1. Information Technology Investments and Sarbanes-Oxley Compliance Assurance By A.Masli, G.F. Peters, V.J. Richardson, J.M.Sanchez Discussant’s Comments By Sati P. Bandyopadhyay University of Waterloo

2. Objectives of paper – Examines effectiveness of firms’ investments in SOX related IT Governance Tools – Paper hypothesizes and finds that SOX IT investments: Reduce Material Control Weaknesses. Results in smaller increases in audit fees. Results in smaller increases in audit delay. – Paper hypothesizes but does not find evidence that transformational investments are more effective than compliance investments:

3. SOX IT investment – IT investment (Dummy) variable Has sample firm announced investment in SOX IT versus not announced ? Compliance versus Transformational investment – Paper needs to provide information about Magnitude of Investment – in dollars – As a percentage of total investments – Are they material amounts

4. Why do some firms invest in IT Governance tools? Issues – Need to know this in order to control for self-selection bias in empirical tests Dummy variable : SOX IT announcers versus others – Firms may invest and choose to announce or not announce, or not invest. Need a model to explain why firms chose to announce rather than why they chose to invest – No model used to explain why firms chose “Compliance” versus “Transform”. Thus, Tables,5- 7 models 4, 5 and 6 probably mis-specified

5. Why do some firms invest in IT Governance tools? (contd.) – Potential determinants of “choice” of SOX IT investments. Need to better articulate argument that – “SOX IT variable is correlated with overall financial reporting quality” – SOX IT investments “increased co-ordination of external/external assurance” probably governance variables (relating to board or audit committee memberships/independence) need to be added as explanatory variables Probably need Big 4/non Big 4 variables too

6. Why do some firms invest in IT Governance tools? (contd.) (table 4) – “Choice” firms had ALREADY achieved greater decreases (than “no choice” firms) in outcomes before making investment in year t (relative year t-1) Weakness – 0.649 to 0.163 (choice) versus 0.322 to 0.278 (no choice) Audit fee change – 0.762 to 0.481(choice) versus 0.644 to 0.569 (no choice) Audit delay change – 0.351 to 0.170 (choice) versus 0.272 to 0.230 (no choice) – No choice group appear to need IT investments more than the choice group to improve outcomes; conditional on good governance.

7. Why do some firms invest in IT Governance tools? (contd.) (table 4) – Considering firms are announcing SOX IT investments. Perhaps a signaling incentive (e.g., future financing) May want to include future financing as a RHS variable in equation 4

8. YearMaterial WeaknessAudit Fee ChangeAudit Delay Change SOX ITNo SOX ITSOX ITNo SOX ITSOX ITNo SOX IT Mean t-10.6490.3220.7620.6440.3510.272 t0.1630.2780.4810.5690.1700.230 T+10.0970.2590.2430.4780.0550.181 Why do some firms invest in IT Governance tools ? (contd.)

9. Some other issues – Provide more information/arguments explaining rationale for including different control variables in equations 1, 2 and 3. – Issues relating to equation (4) Need to provide directional predictions for RHS variables Need to provide more information about estimation of equation (4), e.g., predictive accuracy etc. Model Chi square values etc – Run the tests for later years (e.g., year t+2) for long term effects if any.

10. Conclusions Choice model (equation 4) needs to be re- considered – Before observed differences in outcomes are attributed to timely SOX IT investments Empirical tests of differences in outcomes (material weaknesses, audit delay/fee change) are probably still subject to self selection bias