Senior Executives' IT Management Responsibilities: Serious IT-Related Deficiencies and CEO/CFO Turnover

Abstract

While the information systems scholarly and practice literatures both stress the importance of senior executive engagement with IT management, the recommendations for doing so remain, at best, limited and general. Examining the influence of serious IT-related deficiencies on CEO/CFO turnover within the post-SOX financial reporting context, specific CEO/CFO IT management responsibilities are identified: CEOs are shown to be held accountable for global IT management responsibilities, and CFOs are shown to be held accountable for demand-side IT management responsibilities. Implications for information systems research, management research, and information systems practice are provided.

CEO/CFO turnover and subsequent remediation of information technology material weaknesses

“…Information technology material weaknesses are a breakdown of internal control systems that threaten a firm's legitimacy as they represent significant and costly failures in the financial reporting system (Masli et al, 2016). ITMWs generate greater uncertainty and risks within the internal control system than other types of ICMW.…”

“…In sum, the results provide partial support for H2, suggesting that CEO turnover (but not CFO turnover) exerts a positive effect on ITMW remediation. Both CFOs and CIOs report ITMW to CEOs (Masli et al, 2016), who have ultimate authority to initiate remediating actions. According to SOX section 404, CEOs and CFOs are required to assess the effectiveness of IT control.…”

“…Typical examples of IT general controls are security administration, application change control and data backup and recovery (Protiviti, 2012). Specifically, CEOs must be assured that proper governance systems are in place to maintain their firm's operational capabilities and enterprise architecture, and CFOs must be assured that the design and implementation of applications for financial reporting are effective (Masli et al, 2016). Automated process controls, reporting controls and application security controls implemented in the purchasing module of an enterprise system are examples of IT application controls (Protiviti, 2012).…”

“…ITMWs are likely to negatively affect a firm's overall internal control system. Prior research (such as that by Klamm and Watson, 2009;Masli et al, 2016) indicates that IT is the foundation of an effective internal control system, and firms with good IT controls are less likely to have material weaknesses in their internal controls. Klamm and Watson (2009) have found that ITMW has a more pervasive influence on a firm's overall internal control system relative to other types of internal control material weaknesses (ICMW).…”

“…threaten firms' legitimacy, and firms may take steps to repair this and restore the public's confidence in their financial reporting process by dismissing CEOs and/or CFOs, as they are held accountable for IT problems associated with the financial reporting process. Specifically, CEOs must be assured that proper governance systems are in place to maintain their firm's operational capabilities and enterprise architecture, and CFOs must be assured that the design and implementation of applications for financial reporting are effective (Masli et al, 2016). Despite the significant effects, ITMWs have on financial reporting, prior research has only examined CEO/CFO turnover following ICMW disclosures (e.g.…”