The Influence of Industry Differences and Restructuring on the Disclosed IT Control Weaknesses under SOX Section 404 in US based companies

This research study investigates the impact of industry differences and restructuring on the IT control quality, as measured by the existence of material IT control weaknesses. The growing importance of IT controls is highlighted by the Sarbanes Oxley Act (2002), which requires management and auditors to report on the effectiveness of internal controls, including IT controls. The investigation of IT control quality in this study is relevant, because it may help auditors to determine which industries/ circumstances need extra attention to identify IT control weaknesses. Investors and management may also use these research results to assess whether a company is more likely to have IT control weaknesses. The results reveal that industry differences are significantly and positively associated with firms disclosing material IT control weaknesses under SOX section 404 in the years 2004-2011. Industry differences are partly based on the complexity of financial reporting. The research study results support the hypothesis that technology, health care and financial services industries (having more fraud opportunities) are more likely to have material IT control weaknesses. Other industry differences, based on the competitiveness level, are also significant and support the hypothesis that non-competitive industries have more material IT control weaknesses. This study also highlights the effect of restructuring on material IT control weaknesses. Three measures are used to analyze this and the results indicate that only the existence of a restructuring in the sample period is significant and supports the hypothesis. The existence of a restructuring and the amount of the restructuring costs in the same year as the IT material weakness are highly inter-related, causing a possible bias in the analysis. The correlations of these variables also have a negative sign for the coefficient and therefore do not support the hypothesis. An additional analysis of the trend of the material IT control weaknesses shows a downward trend from the year 2007. A surprising finding is that the year 2007 shows relatively more material IT control weaknesses than other years, while the total number of material weaknesses remained the same. Finally in the discussion the limitations of this study and recommendations for further research are considered.