[This study describes an experiment that examines the effects of managers' perceptions of internal and external auditing on the potential commission of financial reporting irregularities. An earlier study by Uecker et al. (1981) examined the impact of auditor aggressiveness on auditee behavior. By introducing a no-audit condition into the experimental design, this study addresses the fundamental issue of whether the existence of internal and external auditing affects auditee behavior. The study also tests whether the deterrence effects of internal and external auditing are similar. Rather than directly eliciting responses from subjects, this experiment used the quantitative randomized response technique. This method is designed to assure subjects of anonymity and thereby obtain truthful responses to sensitive questions. A total of 264 subjects, the vast majority of whom were experienced managers, made decisions on three cases involving financial reporting issues. The first case, involving a potential write-off of a loan made to a key company officer, was virtually identical to that of Uecker et al. (1981). The second case involved a writedown of inventory to the lower of cost or market. The third case involved an accrual of an invoice for services rendered prior to closing the books. These cases varied several factors expected to impact on the effectiveness of auditing as a deterrent. The factors were: materiality, type of irregularity, perceived extent of GAAP violation, and incentives for misstating income. The decisions were made in a situation in which there was either no auditing at all, only internal auditing, or only external auditing. The results clearly supported internal and external auditing as deterrents to financial reporting irregularities when all of the following four conditions were present: material dollar amounts, irregularities involving asset overstatements, unambiguous GAAP violations, and less incentive for misstating income. However, the deterrent effects cannot be attributed to any one of the conditions. Also, the internal auditing effects were similar to those of external auditing.]

Abstract Reviews the book "Management Control Systems," by Joseph A. Maciariello.

Abstract Reviews the book "A Behavioral Analysis of Joint-Cost Allocation and Transfer Pricing," by Arthur L. Thomas.

Abstract Describes an experiment that examines the effects of managers' perceptions of internal and external auditing on the potential commission of financial reporting irregularities. Deterrence effects of internal and external auditing; Use of quantitative randomized technique.