MIS 9003 – Prof. Min-Seok Pang

Week6-Reading Summary- Leting Zhang

The Sarbanes-Oxley Act of 2002 had a pervasive influence on forms. Among many articles, SOX section 404 highlights the importance of controls related to the financial reporting function of management information systems, it requires a regular assessment of the quality of the financial reporting function, which provides conditions for this research.

This paper examines how weakness in IT controls impact the quality of the information and cause poor forecasts. It also investigates how this relationship varies by the type of IT material weaknesses reported.

The material weakness is defined as a control deficiency that results in a reasonable possibility that a material misstatement of financial information will occur without the being detected or corrected. The paper highlights the importance of IT in producing meaningful financial reports. Thus IT weaknesses will have a significant negative impact on data quality. So they propose for firms with SOX 404 IT material weakness will have lower management earnings forecast accuracy, comparing to firms have effective internal controls and non-IT material weakness.  In order to investigate the different impacts caused by different IT material weakness, the author classifies the control weakness into three categories: 1. data processing integrity; 2. system access and security; 3. system structure and usage. It proposes that IT material weakness related to the data processing integrity category will have the greatest negative impact on information quality and forecasting accuracy.  Their research model is OLS regression. The dependent variable is management forecast error, the focal independent variables are whether a firm has IT material weakness and the dimensions the weakness in. They collect data on SOX 404 report, financial report and forecast, the time span is 2004 to 2008. After a series of robustness check, the hypotheses are supported.

This paper contributes to the IS literature by providing evidence linking overall IT controls and their relative quality dimensions to the quality of management decision outcome.

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