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SubscribeWorking Paper: Putting the IT in AudIT Risk: IT Complexity and IT Auditor Mitigation
Paper Authors: Jake Sigler, Preeti Choudhary, and Vikram Ramadas
Abstract: We use an instrumental variable approach and proprietary data from the PCAOB to estimate information technology (IT) complexity of client’s financial reporting environment. We find that IT complexity is associated with significantly higher control risk via greater internal control deficiencies identified by the auditor and control failures. We also find that, on average, IT complexity is not fully addressed by auditors as it is associated with increased audit risk (e.g. IT audit deficiencies identified by regulatory inspectors and increased restatement propensity). We also find that auditors only partially offset the increased audit risk from IT complexity by using more experienced IT auditors at the middle manager level. Overall, our analysis quantifies the costs of IT complexity on the audit and highlights the importance of staffing continuity to address it.
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