explanation of these findings, Aranya & Ferris suggested that the goals of commercial or industrial organizations may often conflict with the professional requirements of CPAs and CAs, while the goals of public accounting firms probably coincide closely with the professional requirements of CPAs and CAs. With this in mind, one would expect the potential for conflict between the demands of internal auditors' organizations and the demands of their profession to be quite high, for internal auditors are usually members of commercial or industrial organizations. The potential conflict between the goals of their organizations and the demands of their profession can threaten the professional objectivity of internal auditors. Professional objectivity is of particular importance in situations which involve professional judgment. Professional judgment is involved when a trained individual makes decisions in situations where the "correct" decision either cannot be specified, i.e. where there is no normatively correct decision outcome, or where a decision is required currently and the "correct" decision o u t c o m e can't be determined until after the passage of time or the o c c u r r e n c e of subsequent events. ~One cannot, for example, determine the "correctness" of an internal auditor's evaluation of the adequacy of an intern~ control system at the time such a decision must be reached. Since the "correctness" of decisions which involve professional judgment is difficult to determine, great importance is placed on the objectivity of the decisionmaker. An objective decision-maker is one w h o
26 !
reaches decisions which are not biased in favor of the outcomes desired by a particular group or individual. Correspondingly, a decision-maker w h o reaches decisions which are biased in favor of the outcomes desired by some particular group or individual is not an objective decisionmaker. Relativly little accounting research has focused on management's ability to influence the professional decisions of members of the organization. In one of the few such studies, Hattell ( 1 9 7 7 ) examined h o w the management control decisions of middle managers can be influenced by senior management. His experiment involved 75 subjects who were randomly assigned to five groups, a control group and four experimental groups. The subjects completed a decision-making exercise which involved evaluating the performance of a number of hypothetical organizational subunits using five evaluation criteria. The evaluation policy preferred by senior management was initially communicated to the subjects in the four experimental groups by indicating the weights management desired to be placed upon the five evaluation criteria. The subjects in three of the four experimental groups were also provided with either consonant, dissonant or random outcome feedback. Senior management's influence was strongest in the group which received information indicating the weights senior management desired to be placed on the five evaluation criteria in conjunction with consonant feedback indicating the decision outcomes associated with using management's preferred weights. In Harrell's ( 1 9 7 7 ) experiment, it was appropriate for senior management to influence the management control decisions reached by the middle managers w h o served as subjects. The situation is, however, quite diferent when an organization's internal auditors, rather than the organization's middle managers, are involved. The
Most prior research of the professional judgment exercised by accounting professionals (e.g. Ashton, 1974; Ashton & Brown, 1980; Ashton & Kramer, 1980; Libby, 1981; Ashton, 1982) has focused on how external auditors integrate information cues into their professional decisions. Although this research employed a modification of Ashton's (1974) exercise to gather the data, the conceptual issue involved here, the professional objectivity of internal auditors, is fundamentallydifferent from the issues examined in prior studies of the professionaljudgment of external auditors.
262
ADRIANHARRELLet al.
