Information Technology Capability, Internal Control Effectiveness, and Audit Fees and Delays

Abstract

We examine the role of firm IT capability in contributing to internal control and external audit in the post-SOX environment. Specifically, we measure the effectiveness of both the overall internal control and the five components of internal control as defined by the Committee of Sponsoring Organizations of the Treadway Commission's Internal Control—Integrated Framework (COSO 1992). Our findings support the concern that accounting professionals have regarding the impact of the use of IT on business risks and controls relevant to the audit. Specifically, IT capability directly mitigates audit fee increases, but not audit delay increases, indicating high IT capability signals lower business risks associated with the use of IT and reduces the auditor's risk premium. Further, IT capability has pervasive impacts on both the effectiveness of internal control and the components of effective internal control, which in turn further restrain audit fee and audit delay increases. Overall, our results suggest that a firm's IT capability has the additional benefits of supporting the functioning of internal control and the efficiency of the audit process.

Audit Delay: Case Studies at Conventional Banking in Indonesia

“…It will affect to the level of mistake made. The mistakes will resulted in time-consuming duration of the financial statement audit process (Abbott, Parker, & Peters, 2012;Chen, Smith, Cao, & Xia, 2014). Meanwhile, the rules in Indonesia has managed the deadline of financial report.…”

Information systems and internal control: evidence from China

“…Morris [24] shows that firms with enterprise resource planning systems are less likely to report internal control weaknesses. Masli et al [21] and Chen et al [6] find that information technology improves the effectiveness of internal control and mitigates audit fee increases. Our study differs from these papers in that we evaluate the impact of ISW relative to NISW on firm performance, instead of disclosure quality.…”

“…For a firm with three segments, the effect of ISW 5 on ADJROA will be -0.012 (0.008 -0.010 9 2), i.e., ISW firms' industry-year-adjusted ROA will be 1.2 % lower than that of firms with only NISW, suggesting that the differential effects on performance are economically significant. 6 The coefficients on control variables and adjusted-R 2 in Eq. (2) are similar to that in Eq.…”

“…Until now, some studies have examined the effect of information systems, as a whole, on firm performance (e.g., [27,29]). Others have studied the effect of information systems, as a component of internal control, on firms' disclosure quality [6,14,20,21]. However, none of these prior studies have compared the effect of information systems, as a component of internal control, on firm performance with that of other internal control components.…”

“…b 6 (Seg-1) = 0.008 -0.010 9 (2 -1) = -0.002, and when Seg = 3, b 1 ? b 6 (Seg-1) = 0.008 -0.010 9 (3 -1) = -0.012 6. Among the 552 observations used in our regressions, there are 515 firm-years with one segment, 4 with two segments, and 33 with three or more segments, respectively.…”