The Effect of Incentive‐Based Compensation on Internal Auditors' Perceptions of Objectivity

16 Pages Posted: 29 Jan 2015

See all articles by Hasni Mohd Hanafi @ Omar

Hasni Mohd Hanafi @ Omar

Multimedia University (MMU)

Jenny Stewart

Griffith University - Griffith Business School

Date Written: March 2015

Abstract

A key threat to internal audit objectivity is the payment of incentive‐based compensation (IBC) to internal auditors. This study uses an experimental approach to examine whether IBC paid to internal auditors based on company performance and individual performance does impact their objectivity. The study also investigates whether the cultural background of internal auditors affects their objectivity in the context of IBC by examining whether those from an individualist culture (Australia) differ in their responses to those from a collectivist culture (Malaysia). The descriptive results suggest that IBC is awarded to both internal auditors/chief audit executives in Australia and Malaysia. The experimental results indicate that IBC is a threat to internal auditors' objectivity when it is based on company performance, but is less of a threat when it is based on individual performance. Culture does not appear to impact perceptions of internal auditors' behaviour but does affect perceptions of the appropriateness of adverse behaviour.

Keywords: Internal audit, objectivity, incentive‐based compensation, economic interest threat, culture

Suggested Citation

Mohd Hanafi @ Omar, Hasni and Stewart, Jenny, The Effect of Incentive‐Based Compensation on Internal Auditors' Perceptions of Objectivity (March 2015). International Journal of Auditing, Vol. 19, Issue 1, pp. 37-52, 2015, Available at SSRN: https://ssrn.com/abstract=2557144 or http://dx.doi.org/10.1111/ijau.12032

Hasni Mohd Hanafi @ Omar (Contact Author)

Multimedia University (MMU)

Jalan Multimedia
Cyberjaya, Selangor 63100
Malaysia

Jenny Stewart

Griffith University - Griffith Business School ( email )

Brisbane, Queensland 4111
Australia

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