The Impact of Internal Auditor
Compensation and Role on External
Auditors’ Planning Judgments and
Decisions
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By F. Todd DeZoort, Richard W. Houston,
and Michael F. Peters
Presented by: Julie C. Hyde
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Research Questions
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• Does incentive compensation for internal auditors
affect external auditors’ reliance on their work
thereby increasing budgeted audit hours when
internal auditors perform subjective tasks?
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• Does consulting activities by internal auditors
affect external auditors’ reliance on their work or
budgeted audit hours when internal auditors
perform subjective tasks?
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Why is this research question important?
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• IIA Standards are vague regarding factors
that threaten internal auditor objectivity.
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• SAS 65 and CICA General Assurance and
Auditing Section 5050 are silent with
respect to internal auditor compensation and
role.
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Prior Research – Attribution Theory
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• Hypotheses are based on attribution theory.
• Attribution theory provides a basis for predictions
of how evaluators (e.g., external auditors) assess a
source’s (e.g. internal auditors) message when
sources have incentives to bias.
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Prior Research - Compensation
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• Internal auditor increasingly are eligible for
incentive compensation based on company
performance.
Stapp (1991); DeZoort et al. (2000)
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• Attribution theory indicates that external auditors
should recognize this incentive to bias and rely
less on internal auditors who are eligible for
incentive compensation.
Prior Research – Internal Auditor Role
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• Internal auditors have incentives to preserve
working relationships with management
through consulting engagements.
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Greenspan et al. (1994)
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Hypotheses
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H1a: The effect of internal auditor
compensation (eligible for incentive
compensation vs. fixed salary only) on
external auditors’ reliance judgments will
be greater when internal auditors perform
subjective tasks than when they perform
objective tasks.
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Hypotheses (cont.)
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H1b: The effect of internal auditor
compensation (eligible for incentive
compensation vs. fixed salary only) on
external auditors’ budgeted audit hours will
be greater when internal auditors perform
subjective tasks than when they perform
objective tasks.
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Hypotheses (cont.)
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H2a: The effect of internal auditor role
(primarily consulting vs. primarily auditing)
on external auditors’ reliance judgments
will be greater when internal auditors
perform subjective tasks than when they
perform objective tasks.
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Hypotheses (cont.)
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H2b: The effect of internal auditor role
(primarily consulting vs. primarily auditing)
on external auditors’ budgeted audit hours
will be greater when internal auditors
perform subjective tasks than when they
perform objective tasks.
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Data Source
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• 76 auditors from 4 Big 5 public accounting
firms
• Voluntary
• 63% response rate (76/120)
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The Methods
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Each independent variable was manipulated at
two levels:
• Eligibility for compensation
• Internal auditor role
• Task subjectivity
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The Methods (cont.)
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Two dependent variables:
• Planned reliance
• Time-budget adjustments
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Results
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• H1a and H1b (compensation) are supported.
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• Neither H2a nor H2b (role) is supported.
• Marginally significant COMP x ROLE
interaction
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Commentary
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External Audit
vs.
Internal Audit
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Contributions
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• Provides evidence related to the accounting
profession’s evaluation of factors that affect
perceptions about auditor objectivity and
independence.
• Could provide information to standard
settings bodies when deciding on additional
guidance concerning compensation and role
(Paper pre-dated SOX).
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