Internal Auditors Perceptions of the Effects of Continuous Auditing and Their Dual Role

on the Likelihood of Management Opportunism 1

Dereck Barr-Pulliam
Assistant Professor
University of Wisconsin Madison
975 University Avenue
Madison, WI 53706
dbarr@bus.wisc.edu

August 2016

This paper is based on my dissertation completed at the University of Mississippi. I am grateful

for the guidance of my dissertation committee: Karl Wang (Chair), Kendall Bowlin, Victoria
Dickinson, and Richard Gentry. I appreciate the Chief Audit Executives who assisted in the
development of the experiment and the local chapters of the Institute of Internal Auditors and the
Association of College and University Auditors who participated in the study. This paper has
benefitted from helpful comments on earlier versions from Helen Brown-Liburd, Michael
Clement, Brian Goodson, Audrey Gramling, Jennifer Joe, Kevin Jackson, Karla Johnstone, Bill
Kinney, Sydnee Manley, Stephani Mason, Brian Mayhew, Michael Robinson, Ryan Seay, Sandra
Shelton, and Kelly Williams; participants at the 2013 KPMG PhD Project Accounting Doctoral
Scholars Association, the 2014 American Accounting Association Annual Meeting, the 2015
Audit Midyear Meeting, and the 2015 International Symposium on Auditing Research; and
workshop participants at the University of Mississippi, Rutgers, the State University of New
Jersey, and the University of Wisconsin Madison.

This study (Protocol #14x-108) has been reviewed and approved by the Institutional Review Board at the
University of Mississippi.

Internal Auditors Perceptions of the Effects of Continuous Auditing and Their

Dual Role on the Likelihood of Management Opportunism

ABSTRACT: This study examines whether (1) internal audit frequency, (2) functionally
separating the internal auditors dual role as providers of both assurance and consulting, and (3)
type of earnings management affect auditors perceptions of the likelihood of management
opportunism. In a 2x2x2 between-subjects experiment, 255 practicing internal auditors specifically
assess the likelihood of either accruals-based or real earnings management. I find that auditors
perceive earnings management, in general, to be less likely when the internal audit department
employs continuous auditing and when it functionally aligns its roles. I further find that internal
auditors expect both accrual-based and real earnings management to be less likely when the
internal audit function uses continuous auditing, but the effect of separating the dual role is contextspecific, such that the likelihood of accrual-based (real) earnings management is assessed as less
likely (no different). This study has implications for auditors, managers, accounting researchers,
and standards setters.
KEYWORDS: continuous auditing; earnings management; internal audit; perceptions

INTRODUCTION
With the help of the internal audit (IA) function and other divisions (e.g., accounting,
operations), a significant number of companies have begun to leverage their internal technology
to enable both continuous auditing (CA) and continuous monitoring (PwC 2006). 2 Internal and
external firm stakeholders (e.g., investors, standards setters) argue that CA could increase the
probability that auditors identify and report opportunistic behavior, e.g., earnings management,
by managers (American Institute of Certified Public Accountants (AICPA) 2012b). Prior
research, however, suggests that continuous auditing is less effective than traditional periodic
auditing (Schwartz and Young 2002). Further, in its dual role as provider of both assurance and
consulting, involvement of the internal audit function (IAF) in the development of the CA
technology could present independence concerns when the IAF uses the CA in its assurance
activities (IIA 2009a). 3 In this context, I examine internal auditors perceptions of the
effectiveness of using CA to mitigate earnings management when their dual role is functionally
separated within the IAF. I also examine whether there are differences in IAs perceptions of the
likelihood of each type of earnings management: accruals-based (AEM) versus real earnings
management (REM).
Examining these research questions is important for a number of reasons. First, CA suggests
more frequent monitoring of managements choices, which has been shown to reduce opportunism
and increase ethicality (e.g., Merchant and Rockness 1994). As important members of the

The term continuous monitoring should be distinguished from CA. While the two concepts produce similar
outcomes, the IAF owns CA (an assurance function) and management owns continuous monitoring (which enables
managers to assess compliance with internal controls). In this study, I focus only on continuous auditing, defining it
as real-time audits of company data at the transaction level using technology.
3
In the current study, I specifically focus on the notion of functional alignment of the IAFsuch that auditors
performing the assurance and consulting functions are segregatedas a means of increasing independence (Ahlawat
and Lowe 2004).

corporate governance framework (Gramling, Maletta, Schneider, and Church 2004; Cohen,
Krishnamoorthy, and Wright 2004) who are able to provide a window into the organization
(Tapestry Networks 2004), IAs are likely to understand the implications of more monitoring and
are likely to believe continuous auditing will result in less opportunistic behavior. Prior research
examining whether CA helps to deter management opportunism is limited in that it focuses
primarily on REM and it is inconclusive in its findings. On the one hand, this research suggests
that CA indeed helps to constrain earnings management (Chiu, Liu, and Vasarhelyi 2014). On the
other hand, the literature suggests that periodic auditing is more effective (e.g., Schwartz and
Young 2002).
Second, IAs serve in a dual role as provider of both assurance and consulting services
(Gramling, Maletta, Schneider, and Church 2004). For example, when companies develop CA inhouse, they use multi-disciplinary teams that include accounting, operations, information
technology, and IAs serving in a consulting role. 4 Some argue that serving in this dual role
decreases objectivity when IAs provide assurance in areas where they previously served as
consultants (Plumlee 1985; Brody and Kaplan 1996). However, IA standards do not preclude
serving is this dual role (IIA 2009b) and managers prefer it because it increases the perceived value
that IAs add to the company (Bou-Raad 2000). In this study, I explore whether functional
separation of these roles could increase the perceived effectiveness of the IA function by mitigating
potential social pressure threats from management (Brody and Lowe 2000), as well as self-review
threats resulting from serving in this dual role (e.g., Church and Schneider 1992). Additionally,
this structure could address economic conflicts of interest specifically related to incentive

The team often develops technology enabling both continuous controls monitoring (which is a management
responsibility) and CA (an audit function). I focus on CA as defined by Coderre, Verver, and Warren (2005).

compensation or other benefits the internal auditor receives from the company (Dezoort, Houston,
and Peters 2001; Schneider 2003).
Finally, although the nature of each type of earnings management differs, managers often
manipulate accounting numbers to reach a specific earnings target that ensures some tangible
reward (Healy 1985). Like AEM, manipulating real activities (REM) requires judgment. However,
REM is often more severe because of its cash flow implications (Roychowdhury 2006).
Knowledge of a companys operations, trends in the industry, and business acumen helps auditors
generate assumptions about the likelihood and appropriateness of changes in accounting numbers.
Internal auditors typically have greater familiarity with operations and the internal control
environment, which uniquely qualifies them not only to assess the likelihood of managers
decisions but also to mitigate opportunistic behavior (Christ, Masli, Sharp, and Wood 2015; Christ,
Sharp, and Wood 2011; Prawitt, Smith, and Wood 2009). Nonetheless, the IA function is
essentially part of the control environment, and thus, may be reluctant to report findings. Gauging
auditors opinions about the likelihood of opportunism is possibly one of many measures of
changes in auditors attitudes regarding management (as suggested in Nolder and Kadous 2014).
The experimental instrument applies a 2x2x2 between-subjects design and manipulates (1)
the assurance frequency (continuous vs. periodic), (2) functional alignment of the IA function
(combined vs. separate consulting and assurance functions), and (3) type of management
opportunism (AEM vs. REM). Participants were 255 practicing IAs identified through professional
affiliation with current chief audit executives, local chapters of the IIA, and other professional
associations. Participants had on average 12.56 years of IA experience and represent staff, seniors,
management, and chief audit executives. Participants were randomly assigned to one of the eight
experimental conditions and read a case about a particular division of a manufacturing company.

