Does reputation influence internal auditor decision-making?
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Journal Title
Journal ISSN
Volume Title
School of Business |
Master's thesis
Author
Date
2024
Department
Major/Subject
Mcode
Degree programme
Accounting
Language
en
Pages
56
Series
Abstract
The role of the internal auditor is becoming increasingly crucial in corporate governance, attracting significant attention from both the theoretical and practical fields on how to enhance the quality of internal auditing. Numerous studies approach their subjects from a variety of perspectives, and I choose to base my study on game theory and reputation for two compelling reasons. Firstly, it aligns with the nature of my research because inherent conflicts exist between managers and internal auditors, essentially constituting a form of a strategic game. Secondly, reputation refers to an effective incentive within the field of economics and management, this approach opens a novel perspective for scrutinizing the actions of internal auditors, enabling them to offer valuable recommendations for enhanc-ing fraud management strategies. The focus of my attention lies in examining whether the reputation of internal auditors serves as motivation for their diligence and whether the reputation of managers poses challenges for internal audi-tors in detecting fraudulent activities. Based on Mixed-Strategy Nash Equilibrium, on the one hand, I analyze the internal auditor's role in the internal reputation-building process, the presence of misconduct in management, and the effectiveness of internal auditors in overseeing it, pointing out that the internal auditor can effectively restrain the management's tendency to violate the rules by increasing the supervision or improving its reputation in the management's mind. In particular, I design two types of IA in the model, which are high ability and low ability. Through the discussion of the equilibrium results of this game model, I analyze the optimal strategies of company managers and auditors as well as the possible results of repeating the game model for multiple periods. It is then suggested that enterprises should raise the organizational status of internal auditing and internal auditors should focus on building internal reputation. Furthermore, even in the absence of cash incentives, internal auditors will strive to detect fraud to the best of their ability due to reputation incentives. Additionally, companies have the option to add penalties for managers or reduce audit costs to diminish the likelihood of fraudulent activities. On the other hand, I also design another model to observe the manager’s reputation. In this model I consider two types of managers, one is a strategic type who can choose to commit fraud or not, and another is a commitment type who always chooses not to commit fraud. The outcome shows that an ongoing updated manager reputation can also affect IA’s strategic choices. Although the manager has a good reputation at the moment, IA should adopt a cautious attitude to perform their auditing duties effectively. Otherwise, IA may not put more effort into the audit in the next period since no fraud has been detected.Description
Thesis advisor
Sinha, VikashHauser, Daniel
Keywords
internal auditor, incomplete information game, reputation, MNSE
