International Journal of Auditing

Int. J. Audit. 4: 169-176 (2000)

The New Role of the Internal

Auditor: Implications for Internal
Auditor Objectivity
Richard G. Brody and D. Jordan Lowe*
University of Nevada, Las Vegas, USA

The role of the internal auditor continues to evolve. The recent

emphasis on consulting activities has brought new questions
and concerns regarding the ability of internal auditors to
function in an independent and objective manner. The
purpose of this research is to explore whether internal auditors
view their consulting role as one in which they are to provide
objective feedback to management or one in which they are to
provide solutions that they believe are in the best interests of
their company. Specifically, we examine whether the internal
auditors’ judgments are dependent on their company’s role
(buyer or seller) in an acquisition. Results revealed that the
role of the company in the negotiation process did influence
judgments. This suggests that internal auditors are likely to
assume the position that is in the best interests of their
employer. Implications of these results are discussed as are
suggested areas for future research.
Keywords: acquisitions, consulting, independence, internal
auditors, objectivity.

SUMMARY of the organisation such as acquisitions,

Internal auditors have seen their role evolve
from performing traditional internal audit
functions to focusing upon adding value to the
organisation. As evidenced by the new defini-
tion of internal auditing (as adopted by the
Institute of Internal Auditors), the work
performed by internal auditors is not limited to
the area of assurance services, but now includes
consulting activities. Internal auditors are being
asked to provide consulting in various activities
Correspondence to: Department of Accounting, University
of Nevada, Las Vegas, NV 89154-6003. Tel.: (702) 895-1841
dlowe@ccmail.nevada.edu
Data used in this study is available from the authors upon
request.
ISSN 1090–6738
Copyright © 2000 Management Audit Ltd.
mergers, and strategic alliances. This recent
emphasis on consulting has brought new
questions and concerns regarding the ability of
internal auditors to function in an independent
and objective manner.
The purpose of this research is to investigate
the issue of internal auditors’ objectivity with
respect to consulting activities. That is, we
wanted to explore whether internal auditors
view their consulting role as one in which they
are to provide objective feedback to manage-
ment or one in which they are to provide
solutions that they believe are in the best
interests of their company. Specifically, we
examine whether internal auditors’ objectivity is
dependent on their company’s role (buyer vs.
Received May 2000
Revised June 2000
Accepted June 2000
170
seller) in an acquisition setting. Given that the
definition of internal auditing explicitly states
that objectivity is required, the results will
provide some initial evidence regarding the
impact of the expanded scope of internal
auditors’ duties.
An experiment was conducted with 55
internal auditors. Participants were provided
with a cover letter, a brief case scenario and a
questionnaire. Each individual was asked to
assume the role of an internal auditor for either
the buyer or the seller in a corporate acquisition
scenario and to assess the potential obsolescence
of an inventory balance. The value of this
inventory was structured to be essential to the
purchase/selling price of the company. While
participants were presented with the exact same
factual information, their role was manipulated
as either being employed by the buyer or seller
organisation.
Results revealed that the role the company
was taking in the negotiation process influenced
internal auditor judgments. Internal auditors in
the buyer condition expressed a higher degree of
inventory obsolescence and thus correspond-
ingly a lower price in the negotiation process,
and vice-versa for the seller condition. These
results suggest that internal auditors are likely to
assume the position that is in the best interests of
their employer. Thus, the expanded role of the
internal auditor into the consulting arena may
produce some unintended results as individuals
may no longer function in an independent and
objective manner. Future research is clearly
needed to explore these issues as they represent
an emerging trend that has important conse-
quences for the internal audit profession.
INTRODUCTION
The internal audit profession has changed dra-
matically in the last few years as the profession’s
scope has expanded to a much broader
spectrum of activities. Increasingly, internal
auditors are looked upon as service providers
such that their continued existence is dependent
on adding value to the organisation. New
emphasis is being placed on adding continuous
value through the prevention of problems and
the identification of potential risks (Auditwire,
2000). There is also a relatively new focus on risk
management, control, and corporate governance
as the internal audit role goes beyond account-
Copyright © 2000 Management Audit Ltd.
R. G. Brody and D. J. Lowe
ing controls to both understanding and evaluat-
ing the effectiveness of controls in managing
business risk. Furthermore, internal auditors
have been challenged to not only work on
problems but to also work with management to
recommend solutions (Rittenberg, 2000).
The breadth and depth of work performed by
internal auditors can be seen in the recent defi-
nition of internal auditing adopted by the
Institute of Internal Auditors (IIA, 2000):
‘Internal auditing is an independent and
objective assurance and consulting activity
that is guided by a philosophy of adding
value to improve the operations of the
organisation. It assists an organisation in
accomplishing its objectives by bringing a
systematic and disciplined approach to
evaluate and improve the effectiveness of
the organisation’s risk management, control,
and governance processes (emphasis
added).’1
This new definition puts internal auditing into
both the assurance and consulting arena. The
