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The Pervasive Nature of IT Controls: An Examination of Material Weaknesses in IT Controls and Audit Fees
Joseph Canada, University of Central Florida
John R. Kuhn, University of Central Florida
Steve G. Sutton, University of Central Florida and University of Melbourne
ABSTRACT. The complexity of computerized information systems increases the complexity of external auditor assessments of clients’ internal control systems reliability. This study investigates the impact of IT-related internal control weaknesses on the cost of SOX 404 audits. We consider the impact on audit fees through the (1) percentage increase in audit fees, (2) amount of change in audit fees per outstanding common share, and (3) actual dollar amount of audit fees. Examination yields 131 companies with material IT control weaknesses. These companies are matched with companies that reported no weaknesses. An additional comparison to companies reporting only non-IT control weaknesses occurred for a subset of 54 companies from the 131 where we identified a good match. Substantial fee differentials were noted for companies reporting material IT-based weaknesses compared to both matched sets.
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