w o r k o f t h e firm's internal a u d i t o r s is often r e l i e d u p o n b y t h i r d parties, s u c h as t h e firm's b o a r d o f d i r e c t o r s (IIA, 1981, p. 1 ) a n d e x t e r n a l a u d i t o r s ( W a r d & R o b e r t s o n , 1980). A c c o r d i n g l y , t h e professional standards of the Institute of Internal A u d i t o r s r e q u i r e its m e m b e r s to r e a c h u n b i a s e d p r o f e s s i o n a l j u d g m e n t s (i.e. j u d g m e n t s that a r e n o t i n f l u e n c e d b y t h e i r firm's m a n a g e m e n t ) . Professional o b j e c t i v i t y is essential if internal aud i t o r s ' w o r k is to b e r e l i e d u p o n b y t h i r d p a r t i e s (AICPA, 1986, AU322.07; IAA, 1981, pp. 1 0 0 102). 2 T h e n e e d for p r o f e s s i o n a l o b j e c t i v i t y is especially g r e a t w h e n internal a u d i t o r s e v a l u a t e t h e a d e q u a c y o f t h e i r firm's internal c o n t r o l systems. T h e A m e r i c a n I n s t i t u t e o f Certified Public Acc o u n t a n t s ( A I C P A ) has r e c o g n i z e d t h e i m p o r t ant r o l e o f internal a u d i t o r s in e v a l u a t i n g t h e firm's s y s t e m o f internal c o n t r o l , n o t i n g that " . . . t h e y act as a separate, h i g h e r level o f c o n t r o l to d e t e r m i n e that the s y s t e m is f u n c t i o n i n g effectively" (AICPA, 1986, AU 322.03). If, therefore, internal a u d i t o r s ' internal c o n t r o l s y s t e m evaluations c a n b e significantly i n f l u e n c e d b y t h e i r firm's m a n a g e m e n t , t h e n internal a u d i t o r s lack p r o f e s s i o n a l objectivity, t h e " . . . i n d e p e n d e n t m e n t a l a t t i t u d e w h i c h internal a u d i t o r s s h o u l d m a i n t a i n in p e r f o r m i n g audits" (IIA, 1981, pp.
100-102). HYPOTHESES W i t h t h e d i s c u s s i o n p r e s e n t e d a b o v e in mind, it is p r o p o s e d that m a n a g e m e n t has t h e ability to i n f l u e n c e t h e i n t e r n a l c o n t r o l s y s t e m evaluations r e a c h e d b y t h e firm's i n t e r n a l auditors. Further, it is p r o p o s e d that, b e c a u s e o f t h e training a n d p r o f e s s i o n a l socialization p r o v i d e d b y this organization, i n t e r n a l a u d i t o r s w h o a r e members of the Institute of Internal Auditors ( I I A ) will resist efforts b y t h e i r firm's managem e n t to i n f l u e n c e t h e i r internal c o n t r o l s y s t e m
evaluations. T w o h y p o t h e s e s a r e e m p l o y e d to examine these proposals. HI: Internal auditors who have knowledge of management's desired internal control system evaluation outcomes will reach internal control system evaluations which are more in consonance with management's desired outcomes than those of their contemporaries without such knowledge. H2: Among those internal auditors who have knowledge of management's desired internal control system evaluation outcomes, internal auditors who are ILA members will reach internal control system evaluations which are less in agreement with management's preferred outcomes than those of non-members. Various c o m b i n a t i o n s o f s u p p o r t o r lack o f s u p p o r t for t h e t w o h y p o t h e s e s have different implications about the professional objectivity o f internal auditors. S u p p o r t for b o t h H1 a n d H 2 w o u l d i m p l y that, a l t h o u g h internal a u d i t o r s as a group may reach biased internal control system evaluations, t h o s e w h o are IIA m e m b e r s will resist m a n a g e m e n t ' s efforts t o bias t h e i r professional o b j e c t i v i t y . S u p p o r t for H1 w i t h o u t supp o r t for H 2 w o u l d i m p l y that internal a u d i t o r s as a g r o u p m a y r e a c h b i a s e d evaluations, w i t h n o d i s t i n c t i o n b e i n g a p p a r e n t b e t w e e n IIA m e m b e r s a n d IIA n o n - m e m b e r s . A lack o f s u p p o r t for H I c o m b i n e d w i t h s u p p o r t for H 2 w o u l d i m p l y that, a l t h o u g h b o t h IIA m e m b e r s a n d IIA nonm e m b e r s m a y r e a c h u n b i a s e d evaluations, IIA m e m b e r s a n d IIA n o n - m e m b e r s will differ in t h e e x t e n t to w h i c h t h e y c a n b e i n f l u e n c e d b y m a n a g e m e n t ' s a t t e m p t s to bias t h e i r p r o f e s s i o n o b j e c t i v i t y . A lack o f s u p p o r t for b o t h H1 a n d H 2 w o u l d i m p l y that, internal a u d i t o r s as a g r o u p m a y r e a c h u n b i a s e d evaluations, w i t h n o distinction b e i n g a p p a r e n t b e t w e e n IIA m e m b e r s and IIA n o n - m e m b e r s .