The primary dependent measure was the auditors assessment of the likelihood that the division
vice president would adjust accounting numbers to achieve an annual bonus.
I find that IAs perceive both types of earnings management to be least likely when the IA
function uses CA. The motivation for CA is multi-faceted, but straightforward. Management is
thus a key driver in the decision to implement CA, though prior research suggests that the
prevalence of use by the IA function is emerging rather than pervasive (see Gonzalez, Sharma, and
Galletta 2012; Janvarin, Bierstaker, and Lowe 2008; Bierstaker, Brody and Pacini 2006) However,
where it is being used at an organization, managers may be less likely to manipulate earnings. To
the extent that IAs understand this supposition, it is reasonable to expect that they would be likely
to perceive opportunism to decrease when CA is used. Interestingly, I find that IAs perceive the
likelihood of earnings management to be context-specific when the IA function functionally
segregates its two roles. Specifically, I find that IAs expect AEM to be less likely when the IA
function has separate assurance and consulting roles, but expect no difference in the likelihood of
REM. On the one hand, this latter finding suggests that the IAs greater familiarity with company
operations allows the IA to develop independent expectations about the feasibility of an
operational accounting change (i.e., REM). On the other hand, the IAs expectation could be a byproduct of greater subjectivity in the determination of accruals (AEM) such as the allowance for
doubtful accounts, depreciation, or other complex estimates.
In additional analyses, I explore whether IAs strength of identification with their
organization (Bamber and Iyer 2007), whether more skeptical auditors perceive the likelihood of
earnings management differently (Hurtt 2010), and whether IAs years of assurance experience
affect their perceptions. I find that 1) IAs that identify the most with their organizations assess
earnings management overall and in each context as more likely; 2) skepticism appears to play no

role in IAs judgement of the likelihood of earnings management overall and by type; and 3) IAs
with more assurance experience assess the likelihood of earnings management as less likely.
This study contributes to the literature in several important ways. First, this study provides
baseline evidence on the potential impact of CA on two forms of management opportunism. The
participants in this study have significant internal audit experience, which uniquely qualifies them
to assess the likelihood of earnings management (e.g., as in Nelson, Elliott, and Tarpley 2002).
Their insights contribute to our understanding of conditions in which the use of CA could be most
effective. The primary driver for CA is demand by key stakeholders. Prior surveys of auditors
indicate there is sufficient demand for CA (AIPCA 2012a; PwC2006), but implementation has
been slow due to factors such as insufficient information technology expertise in the IA function
and costs that exceed the benefits (Gonzalez et al. 2012; Alles, Kogan, and Vasarhelyi 2002).
Second, though this study focuses on the IA function, it contains implications for external auditors
and accounting standards setters, who both have an interest in the efficacy of CA (AICPA 2012b).
Third, related to external auditors, this study complements prior literature, which suggests that
when an IA function already uses CA, there may be an opportunity for the external auditor either
to leverage the work of the IA function or to gain access to data by relying on the IA function (e.g.,
Malaescu and Sutton 2015; Davidson, Desai, and Gerard 2013). Finally, related to regulators, this
study complements initiatives by standards setters that have focused on auditing standards and
related project initiatives designed to address limitations on the external auditors ability to use
data analytic tools that provide benefits similar to CA (e.g., Zhang, Pawlicki, McQuilken, and
Titera 2012; Vasarhelyi, Alles, and Williams 2010 ).

In the remainder of this paper, I review the prior literature and develop the four research
questions. I then provide a summary of the experimental methodology and discuss results. Finally,
I offer conclusions and implications for future research.

DEVELOPMENT OF RESEARCH QUESTIONS AND HYPOTHESES

Management Opportunism: Accrual-Based vs. Real Earnings Management
In this study, I build on and contribute to prior research by examining IAs perceptions of
the likelihood that a manager will engage in AEM, which involves choosing an accounting method
that results in desired levels of earnings, and REM, which involves the timing and/or magnitude
of operating decisions to reach desired earnings (Healy and Wahlen 1999). The former is relatively
transparent in the year of the change and is typically the focus of the external auditor and
regulators. 5 The latter, which contributes to operating decisions, has long-term effects and
ultimately affects future cash flows. Because the results of operations (e.g., financial statements)
include any REM decisions, the external auditor likely accepts REM as fact, regardless of
preconceived notions about what results of operations should have been. Less is known about both
external auditors and IAs perceptions of and responses to managements use of REM when the
auditor becomes aware of it (Commerford, Hermanson, Houston, and Peters 2013).
Accounting research reflects the external audit focus on AEM (e.g., Chen, Kelly, and
Salterio 2011). In practiceand likely in response to the focus of the external auditor on AEM
managers often prefer REM (Roychowdhury 2006; Graham, Harvey and Rajgopal 2005) over
AEM. Recent studies examining the relationship between the two types of earnings management
propose that managers actually tradeoff between the two forms of earnings management in various

The auditors task is to determine the appropriateness of the adjustment through inquiries of management.

