For most firms, the information technology (IT) budget represents a major element in the overall firm budget, and IT budget decisions often have significant operational and strategic impacts on the business processes in the firm’s value chain. In this paper we use a large unique data set to examine the extent to which IT budgets are affected by environmental, organizational, and technological circumstances. We find that our cross-sectional model explains substantial variance in IT budgets, which indicates that contingent environmental, organizational, and technological factors affect managers’ budget decisions. We then examine the extent to which these IT budget levels are related to future firm performance, measured using both broad financial accounting measures, such as operating profit margins and return on assets, and market returns. We find that IT budget levels are positively associated with subsequent firm performance and shareholder returns. We further suggest that IT’s aggregate effect on performance is a weighted average of two very different components: (1) context-driven IT budget levels, which reflect the effects of environmental, organization, and technological factors and the IT budgets resulting from them, and (2) idiosyncratic IT budget levels, which reflect the effect of any marginal firm-specific IT budget expenditures after controlling for these contextual factors. Both components are positively associated with performance, indicating that the specified contextual factors provide an incomplete explanation of firms’ value-relevant IT expenditures. The current study contributes to the accounting information systems and management accounting literatures by assessing the causes and consequences of IT budgets.
SYNOPSIS
This paper analyzes the degree to which material weaknesses (MWs) in internal control reported under the Sarbanes-Oxley Act of 2002 (SOX) affect the future reporting of MWs. Particularly, we examine information technology (IT) and non-IT MWs and their breakdown into specific IT-related entity-level, non-IT-related entity-level, and account-level deficiencies. Analysis reveals that most account-level and entity-level deficiencies occur at a significantly higher rate in SOX 404 reports with at least one IT MW than in MW reports with only non-IT MWs. Further, the presence and count of both types of MWs and all three types of deficiencies are associated with increased future MWs, as are lower profitability, non-Big 6 auditor, and firm complexity. Specific control deficiencies related to senior management, training, and IT control environment have the strongest impact on future MWs. These results indicate that effective corporate governance of both the IT and non-IT domains is pivotal in establishing and maintaining strong internal controls over financial reporting.
Data Availability: Data are available from the public sources identified in the paper.
Although information technology (hereafter, IT) expenditures represent an increasingly large investment for most corporations, firms are not required to disclose them separately in their financial statements. We hypothesize and find evidence that information about a firm’s IT expenditures helps explain its future performance as reflected in both accounting measures (residual income, earnings volatility) and market measures (stock price and long-run abnormal returns). In particular, we provide evidence of market mispricing and suggest the lack of firm-level annual IT expenditure disclosure as one potential reason for such mispricing. Altogether, the evidence presents a persuasive case that information about a firm’s IT expenditures is useful to stock market participants. The evidence we report is useful to managers and accounting policy makers contemplating the public disclosure of firm-level information about IT investments.
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