The Effect of Prior Consulting Work on Internal Auditors' Evaluations of Internal Controls

32 Pages Posted: 19 Oct 2012 Last revised: 25 Oct 2015

See all articles by Audrey A. Gramling

Audrey A. Gramling

Oklahoma State University - Stillwater - School of Accounting

Arnold Schneider

Georgia Institute of Technology - Accounting Area

Lori Shefchik Bhaskar

Indiana University - Kelley School of Business - Department of Accounting

Date Written: September 1, 2015

Abstract

We analyze internal auditor objectivity by examining whether consulting work performed by internal auditors influences their subsequent judgments. We conduct an experiment with experienced internal auditors. We present them with an internal control scenario representing an at-margin internal control deficiency (i.e., borderline between a significant deficiency and a material weakness) and ask participants how likely they are to conclude that the deficiency is a material weakness. We manipulate the extent of prior involvement with the internal control (consulted on the design of the control or no prior involvement) and the type of the control deficiency (deficiency in design effectiveness or operating effectiveness). Consistent with our predictions, we find some evidence that internal auditors who had prior involvement in consulting on the design of the control are less likely than others to conclude that the deficiency is a material weakness, but only when the deficiency being evaluated relates to the design effectiveness of the control. The results have important practical and regulatory implications. According to professional standards, consulting on the design of internal controls is not presumed to impair internal auditors’ objectivity, yet we find a systematic influence on subsequent evaluations for purposes of reporting on internal control over financial reporting.

Keywords: control deficiencies, internal auditor objectivity, internal control over financial reporting (ICFR), prior involvement

Suggested Citation

Gramling, Audrey A. and Schneider, Arnold and Bhaskar, Lori Shefchik, The Effect of Prior Consulting Work on Internal Auditors' Evaluations of Internal Controls (September 1, 2015). Available at SSRN: https://ssrn.com/abstract=2162959 or http://dx.doi.org/10.2139/ssrn.2162959

Audrey A. Gramling (Contact Author)

Oklahoma State University - Stillwater - School of Accounting ( email )

College of Business Administration
345 Business Building
Stillwater, OK 74078
United States

Arnold Schneider

Georgia Institute of Technology - Accounting Area ( email )

800 West Peachtree St.
Atlanta, GA 30308
United States
(404) 894-4907 (Phone)
(404) 894-6030 (Fax)

Lori Shefchik Bhaskar

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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