contexts, such as after passage of the Sarbanes-Oxley Act of 2002 (Cohen et al. 2008), after
issuance of seasoned equity offerings (Cohen and Zarowin 2010), or in the presence of high quality
external auditors (e.g., Burnett, Cripe, Martin, and McAllister 2012; Chi, Lisic, and Pevzner 2011).
This research also suggests managers use the two forms of earnings management as substitutes to
achieve specific goals throughout the year (Zang (2011). I extend this research by examining
whether internal auditors believe that increased assurance could affect the likelihood of both types
of earnings management.
One potential advantage the IA function has over the external auditor is a more robust
institutional knowledge of the company. During an assurance engagement, IAs should critically
review a particular division or process and the associated internal controls, whereas in the
consulting role, IAs advocate for and help to improve a particular division or process (Brody and
Lowe 2000). It is plausible that the IA function could be better equipped to deter REM if it holds
that the IA function performs more operational than financial assurance activities (Gramling et al.
2004). It is during these operational audits that IAs develop the independent knowledge of the
company and its processes that can make them uniquely qualified to assess the adequacy of
managements decisions. For reasons such as this, the IA function is often used as a management
training ground (Messier et al. 2011). In addition, prior research indicates that this knowledge of
the operations and sufficiency of internal controls is indeed beneficial to IA assurance activities
related to the examination of financial reporting (Prawitt, Sharp, and Wood 2011) and financial
statement evaluation (Christ, Sharp, and Wood 2011), and is associated with less AEM (Prawitt et
al. 2009). Specifically, the IA function may be better positioned to generate its own expectations
about managements operational decisions. Developing these expectations could compensate for

any incremental improvement in the effectiveness of CA in deterring earnings management that

might result from separating the two IA roles (assurance and consulting) as discussed below.
Little is known about how managers respond to IA practices that focus either directly or
indirectly on mitigating earnings management, especially REM. However, extant literature and
current practice suggest that the IA function may be uniquely qualified to assess the likelihood of
opportunism in both of its forms. Absent research that suggests specific implications of IA
assurance on REM, I pose the following research question:
RQ1: Is accruals-based versus real earnings management perceived as more likely in an
internal audit setting?
The Impact of Internal Audit Frequency on Management Opportunism
Audit practitioners and other stakeholders suggest that continuous auditing (CA) affords the
IA function many benefits (Jans et al. 2014). These benefits include the ability to shorten the audit
cycle time, provide more frequent assurance, and increase the number of interactions auditors have
with managers and the audit committee. Taken together, these benefits suggest that use of CA
could result in less management opportunism (AICPA 2012b; PwC 2006). Until recently, the
literature examining the implications of the IA function using CA has been limited. The majority
of the studies focus on the technological aspects of CA (Brown-Liburd et al. (2015); Chiu et al.
(2014); and Brown, Wong, and Baldwin (2007) provide comprehensive reviews of this literature)
while a few recent studies demonstrate how external auditor reliance on the IA function could be
improved when the IA function uses CA (Malaescu and Sutton 2015; Davidson et al. 2013).
Schwartz and Young (2002) provide an explanation for why these expectations may not
hold. In an intra-firm setting in which managers exchanged privately-held information, they
examine the effect of frequency of interaction and ex post verification of this information on how
truthfully managers report their information. They find that verification alone was sufficient to
10

increase honesty. They also note a significant interaction between frequency and verification.
However, the direction of the interaction suggests that the benefit of verification was greater when
managers were randomly matched. Further, the authors find that when managers were
continuously matched, the long-term implications of this matching depended on the reputation the
manager formed in the earlier rounds of the experiment. Taken together, the results of this study
suggest that periodic assurance is more effective than continuous assurance in decreasing the
perceived likelihood of earnings management. Accordingly, I pose the following hypothesis:
H1:

Internal auditors will assess the likelihood that a manager engages in earnings
management to be less likely when the IA function uses continuous auditing. 6

The Impact of Internal Auditors Dual Role on Management Opportunism

In the current study, I build on prior research by investigating the dual role of IAs as
providers of both assurance and consulting services to their firm. Consistent with prior research,
I expect that functionally aligning the IA function, such that internal auditors conduct either
assurance or consulting activities, results in greater objectivity and increases management and
other stakeholders perception of IA objectivity (Ahlawat and Lowe 2004). In so doing, I
acknowledge that providing both assurance and consulting services could differ when considering
the internal vs. the external audit setting (e.g., Knechel and Sharma 2012). Auditing standards and
regulations preclude external auditors from providing consulting services to their audit clients
because the additional revenue could increase the perception that auditors will be less willing to
report audit findings to management due to an increase in economic bonding (e.g., Ashbaugh,
LaFond, and Mayhew 2003; Frankel, Johnson, and Nelson 2002; Kinney and Libby 2002). Factors

While I state hypotheses for the overall analyses, I also test each within each of the earnings management settings.

11

such as the size, industry, certifications, and management preferences could affect the amount of
operational vs. financial assurance the IA function performs (Anderson, Christ, Johnstone, and
Rittenberg 2012). These potential differences and the associated emphasis on AEM and REM
could suggest that separating the assurance and consulting functions is a necessarybut not
sufficientcondition in this setting.
The IA setting presents a unique situation in that both managers and IA standards setters
suggest that this dual role adds value to the company in the areas of corporate governance, risk
management, and internal control (IIA 2009a). However, serving in this dual role could present
threats to auditor objectivity. Such threats could include social pressure threats from management;
economic interest threats, if incentive compensation or other benefits are received from the
company; or self-review threats, where the auditor could review his or her own work (Stewart and
Subramaniam 2010). Separating the two functions allows IAs to focus on their specific role as well
as to approach either the consulting or assurance activity more objectively. It can also mitigate the
social pressure and self-review threats. While I hold compensation constant in this study, this
alignment could also address the potential for economic-related conflicts of interest because the
IA function as a whole, regardless of each auditors functional role, would be eligible for any
incentive compensation. This suggests the following hypothesis. Ceteris paribus,
H2:

Internal auditors will assess the likelihood that a manager engages in earnings
management to be less likely when the IA function has separate assurance and
consulting roles.

The Joint Effects of Internal Audit Frequency and Internal Auditors Dual Role
While there is no existing theory to support an interaction between audit frequency and the
dual role of internal auditors, I argue that separating the two roles could improve the perceived
effectiveness of CA, for at least three reasons. First, the auditor is likely to be more critical of the

12

technology prior to use, and is also likely to be more critical in the assessment of its related internal
controls when he or she uses it to conduct assurance activities (Plumlee 1985). Second, as a
provider of assurance alone, the auditor generally has a different relationship with managers. When
properly designed, these two services can be complements and help to increase the value the IA
function adds to the company. However, the goal of assurance is to critically review a particular
division or process, whereas the goal of consulting is generally to advocate for and help to improve
a particular division or process (Brody and Lowe 2000). Finally, it is plausible that the IA function
could be better equipped to deter REM if it holds that the IA function performs more operational
than financial assurance activities. Factors such as the size, industry, certifications, and
management preferences could affect the amount of operational vs. financial assurance the IA
function performs (Anderson, Christ, Johnstone, and Rittenberg 2012). These potential differences
in emphasis on AEM and REM could suggest that separating the assurance and consulting roles is
a necessarybut not sufficientcondition in this setting. As previously indicated, the IA function
may be better positioned to generate its own expectations about managements operational
decisions, expectations that could compensate for any incremental improvement in the
effectiveness of CA in deterring earnings management that might result from separating the two
IA functions. This suggests the following hypothesis. Ceteris paribus,
H3:

Internal Auditors will assess the likelihood that a manager engages in earnings
management to be less likely when the IA function uses CA and has separate
assurance and consulting roles.

