This action might not be possible to undo. Are you sure you want to continue?
American Accounting Association DOI: 10.2308/jis.2011.25.1.129
The Impact of Enterprise Resource Planning (ERP) Systems on the Effectiveness of Internal Controls over Financial Reporting
John J. Morris Kansas State University
ABSTRACT: Software vendors that market enterprise resource planning ERP systems have taken advantage of the increased focus on internal controls that grew out of the Sarbanes-Oxley SOX legislation by emphasizing that a key feature of ERP systems is the use of “built-in” controls that mirror a ﬁrm’s infrastructure. They argue that these built-in controls and other features will help ﬁrms improve their internal control over ﬁnancial reporting as required by SOX. This study tests that assertion by examining SOX Section 404 compliance data for a sample of ﬁrms that implemented ERP systems between 1994 and 2003. The results suggest that ERP-implementing ﬁrms are less likely to report internal control weaknesses ICW than a matched control sample of non-ERP-implementing ﬁrms. It also ﬁnds that this difference exists for both general entity-wide , and individual account-level controls. Keywords: enterprise resource planning; ERP; Sarbanes-Oxley; SOX; Section 404; internal control. Data Availability: The author will make available the list of ﬁrms used in the study. All other data are available from public sources.
I. INTRODUCTION he Sarbanes-Oxley Act of 2002 SOX requires companies to report on the effectiveness of their internal controls over ﬁnancial reporting as part of an overall effort to reduce fraud and restore integrity to the ﬁnancial reporting process. Software vendors that market enterprise resource planning ERP systems have taken advantage of this new focus on internal controls by emphasizing that a key feature of ERP systems is the use of “built-in” controls that mirror a ﬁrm’s infrastructure. They emphasize these features in their marketing literature, asserting
I thank the JIS editor, Paul John Steinbart, the anonymous associate editor, and two anonymous reviewers for their comments and suggestions that have strengthened this paper. I also thank participants at the 2009 Midyear Meeting of the AAA-IS Section, a Kansas State University Faculty Research Seminar, and members of my dissertation committee at Kent State University for comments and suggestions on earlier versions of this paper.
Published Online: March 2011
that these systems will help ﬁrms improve the effectiveness of their internal controls as required by SOX.1 These vendor statements motivate an interesting empirical research question about the impact of ERP systems on internal control. Speciﬁcally, are ﬁrms that implement ERP systems more or less likely to report internal control weaknesses in their annual reports than ﬁrms that do not? Relatively little empirical/archival research has been conducted in this speciﬁc area, because prior to SOX, internal control data did not have to be publicly reported. This study addresses that gap in the literature by examining internal control data that is now available for a sample of ﬁrms that have announced implementation of ERP systems and a control sample of similar ﬁrms that have not. Internal control is one of many mechanisms used in business to address the agency problem. Others include ﬁnancial reporting, budgeting, audit committees, and external audits Jensen and Payne 2003 . Studies have shown that internal control reduces agency costs Abdel-khalik 1993; Bareﬁeld et al. 1993 , with some even arguing that ﬁrms have an economic incentive to report on internal control, even without the requirements of SOX Deumes and Knechel 2008 . Their argument assumes that providing this additional information to the principal shareholder about the behavior of the agent management reduces information asymmetry and lowers investor risk and, therefore, the cost of equity capital. Other research has found that weaknesses in internal controls are associated with increased levels of earnings management Chan et al. 2008; Ashbaugh-Skaife et al. 2008 . Earnings management is the agency problem that motivated SOX legislation in the ﬁrst place, speciﬁcally earnings manipulation by Enron, WorldCom, etc. ERP systems provide a mechanism to deliver fast, accurate ﬁnancial reporting with built-in controls that are designed to ensure the accuracy and reliability of the ﬁnancial information being reported to shareholders. In addition to the increased assurances provided to the external principals shareholders about the behavior of the agents management , ERP systems should also help mitigate the agency problem between various levels of management in large corporations. The added transparency combined with the use of built-in controls should make it more difﬁcult for agents at all levels to beneﬁt from unobservable behavior. It is possible, however, that ﬁrms implementing ERP systems may not take advantage of all the built-in control features, either for legitimate business reasons or because management wants to avoid the added transparency in order to manage manipulate earnings. By examining the effectiveness of these controls, this study not only extends the agency theory stream of research, it also examines this tension between earnings management and internal control with testable hypotheses related to overall internal controls, general entity-wide controls, and speciﬁc account-level controls. The study uses a sample of 108 ﬁrms that announced implementation of ERP systems between 1994 and 2003, and an equal number of control ﬁrms, matched by industry and size. The results provide evidence that ERP-implementing ﬁrms are less likely to report internal control weaknesses ICW than the non-ERP control ﬁrms. This study further examines factors contributing to ICW and ﬁnds that those related to general entity-wide controls and speciﬁc account-
SAP AG, the largest provider of ERP software in the world Eschinger 2006 , states the following in one of its brochures: “Embedded system controls within mySAP ERP ﬁnancials include edit checks and tolerances for document accuracy, required and system-populated ﬁelds for document completeness, and checks to prevent duplication of accounting postings … mySAP ERP Financials can help you reduce risk related to compliance with the U.S. SarbanesOxley Act” SAP 2005 . Also, Oracle Corporation, the world’s second-largest provider of ERP software Brunelli 2006 , in one of its brochures, states the following: “Each application in the Oracle Financials product family uses embedded controls to automate process ﬂows and enforce compliance across the organization, such as cross-validation rules for master data, 2-, 3-, and 4-way purchase-order matching, sequential numbering, and the ability to centrally set quantity and price-tolerance limits during invoice processing. This automated approach reduces risk by enforcing business rules and simpliﬁes auditing activities by making it easier to test controls” Oracle 2005 .
Journal of Information Systems American Accounting Association
The Impact of Enterprise Resource Planning (ERP) Systems
level controls are both less likely to contribute to ICW in ERP ﬁrms than in non-ERP control ﬁrms. This study also ﬁnds evidence that the advantage for ERP ﬁrms strengthened over time, which suggests that ﬁrms may be implementing more of the built-in controls provided by ERP systems as they gain experience with the system. These ﬁndings are important because both SOX and ERP have been the subject of much discussion and research in the academic and professional communities in recent years. Cost is often the common denominator, with the high cost of SOX compliance and the high cost of implementing ERP systems used as the basis for many research questions. These ﬁndings provide evidence that ERP systems may contribute to improved internal controls, which is one of many arguments used in justifying the high cost of ERP systems. This study is believed to be the ﬁrst empirical/archival test of those claims, and provides information about the factors that contribute to internal control weaknesses ICW that both the academic and professional communities should ﬁnd interesting. For instance, the most often cited factor is accounting documentation, policy, and/or procedures. As expected, this factor is found less frequently for ERP ﬁrms than for the control ﬁrms, perhaps justifying the effort needed to document systems during the implementation process. This study also extends the research stream on the relationship between IT and agency theory, in particular the link between the signaling effect of internal control reporting to the ﬁnancial markets and the use of ERP systems to facilitate that process. The remainder of this paper is organized as follows: Section II summarizes prior research and develops the hypotheses, Section III describes the data selection process and the research methodology, Section IV presents empirical results, and Section V concludes. II. PRIOR RESEARCH AND HYPOTHESES DEVELOPMENT Internal Control Background Internal control has played a major role in moderating the agency problem in corporations for many years. Samson et al. 2006 document several internal control procedures used by the Baltimore and Ohio Railroad as early as 1831. In more recent times, internal control has been a subject of discussion whenever there is a prominent scandal in the corporate world. For instance, during the 1970s more than 400 corporations admitted making questionable or illegal payments to foreign government ofﬁcials, politicians, and political parties, which led to enactment of the Foreign Corrupt Practices Act FCPA of 1977 Staggers 1977 . Among other things, the FCPA requires publicly traded companies to devise and maintain a system of internal accounting controls USC 1998 . During the 1980s, several high-proﬁle audit failures led to creation of the Committee of Sponsoring Organizations of the Treadway Commission COSO , organized for the purpose of redeﬁning internal control and the criteria for determining the effectiveness of an internal control system Simmons 1997 . They studied the causal factors that can lead to fraudulent ﬁnancial reporting and developed recommendations for public companies, independent auditors, educational institutions, the SEC, and other regulators COSO 1985 . The product of their work is known as the COSO Internal Control—Integrated Framework Simmons 1997 . The COSO framework broadly deﬁnes internal control as “a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efﬁciency of operations, reliability of ﬁnancial reporting, and compliance with applicable laws and regulations” COSO 1992, 1 . It states that “there is synergy and linkage among these components, forming an integrated system that reacts dynamically to changing conditions” COSO 1992, 1 . The framework also points out that controls are most effective when they are “built into” the entity’s infrastructure COSO 1992, 1 and further states that “built in controls support quality and empowerment initiatives, avoid unnecessary costs and enable quick response to changing conditions” COSO 1992, 1 .