concept of ‘assurance’ implies that the profes-
sion can add value by providing an assessment
of the reliability of the data and operations in
specific organisational settings. This concept
includes all the traditional audit areas (e.g., effi-
ciency, financial, compliance, operational) as
well as newer forms of assurance involving
control and risk management issues (Krogstad et
al., 1999). Consulting differs somewhat from
assurance in its overall objective and context.
Consulting attempts to make direct improve-
ments in the circumstances or conditions of an
organisation. Recently, internal auditors have
been recruited by management to provide con-
sulting in various activities such as ‘acquisitions,
mergers, and strategic alliances’ (Fernandes,
2000).2 In fact, Bell Atlantic’s internal audit
department has adopted the term ‘solution con-
sultants’ as a means of conveying the nature of
their work to their clients (Auditwire, 2000).
Objectivity Issues
The new internal audit definition explicitly
states that internal auditors must remain
objective in their performance of consulting
activities. Relatedly, the IIA Code of Ethics states
that internal auditors must make a balanced
assessment of all the relevant circumstances and
that they are not to be unduly influenced by
Int. J. Audit. 4: 169-176 (2000)
The New Role of the Internal Auditor: Implications for Internal Auditor Objectivity
their own interests or by others in forming their
judgments. That is, their judgments should
reflect an ‘unbiased assessment of the circum-
stances’ (IIA, 1999). In spite of these directives,
internal audit involvement in consulting activi-
ties may result in a perceived (or actual) loss of
objectivity (Galloway, 1995).
When internal auditors consult, they are not
only responsible to senior management and the
audit committee but also to line managers with
whom they develop close working relationships.
Internal auditors may view line managers as
their ‘clients’ in the sense that line management
requests, evaluates, and implements internal
audit consulting work. In these situations,
internal auditors may be less likely to take cor-
rective actions resulting from audit findings
because they do not want to disrupt this client
relationship with management (Houston and
Peters, 1999). Consulting may create a conflict of
interest as internal auditors must concurrently
satisfy line managers and conduct audits in the
same department. Thus, internal auditors are
required to play the role of both monitor and
advisor. This dual role may make it difficult for
the internal auditor to remain objective in his/her
judgments.
Internal auditors become less credible as
monitors if their objectivity (perceived or actual)
is impaired by pressures associated with their
consulting role. This role may also alter external
auditors’ perceptions of the objectivity of
internal auditors. Statement on Auditing
Standards No. 65 (AICPA, 1991) provides
specific guidance to external auditors when con-
sidering the work performed by internal
auditors and when using them to provide direct
assistance with the audit of an entity’s financial
statements.3 External auditors rely upon internal
auditors to some extent on virtually all audits in
areas such as internal control evaluation and
testing and account balance evaluation (Ward
and Robertson, 1980). However, the amount of
reliance is generally based on the objectivity of
the internal auditors and also on the quality and
effectiveness of the work performed (Brody et
al., 1998). Houston and Peters (1999) examined
whether the internal auditor’s involvement in
business consulting activities influenced
external auditors’ reliance upon their work.
Results revealed that when the internal auditor
also assumed a consulting role, external auditors
were more apt to reduce their reliance of the
Copyright © 2000 Management Audit Ltd.
171
work performed by the internal auditors. This
suggests that internal auditors that perform con-
sulting may be perceived as having a ‘mutuality
of interests’ with management and thus a
perceived loss of objectivity in their work.
This exploratory study will examine possible
complications from the expanded role of the
internal auditor. We plan to investigate if
internal auditors are able to remain objective in
their role as a consultant to management. That
is, we examine whether internal auditors view
their consulting role as one in which they are to
provide objective feedback to management or
one in which they are to provide solutions that
they believe are in the best interests of their
company. For instance, do internal auditors see
themselves as providers of objective input to
management or as more of a direct part of the
decision-making function? Can internal auditors
be truly objective when their continued
existence is dependent on adding value to the
organisation?
RESEARCH METHOD
The overall purpose of this research is to identify
whether internal auditors’ objectivity is subject
to the interests of their company. Specifically, we
wanted to examine whether the internal
auditor’s judgments are dependent on their
company’s role (buyer vs. seller) in the acquisi-
tion process. The experimental design resulted
in two groups that were used to assess our
research questions. Internal auditors were
provided with identical acquisition cases, except
that the role of the buyer and seller was manip-
ulated between groups. That is, half of the
participants were given the buyer version of the
case and the other half were provided with the
seller version. Because a between-subjects
design was employed, identification of the exact
nature of the manipulation was difficult (or
impossible) for individuals to assess (see Pany
and Reckers, 1987).
Participants
In order to obtain relevant data requiring indi-
viduals from a wide variety of institutions, a
significant portion of research with internal
auditors (e.g., Greenspan et al., 1994; Felix et al.,
1999) has used mail questionnaires. We followed
this same approach. Case instruments were
Int. J. Audit. 4: 169-176 (2000)
172 R. G. Brody and D. J. Lowe