The theoretical development of the hypotheses also provides intuition for a more precise
ordering of the effect of continuous auditing on the perceived likelihood of earnings management
that vary in relation to the structure of the IA functions roles. I expect that IAs will perceive
earnings management to be least likely when the IA function uses continuous rather than periodic

13

auditing. I expect this result even when the IA function combines its dual roles, but expect that the
effect will be magnified when the IA function segregates the roles. I expect this difference in
perceptions to occur primarily because of the illumination of the strengths associated with
increased audit frequency and a more objective approach to assurance. Alternatively, I expect that
IAs will perceive earnings management to be most likely when the IA function uses periodic
auditing, even when the IA function segregates its dual roles, but this effect will be magnified
when the IA function combines these roles. Further, it is unclear whether differences in the
perceived likelihood of earnings management will occur when the IA function uses CA and
combines its roles versus when the IA function uses PA and segregates its roles. Combined with
the discussion above, this intuition suggests that the perceived likelihood of earnings management
will be the lowest when the IA function uses CA and segregates its roles; higher when the IA
function uses CA and does not segregate its roles or when the IA function uses periodic auditing
and segregates its roles; and highest when the IA function uses periodic auditing and combines its
roles. I also examine the empirical question of whether differences in this intuition exist by setting.

EXPERIMENTAL APPROACH
In this study, I elicit practicing internal auditors assessments of the likelihood that managers
would use AEM or REM to achieve a specific earnings target, which, if met, would result in those
managers receiving an annual bonus. Although managers may be better able to predict their
responses to the hypothetical case, their predictive capability is limited by their own prior
experience both with earnings manipulation and with the IA function. Further, rather than
measuring management intent, this study focuses on measuring auditors attitude changes
regarding management (e.g., as suggested in Nolder and Kadous 2014). Further, prior research

14

suggests that IAs make decisions about management behavior no differently than managers do, for
several reasons. First, IAs have experience with management at multiple levels and in various
divisions of the company. The Institute of Internal Auditors Professional Standards (IIA 2013)
requires auditors to both identify and understand managements incentives. Accordingly, IAs are
able to estimate how managers would respond. Second, managers may not respond truthfully in
estimating their behavior related to a practice that internal and external stakeholders may deem
unethical. In contrast, IAs do not have managements direct incentives to bias their responses.
Finally, IAs are not bound by the restrictions of accounting and auditing standards (Libby and
Kinney 2000; Nelson et al. 2002).
The experimental instrument is based on prior auditing and CA research (e.g., a review of the
CA literture by Chiu et al. 2014; Ahlawat and Lowe 2004; Hirst 1994) as well as interviews with
three chief audit executives and two IA managers who collectively represent four publicly-traded
companies. Three additional chief audit executives reviewed the final instrument for relevance. In
addition, I conducted two pilot tests. Three accounting faculty and ten accounting Ph.D. students
participated in the first pilot study. Forty masters of accountancy students who were enrolled in an
Internal/Operational Auditing course at a medium-sized southeastern university during the fall of
2013 participated in the second pilot test. Their helpful comments resulted in improvements to the
instructions, in both experimental manipulations, and in the dependent measures.
The Case
Participants learn that the primary financial goal of a hypothetical manufacturing company
is to increase profitability. I measure profitability at the division level as return on investment.
Managers receive an annual bonus when their divisions return on investment exceeds the

15

companys cost of capital (fixed at 12 percent). Any significant IA findings reported to senior
management result in a reduction of the divisional managers return on investment. 7
The case first presents background information about the company, about how the IA
function assigns auditors to assurance and consulting engagements, and about the audit
methodology. Next, the case presents the divisions return on investment for the first half of the
fiscal year, which is currently below the cost of capital at 10 percent, and the return on investment
projection for the full year (11 percent) if the manager does not manipulate income for the division.
Finally, the case presents the manager the option of slightly exceeding the cost of capital in order
to receive the bonus (this is the earnings management type manipulation). Participants are made
aware that if the manager chooses to adjust the underlying accounting information, it will be
reflected in the next internal audit as a variance from the budgeted and prior year amounts, will
require follow-up, and will result in a reduction in the divisions return on investment. The final
phase includes a post-experimental questionnaire. Participants answer demographic and other
classification questions in this section (see Table 1).
Experimental Manipulations
I first manipulate earnings management type (Type) at two levels between subjects, [AEM]
vs. (REM), and operationalize it as follows:
To increase the divisions budgeted annual ROI above the 12 percent cost of capital, the
manager could [reduce bad debt expense] (cut quality control expenditures) for the
second half of FY13.
Related to AEM, the case further indicates that reducing the allowance percentage for
uncollectible accounts for accounts over 90 days due from 50 percent to 25 percent will

In practice, the IA function should report findings to the Audit Committee. I pilot tested senior management
versus Audit Committee and found no difference. Chief audit executives suggested that the terms are synonymous.

16

significantly decrease the bad debt expense (focusing on an accounting estimate). However,
collection patterns for prior years are inconclusive as support for a reduction in the allowance
percentage. Related to REM, the case further indicates that cutting quality control expenditures
will result in a reduction of product costs (focusing on the direct cash flow implications). With
these lower costs, the price of products can be reduced and sales should increase. Sales returns in
future years, however, are likely to increase as sales of defective products are returned. While
either option presents the manager with a viable option to reach the bonus target, either because
the underlying support for the alternative is either inconclusive (AEM) or will have more longterm effects (REM), it makes the decision-making process more complex and helps to demonstrate
the amount of judgment required when making these decisions. 8
Next, I manipulate audit frequency (IAFreq) at two levels between subjects, [continuous]
vs. (periodic), and operationalize it as follows:
When the internal audit function performs assurance engagements, it does so on a
[continuous basis using automated software] (rotating basis) such that divisions are
audited [continuously] (once every three years). Any significant variances and control
exceptions are reported [continuously] (whenever the audit is complete) to all divisional
and senior management. The last audit of this division was [yesterday] (last year), and
there were no significant findings.
I pattern the audit frequencies after the traditional and continuous auditing practices currently used
by the IA function to measure the occurrence and timing of audits (Coderre et al. 2005). The CA
condition emphasizes the transactions-based audit with alerts when real-time transactions violate
the pre-established controls. It also highlights the fact that senior management will receive more
timely reports from the IA function. In the periodic auditing condition, the hypothetical IA function
reviews the same information. There exists a more significant delay, however, in relaying any

Pilot study participants and chief audit executives judged the earnings management options to be equally complex.