Journal of Information Systems
Spring 2011 American Accounting Association
Some researchers have used this source of data to examine the relationship between internal controls and other corporate governance measures. 2006 . 2010.132 Morris At the turn of the century. Also excluded are mutual funds and foreign ﬁrms that ﬁle Form 20-F. delays in audits Ettredge et al. Internal control was considered an “internal issue” and public companies were not required to disclose information about their internal control procedures. Therefore. has been extended several times and is now effective for ﬁscal years ending on or after December 15. another group of corporate scandals resulted in enactment of the Sarbanes-Oxley Act of 2002 SOX which. have been subject to SEC reporting requirements for at least 12 calendar months. requires a formal report on the effectiveness of internal controls.S. became effective in 2004 under a two-phase schedule. Section 302 requires the CEO and CFO to certify that their ﬁnancial statements “present fairly. Prior Internal Control Research Although internal controls have played a major role in corporate governance for many years. The added reporting requirements of Sections 302 and 404 have placed information in the public domain that researchers are using to examine numerous issues related to internal control and corporate governance. the SEC has speciﬁcally stated that the COSO Framework satisﬁes SEC criteria and “may be used as an evaluation framework for purposes of management’s annual internal control evaluation and disclosure requirement” by companies listed on U. for the management report and June 15. which became effective in 2002. which requires a much more extensive review of internal controls. Ashbaugh-Skaife et al. Krishnan 2005 uses these disclosures as a data source to compare internal control quality to audit committee quality. among other things. that previously have ﬁled at least one annual report. it is now possible to measure the effectiveness of internal controls by analyzing the material weaknesses disclosed in these reports. which includes compliance for all other companies. Accelerated ﬁlers are ﬁrms that have at least $75 million in market capitalization.4 Section 404. For instance. The AICPA reports that language was added to the Investor Protection Act of 2010. the report must disclose if there are any material weaknesses in the internal controls over ﬁnancial reporting. Doyle et al. The second phase.3 Following enactment of SOX. the ﬁnancial condition of their company. 2007. and that they have evaluated the effectiveness of their internal controls and disclosed any material weakness and any signiﬁcant changes in internal control procedures Ge and McVay 2005 . stock exchanges Gupta and Thomson 2006. Section 404 has been used by researchers to examine such issues as the increased cost of audits Raghunandan and Rama 2006 . 2 a statement identifying the framework used by management to evaluate the effectiveness. for the auditor attestation report SEC 2009 . and 3 a statement that the registered public accounting ﬁrm that audited the company’s ﬁnancial statements included in the annual report has issued an attestation report on management’s assessment of the company’s internal control over ﬁnancial reporting SEC 2003 . 2007 . In the ﬁrst phase. 28 . 2007. that would permanently exempt these nonaccelerated ﬁlers from the attestation report AICPA 2010 . Section 302. compliance is required for companies known as accelerated ﬁlers5 in annual reports for ﬁscal years ending on or after November 15. internal control-related empirical/archival research has signiﬁcantly increased. 2 3 4 5 6 The internal control report requires speciﬁc language including: 1 a statement of management’s assessment of the effectiveness of the company’s internal control over ﬁnancial reporting. The COSO framework plays a key role in compliance because Section 404 of the Act requires companies to include in their annual report Form 10-K . a separate management report on the company’s internal control over ﬁnancial reporting and an attestation report issued by a registered public accounting ﬁrm. provided initial data that were used to test the relationship between internal control weaknesses and other ﬁrm characteristics Ge and McVay 2005. and that are not eligible to ﬁle its quarterly and annual reports on Form 10-QSB and 10-KSB.2 Although other frameworks may be accepted. mostly due to a lack of public data. 2004 SEC 2003 .” in all material respects. empirical/archival research on internal controls was limited prior to SOX. The only exception was the required disclosure in Form 8-K of any internal control problems pointed out by predecessor auditors when companies changed auditors. which was recently signed by the President.6 Although the exact form and language of the management report on internal controls may vary from one ﬁrm to another. Journal of Information Systems American Accounting Association Spring 2011 .
the agent is more likely to behave in the interest of the principal. but to minimize the number of internal control weaknesses reported under SOX Section 404. One would expect ﬁrms that implement ERP systems to maximize use of these built-in control features to not only reduce agency costs. receiving. It is possible. for instance. that during implementation. This feature allows the auditor to use a ‘benchmarking’ strategy … benchmarking automated application controls can be especially effective for companies using purchased software when the possibility of program changes is remote—e. provides some insight into the perceived relationship between information technology and internal controls. senior management may opt to override control features in order to manipulate data to “manage earnings. and invoices three-way match . Although internal control-related empirical/archival research is relatively new. but more importantly. on the other hand. they enable fast. issued by the Public Company Accounting Oversight Board PCAOB . who 7 Eisenhardt’s 1989 second proposition states that “when the principal has information to verify agent behavior. Auditing Standard No. Since ERP systems are purchased software. most legacy systems. These built-in controls are made possible in part because the systems are designed around the concept of a single. match the documents prior to authorizing payment.. in Appendix B of AS No. which are developed and maintained internally. a counter argument could be made that just because companies implement ERP systems. it states that “entirely automated application controls are generally not subject to breakdowns due to human failure.” Journal of Information Systems Spring 2011 American Accounting Association . 5 AS No. Given all of these factors. which evolved around the needs of individual functional areas.7 ERP systems facilitate this monitoring process in two ways. By contrast. most of it using an agency theory foundation Brennan and Soloman 2008 . and accounts payable that have some built-in control features. Legacy systems. there is a considerable body of prior literature related to corporate governance. but not for ERP systems. company employees would most likely have access to the source code for legacy systems. However.g. have information spread across dozens or even hundreds of separate computer systems Davenport 1998 . 2008 . Eisenhardt 1989 provides the theoretical basis for the use of monitoring mechanisms such as ﬁnancial reporting and audits to provide information to the principal about the behavior of the agent. Consequently. but do not communicate with each other. Chan et al. accurate reporting of ﬁnancial information to the principal. 5. Although legacy systems may include some built-in controls. Or. integrated system that captures data in a common database for use throughout the company. one would not expect these controls to be as effective as those that are designed into an integrated ERP system. one would expect ERP systems to have a positive impact on the effectiveness of internal controls over ﬁnancial reporting. Ashbaugh-Skaife et al. in a more sinister view. when the vendor does not allow access or modiﬁcation to the source code” PCAOB 2007. rather than electronically. receiving documents. some of the control features might not be activated. the relationship between internal control weaknesses ICW and the cost of equity Ogneva et al. 2007. taking advantage of the integrated nature of all three functional areas. and the relationship between ICW and earnings management Ashbaugh-Skaife et al. B28. B32 . 2008. For instance. may have different applications for purchasing. 2008 . a typical ERP system will include built-in controls for matching purchase orders. 5 . they may not take advantage of all the built-in control features. they include features that facilitate implementation and enforcement of internal controls that are used to ensure the accuracy of ﬁnancial information being reported. manual controls would have to be used to supplement the built-in controls and physically. For instance. in contrast to legacy systems.” This argument would be more consistent with Brazel and Dang 2008 . First. 2009 .The Impact of Enterprise Resource Planning (ERP) Systems 133 percent of ﬁlers reporting deﬁciencies Grant et al.
then one might expect to ﬁnd more ICW related to speciﬁc account-level controls. it is possible that even if H1 is supported from an overall internal control perspective. 2004. compiled by Audit Analytics. For instance. However. If management was overriding control features in order to manage earnings. The sample data are based on 108 ERP- Journal of Information Systems American Accounting Association Spring 2011 . Hunton et al. But Brazel and Dang 2008 also point out that most of this research. including theirs.134 Morris argue that increased control by senior management over ﬁnancial data in a centralized ERP system will lead to an increase in earnings management. Brazel and Agoglia 2007 . DATA SELECTION AND RESEARCH METHODOLOGY Sample Data Selection An empirical/archival methodology is used to test these hypotheses by examining management reports on the effectiveness of internal controls over ﬁnancial reporting. then one would expect to see less ICW in these types of controls. This leads to the following hypothesis stated in the alternate form: H2: Firms that have implemented ERP systems will be less likely to report material weaknesses related to general entity-wide internal controls than nonimplementers. Indeed. Paragraph 24. 2008 . included in Form 10-K annual reports. if the ﬁrms had opted not to activate certain control features during implementation. then one would expect to ﬁnd more ICW related to general controls. who ﬁnd that ﬁrms reporting internal control deﬁciencies have lower quality accruals. which leads to the following hypothesis stated in the alternate form: H3: Firms that have implemented ERP systems will be less likely to report material weaknesses related to speciﬁc account-level internal controls than nonimplementers. This would be more consistent with Chan et al.” On the other hand. 5. which leads to the following hypothesis stated in the alternate form: H1: Firms that have implemented ERP systems will be less likely to report material weaknesses in their internal controls than nonimplementers. if the controls are in place and implemented. This type of behavior should be uncovered during the audit process since this is an area of concern speciﬁcally identiﬁed in AS No. who ﬁnd an association between internal control weaknesses and positive absolute discretionary accruals. prior to Sarbanes-Oxley. If so. Wright and Wright 2002. III. and argue that it is possible that these safeguards have since improved. even if the general entity-wide controls are effective. Looking only at total ICW may mask possible differences in subsets of controls. even if the speciﬁc account-level controls are effective. it is more likely that ﬁrms will take advantage of these built-in controls. Although a case could be made for either side of this argument given the pressures of SOX. it may be uncovered by segregating the internal controls into those that are general entity-wide controls from those that are speciﬁc account-level controls. Janvrin et al. a stronger argument could be made that if general controls are in place and working. they cite prior research that ﬁnds reductions in audit and internal control quality following ERP adoption Bagranoff and Vendrzk 2000. the counterintuitive behavior described above could still be taking place. relates to implementations that took place during the early years of ERP adoption. the increased emphasis on internal controls following SOX makes it likely that ﬁrms that adopted ERP systems early in the cycle have since taken advantage of the built-in features to improve their internal controls. then one would expect to ﬁnd less ICW related to general controls. 2008 . In support of their argument. which states that “entity-level controls include … controls over management override. For instance. and Ashbaugh-Skaife et al. Another explanation could be that ﬁrms have just not taken full advantage of the built-in controls that are available. 2004.
then the ﬁrm is added to the ERP sample set. 6 QAD. 5 Oracle. This study examines the ﬁrst ﬁve years that SOX 404 reporting was required. If the record is an announcement. if the document only implies that an ERP system is in use. 2001 . Probit Regression Model This study uses a probit regression model adopted from Ogneva et al. 2008. therefore. only ﬁrms with November and December year-ends would be included for 2004. Once a match is identiﬁed. some of the sample ﬁrms were not classiﬁed as accelerated ﬁlers due to market capitalization levels and/or ﬁling status. and an indicator variable for ERP implementers as the primary variable of interest.The Impact of Enterprise Resource Planning (ERP) Systems 135 implementing ﬁrms from 27 industry groups that announced implementation of ERP systems between 1994 and 2003. The sample is heavily concentrated around manufacturing ﬁrms that announced ERP system implementation from 1997–2000. including the fact that the effective date was for years beginning after November 15. it is rejected as a match. The second step in the process involves a search of all available newswire services using the LexisNexis service for years after 1998. then the next closest ﬁrm in terms of total assets is used. Also. 8 Peoplesoft. The resulting model is as follows: Prob COUNT_WEAKit = f + + + + 1ERPit + 2FOREIGNit + 3 M&Ait + 4RESTRit 5LOSSit + 6BIG4it + 7LOGSEGit + 8SALEGRWit 9INVTATit + 10LOGMKTVit + 11ZSCOREit + 12LOGAGEit 13LOGERPAGEit 1 8 9 10 I would like to thank David C. Journal of Information Systems Spring 2011 American Accounting Association . The speciﬁc vendors listed 4–10 represent the seven most common ERP systems identiﬁed in Nicolaou 2004 . The process starts with the list of 91 ERP announcements made between 1994 and 1998 from Hayes et al. Eliminating these observations leaves 108 ﬁrms and 377 ﬁrm-year observations for which SOX 404 reporting data are available in the Audit Analytics database. 9 JD Edwards. Reck for providing this list of ﬁrms. Doyle et al. this study uses a matched pairs approach to select a control group. however. searching on key phrases such as: “ERP. 3 Enterprise Systems.8 from which 36 ﬁrms were eliminated because they are no longer listed or data were otherwise not available. a further search of LexisNexis Newswires is conducted for all available years using a combination of the ﬁrm name and several terms related to ERP systems. then by total assets at the beginning of the implementation year. 2004–2008. 2007 with the number of internal control weakness ICW as the dependent variable.” “Enterprise Resource Planning. 7 Baan. Not all ﬁrms were required to ﬁle in all years for a number of reasons. 2004. If a record is found that indicates an ERP system may be in use. then by the availability of Compustat accounting data and Audit Analytics SOX 404 reporting data.10 Panel B of Table 1 provides a breakdown of the 108 ERP ﬁrms by two-digit SIC code and implementation year. 2007 plus one control variable speciﬁc to ERP systems. 2 Enterprise Resource Planning.” and “Enterprise Systems. 4 SAP. Ashbaugh-Skaife et al. It includes control variables that prior research indicates are associated with ICW Ge and McVay 2005. ERP-implementing ﬁrms are ﬁrst matched with other ﬁrms based on SIC code. consistent with the period of time that ﬁrms were concerned about Y2K compliance. Following the recommendations of Barber and Lyon 1997 and the method used by Nicolaou 2004 . Terms include: 1 ERP. the ﬁrm is used as a match for this study. and 10 Lawson. Panel A of Table 1 provides a summary of the sample selection process for these ERP-implementing ﬁrms. but not added to the ERP sample. and the process repeated.9 If no newswire records are found.” This search found an additional 92 ﬁrm announcements yielding a total of 147 ﬁrms. Hayes and Jacqueline L.
