'Serving Two Masters' and the Chief Audit Executive's Communication: Experimental Evidence About Internal Auditors’ Judgments
43 Pages Posted: 28 Jul 2013 Last revised: 15 May 2019
Date Written: March 15, 2015
Abstract
The position of an internal audit function (IAF) as a “servant of two masters” (i.e., management and the audit committee) may lead to a conflict of priorities. In this setting, the tone at the top set by the Chief Audit Executive (CAE) plays a critical role in balancing the potentially competing priorities of the “two masters.” We test two hypotheses in a mixed experimental design with the communicated preferences of the CAE to subordinates (cost reduction vs. effectiveness of internal controls) as a between-subjects factor, and levels of ambiguity (low, medium, high) manipulated within-subjects. Findings suggest that the emphasis in the CAE’s message can influence internal auditors’ judgments, and such influence is more pronounced when task ambiguity is high, resulting in the elimination of a significantly greater number of internal controls and the design of less effective processes. We discuss implications of our results for modern IAFs and the role of the CAE.
Keywords: corporate governance, internal audit function, effectiveness, internal controls
JEL Classification: M42, G34, M48
Suggested Citation: Suggested Citation