The Implications of IT Environment on the Audit and Financial Reporting Quality

Abstract

This study explores the impact IT complexity and IT control deficiencies have on the audit and financial reporting. We create and validate a new theory-based measure of IT financial reporting complexity at the client level. Next, we quantify the cost of IT complexity and IT control deficiencies on audit effort. We find that, on average, an increase of one (out of 18) on the client’s complexity score relates to an increase of 6% in IT audit hours. In comparison, the presence of an IT control deficiency relates to a 70% increase in IT audit hours. We further investigate and find that IT specialist experience partially mitigates the cost of IT complexity and IT control deficiencies, in particular, experienced IT managers and senior managers rather than experienced IT partners and directors. Finally, we find that experienced IT specialists are able to mitigate some but not all of the cost of IT complexity on financial reporting reliability. Overall, our results provide some of the first insight into complex IT environments’ costs over financial reporting and highlights the importance of staffing decisions at the manager level.