and Com. Manufacturing 42-Motor Freight Transportation 45-Transportation by Air 1 1 1 2 1 1 2 1 1 1 1 1 91 36 55 92 147 39 108 99 2 2 1 1 1 1 1 1 7 2 1 1 1 00 1 1 01 02 1 03 Total 5 6 3 1 4 4 3 13 1 2 2 20 12 1 8 1 1 2 Morris 1 1 1 1 1 2 1 2 2 2 2 1 1 1 1 2 2 4 5 1 1 2 2 1 4 1 1 1 1 2 (continued on next page) . Equip.Journal of Information Systems American Accounting Association Spring 2011 136 TABLE 1 Summary of Sample Selection Process Panel A: Sample Selection Process Initial ERP announcements from Hayes et al. 2001 Less ﬁrms no longer listed or data otherwise not available Remaining ﬁrms from Hayes et al. Machinery 36-Mfg: Electronic and Elect. 37-Mfg: Transportation Equipment 38-Mfg: Measuring and Control Instr. 39-Mfg: Misc. 2001 Additional ERP announcements collected from Lexis-Nexis search Total ﬁrms with ERP implementation announcements Firms not required to ﬁle Section 404 or Section 404 data not available Total ﬁrms announcing ERP implementations used in study Panel B: Distribution of ERP Firms by Two-Digit SIC Code and Implementation Year Two-Digit SIC Codes 94 95 96 97 98 13-Oil and Gas Extraction 20-Mfg: Food and Kindred Products 23-Mfg: Apparel 24-Mfg: Lumber and Wood Products 25-Mfg: Furniture and Fixtures 26-Mfg: Paper and Allied Products 27-Mfg: Printing and Publishing 28-Mfg: Chemicals 29-Mfg: Petroleum Reﬁning 33-Mfg: Primary Metal Industries 34-Mfg: Fabricated Metal Products 35-Mfg: Ind.
Mgt Totals 1 1 Journal of Information Systems Spring 2011 American Accounting Association The Impact of Enterprise Resource Planning (ERP) Systems 99 2 00 1 1 01 02 03 Total 2 2 1 1 1 4 1 6 1 1 1 1 1 5 4 13 25 1 2 1 2 28 12 3 1 10 6 4 108 137 . Actg.Panel B: Distribution of ERP Firms by Two-Digit SIC Code and Implementation Year Two-Digit SIC Codes 94 95 96 97 98 48-Communications 50-Wholesale: Durable Goods 51-Wholesale: Non-Durable Goods 52-Retail: Bldg Materials. R&D. Hardware 54-Retail: Food Stores 59-Retail: Miscellaneous 67-Holding and Other Investment 73-Automotive Repair and Service 87-Engineering..
3 B 0. 2007 . E Retained Earnings/Total Assets . then age was based on information from either Compustat or the company’s website. which also would not impact the overall results of this study. 2 organizational change M&A. although it does not provide as strong of a model ﬁt. else 0. indicator variable equal to 1 if earnings before extraordinary items Compustat mnemonic IB-Income Before Extraordinary Items are less than 0. else 0. RCEPS-Restructuring Costs Basic EPS Effect. natural log of market value of equity Compustat mnemonic MKVAL-Market Value . which is the same approach used by Doyle et al. Journal of Information Systems American Accounting Association Spring 2011 . ZSCORE A 3. C Market Value of Equity/Total Liabilities. indicator variable equal to 1 if the ﬁrm’s auditor is one of the Big 4 ﬁrms. or the year after the announcement. 2007 use an indicator variable if a ﬁrm’s sales growth is in the upper quintile of its industry. who report that their results are not sensitive to the use of percentage growth instead.4. Ogneva et al. 4 accounting applications measurement risk SALEGRW. rather than percentage growth. indicator variable equal to 1 if at least one of the following Compustat mnemonics is not equal to zero: RCP-Restructuring Costs Pretax. else 0.99 C 0. and size of the audit ﬁrm BIG4 .12 natural log of years the ﬁrm exists in the CRSP database. RCD-Restructuring Costs Diluted EPS Effect . B Net Sales/Total Assets. RCA-Restructuring Costs After-Tax. LOGERPAGE is used to control for 11 12 13 14 Ogneva et al. indicator variable equal to 1 if acquisitions reported on the Statement of Cash Flows Compustat mnemonic AQC-Acquisitions . depending on whether the announcement is prospective or retrospective in nature and whether it is made early or late in the year.2 E 1. 2007 used a decreasing deciles rank rather than the actual Z-score. else 0. only reduce the measure of model ﬁt. D Working Capital/Total Assets. INVTAT . else 0. One additional control variable is added speciﬁc to ERP systems.14 M&A RESTR LOSS BIG4 LOGSEG SALEGRW INVTAT LOGMKTV ZSCORE LOGAGE LOGERPAGE The control variables from prior research that are hypothesized to be associated with ICW are categorized as: 1 complexity of operations FOREIGN. Altman’s Z-score Computed from Compustat data . If ﬁrm not found in CRSP database. where A EBIT/Total Assets. LOGSEG . percentage change in sales Compustat mnemonic SALE-Net Sales . natural log of number of business segments computed from Compustat mnemonic SNAME-Segment Name in the Segment database . else 0.138 Morris where: COUNT_WEAK ERP FOREIGN number of ICW reported. indicator variable equal to 1 for ﬁrms that have implemented ERP systems.13 and natural log of the number of years since the ERP system was implemented. age of the company LOGAGE . The indicator method does not change the overall results of this study either. and 5 other factors including potential for bankruptcy ZSCORE . RESTR . LOGMKTV . 3 indicators of resource constraint LOSS.11 ratio of inventory over total assets Compustat mnemonic INVT-Inventories Total/AT Assets-Total . The implementation year is assumed to be the year before the announcement.6 D 1. indicator variable equal to 1 if the ﬁrm has a nonzero foreign currency translation Compustat mnemonic FCA-Foreign Exchange Income Loss . the year of the announcement.
however.5 percent out of 377 of the control ﬁrm-years. Additional diagnostic tests using variance inﬂation factors conﬁrm no signiﬁcant multicollinearity in that all VIF values are below 2. 2008 .345.148.0. The ﬁrst three columns report frequencies.3 percent. Dropping 11 pairs with the largest absolute value differences in total assets results in a sample that is not statistically different in size 1.465 versus 1. Note. The results for individual years reﬂect signiﬁcant differences between ERP implementers and nonimplementers for 2006–2008.650 and 0. The majority of ﬁrms that report material weaknesses in their internal controls only report one weakness. except for the Spearman correlation between LOSS and ZSCORE 0. for instance.0 percent15 Cheffers et al. through November 14. divided between the treatment ﬁrms ERP 1 and the control ﬁrms ERP 0 .5 percent proportional difference between ERP implementers and control ﬁrms has a Z-statistic of 2. Year 3 9. Probit Regression Analysis Although the univariate results provide initial support for the ﬁrst hypothesis H1 in that a higher proportion of control ﬁrms reported internal control weaknesses than ERP-implementing ﬁrms.7 percent reported at least one ICW. which indicates a signiﬁcant difference at the 0.50. but no signiﬁcant differences in 2004 or 2005.664. The probit procedure models the probability that levels of COUNT_WEAK have lower ordered values. a probit regression analysis is run using the model described in the prior section that includes control variables that prior research has found to be associated with internal control weaknesses. which enables interpretation of parameter estimates based on the likelihood that they are associated with lower levels of weaknesses. EMPIRICAL RESULTS Univariate Analysis Table 2 provides a summary of univariate statistics for the key dichotomous and continuous variables used in this study. Table 4 summarizes the frequency of internal control weaknesses ICW reported by ﬁrms in their 10-K annual reports for the years 2004–2008. t 2.364 and does not change the overall conclusions of this study. with mean values of only 0.The Impact of Enterprise Resource Planning (ERP) Systems 139 the possibility that ﬁrms with ERP systems that have been in place longer are more likely to have implemented more of the built-in internal control features.508 .9 percent. The 5. The results shows that in total for all ﬁve years.05 among the independent variables have r values less than 0.47. To control for this. The results are presented in Table 5.1 percent. IV.536. and Year 4 7.212 and 0.446 versus 1. that the maximum number of reported weaknesses COUNT_WEAK is only six for control ﬁrms and eight for ERP ﬁrms. Journal of Information Systems Spring 2011 American Accounting Association . the results are not sensitive to this difference. Total assets for the ERP group are larger on average than that of the control group 2. and the next three. 81 ﬁrm-years out of the 754 10. proportions of ﬁrms reporting no ICW Weak 0 or at least one ICW Weak 1 for each year and in total for the ﬁve years.696 . Positive estimates indicate that 15 Audit Analytics deﬁnes Years 1 through 4 as November 15. although that weakness may be attributed to a number of factors identiﬁed in the review process. and standard deviations of 0.01 level based on a one-tailed test. Year 2 10. 2004. These numbers compare to the following results for all ﬁlers reported by Audit Analytics during the ﬁrst four years that SOX Section 404 compliance was required: Year 1 16. extracted from the Audit Analytics database. 2008. t 1. Table 3 is a correlation matrix of the variables used in the probit model. which corresponds to the effective date of the SOX Section 404 reporting requirements. No signiﬁcant multicollinearity problems are indicated since all signiﬁcant correlations p 0. other variables may be contributing to the differences. with 30 8 percent out of 377 ERP-implementing ﬁrm-years compared to 51 13.
