SYNOPSIS This study develops and tests a conceptual model articulating factors associated with internal audit function size in the post-SOX era. These factors include audit committee characteristics, internal audit characteristics and mission, internal audit activities performed by others (including outsourced providers and other divisions within the organization), and organization characteristics. Results from a survey of 173 public and private companies reveal that internal audit function size is positively associated with: (1) better audit committee governance, (2) greater organizational experience of the chief audit executive, (3) missions involving IT auditing, (4) the use of sophisticated audit technologies, (5) the use of a staffing model in which internal audit is used for rotational leadership development, (6) organization size, and (7) the number of foreign subsidiaries that the organization possesses. Further, internal audit function size is inversely associated with: (1) the percentage of internal audit employees that are Certified Internal Auditors, and (2) the extent of assurance and compliance activities outsourced to outsiders. These results contribute to prior literature on internal audit function size by considering a variety of factors that are associated with internal audit function size in the contemporary era. Data Availability: Contact the authors.

Data analytics is transforming our global markets and significantly impacting the financial reporting environment. We investigate how auditors, company managers, and regulation interact with data analytics and one another to affect the diffusion (i.e., development and spread) of data analytics throughout the financial reporting environment. We interview company managers and their audit partners, as well as additional stakeholders, including regulators. We interpret findings from our interviews using theory that highlights the importance of dynamic interactions between people and their environments, which include the prevailing rules (e.g., regulatory guidance). Our findings contribute to the accounting literature and practice by revealing three areas of conflict emerging from stakeholders' disparate preferences for data analytics. First, we uncover growing tensions between managers and audit partners regarding audit fees. Second, we find that managers and auditors believe the lack of accounting regulation specific to data analytics causes confusion and frustration. Finally, auditors report that they strategically leverage data analytics to provide clients with business‐related insights. However, regulators voice concerns that this practice might impair auditor independence and reduce audit quality. These areas of conflict suggest a need to revisit key tensions surrounding the audit function in a contemporary context characterized with significant technological shift.

In this study, we examine the effect of incentive contract framing on agent effort in an incomplete contract setting. Prior research suggests that when governed by complete incentive contracts, agents exert greater effort under penalty contracts relative to bonus contracts. However, in an incomplete contract setting, in which the incentive contract does not govern all tasks for which the agent is responsible, the agent's trust in the principal is relevant. In this setting, we predict that bonus contracts create a more trusting environment, and this effect spills over to tasks not governed by the incentive contract, such that bonus contracts elicit greater effort on these tasks as compared to penalty contracts. We develop and experimentally validate a theoretical model of the effects of contract frame on trust and effort in this incomplete contract setting. The main intuition behind the model is that the framing of an incentive contract affects the degree to which the contract terms are interpreted by the agent as a signal of mistrust. More specifically, penalty contracts engender greater distrust than do bonus contracts and, therefore, when contracts are incomplete, penalty contracts lead to lower effort on tasks not governed by the contract than do bonus contracts.

Prior academic research finds that formal controls can cause employees to engage in dysfunctional behaviors (e.g., decreased effort, fraud, or theft). This study investigates one specific aspect of formal control that contributes to employees' negative reactions—employees' beliefs about management's intentions signaled by the control. I use two interactive experiments to examine the effects on employee effort and firm profit of: (1) employees' beliefs regarding management's intentions when implementing control (i.e., perceived intentionality), and (2) employees' preferences for reciprocity. Consistent with prior literature, I find that formal control can cause employees to exert low effort, resulting in reduced firm profit. However, I find that the adverse consequences only occur when management clearly imposes the control and, therefore, employees interpret it as a signal of distrust. Further, employees respond negatively to controls that are unambiguously imposed by managers, even when managers have entrusted them with a large amount of resources. Thus, when employees are faced with simultaneous, conflicting signals regarding managers' trust, the distrust signaled by the control crowds out employees' positive reciprocity. Alternatively, when managers' intentions for imposing control are ambiguous or clearly do not signal distrust (i.e., it is exogenously imposed), the control does not cause such negative effects. I find that all of the observed effects persist over time. In supplemental analysis, I also find that managers accurately predict that employees' response to formal control is influenced by their beliefs regarding management's intentions, and entrust fewer resources to employees when they have imposed the control than when it is imposed exogenously. The results of this study suggest that organizations should carefully consider employees' beliefs about management's intentions when implementing formal controls, because these beliefs influence employee behavior.

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