The Effect of Continuous Auditing, Role Duality, and Organizational Identification on the Incidence and Likelihood of Reporting Management Opportunism

Abstract

Increasingly more internal audit functions use company-developed technology to provide timelier assurance to management and that could decrease management opportunism. However, serving in the dual role as provider of consulting and assurance services related to this technology could present objectivity concerns. In this study, 255 practicing internal auditors estimate the likelihood of either accrual-based or real earnings management in one of two experiments manipulating internal audit frequency (continuous vs. periodic) and auditor objectivity (separate vs. combined assurance and consulting activities). Although managers may be better able to predict their responses to the hypothetical scenario, their predictive capability is limited by their own prior experience with earnings manipulation and with the internal audit function. Additionally, prior auditing research suggests internal auditors provide responses no different from the responses of managers when assessing the effectiveness of IA assurance. In both experiments, I predict and find that internal auditors expect the likelihood of earnings management will be lower when the internal audit function uses continuous auditing, regardless of the level of objectivity. However, the effect of objectivity is context-dependent such that accrual-based (real) earnings management is less likely (no different) when the internal audit function is more objective, regardless of audit frequency. This study has implications for internal and external audit practice as auditing regulators begin to examine potential changes to auditing standards that encourage the use of recent technological advances in the audit. In addition, this study suggests ways to improve the internal auditor’s role in corporate governance.