342 0. and TOTAL_ASSETS total assets billions beginning of implementation year n 108 for each group .221 3.777 3.000 1.000 11.079 4.000 6.333 0. SPECIFIC number of contributing factors related to speciﬁc account-level controls.000 8.380 1 (n Min 0 0 0 0 0 0 0 0 0 0 0 0 1.714 0.135 0.342 0.000 1.173 2.998 4.059 0 (n Min 0 0 0 0 0 0 0 0 0 0 0 0 0.107 1.400 1. 0 for control ﬁrms. else 0.400 2.337 0. COUNT_WEAK number of material weaknesses recorded in Audit Analytics for each ﬁrm-year.297 0.536 Std.126 1. RCA.243 2.693 0. ZSCORE Altman’s Z-score. LOGMKTV natural log of market value of equity Compustat mnemonic MKVAL/MKVALM .394 0.226 3.528 0.812 2.000 1. RESTR indicator variable equal to 1 if at least one of the following is not equal to 0 Compustat mnemonics RCP.140 Morris TABLE 2 Firm Characteristics (Univariate Statistics) ERP Mean Dichotomous WEAK SPE GEN FOREIGN M&A RESTR LOSS BIG4 Continuous COUNT_WEAK SPECIFIC GENERAL LOGSEG SALEGRW INVTAT LOGMKTV ZSCORE LOGAGE LOGERPAGE TOTAL_ASSETS 0.935 1.267 0.709 0.017 377) Med 0 0 0 0 1. 0.000 1.000 1.398 0.000 1.077 0.646 0.394 5.830 11.501 0.872 Max 1.398 0.135 0. INVTAT ratio of inventory over total assets Compustat mnemonic INVT/AT .089 0.544 12.500 0.387 0.609 1.386 1.671 0 1.000 1.946 0. else 0.191 0.208 0.562 0.249 0.115 6.693 0.000 11. BIG4 indicator variable equal to 1 if the ﬁrm’s auditor is one of the Big 4 ﬁrms.621 Variable Deﬁnitions: ERP 1 for ﬁrms that implemented ERP systems.332 0.295 0. RCEPS.079 0. SPE indicator variable equal to 1 for ﬁrms reporting a contributing factor related to speciﬁc account-level controls.465 ERP Std.108 7.773 34.473 0.895 42. M&A indicator variable equal to 1 if acquisitions reported on the Statement of Cash Flows Compustat mnemonic AQC . Journal of Information Systems American Accounting Association Spring 2011 .000 0 0 0 0.946 0. RCD .271 4.271 0.000 8.488 0. LOGAGE natural log of years the ﬁrm exists in the CRSP database.130 0.484 0. LOSS indicator variable equal to 1 if earnings before extraordinary items Compustat mnemonic IB are less than 0.565 3.129 0.805 28. else 0.000 1.000 1.054 Mean 0.011 377) Med 0 0 0 0 0 0 0 1. Dev.267 0.294 0.000 0 1.178 2.000 2. Dev.445 0.314 3.650 0.000 0 0 0 0.963 1. FOREIGN indicator variable equal to 1 if the ﬁrm has a nonzero foreign currency translation Compustat mnemonic FCA .000 1.942 3.271 0.079 1.141 6. 0.664 0.173 4.638 0.148 0. else 0.212 0.091 1.367 2.080 35.000 1.497 0.395 0. LOGSEG natural log of number of business segments Compustat mnemonic SEGNUM .100 0.000 1.115 0.582 0.484 0.000 1.000 1.236 0.342 0.079 0.905 0.923 0. WEAK indicator variable equal to 1 for ﬁrms reporting an ICW.271 0.625 3. GENERAL number of contributing factors related to general controls. else 0.469 0.000 1.59 1.197 4.872 5. else 0.000 2.490 0.496 0.773 8.132 7.000 6. GEN indicator variable equal to 1 for ﬁrms reporting a contributing factor related to general controls.000 0 1. SALEGRW percentage change in sales Compustat mnemonic SALE .554 3.997 2.371 0.678 Max 1. LOGERPAGE natural log of the number of years since the ERP system was implemented.323 2.702 0.642 0. else 0. else 0.
035 0.112 0.247 2 0.184 1.126 0.166 0.252 0.021 0.123 0.656 0.061 0.027 0.102 0.048 0.063 0.161 0.329 0.156 0.018 0.0001 0.562 0.001 0.033 0.262 0.0001 0.005 0.044 5 0.066 0.012 0.010 0.0001 0.0001 0.Journal of Information Systems Spring 2011 American Accounting Association The Impact of Enterprise Resource Planning (ERP) Systems TABLE 3 Correlation Matrix: Pearson above the Diagonal and Spearman Below 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 COUNT_WEAK ERP FOREIGN M&A RESTR LOSS BIG4 LOGSEG SALEGRW INVTAT LOGMKTV ZSCORE LOGAGE LOGERPAGE 1.000 0.069 0.084 0.006 0.002 0.094 0.085 0.000 3 0.092 0.060 0.031 0.037 0.069 0.901 0.000 0.031 0.364 0.016 0.058 0.001 0.393 4 0.567 0.061 0.611 0.436 0.0001 0.042 0.364 0.003 0.111 0.187 0.0001 0.007 0.395 0.308 0.021 0.455 1.005 0.057 0.0001 0.021 0.000 0.096 0.021 0.094 0.001 1.0001 0.604 0.849 0.001 0.133 0.971 0.004 0.000 0.058 0.096 0.927 0.0001 1.084 0.021 0.0001 0.101 0.120 0.126 0.175 0.113 0.390 6 0.571 0.133 0.191 0.455 0.477 0.058 0.115 0.006 0.026 0.175 0.000 0.086 0.041 0.038 0.746 7 0.015 0.0001 0.036 0.246 0.066 0.0001 0.007 0.073 0.012 0.085 1.103 0.0001 0.0001 0.050 0.845 0.686 (continued on next page) 141 .010 0.039 0.175 0.271 0.001 0.048 0.031 0.874 0.508 0.000 0.166 0.000 0.063 0.175 0.036 0.567 0.076 0.222 0.174 0.040 0.738 0.021 0.0001 0.002 0.921 0.0001 0.019 0.889 0.279 0.002 0.733 0.011 0.089 0.000 1.191 0.111 0.0001 1.118 0.0001 0.000 0.076 0.042 0.305 0.167 0.115 0.019 0.616 0.000 0.033 0.015 0.012 0.279 0.005 0.265 0.019 0.176 0.340 0.0001 0.027 0.
868 1. FOREIGN indicator variable equal to 1 if the ﬁrm has a nonzero foreign currency translation Compustat mnemonic FCA .002 0.739 0.005 0.073 0.821 0.029 0.003 0.000 0.0001 0.624 0.023 0.006 0.018 0.339 0.031 0. Morris (continued on next page) .040 0.0001 0.076 0.033 0.105 0.018 0.686 10 0.909 0. M&A indicator variable equal to 1 if acquisitions reported on the Statement of Cash Flows Compustat mnemonic AQC).019 13 0.008 0.114 0.091 0. else 0.421 0.0001 0.125 0.000 0.254 0.0001 1.076 0. ERP indicator variable equal to 1 for ﬁrms that have implemented ERP systems.053 0.165 0.044 0.074 0.040 0.062 0.000 0.019 0.038 0.002 0.186 0. else 0.089 0.918 0.146 0.038 0.000 0.004 0.001 0.0001 0.318 1.032 0.260 0.105 0.0001 0.752 0.006 0.097 0.989 0.0001 0.004 0.002 0.018 0.0001 1.218 0.259 0.063 0.0001 0.024 0.045 0.037 1.0001 0.0001 0.000 Variable Deﬁnitions: COUNT_WEAK number of internal control weaknesses reported.222 0.054 0.267 0.113 0.8 Journal of Information Systems American Accounting Association Spring 2011 1 2 3 4 5 6 7 8 9 10 11 12 13 14 COUNT_WEAK ERP FOREIGN M&A RESTR LOSS BIG4 LOGSEG SALEGRW INVTAT LOGMKTV ZSCORE LOGAGE LOGERPAGE 0.441 0.0001 0.000 0.007 0.107 0.294 0.561 0.617 0.048 0.0001 0.210 0.433 1.000 1.012 0.179 0.350 0.083 0.497 0.041 0.099 0.002 0.054 0.056 0.029 0.0001 0.085 0.125 0.516 0.0001 0.220 0.458 0.0001 0.073 0.270 0.115 0.042 0.309 0.022 0.107 0.008 0.065 0.630 0.523 0.029 0.043 0.0001 0.745 0. else 0.012 0.950 0.073 0.265 0.003 0.016 0.001 0.078 0.045 9 0.148 0.068 0.061 0.000 0.028 0.062 0.004 0.387 12 0.198 0.0001 0.095 0.452 0.228 0.019 0.154 0.036 0.422 0.084 0.399 0.015 0.074 0.004 11 0.025 0.012 0.000 0.027 0.246 0.361 0.0001 0.001 0.032 0.046 0.137 14 142 0.021 0.659 0.217 0.896 0.612 0.098 0.120 0.137 0.136 1.224 0.173 0.037 0.595 0.279 0.061 0.000 0.040 0.076 0.
