The effect of the implicit theory of integrity on an internal auditor's assessment of management fraud risk

The purpose of this research project is to determine whether the implicit theory of integrity, a theory from the social psychology literature that predicts how social judgments and decisions are made, can explain internal auditors' decisions. The implicit theory (Dweck and Leggett 1988) states that there are two types of people: (1) entity theorists and (2) incremental theorists. Entity theorists form strong inferences from observed behavior that are used to predict future behavior. Incremental theorists, on the other hand, do not infer characteristics from behavior, and therefore, do not attempt to predict future behavior. In an internal auditing context, the implicit theory is applicable to an internal auditor's assessment of management's integrity. A quasi-experiment was used to assess the main effect of integrity cues (three levels of integrity between subjects) on an internal auditors' assessed risk of management fraud based on a hypothetical case. The auditors' implicit theory of integrity (interacted with the integrity cue) is also investigated. These tests offer some evidence in support of the main effect of the integrity cue on the fraud risk assessment, but no evidence is found in support of the interaction effect of the implicit theory.