The effect of continuous auditing and role duality on the incidence and likelihood of reporting management opportunism

This study examines whether continuous auditing and functionally separating the internal audit function’s (IAF) dual role as provider of both assurance and consulting affect (1) internal auditors’ perceptions of the likelihood management opportunistically manipulates earnings and (2) the likelihood auditors report evidence of these reporting choices. Participants are 188 practicing internal auditors. Related to the first research question, I predict and find an ordinal interaction that suggests the perceived likelihood of earnings manipulation is least likely when the IAF both employs continuous auditing and functionally separates its roles. Related to the second research question, I find that separating the dual role increases the likelihood of reporting. In addition, how auditors perceive the likelihood of earnings manipulation positively affects the likelihood of reporting. Subsequent analyses examining both research questions in the context of accruals-based versus real earnings management suggest a more nuanced story. Related to the perceived likelihood of earnings manipulation, I find a similar ordinal interaction in the accruals setting but only find a main effect of continuous auditing in the real earnings management setting. Related to the likelihood of reporting, I find no significant effects in the accruals setting, but find that either continuous auditing or functional separation of the IAF’s dual role increases the likelihood of reporting identified incidences of real earnings manipulation. This study has implications for auditors, managers, and accounting researchers.