4. C Market Value of Equity/Total Liabilities. Altman’s Z-score Computed from Compustat as ZSCORE A 3. 143 . else 0.3 B 0. natural log of years the ﬁrm exists in the CRSP database. RCEPS.Journal of Information Systems Spring 2011 American Accounting Association The Impact of Enterprise Resource Planning (ERP) Systems RESTR LOSS BIG4 LOGSEG SALEGRW INVTAT LOGMKTV ZSCORE LOGAGE LOGERPAGE indicator variable equal to 1 if at least one of the following is not equal to 0 Compustat mnemonics RCP. RCA. else 0.99 C 0. indicator variable equal to 1 if the ﬁrm’s auditor is one of the Big 4 ﬁrms. and natural log of the number of years since the ERP system was implemented. Natural log of market value of equity Compustat mnemonic MKVAL/MKVALM . percentage change in sales Compustat mnemonic SALE . E Retained Earnings/Total Assets . B Net Sales/Total Assets. ratio of inventory over total assets Compustat mnemonic INVT/AT . Where A EBIT/Total Assets. indicator variable equal to 1 if earnings before extraordinary items Compustat mnemonic IB are less than 0.6 D 1. RCD . natural log of number of business segments Compustat mnemonic SEGNUM .2 E 1. else 0. D Working Capital/Total Assets.
more sales growth.6% 100.9% 100.0% 79.6% 3.2% 6.46 0 1 76 10 86 81 5 86 157 15 172 88.2% 5.144 Morris TABLE 4 Frequency of Internal Control Weaknesses Frequency ERP 2004–2008 Weak 0 Weak 1 Totals 2004 Weak Weak Totals 2005 Weak Weak Totals 2006 Weak Weak Totals 2007 Weak Weak Totals 2008 Weak Weak Totals 326 51 377 0 ERP 347 30 377 1 Total 673 81 754 ERP 0 Proportions ERP 1 Total 89.9% 100.04 0 1 78 12 90 80 10 90 158 22 180 86.4% 11.0% 8.35* 0 1 79 9 88 85 3 88 164 12 176 89.3% 10.0% 7.0% 88.1% 100.5% 2.4% 100.0% 83.0% 100. As for the control variables.0% 96. *** Prob Weak Weak ERP ERP Z at 0. respectively.3% 8.0% 1.8% 1.0% 91.9% 7.2% 100.8% 12.8% 100. merger and acquisition activity.8% 1.0% 5.9% 11.05.0% 6. such that Proportion ERP 0: Firms with no Internal Control Weaknesses in the Audit Analytics database.6% 20. variables are more likely to be associated with lower levels of material weaknesses. 0: Control ﬁrms that have not reported implementation of an ERP system.0% 5.0% 0.3% 100.0% 92.0% 0 7.2% 0.01 levels.0% 100.5% 100.7% 100.0% 87. it is expected that the primary variable of interest ERP will be positive.4% 3.0% 96.7% 100. ERP 1 0.76** *.47*** 0 1 54 17 71 59 12 71 113 29 142 76.8% 100.10.8% 10.2% 100. restructuring activity. indicating that ERP implementers ERP 1 are more likely to report lower levels of material weaknesses than control ﬁrms ERP 0 .1% 1.7% 13.0% 94.0% 2.1% 23.1% 16. losses. 0.1% 100.0% Diff Z-stat 86. ﬁrms with foreign operations. and 0. and negative estimates indicate that variables are less likely to be associated with lower levels of material weaknesses.79** 0 1 39 3 42 42 0 42 81 3 84 92. By Journal of Information Systems American Accounting Association Spring 2011 .5% 13.6% 100. 1: Firms with at least one Internal Control Weakness in the Audit Analytics database.0% 93. and higher inventory are expected to have negative estimates.4% 100. **. more segments. indicating that they are less likely to be associated with lower levels of material weaknesses than their counterparts. 1: Firms that implemented ERP systems between 1994 and 2003.0% 100. Therefore.
Conﬁdence limits are based on 95 percent Wald Conﬁdence Limits.5732 0. LOGMKTV natural log of market value of equity Compustat mnemonic MKVAL/MKVALM . RESTR indicator variable equal to 1 if at least one of the following is not equal to 0 Compustat mnemonics RCP.1257 0.4735 0.2 E 1.4209 0.9000 4. SALEGRW percentage change in sales Compustat mnemonic SALE .05. else 0.3101 0.1552 *.0514 0.6162** 0. else 0. else 0. INVTAT ratio of inventory over total assets Compustat mnemonic INVT/AT .0319 0.1958 0. else 0.3397** 0.2640 0.0248 0.3311* 0.2643 0.0353 0. 0.1974 0.4752* 0. B Net Sales/Total Assets.0122 0. RCD . Where A EBIT/Total Assets.0543 0.3 B 0. C Market Value of Equity/Total Liabilities.5363 0.4.7435 322.0931 0.560 754 Wald 2 0. Sign ? Std.2668 0. Prob COUNT_WEAKit = f + + + 1ERPit + 2FOREIGNit + 3 M&Ait + 4RESTRit + 5LOSSit + 6BIG4it 7LOGSEGit + 12LOGAGEit 8SALEGRWit + 9INVTATit + 10LOGMKTVit + 11ZSCOREit + 13LOGERPAGEit Variable Deﬁnitions: COUNT_WEAK number of internal control weaknesses reported. Journal of Information Systems Spring 2011 American Accounting Association . ERP indicator variable equal to 1 for ﬁrms that have implemented ERP systems. FOREIGN indicator variable equal to 1 if the ﬁrm has a nonzero foreign currency translation Compustat mnemonic FCA . else 0. BIG4 indicator variable equal to 1 if the ﬁrm’s auditor is one of the Big 4 ﬁrms. LOSS indicator variable equal to 1 if earnings before extraordinary items Compustat mnemonic IB are less than 0.99 C 0.6 D 1.6106 0.0262 3. and 0.1786 0. LOGSEG natural log of number of business segments Compustat mnemonic SEGNUM . and LOGERPAGE natural log of the number of years since the ERP system was implemented.0770 1.0398 5.0892 0. LOGAGE natural log of years the ﬁrm exists in the CRSP database.8123 0.2573 0.The Impact of Enterprise Resource Planning (ERP) Systems 145 TABLE 5 Probit Regression Results Exp. D Working Capital/Total Assets. ZSCORE Altman’s Z-score Computed from Compustat as ZSCORE A 3. RCA. Error 1.01 levels. **. respectively.10.3790** 0.0179 2.3195 0.9089 0.6917 Parameter Intercept ERP FOREIGN M&A RESTR LOSS BIG4 LOGSEG SALEGRW INVTAT LOGMKTV ZSCORE LOGAGE LOGERPAGE Log Likelihood Observations Estimate 1. using one-tailed test where sign is predicted.0311 11. RCEPS.2918 1.7866*** 2.0390 0. E Retained Earnings/Total Assets . else 0. *** Indicate signiﬁcance at 0. M&A indicator variable equal to 1 if acquisitions reported on the Statement of Cash Flows Compustat mnemonic AQC .
which does not support the argument that older implementations may be using more of the control features. The Appendix is an abridged example of an audit report issued by PricewaterhouseCoopers. which are listed at the end of the sample audit report. including: a Hosmer and Lemeshow Goodness-of-Fit test. These contributing factors are not considered to be 11 instances of ICW. The primary variable of interest ERP is positive and signiﬁcant at the 0. indicating that ERP-implementing ﬁrms are more likely to be associated with lower levels of material weaknesses. a logistic regression was run using a dichotomous variable WEAK set to 1 if any material weaknesses were found and 0 if none were found. analysis of correlations. These results may be impacted by low power due to the relatively small sample size. higher sales growth. 2004. indicating that they are more likely to be associated with lower levels of material weaknesses. These factors are classiﬁed by Audit Analytics after reading the compliance document.560. Other tests of model assumptions. Based on this language. for Pride International. Sensitivity Analysis An argument can be made that the number of material weaknesses counted may not be the best measure of internal control. and lower Z-scores are less likely to report lower levels of material weaknesses.05 level. all validate the model. The untabulated results were essentially the same. because even if only one weakness is found. as expected. higher Z-scores. As a sensitivity analysis. Control variables with signiﬁcant results in the expected direction include: M&A. The variable related to age of the ERP implementation LOGERPAGE is not signiﬁcant. the company has an internal control problem that must be reported. analysis of classiﬁcation tables. but 11 factors that contribute to a single ICW. and ZSCORE.05 level. the regression was run using a sub-set of the observations excluding the 11 pairs of ﬁrms with the largest absolute value difference in total assets. The panel consisted of three members of the accounting profession familiar with Journal of Information Systems American Accounting Association Spring 2011 . LLP. SALESGRW. a Percent Concordant test. with the coefﬁcient on the ERP variable still signiﬁcant at the 0. These results further support the ﬁrst hypothesis H1 in that ERP-implementing ﬁrms are less likely to report material weaknesses than the control ﬁrms. for December 31. LOSS. it is necessary to examine the speciﬁc factors contributing to material weakness determination. with a Log Likelihood of 322. lower market values. which concurs with management’s determination that a material weakness has been identiﬁed. The model is a good ﬁt. Audit Analytics identiﬁed 11 factors contributing to internal control weakness. are older. and have older ERP systems are expected to have positive estimates.146 Morris contrast.05 level. The results untabulated are very similar to the probit regression with the variable of interest ERP signiﬁcant at the 0. LOGMKTV. To test the sensitivity of results to the size difference discussed in the previous section. Factors Contributing to Material Weakness Determination To test the second and third hypotheses. A panel of experts was used to review the various factors deﬁned by Audit Analytics and identify those that relate to general entity-wide controls and those that relate to speciﬁc accountlevel controls. The appropriate section of the audit report has been underlined to illustrate the point. after controlling for other variables found in prior research to contribute to ICW. and test for multicollinearity. ﬁrms that use Big 4 audit ﬁrms have higher market value. Audit Analytics includes in their database a listing of these factors with detailed descriptions for each. indicating that ﬁrms with M&A activity. losses. It is important to understand that there is no speciﬁc standardized requirement for companies or their auditors to categorize the factors that lead to a determination of internal control weakness. and the same control variables signiﬁcant at similar levels as with the probit regression. Inc.