METHOD It w o u l d b e d e s i r a b l e to e x a m i n e internal
ZArelated body of research (e.g. Brown. 1983; Brown & Karma, 1985; Abdei-khalik et aL, 1983; Clark e t aL, 1979; Gibbs & Schroeder, 1980; Schneider, 1984, ! 985 ) examines how external auditors weight various factors when determining the level of reliance to place on the work of internal auditors. Since these studies focus upon external auditors' judgment processes, they are only indirectly related to the issues considered in this paper.
BIASINGOBJECTIVITYOF INTERNALAUDITORS a u d i t o r s ' p r o f e s s i o n a l o b j e c t i v i t y in a natural w o r k e n v i r o n m e n t . Unfortunately, t h e m e a s u r e ment of internal auditors' professional objectivity in a n a t u r a l w o r k s e t t i n g p o s e s substantial difficulties. For e x a m p l e , w o u l d a firm's managem e n t b e w i l l i n g to a c k n o w l e d g e an a t t e m p t to bias t h e p r o f e s s i o n a l o b j e c t i v i t y o f t h e firm's internal auditors? If s u c h an a t t e m p t w a s m a d e a n d was successful, w o u l d t h e firm's internal aud i t o r s b e w i l l i n g to a c k n o w l e d g e that t h e i r p r o fessional o b j e c t i v i t y h a d b e e n biased? As n o t e d by Swieringa & Weick (1982), the experimental a p p r o a c h aims at o v e r c o m i n g s u c h m e a s u r e m e n t difficulties, s i n c e an e x p e r i m e n t a t t e m p t s b y its v e r y n a t u r e to simplify t h e r e a l - w o r l d envir o n m e n t in o r d e r to focus u p o n p a r t i c u l a r relevant factors. T h e e x p e r i m e n t a l a p p r o a c h a l l o w s r e l e v a n t factors to b e m a n i p u l a t e d a c c o r d i n g to t h e r e s e a r c h e r s ' .plan, so c o m p a r i s o n s can b e m a d e w h i c h w o u l d n o t b e feasible in a naturalistic setting. T h e p r a c t i c a l difficulties a s s o c i a t e d with measuring internal auditors' professional o b j e c t i v i t y in a naturalistic s e t t i n g l e d to t h e use o f t h e e x p e r i m e n t a l a p p r o a c h for this study.
263
1. Are the tasks of both timekeepingand payment of employees adequately separated from the task of payroll preparation? .................................................... No 2.
Are the tasks of both payroll preparation and payment of employees adequately separated from the task of payroll bank account reconcilliation? ............................................................. Yes
3.
Are the names on the payroll checked
periodicallyagainst the active employee file of the personnel department? .......................................Yes 4. Are formal procedures establishedfor changing names on the payroll, pay rates and deductions? .Yes 5. is the payroll audited periodicallyby internal auditors? .......................................................................... No 6. Was the internal control over payroll found to be satisfactory during the previous audit? ..................Yes
1
2
3
4
5
6
Circle the response which most closely indicates your evaluation of this payroll internal control subsystem. Fig. 1. Sample case from the decision-making exercise.
