Effects of reporting relationship and type of internal control deficiency on internal auditors’ internal control evaluations

Abstract

Purpose This paper aims to explore whether an internal auditor’s evaluation of internal control deficiencies are influenced by the party with primary influence over the internal audit function and by the type of internal control deficiency. Design/methodology/approach A behavioral experiment is conducted with internal auditors as participants in a 2 × 2 between-subjects factorial design. Findings Results indicate that internal auditors are less likely to evaluate a pervasive control deficiency related to “tone at the top” as a material weakness than a process-specific control deficiency. Furthermore, internal auditors are somewhat less likely to evaluate a process-specific internal control deficiency as a material weakness when management has primary influence over the internal audit function than when the audit committee has primary influence. It is also found that the best practice of internal audit oversight (i.e., primary oversight of internal auditors by the audit committee) may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal control. Research limitations/implications Limitations of this research include lack of economic consequences (e.g. future pay and job loss) associated with the internal control decisions made by the participants; less concise information provided to the participants than would generally be available to them; and lack of generalizability of the findings beyond the specific company setting and internal control scenario portrayed in the case materials. Practical implications Not evaluating a pervasive control deficiency related to “tone at the top” as a material weakness seems to not fully align with relevant professional guidance and can possibly result in inaccurate internal information about the quality of internal controls. Furthermore, having an internal auditor’s evaluation of a process-specific internal control deficiency influenced by the party with primary influence over the internal audit function would not appear to align with relevant professional guidance. Finally, primary oversight by the audit committee of the internal auditors may lead to potential internal under-reporting of instances where the audit committee represents a material weakness in internal controls and, thus, possible communication of inaccurate internal control information. Originality/value This study is the first to address whether the party with primary influence over the internal audit function influences an internal auditor’s evaluation of internal control deficiencies.

Relationship between Corporate Sustainability and Compliance with State-Owned Enterprises in Central-Europe: A Case Study from Hungary

“…The subject matter and methods of auditing have become increasingly sophisticated in recent times and, along with financial auditing in the strict sense, performance-based and compliance audits have appeared. At the same time, this implies that besides the requirement to comply with and enforce normative requirements, there is a need to enforce and control certain (fundamental) principles, organizational goals, values or the intention of the legislator [47].…”

“…At the same time, there have been many advances compared to previous years, such as the issue of conflicts of interest, which are well regulated by most institutions, but have also highlighted a significant lack of integrity in the public sector, particularly in organizations where demand is consistently higher than supply. It is the closest to the issue of integrity used in public administration with regard to the purpose of "compliance'-both of which are intended to increase the resilience of the organization and to ensure its integrity [47][48][49][50]. The State Audit Office defines integrity as the totality of attributes, abilities, attitudes, and behaviors that are intended to serve the public interest and to ensure that public administration functions properly, effectively, and efficiently [24].…”

The Type of Control Deficiency, Internal Audit Function Relationship and Internal Auditor’S Evaluation: an Experimental Study

“…Previous research has found there are two unique factors that internal auditors' evaluation can be objective when evaluating the Internal Control Deficiency (ICD) (Gramling and Schneider, 2018). First, the internal auditors' evaluation might be influenced by the type of ICD.…”

“…In evaluating internal control, internal auditors will evaluate a deficiency from pervasive control along with a deficiency from a processspecific specific control. Prior research was using "tone at the top" as their pervasive control for conducting the experiment of internal auditor's evaluation (Gramling and Schneider, 2018). There was a potential bias on their result since auditor perceives that pervasive control as less important than other types of controls (Gramling and Schneider, 2018).…”

“…Prior research was using "tone at the top" as their pervasive control for conducting the experiment of internal auditor's evaluation (Gramling and Schneider, 2018). There was a potential bias on their result since auditor perceives that pervasive control as less important than other types of controls (Gramling and Schneider, 2018). As supported also by Hermanson, Smith and Stephens (2012), it showed that many companies do not regularly assess tone at the top.…”