whereas the differences are not signiﬁcant for the ERP ﬁrms. The EP# column identiﬁes the number of expert panel members that were in agreement 2 or 3 as to which category was appropriate. indicating they are impacting the results similar to prior research.” 4 “ﬁnancial derivatives/hedging FAS No. The most often cited factor.5 percent of control ﬁrmyear observations and 30 8. Table 6 provides a summary of factors contributing to general entitywide internal control weaknesses in Panel A and speciﬁc account-level internal control weaknesses in Panel B for the 754 ﬁrm-year observations.01 level.” 3 “intercompany/investment w/subsidiaries/afﬁliates issues.5 percent difference also signiﬁcant at the p 0. The overall model is reasonable. and lower Z-scores are less likely to report higher levels of speciﬁc accountlevel control-related factors.63 percent of the control ﬁrm-years and only 30 3. Comparing the mean values in Panel B yields similar results. competency/training” and “material and/or numerous auditor/YE adjustments. policy and/or procedures” was cited in 50 6. Likewise.0 percent of ERP ﬁrm-year observations.” The speciﬁc account-level category includes: 1 “restatement or non-reliance of company ﬁlings. the average number of general entity-wide factors is signiﬁcantly higher than the average number of speciﬁc account-level factors. losses. 109 issues. and one is a supervisor for a Fortune 50 corporation with internal audit experience.98 percent of the ERP ﬁrm-years. lower market value. with log likelihood of 358. Journal of Information Systems Spring 2011 American Accounting Association . at a p-value 0.” and 6 “Pension and other post-retirement beneﬁt issues. with the 5. General entity-wide factors are found in 49 13. One is a partner for a Big 4 CPA ﬁrm. four of the control variables related to general entity-wide controls and ﬁve of the control variables related to speciﬁc account-level controls are signiﬁcant with the expected sign.314 and 358.3 percent difference is statistically signiﬁcant at the p 0. higher sales growth.685 for general and speciﬁc models. The table shows the frequency with which each of the factors has been cited and the proportion of the total represented by that frequency.” 5 “tax expense/beneﬁts/ deferral/other FAS No. indicating that ﬁrms that implemented ERP systems were more likely to report lower levels of both general entity-wide and speciﬁc account-level control-related weaknesses than the control group.01 level. Panel A presents frequencies of ﬁrm-years reporting general versus speciﬁc contributing factors to ICW. Table 8 summarizes results of probit regressions of factors related to general entity-wide and speciﬁc account-level control weaknesses. and lower Z-scores are less likely to report higher levels of general entitywide control-related factors. while Panel B evaluates the mean values of total occurrences for each category. higher sales growth. with both general and speciﬁc averages signiﬁcantly larger for control ﬁrm-years than the ERP ﬁrm-years. This result indicates that control ﬁrms will report more of these factors than the ERP-implementing ﬁrms. lower market value. rejecting the null hypotheses. with the differences statistically signiﬁcant. The 5. The primary variable of interest ERP is positive and signiﬁcant at the 0. using the previous model from Table 5 to test H2 and H3.The Impact of Enterprise Resource Planning (ERP) Systems 147 SOX Section 404 reporting and internal controls. “accounting documentation. In the general entity-wide category.05 level in both cases. 133 accounting. one is a supervisor for a large regional CPA ﬁrm.01 level. Although many of the factors are not statistically different between the ERP implementers and control ﬁrms. Firms with M&A activity. ﬁrms with M&A activity. Similar results are shown for the speciﬁc account-level factors.” 2 “restatement of previous 404 disclosures. they include in addition to the documentation factor discussed above : “accounting personnel resources. three of the general entity-wide factors and six of the speciﬁc account-level factors are at least marginally signiﬁcant.7 percent of the ERP ﬁrmyear reports. with 51 13.0 percent of control ﬁrm-year reports versus 29 7. respectively.” Table 7 summarizes further analysis of the contributing factors. Note also that for control ﬁrms. Similar to the previous probit regressions.
13 0.00 0.40 3.00 0.59* 0./training Unspeciﬁed/unidentiﬁed/inapplicable FASB/GAAP Material and/or numerous auditor/YE adjustments Fin Stmt.66 1. footnote. segment disclosure Remediation of material weakness identiﬁed Total General Entity-Wide Factors Panel B: Speciﬁc (Account-Level) Factors Lease.71 0.79 0.13 0. 95 classiﬁcation errors Consolidation.93 0.27 1. and commit issues Restatement or nonreliance of company ﬁlings Cash ﬂow statement FAS No.27 0.53 0. and FAS No.52* 0.98*** 0.00 0. GAAP. legal.40 3.40 0.40 0.53 3.86 0. accuracy. comp.13 0. leasehold.00** Morris (continued on next page) . compet.53 0.27 0. Fin46r/Off BS and foreign currency Income statement classiﬁcation.25** 0.71 0.40 1.13 0. and EPS Foreign. contingency. 5.53 0. Senior management competency.19 0. tone.Journal of Information Systems American Accounting Association Spring 2011 148 TABLE 6 Factors Contributing to Internal Control Weaknesses Panel A: General (Entity-Wide) Factors AA Ref Inadequate disclosure controls timely.06 1. policy and/or procedure Insufﬁcient or nonexistent internal audit function Scope disclaimer of opinion or other limitations Ethical or compliance issues with personnel Information technology. software. FAS No.27 0.66 2. related party.53 2.13 2. security. access Segregations of duties/design of control personnel Accounting personnel resources.13 3 5 10 24 36 38 43 73 76 77 8 2 2 2 2 2 2 2 2 2 2 3 4 21 2 4 1 8 14 3 5 9 4 4 12 1 2 0 5 1 3 6 7 0 0. margin.66 0.13*** 0.19 0.63 0. 13 98 subcategory Journal entry control issues Nonroutine transaction control issues Intercompany/Investment w/sub/afﬁl issues 9 13 17 18 20 21 22 42 44 68 4 40 57 Frequency EP # 3 3 3 3 3 3 3 3 3 3 2 2 2 ERP 0 2 50 0 1 2 9 4 28 3 28 2 0 129 0 ERP 1 3 30 1 1 3 8 5 19 1 17 4 1 94 1 ERP 0. U.06 0. afﬁliated and/or subsidiary Restatement of previous 404 disclosures Lease.13 1.53 1.27 6.13 0.S.00 Proportions 0 ERP 1 0. reliability Accounting documentation.80 0.
06 0. and cost of sales issues Liabilities.00* 0.53 1.27 0.13 1.13 0.06** 0.46 1.Panel B: Speciﬁc (Account-Level) Factors Untimely or inadequate account reconciliations Capitalization of expenditures issues Accounts/loans receivable.33 0. *** Prob Z at 0.06 0. intangible or ﬁxed asset value/diminution Deferred.00 *.19 0. 133 accounting Inventory. ERP 1: ERP Implementing Firms.13 0. and equity BCF security Pension and other post-retirement beneﬁt issues Asset retirement obligation issues Total Speciﬁc Account-Level Factors Total of All Factors Reported Journal of Information Systems Spring 2011 American Accounting Association The Impact of Enterprise Resource Planning (ERP) Systems 12 14 15 16 27 28 29 30 32 33 35 39 41 47 80 81 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 3 12 1 5 9 7 5 1 2 13 8 6 10 19 1 2 1 177 306 10 0 5 5 3 4 2 0 10 8 4 11 8 1 0 0 112 206 1.72 1. and 0.00 0. merger. and accrual estimate Acquisition.27 0. depletion.59 0.53 0. **. vendor. disposal. or executive comp issues Depreciation. respectively.05. reserves.66 0. 0 ERP 1 0.13 0. stock-based.52 0.00* 1. 0.13 0.27 1.10. payables. EP # Expert Panel members in agreement on classiﬁcation.40 0.66 1.93 0.33 2. 149 . or reorganization Revenue recognition issues Tax expense/beneﬁt/deferral/other FAS No. investments. warrants.66 0.66 0. SG&A issues Financial derivatives/hedging FAS No.01 levels. 109 Debt. or amortization issues Expense recording payroll. ERP 0: Control Firms. such that Proportion ERP AA Ref Audit Analytics Reference Number.33 1.80 1. quasi-debt. and cash PPE.
150 Morris TABLE 7 Analysis of Factors Contributing to Material Weaknesses Panel A: Frequency of Firms Reporting General versus Speciﬁc Contributing Factors Frequency Proportions ERP General GEN 0 GEN 1 Totals Speciﬁc SPE 0 SPE 1 Totals 328 49 377 326 51 377 0 ERP 348 29 377 347 30 377 1 Total 676 78 754 673 81 754 ERP 0 ERP 1 Total 89. V.0% 100.5% 100.295 0. and 0.5% 13. two-tailed test. respectively. such that Prob t ERP 0 ERP 1 0. GEN 1: Firms with at least one Internal Control Weakness in the Audit Analytics database and contributing factors that are related to General controls.05.3% 100.172 0.297 0.3% 7. and 0.0% 5. 0.47*** Panel B: Mean Values of Contributing Factors Reported ALL ERP 0 ERP n GENERAL SPECIFIC Difference t-stat 754 0.469 0. respectively. . a smaller proportion of ERP-implementing ﬁrms have reported ICW than the control ﬁrms. one-tailed test.5% 2.7% 100. SPE 1: Firms with at least one Internal Control Weakness in the Audit Analytics database and contributing factors that are related to Speciﬁc account-level controls.0% 86.39*** 5.7% 10.10.01 levels.7% 100.3% 10.05.342 0. .741 1.3% 2.0% 8.01 levels. SPECIFIC: Number of factors contributing to material weaknesses that relate to speciﬁc account-level controls. 0.088 2.383 0. #. GENERAL: Number of factors contributing to material weaknesses that relate to general controls.343 *. The results show that during the ﬁrst ﬁve years that SOX Section 404 has required such reporting. 0. These results hold up in a probit regression analysis that includes several control variables that prior research has found to be associated with ICW.0% 100.05. such that Prob t GENERAL SPECIFC 0. GEN 0: Firms with no Internal Control Weaknesses in the Audit Analytics database.10. The regression suggests that ﬁrms that implemented ERP systems are less likely to have ICW than the non-ERP control ﬁrms.0% Diff Z-stat 87.782## 377 0.10. and 0.0% 89. respectively. It compares internal control weaknesses ICW reported in Form 10-K for each of the groups.479## 377 0.0% 92.249 0.##. ERP 1: Firms that implemented ERP systems between 1994 and 2003. such that Prob Z Proportion ERP 0 ERP 1 0.### 0. one-tailed test. CONCLUSIONS Summary of Results This study examines the impact that enterprise resource planning ERP systems have on the effectiveness of internal controls over ﬁnancial reporting. SPE 0: Firms with no Internal Control Weaknesses in the Audit Analytics database. Journal of Information Systems American Accounting Association Spring 2011 .093 t-stat 1. *** 0.0% 13.314 1 Diff 0. 0.048 1. **.127 2. It uses a sample of ﬁrms that implemented ERP systems from 1994 to 2003 matched with control ﬁrms based on industry and size.01 levels. ERP 0: Control ﬁrms that have not reported implementation of an ERP system.0% 92.