The decision-making exercise The decision-making exercise developed by Ashton (1974), with minor modifications which r e l a t e t h e d e c i s i o n - m a k i n g task to i n t e r n a l auditors instead of the external auditors Ashton u s e d as subjects, w a s e m p l o y e d to g a t h e r t h e data. This d e c i s i o n - m a k i n g e x e r c i s e focuses o n t h e e v a l u a t i o n o f p a y r o l l i n t e r n a l c o n t r o l subsystems, w h i c h was an a p p r o p r i a t e task for t h e s t u d y p a r t i c i p a n t s , w h o w e r e i n t e r n a l a u d i t o r s in banks w h i c h h a d s u b s t a n t i a l p a y r o l l activities. A 26 x I/2 factoral d e s i g n w a s i n c o r p o r a t e d into t h e p r e s e n t a t i o n o f t h e d e c i s i o n c u e i n f o r m a t i o n in t h e e x e r c i s e , so e a c h p a r t i c i p a n t r e a c h e d 32 different i n t e r n a l c o n t r o l s y s t e m e v a l u a t i o n s in c o m p l e t i n g t h e 32 cases in t h e e x e r c i s e . T h e cases w e r e p r e s e n t e d in r a n d o m o r d e r . Figure 1 p r e s e n t s an e x a m p l e c a s e from t h e e x e r c i s e .
The participants T h e 58 s t u d y p a r t i c i p a n t s w e r e all i n t e r n a l a u d i t o r s w h o w e r e e m p l o y e d b y t h r e e banks in a
m i d d l e - s i z e d s o u t h e a s t e r n city. T h i r t y - t w o part i c i p a n t s w e r e m a l e s a n d 26 w e r e females. T h e a v e r a g e p a r t i c i p a n t h a d w o r k e d for a b o u t s e v e n y e a r s as an i n t e r n a l auditor, r a n g i n g f r o m a m i n i m u m o f less than o n e y e a r to a m a x i m u m o f 28 years. In addition, t h e a v e r a g e p a r t i c i p a n t had w o r k e d for a b o u t s e v e n y e a r s for t h e c u r r e n t e m p l o y e r , r a n g i n g from a m i n i m u m o f less than o n e y e a r to a m a x i m u m o f 35 years. T h r e e part i c i p a n t s w e r e c e r t i f i e d p u b l i c a c c o u n t a n t s , 14 w e r e c e r t i f i e d i n t e r n a l a u d i t o r s a n d 35 w e r e members of the Institute of Internal Auditors (IIA). T h e d a t a w e r e c o l l e c t e d b y o n e o f t h e researchers who provided each participant with an e x e r c i s e a n d s u b s e q u e n t l y c o l l e c t e d t h e c o m p l e t e d e x e r c i s e s f r o m t h e participants. T h e e x e r cise i n s t r u c t i o n s a s k e d t h e s u b j e c t s n o t to discuss t h e e x e r c i s e w i t h o t h e r s until after t h e d a t e w h e n all d a t a w e r e c o l l e c t e d . Each c o m p l e t e d e x e r c i s e w a s s e a l e d in an a t t a c h e d e n v e l o p e to e n s u r e that p a r t i c i p a n t s ' r e s p o n s e s r e m a i n e d anonymous.
264
ADRIAN HARRELLe t al.
E x p e r i m e n t a l design
The post-test-only control group experimental design, which is described in detail by Campbell & Stanley ( 1963, p. 8 and pp. 2 5 - 2 6 ) and Kerlinger (1973, pp. 330-332), was employed in the experiment. The internal auditors who participated in the study were randomly assigned to two groups, the control group ( n = 28) and the experimental group (n = 30). Since the participants were employed by three different banks, the employees of each bank were randomly assigned to each of the two groups in order to control for any possible organizational effects. As noted earlier, the data gathering instruments were personally distributed by one of the researchers to 67 individuals and 58 individuals voluntarily provided responses. The initial explanations, instructions, etc., provided to members of the two groups were exactly the same and the data were collected from both groups of participants at the same time. In order to simulate circumstances in which the firm's management made a deliberate attempt to bias the professional objectivity of the firm's internal auditors, the participants assigned to the experimental group were provided information which their contemporaries in the control group did not receive. The additional information included a statement that their firm's management desired that equal weights be placed upon each of the six factors used to evaluate internal control systems (see Fig. 1 ) and consonant o u t c o m e feedback indicating the evaluations that would result from employing these weights (see Fig. 2). The weight to be placed on these factors when evaluating an internal control system is clearly a matter of professional judgment (Ashton, 1974). Accordingly, management's attempt to specify, the weights to be placed on these factors therefore represents an effort by management to bias the professional objectivity of the firm's internal auditors.
