The cost stickiness of information technology material weaknesses: An intertemporal comparison between it-related and other material weaknesses

Abstract

The PCAOB's audit firm inspections drive audit focus and costs. The PCAOB's 2010-initiated increased emphasis on internal control audit work intensified concern over internal control weaknesses (ICW). IT-related material weaknesses (ITMW) have emerged as particularly significant with PCAOB reports (2008, 2012) highlighting on-going deficiencies in IT controls auditing and the 2015 PCAOB brief noting an on-going focus on recurring audit deficiencies. We explore how ICW affect audit fees and how alternative types of ITMW lead to varying degrees of persistence in fee premiums. Using propensity score matched samples, we find fee premiums associated with ITMW linger longer than premiums for non-IT entity-level material weaknesses (ELMW) or firms reporting account-specific material weaknesses. Moreover, we find that audit fee premiums by type of ICW remediated is overall strongest for ITMW linked to data processing integrity. Our findings underscore the importance of distinguishing not only between non-IT ELMW and ITMW but also types of ITMW as identified in data quality research.