17

exceptions noted to senior management. I also indicate that the previous audit of the division was
the previous day (year), and there were no significant findings to ensure that participants focus on
the upcoming audit, which could be either the next day or after a delay of two years.
Finally, I manipulate the auditors dual role (IADual) at two levels between subjects,
[separate] versus (combined) consulting and assurance functions, and operationalize it as follows:
Your internal audit department has [separate] (combined) assurance functions (e.g.,
audits) and consulting functions (e.g., special projects like developing new software).
I operationalize the dual roles as a separation between consulting and assurance functions, for two
reasons. First, while all management teams represent the IA function, separating the two potential
roles of the IA (Ahlawat and Lowe 2004) in this study addresses the findings in prior studies that
continuous verification by the same verifier limits the effectiveness of the audit (Schwartz and
Young 2002). Second, one of the primary differences between internal and external auditors is the
perceived potential for economic bondingresulting in a lack of independence (Lin and Tepalagul
(2012)] review this literature). Both IIA standards and internal audit research suggest that the IA
function can increase objectivity related to this duality of roles as provider of assurance and
consulting services by functionally separating auditors who perform consulting and assurance
engagements within the IA function.
[INSERT TABLE 1 HERE]
Participants
Practicing IAs were identified through professional affiliation with the chief audit
executives of six publicly-traded companies as well as with leadership within thirteen chapters of
the Institute of Internal Auditors and the Association of College and University Auditors.
Participants were randomly assigned to one of the eight experimental conditions and assessed the
likelihood that they believe that a manager working for XYZ Manufacturing would adjust
18

accounting data, using randomly assigned measure of earnings management, for the second half
of 2013, using a 10-point Likert-type scale (ranging from Very Unlikely to Very Likely). A total of
410 IAs accessed the instrument online through Qualtrics. However, I exclude 121 (29.51 percent)
who indicated they were not currently practicing as IAs, 12 (2.93 percent) who failed the IADual
manipulation check, three (0.73 percent) who failed the IAFreq manipulation check, and 19 (4.63
percent) who failed both manipulation checks. 9 As noted in Panel A of Table 1, the primary
analyses include 255 internal auditors with an average of 12.56 years of IA experience. In addition,
44.31 percent of the participants were female and 54.51 percent were male. All participants had at
least a bachelors degree, while 30.83 percent had a masters degree (untabulated). Participants
were 63.92 percent staff, senior, and non-management supervisory auditors; 27.45 percent
managers, senior managers, directors, and non-chief audit executive vice presidents; and 8.63
percent chief audit executives. Of the participants, 56.08 percent had at least one certification (e.g.,
CPA, CIA) while 25.10 percent had multiple certifications. Though participants represent a wide
range of industries, the sample reflects significant participation from auditors in the financial
services (14.12 percent), higher education (21.96 percent), technology (10.20 percent), and
transportation (14.51 percent) industries. Because participants were randomly assigned to
conditions, I find no difference in either demographic characteristic by earnings management type.

RESULTS AND ADDITIONAL ANALYSES

Accrual-Based (AEM) vs. Real (REM) Earnings Management
To test my research question and hypotheses, I estimate an ANOVA model of participants
assessments of the likelihood a manager will engage in earnings management (see Panel B of Table

Results are not significantly different including participants failing the manipulation checks.

19

2) with audit frequency (IAFreq), the auditors dual role (IADual), and earnings management type
(Type) as independent variables. Recall that I examine whether there is difference in the
effectiveness of internal audit (IA) assurance on AEM versus REM. As indicated in Panel B of
Table 2 Type is insignificant (F1, 247 = 0.56, p = 0.455), which suggests no overall difference in the
perceived likelihood of AEM vs. REM in this context. Additional tests of means in Table 3 (t = 0.69, p = .493) also corroborate that there is no difference in the perceived likelihood of AEM vs.
REM in this setting. I further explore this relationship in the analyses that follow.
[INSERT TABLE 2 and FIGURE 1 HERE]
[INSERT TABLE 3 and FIGURE 2 HERE]

Hypothesis Testing (Overall)

I examine the effects of increased audit frequency (IAFreq) and functionally separating the IA
functions assurance and consulting activities (IADual) on the perceived likelihood of earnings
management. Based on prior auditing literature, I expect and find (see Panel B of Table 2 and
Figure 1) main effects for both IAFreq (F1, 247 = 35.91, p < .001) and IADual (F1, 247 = 6.07, p =
0.015), which suggests that IAs expect lower likelihoods of earnings management. These results
partially support H1 and H2. While I find an insignificant IAFreq x IADual interaction (F1, 247 =
1.14, p = .287), I do find a marginally significant IADual x Type disordinal interaction (F1, 247 =
2.48, p = .116) suggesting that separating the two IA roles could make a difference depending
upon the earnings management context (see Panel B of Table 2 and Figure 2).
Follow-up simple effects presented in Panel C of Table 2 show that the pattern of cell
means further explains my results and supports my predictions. Specifically, I find that the
likelihood of earnings management is significantly lower in the Continuous Auditing-Separate

20

condition than both the Periodic Auditing-Separate (Cell A vs. Cell B; t = 4.90, p < .001) and the
Periodic Auditing-Combined (Cell A vs. Cell D; t = 5.86, p < .001) conditions, but only marginally
significantly lower than Continuous Auditing-Combined condition (Cell A vs. Cell C; t = 2.34, p
= .091). In addition, I find that the likelihood of earnings management is significantly lower in the
Continuous Auditing-Combined Roles vs. the Periodic Auditing-Combined Roles condition (Cell
C vs. Cell D; t = 3.54, p = .003) and significantly higher in the Periodic Auditing-Separate Roles
condition than Continuous Auditing-Combined Roles condition (Cell B vs. Cell C; t = 2.56, p =
.054). Lastly, I find no statistically significant differences across the Periodic Auditing conditions
(Cell B vs. Cell D; t = 1.01, p = .744). Overall, these findings support increased audit frequency
and the separation of the dual role of the IA help to decrease the likelihood of earnings management
and provide contexts where the joint effects may be more or less effective.
[INSERT TABLE 4 HERE]
[INSERT FIGURE 3 HERE]

Hypothesis Testing (By Earnings Management Type)

I further examine my hypotheses by examining the earnings management contexts
individually. Related to accruals-based earnings management (AEM), as with the overall analyses
I find main effects for both IAFreq (F1, 116 = 19.40, p < .001) and IADual (F1, 116 = 8.92, p = 0.003),
which suggests that each could result in lower likelihoods of AEM (see Panels A and B of Table
4 and Figure 3). This further provides support for H1 and H2, respectively. Unlike the overall
analyses, I do find, as predicted in H3, that functionally separating the IAs roles in this context
incrementally improves the effectiveness of continuous auditing on the likelihood of AEM. The
significant IAFreq x IADual interaction (F1, 116 = 2.74, p = .100) in Panel B of Table 4 partially