RESULTS The
first hypothesis (H1)
predicts
that
I
1
2
3
O
5
6
Following management's preferred internal control system evaluation approach would result in the evaluation shown above for the preceding case. Fig.2. Exampleofoutcomefeedbackprovidedto participants.
internal auditors w h o have knowledge of management's desired internal control system evaluation outcomes will reach evaluations which are more in consonance with management's desired outcomes than those of their contemporaries without such knowledge. Within the context of the experiment, H1 implies the participants in the experimental group will reach evaluations which differ less from the outcomes preferred by management than those reached by their contemporaries in the control group. The second hypothesis (H2) predicts that, among internal auditors w h o have knowledge of management's desired internal control system evaluation outcomes, IIA members will reach evaluations which are less in agreement with management's desired outcomes than IIA non-members. H2 implies that the participants w h o are IIA members will reach evaluations which differ from the outcomes preferred by management than their contemporaries w h o are not IIA members. H2 applies only to individuals in the experimental group, for the subjects in the control group were not aware that management had specified preferred evaluation outcomes. Since each participant reached 32 internal control system evaluations, the repeated measures analysis of variance model was initially employed to examine the hypotheses. The results are summarized in Table 1. The significant MGMT main effect (F = 6.87,p -- 0.0088) in Table 1 implies that, as predicted by H1, the participants in the experimental group reached different internal control system evaluations than their contemporaries in the control group. The significant CASE main effect (F -- 113.72, p
BIASINGOBJECTIVITY OF INTERNALAUDITORS TABLE 1. Repeated measures analysis of variance results Source
d.f.
F
p
MGMT CASE MGMT x CASE IIA MGMT x IIA CASEx iIA MGMT x CASEx IIA
I 31 31 1 1 31 31
6.87 113.72 0.93 0.05 6.03 1.14 0.98
0.0088 0.0001 0.5783 0.8211 0.0142 0.2696 0.5056
The overall repeated measures analysis of variance model was significant (F = 28.61,p -- 0.000!, R-square = 0.68). MGMT -- the effect due to providing the participants in the experimental group with information about the decision policy preferred by the firm's management. Significant results imply the participants in the experimental group reached different internal control evaluations than those of the control group (HI). CASE -- the within-person effect due to manipulating the decision cue values (see Fig. 1) so that 32 different decision cases were provided to each participant. Significant results imply the individual participants reached different internal control system evaluations when presented with different CaSes.
IIA -- the effect due to membership in the Institute of Internal Auditors (IIA). MGMT x CASE = interaction effect of MGMT and CASE variables. MGMT × IIA = interaction effect of MGMTand IIAvariables. Significant results imply IIA members in the experimental group reached different internal control system evaluations than their contemporaries who were not IIAmembers. Since the IIA variable alone was not significant, significant results imply the evaluations of IIA members and IIA non-members differed in response to the MGMTvariable (H2). CASE x IIA = interaction effect of CASEand IIA variables. MGMT x CASE x IIA ----interaction effect of MGMT. CASE and IIA variables.
= 0 . 0 0 0 1 ) in Ta b l e 1 implies that, as has b e e n d e m o n s t r a t e d in a large b o d y o f p r i o r r e s e a r c h (e.g. Ashton, 1974; A s h t o n & B r o w n , 1980; A s h t o n & Kramer, 1980; Libby, 1981; Ashton, 1982), t h e m a n i p u l a t i o n o f t h e six d e c i s i o n c u e s ( s e e Fig. 1 ) r e s u l t e d in t h e p a r t i c i p a n t s r e a c h i n g different e v a l u a t i o n s for t h e 32 different cases w h i c h e a c h p a r t i c i p a n t c o m p l e t e d . T h e significant M G M T X IIA i n t e r a c t i o n t e r m ( F ---- 6 . 0 3 ; p = 0 . 0 1 4 2 ) in T a b l e 1 i m p l ie s that, as p r e d i c t e d b y H2, IIA m e m b e r s in t h e e x p e r i m e n t a l g r o u p r e a c h e d different e v a l u a t i o n s than IIA n o n - m e m ber's in t h e e x p e r i m e n t a l group. T h e s e results c l e a r l y p r o v i d e s u p p o r t for t h e d i f f e r e n c e s ira.