0.0953 0. and 0.1986 0.7483 358. LOGAGE natural log of years the ﬁrm exists in the CRSP database. else 0.5007** 0.685 754 Std.1957 *. RCA.2632 0.2676* 0.2653 0.2870 1. LOSS indicator variable equal to 1 if earnings before extraordinary items Compustat mnemonic IB are less than 0. LOGSEG natural log of number of business segments Compustat mnemonic SEGNUM . else 0.10.2687* 0.0401 0. M&A indicator variable equal to 1 if acquisitions reported on the Statement of Cash Flows Compustat mnemonic AQC . otherwise two-tailed test.8500 4. Journal of Information Systems Spring 2011 American Accounting Association .4722 0.0022 4. else 0.2566 0.2669 0.3157 0.5714 0.3129 0.0243 0. C Market Value of Equity/Total Liabilities. Where A EBIT/Total Assets.0077 1. Conﬁdence limits are based on 95 percent Wald Conﬁdence Limits.4342 0. LOGMKTV natural log of market value of equity Compustat mnemonic MKVAL/MKVALM .5429 0.2653** 0.6216 0. else 0. FOREIGN indicator variable equal to 1 if the ﬁrm has a nonzero foreign currency translation Compustat mnemonic FCA .0605 0.2894 0.1786 0. respectively.7742 0. Sign ? ? Estimate 1. else 0.2565** 0. BIG4 indicator variable equal to 1 if the ﬁrm’s auditor is one of the Big 4 ﬁrms.1954 0.3 B 0.0061 11.0322 0.3503*** 2.2914 1.1973 0.0338 0. B Net Sales/Total Assets.6131 0.9825 0. INVTAT ratio of inventory over total assets Compustat mnemonic INVT/AT .7027 Wald 2 Dependent Variable SPECIFIC Estimate 1.2672 0.05.0285 4.0804 0. using one-tailed test where sign is predicted.314 754 Std.8858 0.0790 0.The Impact of Enterprise Resource Planning (ERP) Systems 151 TABLE 8 Probit Regression Results for General (Entity-Wide) and Speciﬁc (Account-Level) Controls Dependent Variable GENERAL Parameter Intercept ERP FOREIGN M&A RESTR LOSS BIG4 LOGSEG SALEGRW INVTAT LOGMKTV ZSCORE LOGAGE LOGERPAGE Log Likelihood Observations Exp. ERP indicator variable equal to 1 for ﬁrms that have implemented ERP systems. SALEGRW percentage change in sales Compustat mnemonic SALE .99 C 0.4704*** 5.0908 0.2 E 1.4442 0. E Retained Earnings/Total Assets .1289 0.1249 2.6700 4.4211 0. *** Indicate signiﬁcance at 0.0016 11.1826 0.4.2002 0.3136 0. else 0. Error 1.2697 0. RCD . D Working Capital/Total Assets.0366 0.4180 0.0159 0.0264 0.5452 0. **.6 D 1.0757 0. and LOGERPAGE natural log of the number of years since the ERP system was implemented.8272 0.0272 3.0121 0. ZSCORE Altman’s Z-score Computed from Compustat as ZSCORE A 3.0863** 0.6843 Wald 2 0.0173 0. RESTR indicator variable equal to 1 if at least one of the following is not equal to 0 Compustat mnemonics RCP.0116 0.1395 0.3228 0.6391 385.3058 0.7128** 0.5628 0.5444 0.2652 0.5785** 0. Prob DVit = f + + 1ERPit + 2FOREIGNit + 3 M&Ait + 4RESTRit + 5LOSSit + 6BIG4it + 7LOGSEGit 13LOGERPAGEit 8SALEGRWit + 9INVTATit + 10LOGMKTVit + 11ZSCOREit + 12LOGAGEit + Variable Deﬁnitions: DV dependent variable: count of weaknesses related to GENERAL or SPECIFIC controls.2827 5.5494** 0. RCEPS.01 levels.0937 0. Error 1.2674 0.9255 0.
including those responsible for purchasing such systems. only on the impact of ERP on ICW. Also. it provides support for the claim that ERP systems help improve internal controls over ﬁnancial reporting as required by Sarbanes-Oxley Section 404. The second one is addressed by using a diversiﬁed expert panel to spread the judgment to multiple parties from different perspectives. The ﬁrst one is not critical to this study because it is not focused on identifying speciﬁc factors. this is the ﬁrst empirical/archival test of these claims and should be of interest to many constituencies. To my knowledge. which uses press releases to select ERP implementing and control ﬁrms. or. Since the press releases tend to only identify that an ERP system is being or has been implemented. who determine which factors apply by reading the management and audit reports that are ﬁled. Limitations and Future Research This study has several limitations. Future research should consider additional ways to identify ERP implementers and the extent to which the systems have been implemented and are being utilized. this would also bias the results against the ERP ﬁrms. For instance. Additional large-ﬁrm bias may be introduced in that larger ﬁrms may be more inclined to issue press releases than smaller ﬁrms. introduces potential bias. The second judgment is in determining which of those factors are related to general entity-wide controls and which are related to speciﬁc account-level controls. increased during this period of time until the passage of SOX in 2002. there is no way to know how many of the modules have been implemented. 2009 argue that earnings management. the sample suffers from a large-ﬁrm bias that results from the phased-in timing of compliance with SOX Section 404. Second. in general. However. and the academic community. It is possible that results for smaller ﬁrms that were not required to comply with SOX initially may be different. In this case the results would be biased against the ERP ﬁrms. and that Brazel and Dang’s Journal of Information Systems American Accounting Association Spring 2011 . the selection process. The ﬁrst judgment is made by the staff at Audit Analytics. Second. First. for that matter. including national and regional CPA ﬁrms and internal corporate accounting. how much of the organization has adopted the system. which would strengthen the ﬁndings. but did not issue any press releases discussing it. The results indicate that ERP-implementing ﬁrms are less likely than the control ﬁrms to report factors contributing to ICW in both categories. software vendors. auditors. and these results are also robust when control variables are added in a probit regression. Another issue relates to how much of the ERP system has been implemented and is being used. it is possible that some of the control group may have implemented ERP systems. Implications and Contribution This study’s ﬁnding that ﬁrms which implement ERP systems report fewer material ICW than ﬁrms that do not use ERP systems is important for a number of reasons. First. control ﬁrms report signiﬁcantly more general factors than speciﬁc factors. As with the previous limitation. how many of the built-in internal control features are being used. Dorantes et al. Brazel and Dang 2008 ﬁnd an increase in earnings management activity following implementation of ERP systems from 1993–1999. There is also the problem of human judgment related to the factors that contribute to internal control weaknesses. which would only strengthen the ﬁndings. the results provide additional data that may contribute to a better understanding of the conﬂicting results in prior ERP research related to earnings management.152 Morris The study also examines factors contributing to ICW by dividing them into those that are related to general entity-wide controls and speciﬁc account-level controls. Future research should expand this study to include the nonaccelerated ﬁlers after sufﬁcient data have accumulated. There is not a signiﬁcant difference between the factors related to general and speciﬁc controls for ERP-implementing ﬁrms.
Dorantes et al. These conﬂicting results could be explained in part by the enactment of SOX and the increased emphasis on internal controls. earnings management. 2009 ﬁnd a decrease in earnings management. marginally signiﬁcant differences in the third year. which may then help to better explain some of these differences. This information. which shows no signiﬁcant difference between ERP and non-ERP ﬁrms in the ﬁrst two years of SOX reporting. along with the prior ﬁndings of Dorantes et al. Also consistent with the overall ﬁndings is the fact that ERP ﬁrms report no signiﬁcant differences between the two categories while non-ERP ﬁrms report more general entity-wide control factors than speciﬁc account-level control factors see Table 7 . It is conceivable that as ﬁrms work to comply with SOX.The Impact of Enterprise Resource Planning (ERP) Systems 153 2008 research design does not take this general trend into consideration because the sample is not compared to a control group. The use of additional methodologies such as ﬁeld studies and/or survey data may be needed to better understand the details of how ERP systems are implemented and used. which then leads to a decrease in earnings management activity at least relative to non-ERP ﬁrms . it is not consistent with the fact that the coefﬁcients on the LOGERPAGE variables in the probit regression analyses Tables 5 and 8 were not signiﬁcant. Third. which will increase the power of the tests. they implement more of the built-in features of ERP systems. the ﬁndings that both general entity-wide and speciﬁc account-level controls are less likely to contribute to ICW for ERP ﬁrms than for control ﬁrms is consistent with the overall ﬁndings. and internal control. This explanation is consistent with ﬁndings in the current study as presented in Table 4. placing more emphasis on internal control. suggests that Brazel and Dang 2008 may be an anomaly. only to itself before and after implementation. In their study. and signiﬁcant differences in the fourth and ﬁfth years. 2009 and Morris 2009 . Additional research is needed to further examine the inconsistencies in the relationship between ERP systems. which is similar to the ﬁndings by Morris 2009 for discretionary working capital accruals. Journal of Information Systems Spring 2011 American Accounting Association . However. relative to a control group. It is possible that the nonsigniﬁcance is due to low power that results from a relatively small sample size. Future research should examine this issue after more data become available.
2004. did not maintain effective internal control over financial reporting as of December 31. INC. As of December 31. Accordingly. (2) perform the necessary manual processes. Report of Independent Registered Public Accounting Firm16 To the Stockholders and Board of Directors of Pride International. Inc.'s 2004 consolidated financial statements and of its internal control over financial reporting as of December 31. are presented below. as discussed in Note 2 to the consolidated financial statements. stockholders' equity and cash flows present fairly. and its subsidiaries… Internal control over financial reporting Also. based on our audits. minority interest balances and activity and income tax balance sheet accounts and the related provisions. Consolidated financial statements In our opinion. the first three quarterly periods in 2004 and all quarterly periods in 2003. management has determined that this control deficiency constitutes a material weakness. or combination of control deficiencies. that Pride International. Contributing factors included the large number of manual processes utilized during the period-end financial reporting process and an insufficient number of accounting and finance personnel to. This deficiency also resulted in audit adjustments to the 2004 consolidated financial statements primarily affecting accrued employee benefits and interest and the corresponding expense accounts.: We have completed an integrated audit of Pride International. 2004 because the Company did not maintain effective controls… based on criteria established in Internal Control -. we have audited management's assessment. that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. timing. the financial position of Pride International. including the specifics of non-routine and non-systematic transactions. Our opinions. debt and the related interest and financing costs. Inc. Additionally. The following material weakness has been identified and included in management's assessment. in a timely manner: (1) implement extensive structural and procedural system and process initiatives during 2004. and extent of audit tests applied in our audit of the 2004 consolidated financial statements. Inc. in all material respects. This material weakness was considered in determining the nature. and our opinion regarding the effectiveness of the Company's internal control over financial reporting 16 Source of Audit Report is from Form 10-K Filing in EDGAR Journal of Information Systems American Accounting Association Spring 2011 . the Company did not maintain effective controls over the communication among operating.154 Morris APPENDIX ABRIDGED EXAMPLE OF AN AUDIT REPORT PRIDE INTERNATIONAL. This control deficiency resulted in errors that required the restatement of the Company's consolidated financial statements for 2003 and 2002.Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)… A material weakness is a control deficiency. Inc. this control deficiency could result in a material misstatement to the Company's annual or interim consolidated financial statements that would not be prevented or detected. and (3) analyze non-routine and non-systematic transactions. 2004 and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). the accompanying consolidated balance sheet and the related consolidated statements of operations. The errors primarily affected property and equipment and the related depreciation expense. included in Management's Report on Internal Control Over Financial Reporting appearing under Item 9A. functional and accounting departments of financial and other business information that is important to the period-end financial reporting process.
