Incentives for Dishonesty: An Experimental Study With Internal Auditors

Abstract

We conduct an experiment with professional internal auditors and evaluate their performance and objectivity, measured as the extent to which they truthfully report the performance of other participants in a real‐effort task. In line with our hypotheses, we find that incentive‐based compensation increases dishonest behavior: competitive incentives lead to under‐reporting of other participants' performance, while collective incentives lead to over‐reporting of performance. We replicate these results with a student sample. In addition, we find that moving from an environment with objective performance evaluation toward a peer evaluation scheme reduces performance among internal auditors, but not among students.(JEL C93, M42, M52)

The working relationship between internal and external auditors and the moral courage of internal auditors: Tunisian evidence

“…Although the professional and ethical standards of internal auditing functions are designed so that internal auditors act as truth-tellers in organizational contexts; internal auditors still face ethical conflicts (Roussy, 2012) when the disclosure of audit results can have negative effects on their careers (Khelil & Khlif, 2022). Balafoutas et al (2020) recognize the particular importance of objective reporting in the internal audit field due to the conflict of interest. The authors explain that conflicts of interest arise when an internal auditor has a personal interest or a competing professional making the auditors' independent and objective decision-making hardly possible.…”

“…The view of Balafoutas et al (2020) is supported by Khelil and Khlif (2022) who claim that serving different customers (e.g. managers, informal groups in society and audit committees) with conflicting expectations, puts internal auditors under pressure and urges them to follow a strategy of a trade-off between commercial and professional values.…”

“…It is believed that telling the truth by reporting management fraud has various beneficial effects not only for organizations but for society as a whole (Balafoutas, Czermak, Eulerich, & Fornwagner, 2020;Khelil, 2022). Indeed, previous evidence has shown that reporting wrongdoing has protected the interests of several stakeholders including employees, consumers, minority investors and citizens since it allows the company to continue the activity and avoid bankruptcy (Miceli, Near, & Schwenk, 1991;Harbour & Kisfalvi, 2014).…”

“…It is believed that telling the truth by reporting management fraud has various beneficial effects not only for organizations but for society as a whole (Balafoutas, Czermak, Eulerich, & Fornwagner, 2020; Khelil, 2022). Indeed, previous evidence has shown that reporting wrongdoing has protected the interests of several stakeholders…”

Human Ethics and Virtues: Rethinking the Homo-Economicus Model

“…In conjunction, these results suggest that there is a shift in the perception of individuals in groups about the honesty norms in the rest of the population that drives the results. Balafoutas et al (2017) conducted a real e¤ort experiment with professional German internal auditors who are members of the German Institute for Internal Audit. Subjects were given a set of 30 calculations and told that 10 were incorrect.…”