265
p l i e d by t h e h y p o t h e s e s . Next, individual differe n c e s c o r e s w e r e e m p l o y e d to e x a m i n e t h e dir e c t i o n a l asp ect s o f t h e t w o h y p o t h e s e s . Individual d i f f e r e n c e s c o r e s h a v e b e e n e m p l o y e d p r e v i o u s l y b y Barefield ( 1 9 7 2 ) E i n h o r n et al. (1977) and Polk ( 1 9 7 7 ) . Initially, t h e a b s o l u t e d i f f e r e n c e b e t w e e n t h e internal c o n t r o l s y s t e m e v a l u a t i o n e a c h individual actually r e a c h e d for e a c h o f t h e internal c o n t r o l syst e m cases ( s e e Fig. 1) and t h e e v a l u a t i o n e a c h s u b j e c t w o u l d h a v e r e a c h e d by p e r f e c t l y employing management's desired equal weights a p p r o a c h ( s e e Fig. 2 ) w as c o m p u t e d . N ex t , t h e s e a b s o l u t e d i f f e r e n c e values w e r e s u m m e d to o b t a i n a d i f f e r e n c e s c o r e for e a c h participant. T h e size o f e a c h p a r t i c i p a n t ' s d i f f e r e n c e s c o r e ind i c a t e s t h e e x t e n t to w h i c h t h e individual's internal c o n t r o l s y s t e m e v a l u a t i o n s differed f r o m t h e o u t c o m e s d e s i r e d by m a n a g e m e n t . A relatively large d i f f e r e n c e s c o r e i n d i cat es that t h e individual's actual e v a l u a t i o n s differed substantially f r o m t h e o u t c o m e s d e s i r e d by managem e n t . A r e l a t i v e l y small d i f f e r e n c e s c o r e indicat es that t h e individual's actual ev al u at i o n s diff e r e d o n l y slightly f r o m t h e o u t c o m e s d e s i r e d by management. As n o t e d earlier, H1 p r e d i c t s that t h e differe n c e s c o r e s o f t h e p a r t i c i p a n t s in t h e e x p e r i m e n tal g r o u p will b e s m a l l e r than t h o s e o f t h e i r cont e m p o r a r i e s in t h e c o n t r o l group. As i n d i c a t e d in T a b l e 2, t h e results o f t h e e x p e r i m e n t s u p p o r t this a s p e c t o f H 1 ( t = 2 . 8 5 , p = 0.003). Further, H 2 p r e d i c t s that, w i t h i n t h e e x p e r i m e n t a l group, t h e d i f f e r e n c e s c o r e s o f t h e participants w h o are TABLE2. Difference scores of the control group and experimental group participant Difference scores
X'(s.d.) Control group
18.1 (5.9) ( n = 28)
Experimentalgroup
11.6 (6.7) (n =
3o)
Hypothesized comparison: the difference scores of the par. tictpants in the experimental group were smaller than those of the participants in the experimental group (X = 11.6 vs .,~'= 18.1;t--- 2.8,p = 0.003).
