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Does Incentive-Based Compensation for Chief Internal Auditors Impact Objectivity? An External Audit Risk Perspective
- Source :
- AUDITING: A Journal of Practice & Theory. 36:21-43
- Publication Year :
- 2016
- Publisher :
- American Accounting Association, 2016.
-
Abstract
- SUMMARY This paper considers the potential impact of internal audit incentive-based compensation (IBC) linked to company performance on the external auditor's assessment of internal audit objectivity. We posit that external auditors will view IBC as a potential threat to internal audit objectivity, thus reducing the extent of reliance on the work of internal auditors and increasing the assessment of control risk. The increase in risk and external auditor effort should result in higher audit fees. We hypothesize that the form of incentive-based compensation, namely stock-based versus cash bonuses, moderates the association between IBC and external audit fee. Finally, we consider whether underlying financial reporting risk mitigates the external auditor's potential sensitivity to IBC. We find a positive association between external audit fees and internal audit compensation based upon company performance. The association is acute to IBC paid in stock or stock options as opposed to cash bonuses. We also find evidence consistent with the IBC associations being mitigated by the company's financial reporting risks. Data Availability: Individual survey responses are confidential. All other data are derived from publicly available sources.
- Subjects :
- Economics and Econometrics
Auditor's report
050208 finance
Actuarial science
business.industry
05 social sciences
Walk-through test
Chief audit executive
Accounting
050201 accounting
Audit risk
Auditor independence
External auditor
Internal audit
Joint audit
0502 economics and business
Business
skin and connective tissue diseases
Finance
Subjects
Details
- ISSN :
- 15587991 and 02780380
- Volume :
- 36
- Database :
- OpenAIRE
- Journal :
- AUDITING: A Journal of Practice & Theory
- Accession number :
- edsair.doi...........868aeb6e7bc897ac69ed73000d01f33a