Potential functional and dysfunctional effects of continuous monitoring

James Hunton, Elaine Mauldin, Patrick Wheeler

Research output: Contribution to journalArticleResearchpeer-review

40 Citations (Scopus)

Abstract

The trend toward continuous monitoring of automated business transactions by the internal audit function is growing as organizations seek to improve internal control. In this study, we demonstrate that continuous monitoring and the time horizon over which performance-contingent incentives are based can interact, thereby yielding potential functional and dysfunctional effects on managerial decisions. Seventy-two experienced corporate managers completed a between-participants experiment that randomized monitoring frequency (periodic or continuous) and incentive horizon (short-term or long-term). We found that earnings management of real activities significantly decreased as the frequency of monitoring increased in the presence of a short-term incentive horizon - a functional effect. However, with a long-term incentive horizon, the participant s willingness to change the current level of investment in a risky but viable project significantly dropped as the frequency of monitoring increased, even though additional investment would enhance the likelihood of the projecta s eventual success - a dysfunctional effect. We also observed that more frequent monitoring significantly decreased the willingness of managers to continue with a risky but viable project regardless of incentive horizon and the effect was significantly pronounced in the presence of a short-term, relative to long-term, incentive horizon - another dysfunctional consequence. Implications of the research findings to theory and practice are discussed.
Original languageEnglish
Pages (from-to)1551 - 1569
Number of pages19
JournalThe Accounting Review
Volume83
Issue number6
DOIs
Publication statusPublished - 2008
Externally publishedYes

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