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The purpose of this paper is to understand why managers, internal auditors and compliance staff (in financial firms specifically and using Malaysia as a concrete example) can want to ignore compliance-related legislation (a law on anticompetitive behaviour in this case).

The authors review, discuss and critique the literature on compliance and institutions in the light of existing data from Malaysia’s financial industry (literally confronting theory with data).

Legislative design can actually encourage managers and their auditors disobey/ignore the law for reasons which previous theories cannot explain.

This research does not use the regression techniques in vogue now. The findings, nevertheless, imply that attempts to explain phenomenon in management auditing should start with the laws governing managerial activity.

Auditors may use the methods used in this study to assess the extent to which financial services firms’ managers have incentives to comply with laws. Similarly, this research can quantify the extent to which internal auditors in these firms have incentives to find untoward conduct.

Poorly designed laws affecting managerial auditing derive from pre-existing social relationships, as well as help shape them (as shown using data). Identifying areas of non-compliance may actually signal deeper problems in the way businessmen and lawmakers make and enforce laws requiring compliance and self-assessment.

The authors know of no study looking at the economic incentives driving internal auditors’ behaviour – particularly in the area of antitrust. They show how law shapes management and auditors’ incentives, quantify these incentives and show how/why previous research fails to explain these incentives.

Executive compensation consultants develop compensation programmes through information gathered from documents and interviews with key executives, along with an assessment of management processes and the existing compensation programmes. This information gathering can be very costly. Argues that a good deal of the data required to establish compensation programmes can be gained for the consultants by the company′s internal auditors, who are adept at research, are objective, are free from bias, and are accustomed to evaluating any business process or activity. The consultants gain by being relieved of a good deal of detail work: the company gains by substituting the lower salary rates of the internal auditors for the high fees charged by consultants for data gathering.

In prior work, GAO found that contractors were paid billions of dollars in award fees regardless of acquisition outcomes. In December 2007, the Office of Management and Budget (OMB) issued guidance aimed at improving the use of award fee contracts. GAO was asked to (1) identify agencies’ actions to revise or develop award fee policies and guidance to reflect OMB guidance, (2) assess the consistency of current practices with the new guidance, and (3) determine the extent agencies are collecting, analyzing, and sharing information on award fees. GAO reviewed the Departments of defense (DOD), Energy (DOE), Health and Human Services (HHS), and Homeland Security (DHS) and the National Aeronautics and Space Administration (NASA)-agencies that constituted over 95 percent of the dollars spent on award fee contracts in fiscal year 2008.

This study examines the effects of incentive compensation and guanxi, a type of informal personal relationship between people, on the objectivity of Chinese internal auditors. Given that the objectivity of internal auditors is essential for promoting financial reporting quality, it is important to investigate the effectiveness of internal audit functions, especially in emerging markets where the corporate governance mechanisms designed to promote objectivity are less mature.

The research employs a 2 × 2 between participants experiment with 116 graduate accounting student participants.

After controlling for internal auditors’ ethicality, we find that close-guanxi between management and internal auditors and incentive compensation in the form of bonuses based upon meeting earnings targets both have the capacity to impair the objectivity of Chinese internal auditors. Participants were more tolerant of management’s attempts to manage earnings when there was close guanxi or bonus compensation. Further, compensation structure only influenced internal auditors’ support of management when guanxi was distant, but when there was close guanxi between internal auditors and management, internal auditors were unlikely to challenge management regardless of the compensation structure.

Based on 3,775 firm-year observations from 2009 to 2013 using publicly available disclosure data for Korean listed firms, this study examines whether and how firm-level governance characteristics are associated with investment in internal auditing proxied by compensation and the number of statutory internal auditors.

The authors investigate the association between governance characteristics and investment in internal auditing proxied by compensation and the number of statutory internal auditors.

The authors find that firms with greater ownership of the largest shareholders and with a higher proportion of outside directors invest more in internal auditing. These results indicate that firms with higher incentive and demand for monitoring are more likely to invest more in internal auditing. The authors further find that the positive effect of the largest shareholder ownership (board independence) on investment in internal auditing is attenuated in firms with greater board independence (ownership of the largest shareholders) suggesting that the complementary effect of the two governance mechanisms associated with internal auditing weakens as they function simultaneously.