266
ADRIANHARRELLet aL
IIA m e m b e r s will b e larger t h a n those of the participants in the e x p e r i m e n t a l g r o u p w h o are n o t IIA m e m b e r s . As i n d i c a t e d in Table 3, the empirical data s u p p o r t the d i r e c t i o n a l aspects of H 2 ( t -- 2 . 0 , p = 0.03). T h e results of the e x p e r i m e n t , therefore, i m p l y that, although i n t e r n a l auditors as a g r o u p m a y b e i n f l u e n c e d b y m a n a g e m e n t to reach biased i n t e r n a l c o n t r o l system evaluations, those w h o are IIA m e m b e r s will resist m a n a g e m e n t ' s efforts to bias their professional objectivity. TABLE3. Difference scores for IIA non-members and IIA members
Controlgroup Experimentalgroup
IIAnon-members )~(s.d)
IlAmembers J~(s.d)
20.2 (6.4)
16.7 (5.6)
(n= 11)
(n= 17)
8.2 (6.7) (n = 12)
13.2 (6.8) (n = 18)
Hypothesized comparison: (H2)The difference scores oflIA non-members (X -- 8.2) in the experimental group were smaller than those of iIA members (X = 13.2) in the experimental group (t -- 2.0,p -- 0.03). Post hoc comparisons [Scheffe's t.test (Hayes, 1973, pp. 605-607)]: In the control group, the difference scores of IIA nonmembers (~" -- 20.2) and IIA members (7~ = 16.7) did not differ (p > 0.05). The difference scores of IIA non-members in the experimental group (X" = 8.2) were smaller than those of IIA nonmembers in the control group ()~ = 20.2) (p < 0.05). The difference scores of IIAmembers in the experimental group (X -- 13.2) did not differ from those of IIAmembers in the control group ()~ -- 16.7) (p > 0.05). T h e results s u m m a r i z e d a b o v e suggest m a n a g e m e n t may have b e e n successful in biasing the professional o b j e c t i v i t y of the participants w h o w e r e IIA n o n - m e m b e r s , b u t may have b e e n u n s u c c e s s f u l in biasing the professional objectivity o f the participants w h o w e r e IIA m e m bers. ( T h e significant MGMT m a i n effect in the r e p e a t e d m e a s u r e s analysis o f variance in Table 1 m a y reflect m a n a g e m e n t ' s ability to i n f l u e n c e the evaluations of o n l y IIA n o n - m e m b e r s . ) With this in mind, s o m e additional analysis was perf o r m e d to d e t e r m i n e w h e t h e r the participants
w h o w e r e IIA m e m b e r s successfully resisted m a n a g e m e n t ' s efforts to bias their i n t e r n a l control system evaluations. Scheffe's t-test (Hayes, 1973, pp. 6 0 5 - - 6 0 7 ) was e m p l o y e d for these p o s t h o c c o m p a r i s o n s , 3 w h i c h are p r e s e n t e d in T a b l e 3. In the c o n t r o l group, the difference scores o f IIA n o n - m e m b e r s a n d IIA m e m b e r s did n o t differ significantly (Scheffe's t-test, p > 0.05). As n o t e d earlier in the e x a m i n a t i o n of H2, h o w e v e r , in the e x p e r i m e n t a l g r o u p the differe n c e scores o f IIA n o n - m e m b e r s w e r e significantly smaller than those of IIA m e m b e r s . In addition, the difference scores of IIA m e m b e r s in the c o n t r o l g r o u p did n o t differ from those o f IIA m e m b e r s in the e x p e r i m e n t a l g r o u p (Scheffe's ttest, p > 0.05). Further, the difference scores of IIA n o n - m e m b e r s in the e x p e r i m e n t a l g r o u p w e r e significantly smaller than those of IIA n o n m e m b e r s in the c o n t r o l g r o u p (Scheffe's t-test,p
< 0.05). T h e results of the additional analysis may b e s u m m a r i z e d as follows: IIA n o n - m e m b e r s in the e x p e r i m e n t a l g r o u p r e a c h e d evaluations w h i c h w e r e m o r e in a g r e e m e n t with m a n a g e m e n t ' s p r e f e r r e d o u t c o m e s than did their c o n t e m poraries in the c o n t r o l group; u n d e r the same c i r c u m s t a n c e s , IIA m e m b e r s in the e x p e r i m e n tal g r o u p r e a c h e d evaluations w h i c h w e r e n o m o r e in a g r e e m e n t with m a n a g e m e n t ' s preferred o u t c o m e s than w e r e those of their c o n t e m ° poraries in the c o n t r o l group. T h e evaluations r e a c h e d b y the IIA n o n - m e m b e r s were, therefore, i n f l u e n c e d b y k n o w l e d g e of m a n a g e m e n t ' s p r e f e r r e d o u t c o m e s w h i