The Effects of Serving Two Masters and Using the Internal Audit Function as a Management Training Ground on Internal Auditors' Objectivity

In this study, seventy-nine experienced internal auditors from the gaming industry participated in an experiment designed to investigate two factors that may affect internal auditors' objectivity: (1) reporting to two masters (management or audit committee) who have conflicting preferences and (2) whether or not the internal audit function (IAF) is used as a management training ground (MTG). The participants completed a case – developed with assistance from industry chief audit executives – wherein they were asked to evaluate business risks associated with a major gaming investment and to make a final recommendation. The results include three important findings. First, the internal auditors' risk assessments reveal an interaction effect between masters’ preferences (MP) and MTG. When the IAF is not used as a MTG, internal auditors' risks assessments do not significantly differ when the IAF reports to senior management versus the audit committee. However, when the IAF is used as a MTG, internal auditors' risk assessments are significantly lower when the IAF reports to senior management versus the audit committee. Second, the internal auditors' recommendations show that they provided more favorable recommendations regarding the investment to the audit committee than to management. Third, when the IAF is used as a MTG, the internal auditors provide more favorable recommendations than when the IAF is not a MTG. Overall our results highlight the interplay between MP and whether or not the IAF is being used as a MTG on internal auditors’ objectivity.

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