The impact of client information technology capability on audit pricing

Abstract

This paper explores the question: "How does a client's information technology (IT) capability influence audit pricing?" Company data for the years 2004 through 2012 are employed. Firms appearing on the InformationWeek 500 (IW500) annual list of U.S. organizations with superior IT functions serve as a proxy for companies with superior IT capability. Our findings suggest that companies with superior IT capabilities incur higher levels of audit fees. In addition, as client size increases, the audit fees of firms with advanced IT capabilities increase at a greater rate than firms without such capabilities. These findings contrast with prior research by Chen et al. (2014) that found in the immediate post-Sarbanes-Oxley Act (SOX) period for the years 2004 through 2007, client IT capability reduced audit fee increases. In addition, we replicate the Chen et al. (2014) results and find that IT capability did not influence audit fee increases during the sub sequent recession and recovery periods. Further, superior capability clients see smaller audit fee increases when exogenous shocks such as SOX regulations occur. These results suggest a revised interpretation of Chen et al. (2014) may be warranted. This study contributes to the literature by providing a more complete picture of how a client's IT capability affects audit fees. Prior research has studied the effect of IT capability on the external audit. This work focused exclusively on the immediate post-Sarbanes-Oxley Act of 2002 (SOX) period. Masli et al. (2010) suggest that specific IT investments in internal control-monitoring technology reduce the rate of audit fee increase. Also, during the immediate post-SOX period, for the years 2004 through 2007, companies with strong IT capabilities had slightly lower (9.1%) rates of audit fee increase than those without strong IT resources (Chen et al., 2014). We argue, however, that these findings may not extend beyond the immediate post-SOX era when public audit failures (for example, Enron Corporation, WorldCom, Tyco International, Adelphia Communications Corporation) generated severe market and regulatory responses, leading companies to deploy IT resources specifically targeted to addressing audit and internal control risks. Additionally, we are unaware of any research that explores how the client's IT capability impacts the actual level of audit fees incurred. This paper addresses the gap in prior research by exploring the broader question: How does a client's IT capability impact audit pricing? The COBIT 5 (Control Objectives for Information and Related Technology) framework recommends that firms align, plan and organize IT investments in support of their chosen business strategy (ISACA, 2017). Firms may gain sustainable advantage by uti lizing IT to develop business capabilities that are difficult for competitors to imitate or acquire (Mata et al., 1995). In particular, firms generate value by aligning their internal capabilities with their IT strategy, creating synergistic resources to respond to market, industry and s...

The moderating effect of information technology capabilities on the relationship between marketing mix and corporate entrepreneurship

“…In this study, no direct effect of ITCAP was found on creativity, excellence, risk tolerance or proactive orientation. This confirms the results of Hoffman et al (2018), suggesting that ITCAP do not always make competitive advantage. We can conclude that the existence of ITCAP in itself does not promote a proactive approach to seize opportunities and entrepreneurial creativity.…”

“…Following these seminal works, researchers have reported that MM remains a prominent factor that potentially influences entrepreneurship in a variety of studies (Bilal and Al Mqbali, 2015; Colbert, 2003; Miles and Darroch, 2006; Morris and Lewis, 1995; Arora and Nandkumar, 2012; Carson et al , 1995; Collinson and Shaw, 2001; Bocconcelli et al , 2018; Hultman and Hills, 2011; Knight, 2000; Solé, 2013; Barrett et al , 2000; Nasution et al , 2011; Kraus et al , 2010; Stokes, 2000). Relatedly, studies have also indicated the importance of information technology capabilities (ITCAP) for influencing entrepreneurship effectively (Chen et al , 2014; Chen et al , 2015; Trainor et al , 2011; Chae et al , 2018; Hoffman et al , 2018).…”

Does human resource investment in internal controls and information technology improve audit efficiency?

“…For a robustness check, we use alternative measures of audit efficiency: audit hours and audit fees. Previous research (Hoffman et al, 2018;Knechel et al, 2009) found that audit hours and fees are closely related to audit efficiency.…”

“…Moreover, as suggested by practitioners (Deloitte, 2015; Hoffman et al, 2018; PwC et al, 2015), audit performance depends on the level of sophistication of the IT system, which is generally determined by the quality of personnel who establish the system (Janvrin et al, 2008; Vasarhelyi et al, 2012). IC personnel with more work experience in the IT department could provide appropriate audit evidence using the established IT system based on their knowledge about how business transactions are recorded and configured, thereby contributing to enhanced audit efficiency.…”

Information System Audit Using COBIT and ITIL Framework: Literature Review

“…(Yamamoto, 2017), (Hosono & Shimomura, 2017), (Al-Matari, Helal, Mazen, & Elhennawy, 2021), (Ariffin & Ahmad, 2021), (Alimam, Bertin, & Crespi, 2017), (Shrestha, Cater-Steel, Toleman, Behari, & Rajaeian, 2020), (Proença & Borbinha, 2016), (Schmitz, Schmid, Harborth, & Pape, 2021), (Yandri, Suharjito, Utama, & Zahra, 2019), (Orta & Ruiz, 2019) Knowledge Worker Factor Knowledge workers factor are those who are able to provide assessments using systemic thinking and who can apply systematic approaches, best practices, and tools to utilize IT effectively. (Gantman & Fedorowicz, 2016), (Ariffin & Ahmad, 2021), (Alreemy, Chang, Walters, & Wills, 2016), (Yandri, Suharjito, Utama, & Zahra, 2019), (Terlizzi, Albertin, & de Moraes, 2017), (Hoffman, Sellers, & Skomra, 2018), (Bounagui, Mezrioui, & Hafiddi, 2019), (Amorim, Mira da Silva, Pereira, & Gonçalves, 2021)…”