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The effect of auditor IT expertise on internal controls

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  • Haislip, Jacob Z.
  • Peters, Gary F.
  • Richardson, Vernon J.

Abstract

Material weaknesses in internal controls related to information technology (IT) represent unique threats to organizations. Utilizing the external auditor as an example of an externally observable governance mechanism, we investigate if firms with revealed IT internal control deficiencies employ a strategy of disassociation with their current auditor. Our tests show that prior evidence of disassociation strategies hold in both IT and non-IT contexts. Of particular focus to our study, we document a positive association between firms that report IT material weaknesses and subsequent auditor dismissals or switching. We next investigate the potential internal control benefits of switching to auditors with greater expertise in environments that emphasize the importance of IT. We argue that greater audit firm IT expertise promotes improved internal controls for their clients, especially those controls that are dependent on IT. We find that clients that switch to auditors with greater IT expertise, relative to their former auditor, have a greater likelihood of material weakness remediation within one year of reporting control weaknesses. Complementing these findings, we find that audit IT expertise is negatively associated with both non-IT and IT material weaknesses in an ex ante reporting setting. Prior literature takes a longstanding interest in both the incentive for developing auditor expertise and the effects of that expertise. We contribute to this literature stream by providing additional evidence related to a specific type of expertise.

Suggested Citation

  • Haislip, Jacob Z. & Peters, Gary F. & Richardson, Vernon J., 2016. "The effect of auditor IT expertise on internal controls," International Journal of Accounting Information Systems, Elsevier, vol. 20(C), pages 1-15.
    • Handle: RePEc:eee:ijoais:v:20:y:2016:i:c:p:1-15
    DOI: 10.1016/j.accinf.2016.01.001
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    References listed on IDEAS

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    Cited by:

    1. Chen, Tao, 2023. "Common auditors and internal control similarity: Evidence from China," The British Accounting Review, Elsevier, vol. 55(2).
    2. Rani Hoitash & Udi Hoitash & Ari Yezegel, 2021. "Can sell-side analysts’ experience, expertise and qualifications help mitigate the adverse effects of accounting reporting complexity?," Review of Quantitative Finance and Accounting, Springer, vol. 57(3), pages 859-897, October.
    3. Liu, Wu-Po & Huang, Hua-Wei, 2020. "Auditor realignment, voluntary SOX 404 adoption, and internal control material weakness remediation: Further evidence from U.S.-listed foreign firms," International Business Review, Elsevier, vol. 29(5).
    4. Adrian-Cosmin Caraiman, 2020. "Internal Control in Corporate Governance," Ovidius University Annals, Economic Sciences Series, Ovidius University of Constantza, Faculty of Economic Sciences, vol. 0(2), pages 606-611, December.
    5. Atallah Alhosban & Issa Altarawneh, 2021. "The Role of Management and Teamwork in Helping the Internal Auditor to Cope with IT Environment," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(1), pages 159-167.
    6. Chalmers, Keryn & Hay, David & Khlif, Hichem, 2019. "Internal control in accounting research: A review," Journal of Accounting Literature, Elsevier, vol. 42(C), pages 80-103.
    7. Konstantinos Petridis & Georgios Drogalas & Eleni Zografidou, 2021. "Internal auditor selection using a TOPSIS/non-linear programming model," Annals of Operations Research, Springer, vol. 296(1), pages 513-539, January.
    8. Navarro, Patricia & Robb, Sean W.G. & Sutton, Steve G. & Weisner, Martin M., 2020. "The cost stickiness of information technology material weaknesses: An intertemporal comparison between it-related and other material weaknesses," International Journal of Accounting Information Systems, Elsevier, vol. 37(C).
    9. Bin Fang & Xinming Liu & Chen Ma & Yusang Zhuo, 2023. "Blockchain technology adoption and accounting information quality," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(4), pages 4125-4156, December.
    10. Oliver Henk, 2020. "Internal control through the lens of institutional work: a systematic literature review," Journal of Management Control: Zeitschrift für Planung und Unternehmenssteuerung, Springer, vol. 31(3), pages 239-273, September.

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