（2006）Intended and Unintended Consequences of Continuous Auditing and Incentive Compensation.pdfVIP

Intended and Unintended Consequences of Continuous Auditing and Incentive Compensation: Trapped Between Risk and Reward James E. Hunton Darald and Juliet Libby Professor Accountancy Department Bentley College Phone: (781) 891-2422 E-mail: jhunton @ Elaine Mauldin Associate Professor BKD Professor School of Accountancy University of Missouri-Columbia Phone: (573) 884-0933 E-mail: mauldin @ Patrick Wheeler Assistant Professor School of Accountancy University of Missouri-Columbia Phone: (573) 882-6056 E-mail: wheelerp @ December 1, 2006 DRAFT Intended and Unintended Consequences of Continuous Auditing and Incentive Compensation: Trapped Between Risk and Reward Abstract: Two control mechanisms used to align principal-agent interests are monitoring and incentives. Continuous auditing reflects a type of monitoring aimed at providing principals with timely and reliable feedback of agents’ behaviors. Performance-based bonuses represent an incentive scheme intended to focus agents’ efforts on principals’ interests. We suggest that organizations should consider behavioral implications when implementing continuous auditing because electronic surveillance of this nature can yield desirable and undesirable effects. Seventy-two experienced corporate managers participate in a randomized, between-participants experiment that varies internal auditing frequency (continuous or periodic) and incentive horizon (short-term or long-term). The results indicate that earnings management behavior is relatively high when a short-term incentive