21

supports this prediction. Follow-up simple effects tests of means suggest significant differences in
only the Continuous Auditing-Separate Roles versus the Periodic Auditing-Separate Roles (Cell
A vs. Cell B; t =3.92, p = .003) and the Periodic Auditing-Combined Roles (Cell A vs. Cell D; t
=4.81, p < .001) conditions. Related to Real Earnings Management (REM), I find a main effect
for IAFreq (F1, 131 = 17.21, p < .001), but neither a main effect for IADual (F1, 131 = 0.37, p = 0.542)
nor a significant IAFreq x IADual interaction (F1, 131 = 0.01, p = .941) (see Panels A and B of Table
5 and Figure 4). Follow-up simple effects tests of means suggest significant differences in only the
Continuous Auditing-Separate Roles versus the Periodic Auditing-Separate Roles (Cell A vs. Cell
B; t =3.03, p = .053), Continuous Auditing-Separate Roles versus the Periodic Auditing-Combined
(Cell A vs. Cell D; t =3.52, p = .015) and the Continuous Auditing-Combined vs. Separate roles
(Cell C vs. Cell D; t = 3.18, p = .035) conditions. Taken together, these analyses provide additional
support for my hypotheses and raise interesting questions.
[INSERT TABLE 5 HERE]
[INSERT FIGURE 3 HERE]
Additional Analyses
To examine if other factors explain the relationship between and among my primary
independent variables, I examine whether the level of identification with their organization, selfassessed level of professional skepticism, and the amount of assurance experience affect how CA
and the IAs dual role impact IAs perceived likelihood of earnings management.
First, in the post-experimental questionnaire, I measure organizational identification
(Org_ID) to examine whether stronger identification with the auditors employer affects the
perceived likelihoods of AEM and REM. Prior auditing research suggests that IAs identification
with the company precludes them from making objective judgments about management and about

22

how likely they are to report any audit findings (Bame-Aldred et al. 2013). I use a modified version
of the Bamber and Iyer (2002) Organizational Identification Scale. I modify the original
statements to relate them to the hypothetical company in the experiment. The statements include:
(1) If I worked for XYZ Manufacturing, I would take criticism of XYZ Manufacturing
personally; (2) If I worked for XYZ Manufacturing, I would be interested in what others think
about XYZ Manufacturing; and (3) If I worked for XYZ Manufacturing, I would take
compliments about XYZ Manufacturing personally. Participants respond to each question on a
seven-point Likert-type scale with 1 being Strongly Disagree and 7 being Strongly Agree. The
aggregate score from the three questions constitute the Org_ID score. Potential scores range from
3 (very low Org_ID) to 15 (very high Org_ID), where lower scores on the Org_ID scale suggest
IAs may be more objective. The average Org_ID score is 11.86. To examine my research question
and test my hypothesis, I classify participants as low or high Org_ID based on a median split
(12.00). In untabulated results I find a statistically significant and negative correlation between
Org_ID and the perceived likelihood of earnings management.
[INSERT TABLE 6 HERE]

Second, in the post-experimental questionnaire participants completed a modified version

of the Hurtt Scale (Hurtt 2010) which measures trait (or inherent) skepticism. Potential scores
range from 11 (low skepticism) to 31 (high skepticism). The average Hurtt Scale score was 29.04.
To examine the effect of skepticism on the relationship between audit frequency and the dual role
of the IA, I categorize participants, based on a median split (29.00), as either low or high skeptics.
In untabulated results, I do not find that professional skepticism, as measured in this study, is a

23

significant predictor of the likelihood of earnings management in either the overall or earnings
management setting-specific analyses.
Finally, I also examine whether the participants amount of assurance experience affected
their perceptions of the likelihood of earnings management. For the 135 participants who provided
complete data related to this measure, I find that when controlling for years of assurance
experience, the IAFreq (p <.001) and IADual (p = .057) remain statistically significant (see Table
6, Panel A). Unlike the primary analyses, however, I find that the IADual x Type interaction is
highly statistically significant (p = .010). This suggests that the level of experience is a key factor
in IAs assessments of the likelihood of earnings management. I find similar results when
examining the results by earnings management type as my primary analyses. It appears, however,
that the significance of the IADual x Type interaction is driven by a stronger IAFreq x Dual
interaction in the AEM setting (see Table 6, Panels B and C). Interestingly, however, parsing the
sample by position (e.g, staff auditor through chief audit executive), I find that as participants
ascend the ranks in IA, with more experience, they assess the likelihood of earnings management
as less likely (untabulated).
CONCLUSION
In this study, my findings contribute to prior research suggesting that a specific type of
internal audit (IA) assurance, continuous relative to periodic auditing, and functionally separating
the dual role of the IA helps to decrease the perceived likelihood of management opportunism in
two forms, accruals-based (AEM) and real earnings management (REM). While I find that IAs
perceive no difference in the likelihood of managers engaging in AEM vs. REM in this setting,
with respect to the joint effectiveness of CA and the separation of the dual role of the IA, I find
that the perceived likelihood of earnings management overall is lowest when the IA function uses

24

CA and has separate assurance and consulting functions. The particular effectiveness of separating
the dual role of the IA, however, is context-specific, such that IAs expect AEM to be less likely
when the structure of the IA function segregates these roles, but no different in the REM setting.
These findings are consistent with both anecdotal and empirical research on the IA
function, which suggests that IAs familiarity with company operations facilitates the generation
of independent expectations about the feasibility of managements decisions related to real
activities. These findings also support prior research, which suggests that the more subjective
nature of AEM and the fact that there are no direct cash flow implications for AEM results in more
variation in both application and support for managements use of this type of earnings
management. This finding also suggests a greater need for separating the two potential roles of the
IA in the AEM context. In additional analyses, I find that (1) the more IAs identify with their
organization, the more they perceive both forms of earnings management to be more likely; (2)
more skeptical auditors judge the likelihood of earnings management overall and by type no
differently than less skeptical auditors; and (3) the level of assurance experience is a key factor in
IAs assessments of the likelihood of earnings management such that as participants ascend the
ranks, they assess the likelihood of earnings management as less likely.
This study also complements archival research that examines the effect of assurance on the
likelihood of managements earnings management-related decisions. I specifically add to the
literature by examining the perceived effect of IA assurance on earnings management via a more
holistic approach: examining the joint effects of increasing the probability of discoveringand a
potential limitation on the likelihood of reportingpotential opportunism by management. While
I focus on IA assurance, this study also has implications for external auditors and standards setters.
The nature of and restrictions on the external auditors relationship with the company (e.g., per the