mailed to 122 internal auditors from a local auditors, members of the IIA staff, and Haynes et
chapter of the IIA. Fifty-five usable responses al. 1998. Pilot tests and discussions with
were received representing an effective response internal auditors indicated that the case was
rate of 45%. The average age of the internal realistic and reflective of the current internal
auditors was 40 years. Internal audit experience audit environment.
ranged from 1 to 25 years, with a mean of about The case scenario involved a diversified fabric
8 years. Sixty-seven percent were males. No manufacturer that was in the process of
demographic differences were found for those acquiring a mid-sized children’s apparel
receiving the buyer and seller versions of the company. The focal point of the negotiation
case suggesting that randomisation of the process was the potential obsolescence of the
groups was successful. apparel company’s inventory. Audit evidence
was presented which both supported and dis-
TABLE 1 counted the existence of inventory obsolescence.
Internal Auditors The value of the inventory was essential in
Demographic and Other Information establishing the selling/purchase price of the
company. As the proposed acquisition was con-
Panel A: Continuous Measures ditioned upon continued strong financial
Min Max Mean Std Dev. performance, the decision regarding inventory
obsolescence was crucial.
Age (years) 22 70 39.87 10.55
Experience (years) 1 25 8.05 6.06 Independent Measure
Appropriate to
The independent measure was the position of
Perform Consulting? 1 10 7.47 2.99
the internal auditor in the acquisition process—
Should Int. Auditors Be buyer or seller. This operationalisation reflects
Completely Objective? 1 10 8.91 1.76 the opposing positions in the acquisition process
and allows for an examination of how the
Panel B: Discrete Measures differing perspectives of the ‘buyer’ internal
auditor and ‘seller’ internal auditor affect, if at
Level N % all, interpretations of an inventory balance. To
Gender Male 37 67 enable individuals to accept their role as either
Female 18 33 the internal auditor for the buyer or seller, we
Prior Participation in Yes 14 25 presented the task in the form of a memo to the
an Acquisition Audit? No 41 75 staff of the internal audit department.
Manipulation checks were used to assess partic-
Awareness of New IIA Yes 29 53
ipants’ awareness of their role as either the
Definition? No 26 47
internal auditor for the buyer or seller.
Participants were asked (without looking back)
Research Task to indicate whether they were employed by
either the buyer or seller. Five individuals failed
Internal auditors were mailed a set of the manipulation checks. For the purpose of sta-
materials consisting of (1) a cover letter, (2) a tistical analyses, those responses that failed the
brief case scenario, and (3) a questionnaire. The manipulation checks were omitted from all
research task required internal auditors to analyses and results.4
review a corporate acquisition scenario and
assess whether the acquiring company’s Dependent Measures
inventory was obsolete and thus required a
write-down. An acquisition scenario was chosen Internal auditors were asked to make a
as it represents an area in which internal judgment regarding inventory obsolescence and
auditors are presently performing consulting then to make a subsequent recommendation to
within their respective organisations (Brody and management. Specifically, we asked the
Kaplan, 1996; Fernandes, 2000). The case was following question, ‘What do you estimate as
constructed based on discussions with internal the probability that an inventory obsolescence

