By F . Todd DeZoort, Richard W. Houston, and Michael F. Peters Presented by: Julie C. Hyde

1. The Impact of Internal Auditor Compensation and Role on External Auditors’ Planning Judgments and Decisions By F. Todd DeZoort, Richard W. Houston, and Michael F. Peters Presented by: Julie C. Hyde

2. Research Questions • Does incentive compensation for internal auditors affect external auditors’ reliance on their work thereby increasing budgeted audit hours when internal auditors perform subjective tasks? • Does consulting activities by internal auditors affect external auditors’ reliance on their work or budgeted audit hours when internal auditors perform subjective tasks?

3. Why is this research question important? • IIA Standards are vague regarding factors that threaten internal auditor objectivity. • SAS 65 and CICA General Assurance and Auditing Section 5050 are silent with respect to internal auditor compensation and role.

4. Prior Research – Attribution Theory • Hypotheses are based on attribution theory. • Attribution theory provides a basis for predictions of how evaluators (e.g., external auditors) assess a source’s (e.g. internal auditors) message when sources have incentives to bias.

5. Prior Research - Compensation • Internal auditor increasingly are eligible for incentive compensation based on company performance. Stapp (1991); DeZoort et al. (2000) • Attribution theory indicates that external auditors should recognize this incentive to bias and rely less on internal auditors who are eligible for incentive compensation.

6. Prior Research – Internal Auditor Role • Internal auditors have incentives to preserve working relationships with management through consulting engagements. Greenspan et al. (1994)

7. Hypotheses H1a: The effect of internal auditor compensation (eligible for incentive compensation vs. fixed salary only) on external auditors’ reliance judgments will be greater when internal auditors perform subjective tasks than when they perform objective tasks.

8. Hypotheses (cont.) H1b: The effect of internal auditor compensation (eligible for incentive compensation vs. fixed salary only) on external auditors’ budgeted audit hours will be greater when internal auditors perform subjective tasks than when they perform objective tasks.

9. Hypotheses (cont.) H2a: The effect of internal auditor role (primarily consulting vs. primarily auditing) on external auditors’ reliance judgments will be greater when internal auditors perform subjective tasks than when they perform objective tasks.

10. Hypotheses (cont.) H2b: The effect of internal auditor role (primarily consulting vs. primarily auditing) on external auditors’ budgeted audit hours will be greater when internal auditors perform subjective tasks than when they perform objective tasks.

11. Data Source • 76 auditors from 4 Big 5 public accounting firms • Voluntary • 63% response rate (76/120)

12. The Methods Each independent variable was manipulated at two levels: • Eligibility for compensation • Internal auditor role • Task subjectivity

13. The Methods (cont.) Two dependent variables: • Planned reliance • Time-budget adjustments

14. Results • H1a and H1b (compensation) are supported. • Neither H2a nor H2b (role) is supported. • Marginally significant COMP x ROLE interaction

16. Commentary External Audit vs. Internal Audit

17. Contributions • Provides evidence related to the accounting profession’s evaluation of factors that affect perceptions about auditor objectivity and independence. • Could provide information to standard settings bodies when deciding on additional guidance concerning compensation and role (Paper pre-dated SOX).