The relationship between objectivity of internal auditors and incentive based compensation case study of insurance companies in Kenya

Abstract

This study examines the relationship between objectivity of internal auditors and incentive based compensation awarded to them-case study of insurance companies in Kenya, where a survey of the audit head and the audit staff was undertaken to establish the current practice in these areas. The first is the relationship between the internal audit function and the audit committee. It is argued that a good working relationship and preferably a strong one can enhance organizational independence of the internal audit function. The second is the extent to which the internal audit function is used as a management training ground. While acknowledging the benefits of this practice, it is argued that it might affect individual objectivity because internal auditors may be reluctant to withstand pressure from an auditee who could be their future supervisor. The study established that this is a common phenomenon in organizations and that those who believe that they will, in some future date, be in management positions perceive that their objectivity won‟t be impaired perhaps because of the involvement of the audit committee in the affairs of the internal audit function. The other factor examined how incentive based compensation affect internal auditors' reporting decisions. The study sought to find the effect of these schemes through experimentation where the respondents were given a situation of a hypothetical company XYZ Ltd which involved a GAAP violation and asked whether they would report the violation. It was established that they would report the issue irrespective of their compensation scheme probably because they viewed the benefits as short term.