Copyright © 2000 Management Audit Ltd. Int. J. Audit. 4: 169-176 (2000)

The New Role of the Internal Auditor: Implications for Internal Auditor Objectivity 173

problem exists for the product line discussed in
the case?’ A probability scale anchored on 0% to
100% was used. Based on their response to this
question, internal auditors were asked to
‘Estimate the likelihood that you would propose
an inventory write-down to management?’ A ten
point scale anchored on 1 (Definitely Not
Propose an Adjustment) and 10 (Definitely
Propose an Adjustment) was utilised.5
RESULTS
Probability Judgment
As shown in Table 2, Panel A, the t-tests results
indicate that internal auditors’ probability
judgments varied significantly across buyer and
seller conditions (t = 3.94, p < .001). Individuals
in the buyer condition (62.76%) provided signif-
icantly higher likelihood assessments that an
inventory obsolescence problem existed than
individuals in the seller condition (37.31%).
These results suggest that internal auditors are
partial to their company’s interests in assessing
the degree of inventory obsolescence. That is,
internal auditors in the buyer condition
expressed a higher degree of inventory obsoles-
cence and thus correspondingly a lower price in
the negotiation process, and vice-versa for the
seller condition.
Relatedly, we also inquired whether they
believed their inventory assessments should
affect the purchase (selling) price of the
company in question. A ten point scale anchored
on 1 (Very Little) and 10 (To a Large Degree) was
used. Interestingly, we found that these assess-
ments did not correspond into symmetric
adjustments to the purchase and selling price.
That is, internal auditors in the buyer condition
(mean of 7.82) were significantly more likely (t =
3.48, p< .001) to believe that the inventory
assessment should affect the purchase (selling)
price than their counterparts in the seller
condition (mean of 5.58). Apparently, internal
auditors in the buyer condition were more apt to
believe that inventory obsolescence is a problem
(and an unexpected event) and thus should cor-
respond to an adjustment in the purchase price.
However, internal auditors in the seller
condition may have looked upon the lack of
inventory obsolescence problems as something
expected (or a nonevent) and thus not a factor in
the negotiation process.
Inventory Write-down Recommendation
Having substantiated that the company’s role in
the acquisition process influenced internal
auditors’ probability assessments, the next step
was to determine whether these assessments

TABLE 2
Treatment Means and Significance Levels
Panel A. Probability Judgments
Group N Meana Std Dev. t df Sign. Level
Buyer 29 62.76 24.48 3.94 53 <.001
Seller 26 37.31 23.25

Panel B. Inventory Probability Recommendations

Group N Meanb Std Dev. t df Sign. Level
Buyer 29 6.93 2.12 3.30 53 .002
Seller 26 4.69 2.90
aMean assessment of the probability that an inventory obsolescence problem exists for the product
line discussed in the case. A probability scale anchored on 0% to 100% was used.
bMean likelihood that an inventory write-down should be proposed to management. A probability

scale anchored on 0% to 100% was used. A ten point scale anchored on 1 (Definitely Not Propose an
Adjustment) and 10 (Definitely Propose an Adjustment) was utilized.

