document(2).pdf - ACCOUNTING HORIZONS Vol 32 No 2 June 2018 pp 37–55 American Accounting Association DOI 10.2308/acch-52031 IT Does Matter The Folly

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ACCOUNTING HORIZONS American Accounting Association Vol. 32, No. 2 DOI: 10.2308/acch-52031 June 2018 pp. 37–55 IT Does Matter: The Folly of Ignoring IT Material Weaknesses Gene Kim Gene Kim & Associates Vernon J. Richardson University of Arkansas and Xi’an Jiaotong-Liverpool University Marcia Weidenmier Watson The University of North Carolina at Charlotte SYNOPSIS: Information technology (IT) has a large and growing impact on firms and executives. While there are questions about the ability of IT to create a competitive advantage, we make the case that ignoring IT may be to an organization’s and its executives’ peril. Using the lens of internal control issues associated with financial reporting systems, we illustrate how internal control weaknesses associated with IT (ITMWs) can have both a dramatic and negative impact on the firm and its leadership. ITMWs take longer to remediate; are associated with more subsequent restatements, less accurate forecasts, higher audit fees, and lower earnings quality; and are more likely associated with executives losing their positions than non-ITMWs. We argue that ITMW remediation requires more time to plan, rewrite, and implement IT changes than to implement non-IT changes. Extant literature suggests that executives should focus their efforts on IT vulnerabilities and risks rather than IT opportunities. Data Availability: Data are available from the public sources cited in the text. Keywords: Sarbanes-Oxley Act of 2002; information technology material weaknesses; literature review. INTRODUCTION I nformation technology (IT) does matter. This statement implies that IT is of critical importance to organizations and financial reporting systems, and is the position held by many in the academic and business worlds. However, some still wonder if IT is of strategic importance to the firm ( Mithas, Tafti, Bardhan, and Goh 2012 ; Lohr 2016 ), due in part to the fact that IT can, and often does, create vulnerabilities in the firm ( Carr 2003 ). 1 In this study, we’ll explore one of those vulnerabilities by focusing on a very specific, but important, objective of IT: establishing internal controls over financial reporting. Specifically, we examine extant literature on IT internal control issues associated with financial reporting. Our analysis reveals that IT internal control issues have both a dramatic and negative impact on the firm and its leadership, which is consistent with our argument that IT really does matter. The Sarbanes-Oxley Act of 2002 Section 404 (SOX 404) requires firms to report material weaknesses in internal controls over financial reporting. A material weakness is a ‘‘ deficiency, or a combination of deficiencies . . . such that there is a reasonable possibility that a material misstatement of the firm’s financial statements will not be prevented or detected on a timely basis ’’ ( Public Company Accounting Oversight Board [PCAOB] 2017b , AS 2201.A7). Each material weakness must be described in Management’s Report on Internal Control over Financial Reporting as well as in the
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