3 Insider Trading from Internal Auditor’s Perspective Lawrence Chui University of North Texas, P.O. 305219, Denton TX 76201 Phone: (940) 565-3172 Fax: (940) 565-3803 lawrence.chui@unt.edu Mary B. Curtis University of North Texas, P.O. 305219, Denton TX 76201 Phone: (940) 565-4366 Fax: (940) 565-3803 mary.curtis@unt.edu ABSTRACT This paper explores the effectiveness of internal auditors as control mechanism over insider trading. We examine how contextual factors affect internal auditors’ ethicality judgments of insider trading. We also investigate whether independent reporting structure and familiarity with insider trading laws including company policies influence internal auditors’ willingness to pursue illegal trading activities. One Hundred internal auditors participated in our electronic survey. Our results reveal that internal auditors are less likely than others to be swayed by contextual factors in their perceptions of trading activity. However, our results also suggest that the internal audit profession is under-educated regarding insider trading laws. INTRODUCTION The stock options frenzy in the 90s resulted in top executives receiving massive grants of stock options, motivating them to boost their companies’ stock by beating Wall Street’s expectations. Corporate insiders, faced with astronomical incentives, were led to “pick their moment to buy low, sell high and cash in big on company stock” (Sullivan 2002). Unfortunately, this incentive led some to use their insider (non-public) knowledge to their personal advantage in illegally setting and trading stock options and securities. Our goal in this study is to explore the effectiveness of one possible control mechanism over insider trading – internal auditors. Our study addresses three issues related to insider trading and internal auditors: contextual factors that could impact auditors’ ethicality judgments of insider trading, independence of internal auditor reporting structure and severity of insider trading penalties that could impair auditors’ willingness to pursue such matters, and internal auditors lack of