Copyright © 2000 Management Audit Ltd. Int. J. Audit. 4: 169-176 (2000)

174
would translate into inventory write-down rec-
ommendations. The t-test results indicate that
the company’s role in the acquisition process
was significant (t = 3.30, p = .002), as shown in
Table 2, Panel B. As expected, internal auditors
in the buyer condition (mean of 6.93) were sig-
nificantly more likely to propose an inventory
writedown than internal auditors in the seller
condition (mean of 4.69). These results are con-
sistent with those found for the probability
assessments.
Taken together, these results indicate that the
role the company was taking in the negotiation
process influenced internal auditor judgments.
This was in spite of the fact that these same
internal auditors strongly agreed (mean of 8.91
on a 1 - 10 scale where 10 is ‘completely
objective’ and 1 is ‘not objective’) that they
should be completely objective in how their assess-
ments and/or decision affect their company.
This interesting inconsistency suggests two
things. First, internal auditors are not aware of
their inherent biases toward their company
interests. Second, while internal auditors believe
that they should be objective, they are unable to
do so in a realistic case scenario.
Additional Analysis
We also performed additional analyses in an
effort to gain further insights into these issues.
Of most importance we wanted to determine if
knowledge of the new internal auditing defini-
tion influenced internal auditors’ inventory
assessments and/or inventory writedown rec-
ommendations. Results revealed no significant
differences among internal auditors with and
without knowledge of this new definition.
However, we did find that those internal
auditors who were aware of the new internal
audit definition (52.72%) were significantly
more likely (8.72) to believe that it is appropriate
for internal auditors to perform consulting for
their company than those internal auditors who
were not aware of the new definition (6.08)
(based on a 1 – 10 scale, 10 reflects ‘definitely
appropriate’). We also ascertained whether any
demographic measures (e.g., age, gender) influ-
enced internal auditors’ judgments. This
analysis indicated that none of the demographic
measures were related to the dependent
measures.
Copyright © 2000 Management Audit Ltd.
R. G. Brody and D. J. Lowe
LIMITATIONS
Before discussing the results of our study, it is
first appropriate to note certain limitations. First,
the experimental materials may not have
contained all the richness of a real world setting.
The materials likely excluded certain factors
potentially relevant to an inventory obsoles-
cence task. Second, our sample size was limited
which may affect the generalisability of our
results. Third, the internal auditors in our study
were not accountable for their decisions as they
would be in a professional work environment.
Potentially, our results might not generalise to
an environment where internal auditors are held
more accountable for their decisions. Finally, as
with behavioural experiments in general, this
experiment is subject to other inherent limita-
tions; therefore, results should be interpreted
with care.
DISCUSSION AND IMPLICATIONS
This study clearly demonstrates that the benefits
resulting from expanding the role of the internal
auditor are likely to produce some unintended
results. While it is important for internal
auditors to add value to their organisation, it is
critical that they remain independent and
objective members of the organisation. As
internal auditors increasingly are placed into the
role of ‘consultants’, they may not be able to
function in an independent and objective
manner.
While it is reasonable to conclude that internal
auditors (via their extensive knowledge and
experience with the inner workings of their
company) are excellent candidates to become
more involved with top management as consult-
ants, such involvement raises several issues.
First, is it appropriate for internal auditors to
sacrifice their independence and objectivity as
they pursue this expanded role? Given the
general nature of a consultant’s role, a signifi-
cant amount of judgment is often involved. As
demonstrated by the present study, internal
auditors are likely to assume the position that is
in the best interests of their employer. This pref-
erential position could potentially impact other
judgments made in a non-consulting role. That
is, can it reasonably be expected that internal
auditors can wear both hats as they move from a
Int. J. Audit. 4: 169-176 (2000)
The New Role of the Internal Auditor: Implications for Internal Auditor Objectivity
position of consultant to one of unbiased
evaluator?
A second critical issue relates to the impact of
the expanded internal auditors’ role on their
relationship with external auditors. While some
progress has been made on this relationship
over the past several years, it is not clear that
external auditors will view this new role of
internal auditors in a favourable light. This is
