Paper Summary-Week6 Jack Tong

Paper: Li, C., Peters, G.F., Richardson, V.J. and Watson, M.W., 2012. The consequences of information technology control weaknesses on management information systems: The case of Sarbanes-Oxley internal control reports. Mis Quarterly, pp.179-203.

Academia research holds different opinions toward the SOX (Sarbanes-Oxley Act) act and some scholars claim SOX is bad for business organizations because of the additional regulations and burdensome expense, while others consider SOX is good for business organizations since it helps firms to point out deficiencies in information system. This research builds up on the findings of Feng et al. 2009 and considers the extent that the existence and resolution of information technology control weaknesses impact the ultimate usefulness or quality of the information produced by the financial reporting system(FRS). The author hypothesizes that the stronger (weaker) IT controls over the FRS, the higher (lower) the information quality produced by the system. The authors use the firm’s SOX 404 Management Report on Internal Controls to identify the material weakness of IT controls, and categorize the control weakness across three dimensions: 1. Data processing integrity, 2. System access and security, 3. System structure and usage. The authors find that firms reporting IT material weaknesses in internal control tend to have significantly higher management forecast errors than firms reporting either effective internal controls, or non-IT material weaknesses, accounting for firm size, financial performance, and earning characteristics.

The regression analysis finds that both IT control material weakness and non-IT control material weakness are positively correlated with the forecast errors, but the magnitude of IT control material weakness is more than 3 times larger than that of non-IT control material weakness. The authors also find that the material weaknesses on processing integrity has the strongest impact on the forecast errors.