ESCALATION OF COMMITMENT AS A THREAT TO INTERNAL AUDITOR OBJECTIVITY

Research in psychology has examined a phenomenon called "escalation of commitment." Escalation of commitment situations are defined as predicaments where costs are suffered in a course of action and subsequent activities have the potential to either reverse or compound one's initial losses. Escalation refers to the tendency for decision makers to persist with failing courses of action. Internal auditors are often placed into situations in which sequential judgments are required and, as a result, they may fail to fully compensate for a deteriorating situation. It is not known whether the decision to escalate is a conscious or an unconscious one.; A behavioral experiment was conducted with 107 individuals attending a monthly meeting of the Institute of Internal Auditors in three cities. Subjects were presented with a hypothetical "ad hoc" audit of a potential acquisition candidate. They were asked to make judgments regarding the risk potential of the company being considered for acquisition. Level of responsibility was manipulated as: (1) low, (2) high responsibility only (treatment one), (3) high responsibility with accountability for decision outcome (treatment two), (4) high responsibility with counterexplanation (debiasing one), and (5) high responsibility with accountability for decision process (debiasing two).; Results indicate that internal auditors in conditions of high responsibility consistently evaluate a deteriorating situation more favorably than do internal auditors in a condition of low responsibility. The results are consistent with either an internal or external justification explanation. Additional analyses revealed that the recall of subjects in the high responsibility conditions was not significantly different from that of the subjects in the low responsibility condition. These results are consistent with the interpretation that the decision to escalate is a conscious one.; The counterexplanation debiasing strategy was found to be somewhat successful in eliminating escalation. Contrary to expectations, the accountability for decision process debiasing strategy was not successful. Internal auditors in all of the high responsibility conditions were susceptible to the escalation phenomenon. These results indicate that internal auditors' objectivity may be threatened when sequential judgments are required.