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Examining the Potential Benefits of Internal Control Monitoring Technology Adi Masli, Gary Peters and Vernon Richardson Juan Manuel Sanchez Sam M. Walton.

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Presentation on theme: "Examining the Potential Benefits of Internal Control Monitoring Technology Adi Masli, Gary Peters and Vernon Richardson Juan Manuel Sanchez Sam M. Walton."— Presentation transcript:

1 Examining the Potential Benefits of Internal Control Monitoring Technology Adi Masli, Gary Peters and Vernon Richardson Juan Manuel Sanchez Sam M. Walton College of Business Department of Accounting University of Waterloo Centre for Information Integrity & Information Systems Assurance 6th Bi-Annual Research Symposium

2 Research Question  What are the potential benefits that firms can realize from implementing Internal Control Monitoring (ICM) technology designed to support and facilitate internal control processes?

3 Potential Benefits of ICM Technology Enhanced Audit Efficiency More Effective Internal Control Systems Timely Audit Reporting Conceptually Lower audit fees Lower likelihood of material control weaknesses Shorter audit report delays Empirically

4 Incremental Contribution  Structural changes have increased the demand for and sophistication of effective internal control monitoring (Coderre 2006; PwC 2006; PCAOB 2007).  SOX Section 404 requires evaluation and disclosure of internal control process - penalties for non-compliance (e.g., Hammersley et al. 2008; Ashbaugh-Skaife et al. 2009).  COSO issued additional guidelines on monitoring internal control systems (2009).  Many organizations were not fully utilizing the monitoring component of internal control.  Practitioners’ (ITGI 2008) and external audit partner’s (Behn et al. 2006) views suggest that ICM technology may or may not work.

5 Effective Internal Control Systems Enhanced Monitoring Explicit Controls SOX Process Support Lower likelihood of Material Weaknesses Period of Increasing Focus and Revelation of Material Weaknesses H1: Firms implementing ICM technology will exhibit a lower likelihood of experiencing material internal control weaknesses subsequent to ICM technology implementation. Doyle et al. (2007) ICM Technology

6 Enhanced Audit Efficiency Timely Audit Support (persuasive evidence) Enhanced SOX Audit Trails Stronger Reporting Systems Constraint on Increasing Audit Fees Period of Increasing Audit Requirements and Audit Fees H2: Firms implementing ICM technology will exhibit smaller increases in audit fees subsequent to ICM technology implementation. Raghunandan and Rama (2006) ICM Technology

7 Enhanced Audit Timeliness Stronger Reporting & Documentation Systems Automation of Process Workflows Management of Disparate Reporting Systems Constraint on Increasing Audit Delays Period of Increasing Audit Requirements and Audit Report Delays H3: Firms implementing ICM technology will exhibit smaller increases in audit delays subsequent to ICM technology implementation. Ettredge et al. (2006) ICM Technology

8 Strategic Nature of ICM technology H4: ICM technology transformative implementations will exhibit greater impacts on assurance outcomes than ICM technology compliance implementations. Dehning et al. (2003) Go Beyond Complying with SOX Integrate Enterprise-wide Risk and Compliance Assurance Initiatives ICM is a Critical Component of IS Greater Impacts on Assurance Outcomes Relative to Compliance Implementations, Transformative Ones: ICM Technology

9 Sample Announcements of “SOX” ICM IT Implementations (2003-2006) (n = 139) Audit Analytics Control Sample (n = 14,654) Distribution by Year YearSOX ICM Firms Control FirmsAll TransformComply 20032113,0743,087 2004122536863723 2005144740444105 200682038503878 Total3610314,65414,793

10 Regression Models Doyle et al (2007); Rhagunandan and Rama (2006); Ettredge et al. (2006) Independent Variables SOX ICM Size Complexity Financial Health Reporting Quality Auditor Self-Selection Dependent Variables Material Weaknesses* % Audit Fee Increase** % Audit Delay Increase** * Measured at year t+1 ** Measured as changes from year t (implementation year) to t+1

11 Results (H1 and H4) – Material Weaknesses Predicted DV = Number of Weaknesses at year t+1 Sign(1)(2)(3)(4)(5)(6) SOX ICM--0.103***-0.161***-0.100*** (0.006)(<0.001)(0.017) SOX ICM Transform--0.151***-0.122**-0.093* (0.002)(0.023)(0.081) SOX ICM Comply--0.086**-0.175***-0.103** (0.047)(0.001)(0.041) Control Set 1 Control Set 2 Control Set 3 Control Set 1 Control Set 2 Control Set 3 Observations14,788 12,15614,788 12,156 R20.0450.1200.1050.0450.1200.105 F41.87438.94339.30938.63036.57136.750 p for Model(<0.001)

12 Results (H2 & H4) – Audit Fee Change Predicted DV = Audit Fee Percent Change (from year t to t+1) Sign(1)(2)(3)(4)(5)(6) SOX ICM--0.151***-0.141***-0.071* (0.001)(0.002)(0.082) SOX ICM Transform--0.269***-0.261***-0.188** (0.001) (0.011) SOX ICM Comply--0.109**-0.099**-0.031 (0.026)(0.040)(0.311) Control Set 1 Control Set 2 Control Set 3 Control Set 1 Control Set 2 Control Set 3 Observations14,793 12,16114,793 12,161 R20.2630.2660.3070.2630.2660.307 F311.864222.619212.969288.153210.438201.300 p for Model(<0.001)

13 Results (H3 & H4) – Audit Delays Change Predicted DV = Audit Delays Percent Change (from year t to t+1) Sign(1)(2)(3)(4)(5)(6) SOX ICM--0.060**-0.058**-0.063** (0.015)(0.017)(0.030) SOX ICM Transform--0.134***-0.133***-0.149*** (0.001) (0.003) SOX ICM Comply--0.034-0.032 (0.152)(0.168)(0.206) Control Set 1 Control Set 2 Control Set 3 Control Set 1 Control Set 2 Control Set 3 Observations14,793 12,16114,793 12,161 R20.1830.1850.1640.1830.1850.164 F120.78098.94980.430112.50693.40775.592 p for Model(<0.001)

14 Other Robustness Tests Alternate Control Group Management Changes and ICM Technology Implementation Simultaneity Amongst DVs Econometric Issues Associated with Material Weakness Tests

15 Limitations Self-selection not totally ruled out Short-window (1 year ahead) to capture benefits Low sample size Examine only benefits

16 Conclusions Out study supports the benefit-related assertions embedded within the conceptual application of effective ICM practices.

17 Thanks

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