The Pervasive Nature of IT Controls: An Examination of Material Weaknesses in IT Controls and Audit Fees

26 Pages Posted: 22 Apr 2009

See all articles by Joseph Canada

Joseph Canada

University of Central Florida (UCF) - Dixon School of Accounting

J. Randel Kuhn

University of Central Florida - College of Business Administration

Steve G. Sutton

University of Central Florida; NHH Norwegian School of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: March 2009

Abstract

The complexity of computerized information systems increases the complexity of the external auditor's assessment of the reliability of a client's internal control systems. The purpose of this study is to investigate the impact of weaknesses in IT related internal controls on the cost of a SOX 404 audit of internal controls over financial reporting. We consider the impact on audit fees through three dimensions: (1) percentage increase in audit fees, (2) amount of change in audit fees per outstanding common share, and (3) actual dollar amount of audit fees. Examination of first year reports by accelerated filers yields 131 companies with material IT-control weaknesses. These 131 companies are matched with a similar set of companies with no reported material weaknesses, and for a subset of 54 from the 131 companies in which a good match could be identified, a set of companies having only material non-IT-based control weaknesses were compared. As expected, substantial fee differentials were identified for companies reporting material IT-based control weaknesses as compared to both companies without any material weaknesses and those companies with only non-IT related material weaknesses.

Keywords: Internal control, material weakness, IT audit, Audit pricing, Audit fees, SOX 404

JEL Classification: M40, M41

Suggested Citation

Canada, Joseph and Kuhn, J. Randel and Sutton, Steve G. and Sutton, Steve G., The Pervasive Nature of IT Controls: An Examination of Material Weaknesses in IT Controls and Audit Fees (March 2009). Available at SSRN: https://ssrn.com/abstract=1393515 or http://dx.doi.org/10.2139/ssrn.1393515

Joseph Canada

University of Central Florida (UCF) - Dixon School of Accounting ( email )

University of Central Florida
P.O. Box 161400
Orlando, FL 32816-1400
United States

J. Randel Kuhn

University of Central Florida - College of Business Administration ( email )

PO Box 161400
Orlando, FL 32816
United States

Steve G. Sutton (Contact Author)

University of Central Florida ( email )

4000 Central Florida Blvd
Orlando, FL 32816
United States

NHH Norwegian School of Economics ( email )

Helleveien 30
Bergen, NO-5045
Norway

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