25

Sarbanes-Oxley Act of 2002 ) restrict access to data that could enable CA, but innovations within
the profession do allow various data analytics, such as 100 percent testing of transactions and other
analyses, that provide benefits similar to CA. This study provides contexts in which reliance on or
leveraging the work of the IA function could result in subsequent external audit efficiencies (e.g.,
Malaescu and Sutton 2015; Davidson et al. 2013) and assist in the necessary evolution of auditing
standards (Vasarhelyi et al. 2010) and project initiatives (Zhang et al. 2012) designed to address
the aforementioned limitations on the external auditor.
My study has limitations that are typical of experimental studies. The design choices, for
example, create a very specific context that does not include every important feature of auditing
practice. These features could affect the way in which IAs assess the likelihood of management
opportunism. Nonetheless, my setting captures the essential characteristics of both a hypothetical
(continuous auditing) and traditional (periodic auditing) IA setting that allows me to examine the
effect of IA assurance on the likelihood of earnings management. In addition, this design allows
me specifically to examine the effect of internal auditors dual rolemeasured as the separation
of the two potential roles of the IAon the effectiveness of CA, while holding all else constant. I
acknowledge that this is a complex manipulation that likely impacts internal auditors objectivity.
Yet it also impacts other factors, such as who will work in internal audit; the expertise and or
competence of the IA function; the organizational structure and influence of the IA function; and
other significant factors (e.g., as suggested in Burton, Starliper, Summers, and Wood 2015).
Adding additional institutional features, however, is unlikely to change the basic relationship that
is the focus of this study.
My results suggest avenues for further research in auditing. First, while I contribute to the
prior literature that examines the effects of auditing on earnings management, I do not consider

26

how the quality of the IA function, in conjunction with external audit quality, affects how managers
use, shift between, or substitute the two types of earnings management. The extent to which high
quality IAs preclude managers from either of the aforementioned behaviors could be a significant
consideration in assessing the overall strength of a companys corporate governance mechanisms.
Another avenue for future research relates to the use of organizational identification as a proxy for
objectivity. While the auditor reliance literature suggests external auditors do not rely on the IA
function due to a perceived lack of independence and objectivity, both the current study and
Stefaniak et al. (2012) find that IAs who identify more with the company are less likely to accept
a managers preferred position. In conjunction with other factors, such as the use of the IA function
as a management training ground and the amount of career IAs within the IA function, this finding
could nonetheless be a significant consideration in enhancing external auditors reliance decision.

27

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TABLE 1: Descriptive Statistics

Panel A: Means
Age
Years of Assurance Experience
Likelihood of Earnings Managementa

Accruals (AEM)
31 - 40 years
12.50
6.68

Real (REM)
31 - 40 years
12.62
6.51

Participants assessed the likelihood a manager would engage in either accrual-based or real earnings management
(based on random assignment to each setting) on a Likert-type scale from 1 (very unlikely) to 10 (very likely).

Panel B: Percentage of Participants in Each Categoryb,c

Gender
Male
Female
Current Position
Staff Auditors
Senior Auditors
Managers & Senior Managers
Directors & Vice Presidents (non-CAE)
Chief Audit Executives (CAE)
Current Certification(s)d
Certified Internal Auditor (CIA)
Certified Public Accountant (CPA)
Certified Fraud Examiner (CFE)
Certified Information Systems Auditor (CISA)
Multiple Certifications
Other Business Certification (e.g., PMP)
None
Industrye
Financial Services
Government
Higher Education
Technology
Transportation
Other (e.g., Construction, Retail)
b

AEM
(n = 120)
50.83
48.33

REM
(n = 135)
57.78
40.74

34.16
25.00
15.00
6.67
19.17

31.11
22.96
21.48
11.11
13.33

4.17
12.50
3.33
5.00
20.83
6.67
47.50

7.41
9.63
0.00
2.96
28.89
10.37
40.74

15.00
10.83
19.17
10.00
5.00
40.00

13.33
8.89
24.44
10.37
5.19
37.78

There are no statistical differences between the two settings, where p > .90 for all variable comparisons.
Where totals do not equal 100%, participants did not record an answer for this demographic question.
d
Participants had either one, multiple (most frequent combination is CPA/CIA), or no certifications.
e
Internal Auditors in higher education and government also indicated they had significant prior experience in a
publicly-traded company. Responses to the dependent variable are not significantly different for these industries.
The Association of College and University Auditors (ACUA) distributed to the instrument via email to members.
c

33

Figure 1: Audit Frequency x Duality of Roles (Overall)

Likelihood of Earnings Management

7.45
D

7.25
7.05
B
6.85

Separate
Roles

6.65
6.45

Combined
Roles

6.25
6.05
5.85
5.65

5.45

Continuous

Periodic

Participants assessed the likelihood a manager would manipulate earnings (type based on random assignment) on a
Likert-type scale from 1 (very unlikely) to 10 (very likely). I manipulate audit frequency (continuous vs. periodic) and
alignment of the auditors roles (separate vs. combined assurance and consulting functions).

Figure 2: Duality of Roles x Type (Overall)

Likelihood of Earnings Management

7.15
B
7.05
6.95
6.85
Accrual

6.75
6.65

6.55
6.45
6.35
6.25

6.15
Separate Roles

Combined Roles

34

Real

TABLE 2: Likelihood of Earnings Management (Overall)

Panel A: Mean (standard deviation) [N]
Continuous
5.49
(2.02)
Separate Roles
[57]
A

Combined Roles

Combined

Periodic
7.06
(1.39)
[68]
B

Combined
6.34
(1.87)
[125]

6.26
(2.20)
[62]
C

7.37
(1.47)
[68]
D

6.84
(1.93)
[130]

5.89
(2.14)
[119]

7.21
(1.43)
[136]

6.60
(1.91)
[255]

Panel B: ANOVA Results (Audit Frequency x Duality of Roles x Type)

Df
SS
F
IAFreq (H1)
1
113.98
35.91
IADual (H2)
1
19.26
6.07
Type (RQ1)
1
1.78
0.56
IAFreq X IADual (H3)
1
3.61
1.14
IAFreq X Type
1
.0038
0.00
IADual X Type
1
7.88
2.48
IAFreq X IADual X Type
1
4.37
1.38
784.08
Between-subjects error
247

p-value
< .001
.015
.455
.287
.972
.116
.242

Dependent Variable = IAs assessment of the likelihood a manager would engage in either AEM or REM (randomly
assigned) on a Likert-type scale from 1 (very unlikely) to 10 (very likely).
IAFreq = Manipulated between-subjects as continuous (daily) vs. periodic (every three years) internal audits.
IADual = Manipulated between-subjects as separate vs. combined assurance and consulting roles.
Type = Participants were randomly assigned to either the accrual-based or real earnings management setting.

Panel C: Simple Effects

Comparison
Difference
A vs. C
-0.77
A vs. B
-1.57
A vs. D
-1.88
C vs. D
-1.11
B vs. D
-0.31
B vs. C
0.80

Std. Error
.327
.320
.320
.313
.306
.313

Cells are as defined in Panel A.

