Internal auditors’ reputation and managers’ reliance decision

Abstract

Purpose

The purpose of this paper is to investigate how internal auditors’ performance reputation for auditing and assurance engagements affects corporate managers’ reliance on their consulting recommendations.

Design/methodology/approach

This study conducted a 2 × 2 between-subjects experiment in which 103 MBA students were randomly assigned to one of the four conditions. This paper uses analysis of covariance to analyze the data.

Findings

The results show that internal auditors’ reputation for performing assurance engagements positively influences managers’ reliance on their consulting recommendations. In addition, managers’ compensation structure affects their perceptions of the importance of the decision, and the perceived decision importance in turn partially moderates the effect of internal auditors’ performance reputation on managers’ reliance decision.

Research limitations/implications

This paper advances the understanding of the consulting function of the internal audit function (IAF) and provides evidence on how internal auditors’ performance in one field (assurance) affects management’s perception of their performance in the other field (consulting).

Practical implications

The findings of this paper should be particularly interesting to the parties that are responsible for training internal auditors by highlighting the importance of strengthening internal auditors’ capability of performing consulting service with respect to business operation.

Originality/value

This study is one of the few studies that examine how internal auditors’ consulting recommendations affect managerial decisions in an operational setting. The findings of the interdependence between the assurance and consulting components of the IAF advance the growing research stream of internal audit and its impact on management decision-making.

Citation

Tang, F., Yang, L. and Gan, H. (2020), "Internal auditors’ reputation and managers’ reliance decision", Managerial Auditing Journal, Vol. 32 No. 8, pp. 768-787. https://doi.org/10.1108/MAJ-04-2016-1366