Could perverse incentives encourage financial services compliance and internal audit staff to ignore or engage in illegal behaviour?

Purpose - The purpose of this paper is to understand why managers, internal auditors and compliance staff (in financial firms specifically and using Malaysia as a concrete example) can want to ignore compliance-related legislation (a law on anticompetitive behaviour in this case). Design/methodology/approach - The authors review, discuss and critique the literature on compliance and institutions in the light of existing data from Malaysia’s financial industry (literally confronting theory with data). Findings - Legislative design can actually encourage managers and their auditors disobey/ignore the law for reasons which previous theories cannot explain. Research limitations/implications - This research does not use the regression techniques in vogue now. The findings, nevertheless, imply that attempts to explain phenomenon in management auditing should start with the laws governing managerial activity. Practical implications - Auditors may use the methods used in this study to assess the extent to which financial services firms’ managers have incentives to comply with laws. Similarly, this research can quantify the extent to which internal auditors in these firms have incentives to find untoward conduct. Social implications - Poorly designed laws affecting managerial auditing derive from pre-existing social relationships, as well as help shape them (as shown using data). Identifying areas of non-compliance may actually signal deeper problems in the way businessmen and lawmakers make and enforce laws requiring compliance and self-assessment. Originality/value - The authors know of no study looking at the economic incentives driving internal auditors’ behaviour – particularly in the area of antitrust. They show how law shapes management and auditors’ incentives, quantify these incentives and show how/why previous research fails to explain these incentives.