Incentives for Dishonesty: An Experimental Study with Internal Auditors.

• In Event: Breakfast and Research & Education Table Forum
  In Roundtable Session: Table 10: Audit deficiencies

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. It has been suggested in the literature that incentive-pay compensation for auditors has the potential to lead to dishonest behavior, for instance when their payoff depends on the performance of the unit they are auditing. In line with our hypotheses, we find that incentive-based compensation increases dishonest behavior among internal auditors: competitive incentives lead to under-reporting of other participants’ performance, while collective incentives lead to over-reporting of performance. In addition, we find that moving from an environment with objective performance evaluation towards a peer evaluation scheme reduces performance. This highlights the importance of improving the precision of evaluation procedures in organizations.

Authors

• Loukas Balafoutas, University of Innsbruck

• Simon Czermak, Management Center Innsbruck

• Marc Eulerich, University Duisburg-Essen

• Helena Fornwagner, University of Innsbruck