Integrated Framework issued by the COSO. The effect of ERP system implementations on the management of earnings and earnings release dates. Brazel. Detecting long-run abnormal stock returns: The empirical power and speciﬁcation of test statistics. Auditing and Finance 8 Winter : 31–52.. and V. ——–. ——–. B. and L.. and T. 2005 155 The Audit Analytics Database lists the following contributing factors based on the above opinion. Journal of Accounting. depletion or amortization issues Liabilities. O’Keefe. Bareﬁeld. Soloman. B. based on criteria established in Internal Control -. is fairly stated. quasi-debt. Agoglia..org/advocacy/issues/pages/section404bofsox. R. 2007. and J. reserves and accrual estimate failures PPE. American Institute of Certiﬁed Public Accountants AICPA . Information Systems and Control Journal 5: 33–37. 2008. A. ——–. H. accountability and mechanisms of accountability: An overview. 1997. R. M. Barber. Auditing & Accountability Journal 21 7 : 885–906. Also. 2000. Dang. M. Journal of Financial Economics 43: 341–372. policy and/or procedures Non-routine transaction control issues Restatement or nonreliance of company filings Restatement of previous 404 disclosures Accounting Rules (GAAP/FASB) Application Failures (7): Accounts/loans receivable. and C. Auditing: A Journal of Practice & Theory 12 Spring : 74–87. Why do private companies demand auditing? A case for organizational loss of control. ——–. 2004. intangible or fixed asset (value/diminution) issues Tax expense/benefit/deferral/other (FAS 109) issues REFERENCES Abdel-khalik. because of the effect of the material weakness described above on the achievement of the objectives of the control criteria. Inc. Journal of Accounting Research 47 1 : 1–43. Accounting.The Impact of Enterprise Resource Planning (ERP) Systems does not affect our opinion on those consolidated financial statements. Internal Control Weaknesses (4): Accounting documentation. did not maintain effective internal control over financial reporting as of December 31. warrants & equity (BCF) security issues Depreciation.. PricewaterhouseCoopers LLP Houston. Contemporary Accounting Research 24 Winter : 1059–1083. payables. management's assessment that Pride International. Lyon. The discovery and reporting of internal control deﬁciencies prior to SOX-mandated audits. has not maintained effective internal control over financial reporting as of December 31. W. Journal of Accounting and Economics 44 1 : 166–192. An examination of auditor planning judgments in a complex accounting information system environment. J. Brennan. The effect of SOX internal control deﬁciencies on ﬁrm risk and cost of equity. 2008. 2007. In our opinion. Texas March 25. LaFond. D. The effect of SOX internal control deﬁciencies and their remediation on accrual quality.aspx. ——–. Journal of Information Systems 22 2 : 1–21. (Fin46r/Off BS) & foreign currency translation issues Debt.Integrated Framework issued by the COSO. A.. 2004. The changing role of IS audit among the big ﬁve US-based accounting ﬁrms. P. M. The section of the audit report that discusses the internal control weaknesses is underlined. and W. N. Vendrzk.. Journal of Information Systems Spring 2011 American Accounting Association . in our opinion. Additional evidence on the economics of attest: Extending results from the audit market to the market for compilations and reviews.aicpa. 1993. Inc. based on criteria established in Internal Control -. Collins. Gaver. investments & cash issues Consolidation. in all material respects. Kinney. N. and J. 2009. The Accounting Review 83 1 : 217–250. Section 404(b) of Sarbanes-Oxley Act of 2002. D. J. Pride International. Corporate governance. Available at: http://www. P. Bagranoff. R. 2010. J. 1993. and R. Ashbaugh-Skaife. 2008.
Deumes. J. M. Market reaction to ERP implementation announcements. Available at: http://www. Payne. Auditing: A Journal of Practice & Theory 22 2 : 99–119.156 Morris Brunelli. Reck. 404 Dashboard: Year 4 Update: Audit Analytics Database Report. 1989. Available at: http:// searchoracle. Economic incentives for voluntary reporting on internal risk management and control systems. G. C. R. Smaller Vendors Challenge SAP. Hunton. Stamford. 2009. M. Peters. Inc.cfm?abstract_id 1526521. Auditing: A Journal of Practice & Theory 27 2 : 161–179. Agency theory: An assessment and review.org/. J.pdf. Management trade-offs of internal control and external auditor expertise. 2007. Janvrin. A. Alali. Li. Internal Control—Integrated Framework: Executive Summary. J.sid41_gci1229162.org/icintegratedframework-summary. Thomson. P. J. and M. and S. Measuring the impact of enterprise resource planning ERP systems through the prism of accounting theory. In ID Number: G00141080. Are ﬁnancial auditors overconﬁdent in their ability to assess risks associated with enterprise resource planning systems? Journal of Information Systems 18 2 : 7–28.. 2006. 2006.coso. and S. Ge. Kent State University. Li. Determinants of weaknesses in internal control over ﬁnancial reporting. Auditing: A Journal of Practice & Theory 25 2 : 1–23. Earnings management of ﬁrms reporting material internal control weaknesses under Section 404 of the Sarbanes-Oxley Act.coso. Available at: http://www. L. McVay. Farrell. Wright. A. Dissertation. Nicolaou. K. 2008. edited by Gartner. Market share: ERP software. worldwide.ssrn. Available at: http://papers. and K. 1992. 2008. Putting the Enterprise into the Enterprise System. 2005 executive summary .00. T. M.. Krishnan.. and C. and S.. I.. Lee. M. 2005. M. 2006. J. J. Audit committee quality and internal control: An empirical analysis. Oracle in ERP Market. 2003. W. K. and P.. Doyle. 2004. F. The impact of client information technology on audit procedures. and J. L. C. Committee of Sponsoring Organizations COSO . 2006. 2004. Firm performance effects in relation to the implementation and use of enterprise resource planning systems.. and F. 1985. and V. 2005. Hayes. Use of COSO 1992 in management reporting on internal control. B. and W. Wright. The impact of SOX Section 404 internal control quality assessment on audit delay in the SOX era. D. R. The Accounting Review 80 2 : 649–675. H. 2008. Auditing: A Journal of Practice & Theory 27 1 : 35–66. 2007. The disclosure of material weaknesses in internal control after the SarbanesOxley Act.com/sol3/ papers. Sun. G. C. A. Organization background information. The effect of enterprise systems implementations on the ﬁrm information environment.289142. McVay.. Iowa State University. Working paper. W. Hunton. Raghunandan. Internal control weakness and cost of equity: Evidence from SOX Section 404 disclosures. 1998. E. Available at: http://www. 2001. Journal of Information Systems 18 2 : 79–105. D. Accounting Horizons 19 3 : 137–158. C. Managerial Auditing Journal 23 8 : 803–823. The effect of IT controls on ﬁnancial reporting. T. and J. L. Ogneva. R. L. J. 2004. Grant. The Accounting Review 82 5 : 1255–1297.htm. CT: Gartner. Information Generates Value: The Cornerstone for Sustainable Compliance and Growth 2005. The Committee of Sponsoring Organizations of the Treadway Commission 1992. Lowe. K. Miller.. J. Boston. Thrun.. Subramanyam.. R. K. D. and D. C. H. Morris. Bierstaker. J. Jensen. Whalen. C. Strategic Finance September : 27–33. Chan. J. ——–. Richardson. Journal of Information Systems 15 1 : 3–18.com/applications/ﬁnancials/ﬁnance. 2005. Eschinger.. Eisenhardt.com/originalContent/0.html. Journal of Accounting and Economics 44 1–2 : 193–223. Academy of Management Review 14 1 : 57–74. Oracle. MA: Harvard Business Review. and J. Cheffers. 2009. Knechel. 2008.techtarget. Ettredge. C. L.. Dorantes.oracle.. M. Ge. E.. K. Davenport. Gupta. Journal of Information Systems American Accounting Association Spring 2011 .
Samson. Issues in Accounting Education 21 1 : 45–62. Congress. H.. Journal of Information Systems Spring 2011 American Accounting Association .sap..S. V. and G. 14. Raghunandan.: USDOJ.C. The Internal Auditor 54 6 : 68–73. Rama. 1998). D. ——–. Final Rule: Management’s Reports on Internal Control over Financial Reporting and Certiﬁcation of Disclosure in Exchange Act Periodic Reports. D. 2007. Wright. U. Internal Control over Financial Reporting in Exchange Act Period Reports of Non-Accelerated Filers. Edited by SEC: Release No.C.gov/ criminal/fraud/fcpa/history/1977/houseprt-95-640. R. Anti-Bribery and Books & Records Provisions of the Foreign Corrupt Practices Act (as amended November 10. Wright. Auditing: A Journal of Practice & Theory 25 1 : 99–114. 1977. and A.gov/rules/ﬁnal/33-8238. SOX Section 404 material weakness disclosures and audit fees. 2006. 2006. circa 1831. J. Corporate governance and external and internal controls: The case of the Baltimore and Ohio Railroad. Flesher. 33-9072. M. Available at: http://www.justice. Securities and Exchange Commission SEC .sec. Simmons. 5. Washington. O. 2005. 2009. 1998. and D. COSO based auditing.: PCAOB. Previts. 2002. Enterprise Governance and Sarbanes-Oxley Compliance with mySAP ERP Financials 2005. S. SAP. M. K. D. 2003. Staggers. Washington.The Impact of Enterprise Resource Planning (ERP) Systems 157 Public Company Accounting Oversight Board PCAOB . Edited by U. Auditing Standard No. Unlawful Corporate Payments Act of 1977.. Available at: http://www. Information system assurance for enterprise resource planning systems: Unique risk considerations. D. Available at: http://www. Journal of Information Systems 16: 99–113.: Government Printing Ofﬁce.pdf.com/usa/solutions/business-suite/erp/ﬁnancials/pdf/entpr_gov_so_compliance. An Audit of Internal Control over Financial Reporting that is Integrated with An Audit of Financial Statements.C. SaE Commission. Washington. L. W.htm. 1997.pdf.S. D.
download. . However. users may print. or email articles for individual use.Copyright of Journal of Information Systems is the property of American Accounting Association and its content may not be copied or emailed to multiple sites or posted to a listserv without the copyright holder's express written permission.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue listening from where you left off, or restart the preview.