5. Concluding remarks
The aim of this study has been to examine experimentally how dishonest behavior in the form of misreporting the performance of another participant reacts to incentives in the form of different compensation schemes. Using a sample of professional internal auditors recruited during two large conferences of the German Institute of Internal Auditing, we have shown that individuals respond to changes in incentives in the predicted way: on average, they underreport each other’s performance under a competitive compensation scheme and over-report it under a team-based compensation scheme. These findings complement the existing literature and draw attention to the potential perils associated with incentive-based compensation as it is often encountered in organizations. We have argued that professional internal auditors are particularly well suited for the study of these issues, given that they are employed in a sector where honest and objective behavior is among the central guiding principles, and also given that they typically face at least some combination of the type of incentives examined in our experiment.
Our results can make a number of important contributions to the profession of internal auditing. First, we extend prior literature regarding the impairment of internal auditors’ objectivity by demonstrating that the compensation scheme and personal economic interest directly affects the performance and reporting of internal auditors. Extending prior work by Hanafi and Stewart (2015) and Schneider (2003), we examine how internal auditors’ objectivity reacts to economic incentives in the form of a tournament environment with the possibility of sabotage effects and an environment with team-based incentives. Given that the majority of companies use performance-based compensation schemes, our results identify potential risks of this approach. We expand the understanding of internal auditors’ objectivity with regard to tournament environments and question if an MTG arrangement, as a typical example of a real-life tournament among internal auditors, strengthens or threatens their objectivity. Our findings suggest that objectivity and independence, the two main pillars of the whole internal audit profession, can be jeopardized by the potential effects of an MTG environment (as a tournament situation) as well as by a team performance-based compensation scheme. Boards and the Chief Audit Executive are well advised to take these potential threats into accountwhen setting up their internal audit function, and in general we believe that further exploration of potential compensation schemes that avoid these negative effects is a promising avenue for future research.