important as Generally Accepted Auditing
Standards (GAAS) require an independent and
objective internal audit function as a prerequi-
site for external auditors in relying upon the
internal auditors’ work. As independence and
objectivity are sacrificed in an attempt to add
value to their organisation, internal auditors
may find that their role with external auditors is
reduced. Less reliance on the work of internal
auditors would reasonably be expected to
translate into higher external audit fees.
Companies may want to give further considera-
tion to the effects of the internal auditors’
expanded role on the perspective of external
auditors. Furthermore, these effects could be
extended to stockholders who are likely to
expect (ex-ante) that the internal audit function
is an objective process. It is conceivable that
companies may face potential legal problems for
failing to recognise the consequences of
allowing internal auditors to function as
anything but independent and objective
members of the organisation.
The inherent conflict in the internal auditor’s
role as both consultant and monitor may have
important policy implications for standard
setters. Standard setters should consider
amending existing standards to address this
inherent conflict in roles. Guidance could be
helpful in outlining the conditions in which
internal auditors are to perform each of their
roles. For instance, companies could be
required to separate internal audit into respec-
tive audit and consulting groups, and thereby,
preclude internal auditors from performing
tasks outside their given group. However, this
arrangement may be difficult to achieve in small
to medium-sized companies. Future research is
needed to examine this potential separation of
duties.
Finally, internal auditors must continue to
demonstrate that they add value to their organi-
sation. However, performing the role as a
consultant should not take precedence over
Copyright © 2000 Management Audit Ltd.
175
maintaining an independent and objective
attitude, as this is and always has been the
unique aspect of the internal auditor’s role in the
organisation. Future research is clearly needed
to explore these issues as they represent an
emerging trend that has important conse-
quences for those involved in and those
influenced by the internal audit function.
ENDNOTES
1. On June 26, 1999, the IIA Board of Directors
unanimously approved a new definition of
internal auditing and a Professional Practices
Framework. The definition and framework
are the product of several years of work by
the Guidance Task Force, formed in 1997 to
review the status of guidance provided to
internal auditors and to recommend ways to
improve guidance content and delivery (IIA,
2000).
2. Internal auditors are also involved with
systems development and the proliferation
of electronic commerce, earnings reporting,
environmental risk management, and global
business operations (Fernandes, 2000).
3. Statement on Auditing Standard (SAS) No.
65 requires external auditors conducting
audits of clients with an internal audit
department to assess internal competence,
objectivity, and work performance as a basis
for deciding whether and how much to (1)
rely on work already performed by internal
auditors; and/or (2) use the internal auditors
as assistants (AICPA, 1991).
4. Statistical analyses were run both with and
without those who failed the manipulation
check questions. The effect on results was
minimal and did not affect our conclusions.
5. We also asked participants to list three items
that are the most important factors in
assessing inventory. This was done to
encourage participants to review these
factors which should be helpful in complet-
ing the inventory assessment task.
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AUTHOR PROFILES
Richard G. Brody is an associate professor at
the University of Nevada, Las Vegas. His
research interests are in behavioural auditing
and managerial issues. He has published in
Auditing: A Journal of Practice and Theory,
Accounting and Business Research, Accounting
Horizons, Advances in Behavioural Research in
Accounting, and several other journals. He serves
on the editorial board for Auditing: A Journal of
Practice and Theory and reviews for other
journals on a regular basis. Dr. Brody was the
recent recipient of the outstanding researcher in
the College of Business at UNLV.
D. Jordan Lowe is an associate professor at the
University of Nevada, Las Vegas. Dr. Lowe’s
research interests include auditor decision
making and auditor legal liability. He has
published in such journals as Decision Sciences,
Auditing: A Journal of Practice and Theory,
Behavioural Research in Accounting, Journal of
Accounting and Public Policy, as well as other
journals. He has also received research grants
from KPMG Peat Marwick Foundation’s
Research Opportunities in Auditing Program
and Ernst and Young Dissertation Grant
Program. He serves on the editorial board for
Advances in Accounting and also serves as a
reviewer for other journals.
Int. J. Audit. 4: 169-176 (2000)