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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 College of Business
Department of Accounting
University of Waterloo Centre for Information Integrity & Information Systems Assurance
6th Bi-Annual Research Symposium
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?
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
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.
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
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
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
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
Sample• Announcements of “SOX” ICM IT Implementations
(2003-2006) (n = 139)• Audit Analytics Control Sample (n = 14,654)
Distribution by Year
Year SOX ICM FirmsControl Firms All
Transform Comply2003 2 11 3,074 3,087
2004 12 25 3686 3723
2005 14 47 4044 41052006 8 20 3850 3878
Total 36 103 14,654 14,793
Regression ModelsDoyle 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
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
Observations 14,788 14,788 12,156 14,788 14,788 12,156
R2 0.045 0.120 0.105 0.045 0.120 0.105
F 41.874 38.943 39.309 38.630 36.571 36.750
p for Model (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001)
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) (0.001) (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
Observations 14,793 14,793 12,161 14,793 14,793 12,161
R2 0.263 0.266 0.307 0.263 0.266 0.307
F 311.864 222.619 212.969 288.153 210.438 201.300
p for Model (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001)
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) (0.001) (0.003)
SOX ICM Comply - -0.034 -0.032 -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
Observations 14,793 14,793 12,161 14,793 14,793 12,161
R2 0.183 0.185 0.164 0.183 0.185 0.164
F 120.780 98.949 80.430 112.506 93.407 75.592
p for Model (<0.001) (<0.001) (<0.001) (<0.001) (<0.001) (<0.001)
Other Robustness Tests
• Alternate Control Group
• Management Changes and ICM
Technology Implementation
• Simultaneity Amongst DVs
• Econometric Issues Associated with
Material Weakness Tests
Limitations
• Self-selection not totally ruled out
• Short-window (1 year ahead) to capture
benefits
• Low sample size
• Examine only benefits
Conclusions
• Out study supports the benefit-related
assertions embedded within the
conceptual application of effective ICM
practices.
Thanks