l e the evaluations r e a c h e d b y the IIA m e m b e r s w e r e n o t influe n c e d b y k n o w l e d g e of m a n a g e m e n t ' s preferred outcomes. Accordingly, the overall results of the experim e n t ( s e e Tables 1, 2 and 3) imply that managem e n t was able to bias the professional objectivity of the i n t e r n a l auditors w h o w e r e n o t IIA m e m b e r s . M a n a g e m e n t was not, h o w e v e r , able to bias the professional objectivity of the i n t e r n a l auditors w h o w e r e IIA m e m b e r s . Apparently, the IIA m e m b e r s successfully resisted m a n a g e m e n t ' s efforts to bias their i n t e r n a l con-
-"Theuse of Student's t-test, which is appropriate for apr/or/hypotheses, would not change the reported results.
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external auditors use to judge h o w m u c h reliance to place on internal auditors (e.g. Brown, 1983; Brown & Karan, 1985; Abdel-khalig etaL, 1983; Clark et al., 1979; Gibbs & Schroeder, 1980; Schneider, 1984, 1985). None of these SUMMARY AND DISCUSSION studies identified IIA m e m b e r s h i p as a factor to be considered w h e n judging internal autitors' Since internal auditors are subject to incen- professional objectivity. The results of this tives and sanctions controlled by management, study, however, imply that IIA m e m b e r s h i p may concern exists about management's potential be an important determinant of internal auability to bias their professional objectivity. To ditors' professional objectivity. Accordingly, the examine this issue, internal auditors from three extent to which a firm's internal auditors are acbanks participated in a decision-making experi- t i v e m e m b e r s o f t h e l l A should be considered by m e n t which examined two proposals. First, it third parties w h e n determining the level of rewas proposed that a firm's management has the liance to place on the w o r k of internal auditors. ability to influence the internal control system Some limitations and strengths of this study evaluations reached by the firm's internal should be mentioned. The study participants auditors. A second proposal was that, among w e r e selected based on their availability, so it is those internal auditors w h o had knowledge of not known whether they are representative of management's desired evaluation outcomes, in- the larger population to which it would be desirternal auditors w h o w e r e IIA m e m b e r s would re- able to generalize results. Some strengths of this sist management's efforts to influence their in- research include the use of real internal auditors ternal control system evaluations. as participants and the use of an experimental Both proposals w e r e supported by the results design that provides the high internal validity of the decision-making experiment. Accord- necessary for the examination of the relatively ingiy, the research findings imply that although abstract construct of internal auditors' profesmanagement has the ability to bias the profes- sional objectivity. sional objectivity of internal auditors w h o are Several issues for further research may be not IIA members, internal auditors w h o are IIA mentioned. It is not known h o w frequently in m e m b e r s will resist such efforts by their firm's practice a firm's management might attempt to management. This o u t c o m e suggests that the bias internal auditors' professional objectivity Institute of Internal Auditors has b e e n successful and this issue warrants further inquiry. Another in its efforts to educate its m e m b e r s on the issue w o r t h y of investigation is w h e t h e r efforts necessity for maintaining professional objec- by m a n a g e m e n t to bias internal auditors' profestivity. sional objectivity would result in "whistle blowThe findings have implications for third ing" behavior by some internal auditors. It is parties, such as external auditors, w h o would h o p e d this research will stimulate accounting rely upon the w o r k of internal auditors. A num- researchers to a further examination of these ber of studies have examined the factors which issues.
trol system evaluations towards the o u t c o m e s preferred by management.
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