35

t
2.34
4.90
5.86
3.54
1.01
2.56

p-value
.091
<.001
<.001
.003
.744
.054

Figure 3: Audit Frequency x Duality of Roles (Accrual-Based)

Likelihood of Earnings Management

7.60
D
7.30
B

7.00

Separate
Roles

6.70
C
6.40

Combined
Roles

6.10
5.80
5.50
A

5.20

Continuous

Periodic

Participants assessed the likelihood a manager would manipulate earnings (type based on random assignment) on a
Likert-type scale from 1 (very unlikely) to 10 (very likely). I manipulate audit frequency (continuous vs. periodic) and
alignment of the auditors roles (separate vs. combined assurance and consulting functions).

Figure 4: Audit Frequency x Duality of Roles (Real)

Likelihood of Earnings Management

7.50
D

7.20

B
6.90
Separate
Roles

6.60
6.30

Combined
Roles

6.00
C
5.70

5.40
5.10
Continuous

Periodic

36

TABLE 3: Comparison of the Likelihood of Accrual-Based vs. Real Earnings Management

Panel A: Mean (standard deviation) [N]
Accrual-Based (AEM)
6.68
Likelihood of
(1.83)
Earnings
[120]
Management

Real (REM)
6.51
(1.98)
[135]

Combined
6.60
(1.91)
[255]

Panel B: Independent Samples t-Test comparing AEM to REM

Earnings Management Type
0.165
0.240
253b
0.686
0.493

Meana
Standard deviation
df
t Stat
p-value (two-tailed)
a

Mean value of difference of AEM less REM. Auditors assessment of the likelihood a manager would engage in
AEM and REM measured on a Likert-type scale from 1 (very unlikely) to 10 (very likely).
b
Levene's test was not significant; therefore, I assume variances are equal and use unadjusted degrees of freedom.

37

TABLE 4: Likelihood of Earnings Management (Accrual-Based)

Panel A: Mean (standard deviation) [N]
Continuous
5.26
(1.95)
Separate Roles
[27]
A

Combined Roles

Combined

Periodic
7.10
(1.19)
[31]
B

Combined
6.24
(1.83)
[58]

6.67
(1.95)
[30]
C

7.50
(1.46)
[32]
D

7.10
(1.75)
[62]

6.00
(2.06)
[57]

7.30
(1.34)
[63]

6.68
(1.83)
[120]

Panel B: ANOVA Results (Audit Frequency x Duality of Roles)

Df
SS
IAFreq
1
53.28
IADual
1
24.49
IAFreq X IADual (H1)
1
7.53
Between-subjects error
116
318.56

F
19.40
8.92
2.74

p-value
<.001
.003
.100

Dependent variable = Auditors assessment of the likelihood a manager would engage in accrual-based earnings
management on a Likert-type scale from 1 (very unlikely) to 10 (very likely)
IAFreq = Manipulated between-subjects as continuous (daily) vs. periodic (every three years) internal audits.
IADual = Manipulated between-subjects as separate vs. combined assurance and consulting roles.

Panel C: Simple Effects

Comparison
Difference
A vs. C
-1.41
A vs. B
-1.84
A vs. D
-2.24
C vs. D
-0.43
B vs. D
-0.40
B vs. C
0.83

Std. Error
.473
.469
.466
.456
.449
.453

Cells are as defined in Panel A.

38

t
2.98
3.92
4.81
.94
.90
1.84

p-value
.062
.003
<.001
.982
.986
.593

TABLE 5: Likelihood of Earnings Management (Real)

Panel A: Mean (standard deviation) [N] Cell
Continuous
5.70
(2.09)
Separate Roles
[30]
A

Combined Roles

Combined

Periodic
7.03
(1.55)
[37]
B

Combined
6.43
(1.92)
[67]

5.88
(2.38)
[32]
C

7.25
(1.48)
[36]
D

6.60
(2.06)
[68]

5.79
(2.23)
[62]

7.14
(1.51)
[73]

6.52
(1.98)
[135]

Panel B: ANOVA Results (Audit Frequency x Duality of Roles)

Df
SS
IAFreq
1
61.15
IADual
1
1.33
IAFreq X IADual (H2)
1
0.02
Between-subjects error
131
465.52

F
17.21
0.37
0.01

p-value
<.001
.542
.941

Dependent variable = Auditors assessment of the likelihood a manager would engage in real earnings management
on a Likert-type scale from 1 (very unlikely) to 10 (very likely)
IAFreq = Manipulated between-subjects as continuous (daily) vs. periodic (every three years) internal audits.
IADual = Manipulated between-subjects as separate vs. combined assurance and consulting roles within the internal
audit function.

Panel C: Simple Effects

Comparison
Difference
A vs. C
-0.18
A vs. B
-1.33
A vs. D
-1.55
C vs. D
-1.38
B vs. D
-0.22
B vs. C
1.15

Std. Error
.453
.438
.440
.433
.417
.430

Cells are as defined in Panel A.

39

t
.39
3.03
3.52
3.18
.53
2.68

p-value
1.000
.054
.012
.035
.999
.134

TABLE 6: Likelihood of Earnings Management

(Overall Assurance Experience as Control Variable)*
Panel A: ANOVA Results (Audit Frequency x Duality of Roles x Type)
Df
SS
F
IAFreq (H1)
1
54.63
17.76
IADual (H2)
1
11.35
3.69
Type (RQ1)
1
0.02
0.00
IAFreq X IADual (H3)
1
1.92
0.62
IAFreq X Type
1
0.02
0.01
IADual X Type
1
21.01
6.83
IAFreq X IADual X Type
1
10.49
3.41
378.28
Between-subjects error
123

p-value
< .001
.057
.944
.431
.935
.010
.067

Dependent Variable = Internal auditors assessment of the likelihood a manager would engage in either accrualbased or real earnings management (based on random assignment) on a Likert-type scale from 1 (very unlikely) to
10 (very likely)s mean allocation of resource units
IAFreq = Manipulated between-subjects as continuous (daily) vs. periodic (every three years) internal audits.
IADual = Manipulated between-subjects as separate vs. combined assurance and consulting roles.
Type = Participants were randomly assigned to either the accrual-based or real earnings management setting.
*Where participants answered the demographics, means were adjusted for a covariate [AssurExp_HL measured as
low vs. high based on a median split].

Panel B: ANOVA Results (Audit Frequency x Duality of Roles) Accrual-Based

Df
SS
F
IAFreq
1
24.85
9.78
IADual
1
29.91
11.78
IAFreq X IADual
1
10.11
3.98
Between-subjects error
58
147.32

p-value
.003
..001
.051

Variables as described in Panel A.

Panel C: ANOVA Results (Audit Frequency x Duality of Roles) Real

Df
SS
F
IAFreq
1
30.10
8.47
IADual
1
0.78
0.22
IAFreq X IADual
1
1.82
0.51
Between-subjects error
65
230.96
Variables as described in Panel A.

40

p-value
.005
.640
.476