The results provide regulators and investors with a clear picture of the governance characteristics of firms associated with investment in internal auditing. The results imply that both the largest shareholders and the outside board of directors play a significant role in resource allocation in internal auditing within a firm. The effect of allocation, however, can be attenuated contingent upon the combined characteristics of governance mechanisms.

Using large amounts of public archival data, this study adds to the extant literature on firm characteristics associated with investment in internal auditing. This study also contributes to the literature by expanding the scope of research on executive compensation to the locus of statutory internal auditors.

Based on 1,798 firm-year observations from 2009 to 2013, using publicly available disclosure data for Korean listed firms, this study aims to examine whether statutory internal auditors influence firm-level stock price crash risk.

Based on the bad news hoarding theory of crash risk, the authors investigate the association between the quality of statutory internal auditors and one-year-ahead stock price crash risk. The quality of statutory internal auditors is measured as the compensation of statutory internal auditors and the financial expertise of statutory internal auditors. Stock price crash risk is measured as an indicator variable whether a firm experiences one or more crash weeks during the fiscal year period.

The authors find that higher quality of statutory internal auditors – measured through greater compensation and greater financial expertise – is associated with lower possibilities of future stock price crash risk. These results indicate that high-quality statutory internal auditors mitigate bad news hoarding of managers because of their greater capability and stronger incentive to lower litigation risk and preserve their reputation. The results are mostly robust to different measures for stock price crash risk and the quality of statutory internal auditors.

The findings of this study regarding stock price crash risk are important for investors because such risk can significantly affect investor welfare. The results indicate that statutory internal auditors play an important role in controlling future stock price crash risk and maintaining stability in the equity market.

This study adds to the extant literature on the determinants of stock price crash risk and is the first to examine the impact of internal auditors on stock price crash risk. Moreover, this study also contributes to the existing literature on internal auditor quality by showing that high-quality statutory internal auditors reduce risks in financial markets.

The purpose of this paper is to explore the effects of varying motivation induced by financial incentives and common uncertainty caused by time pressure on audit judgment performance.

The experimental method is used to examine how financial incentives and time pressure affect audit performance, based on predictions by both economic and behavioral theories. The relative performance contract and the profit sharing contract are two incentive schemes considered. To achieve the incentive effect on subjects when conducting the experiment, all subjects were compensated with real cash rewards, according to their incentive contracts as randomly assigned.

As predicted, major results show that both incentive contract and time pressure affect audit judgment performance. The audit performance is generally better under the relative performance contract than under the profit sharing contract. Additionally, it is demonstrated that an increase in the level of time pressure significantly improves recall, recognition, and total efficiency under both types of incentive contracts, but impairs recall and total performance, particularly under the relative performance contract. Moreover, the reduction of recall and total performance under the relative performance contract is significantly greater than under the profit sharing contract. Nevertheless, in this case, the relative performance contract still outperforms the profit sharing contract.

The findings suggest the relative superiority of the relative performance contract in comparison with the profit sharing contract in improving auditors' judgment performance for structured tasks.

The relative performance contract would motivate junior auditors to exert more effort to increase their performance in the work environment of increased time pressure. The audit firms may incorporate relative performance evaluations into incentive schemes, to improve junior auditors' performance for structured tasks.

The paper is of value to audit firms in the design of performance‐contingent incentive contracts.

Whistleblowers have been credited for uncovering financial scandals in companies globally, including Enron, Olympus Corporation, and WorldCom. Despite increasing support and incentives for whistleblowing, there generally remains reluctance to blow the whistle. Thus, the purpose of this study is to review: (1) the determinants of internal and external whistleblowing on accounting-related misconduct, (2) U.S. whistleblowing legislation on accounting-related misconduct and related research, and (3) the effects of whistleblowing on firms and whistleblowers. Within each area, suggestions for future research are offered.

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.

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.

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.

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).

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.

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.

The purpose of this paper is to examine whether external auditor traits influenced the reporting of internal control deficiencies (ICDs) prior to SOX‐mandated audits, holding constant the existence of a control weakness.

Data are collected from publicly available sources such as Securities and Exchange Commission filings and Audit Analytics database.

Companies that were audited by industry leading auditors were more likely to disclose ICDs prior to SOX‐mandated audits and that companies with longer client‐auditor tenure were less likely to disclose ICDs prior to SOX‐mandated audits.

These findings suggest that while external auditors were not required to participate in internal control evaluation and certifications prior to their audit of internal control for the 2004 fiscal year, they nevertheless influence the likelihood of ICD disclosure prior to their initial audit.