This study uses an archival research design to assess the impact of enterprise systems on a firm's internal information environment as reflected in the production of management earnings forecasts. Specifically, the authors hypothesize that, if enterprise systems improve management's access to decision‐relevant internal information, higher quality management earnings forecasts should ensue. Consistent with disclosure theory and the purported technical characteristics of enterprise systems, the authors find a positive association between enterprise system implementations and subsequent increases in the likelihood of management forecast issuance and the accuracy of the forecasts. Additional robustness tests support the argument that improvements in management forecasts are due to improvements in the firm's internal information environment rather than to enhancements in management's ability to manage earnings. Beyond accumulating financial reporting information, the authors note that such systems provide management with information to make day‐to‐day operational decisions. Moreover, the paper provides a basis for considering management forecast qualities as a measurable proxy for improvements in the firm's internal information environment that result from information technology investments.

This study examines the association between audit committee characteristics and the ratio of nonaudit service (NAS) fees to audit fees, using data gathered under the Securities and Exchange Commission's (SEC's) fee disclosure rules. Issues related to NAS fees have been of concern to practitioners, regulators, and academics for a number of years. Prior research suggests that audit committees possessing certain characteristics are important participants in the process of managing the client‐auditor relationship. We hypothesize that audit committees that are independent and active financial monitors have incentives to limit NAS fees (relative to audit fees) paid to incumbent auditors, in an effort to enhance auditor independence in either appearance or fact. Our analysis using a sample of 538 firms indicates that audit committees comprised solely of independent directors meeting at least four times annually are significantly and negatively associated with the NAS fee ratio. This evidence is consistent with audit committee members perceiving a high level of NAS fees in a negative light and taking actions to decrease the NAS fee ratio.

In light of the growing importance of internal audit functions (IAF) and the limited archival evidence on internal audit quality, we examine an interactive model of IAF quality (comprised of competence and independence) to better understand the determinants of IAF effectiveness as a financial reporting monitor. Our tests support the hypothesis that the joint presence of competence and independence is a necessary antecedent to effective IAF financial reporting monitoring. In sum, our results show that, the answer to “what is the effect of internal audit competence (independence) on financial reporting quality?” is “it depends on the independence (competence) of the internal auditor.” Our study extends the understanding of IAF quality determinants in the realm of financial reporting as it relates to ongoing discussions by researchers, standard setters, regulators, and practitioners.

We analyze the potential benefits that firms can realize from implementing technology specifically aimed at monitoring the effectiveness of their internal control systems. The Committee of Sponsoring Organizations of the Treadway Commission asserts that effective internal control monitoring should enhance the efficiency of internal control processes, and, in turn, the assurance over such processes (COSO 2009a). We develop hypotheses to test the realization of these potential benefits. Specifically, we identify a sample of firms that implemented internal control monitoring technology in response to the internal control requirements of the Sarbanes-Oxley Act. Consistent with our hypotheses, we document that the implementation of internal control monitoring technology is associated with lower likelihood of material weaknesses, smaller increases in audit fees, and smaller increases in audit delays during the post-SOX time period. We discuss the potential implications of our findings for research related to continuous monitoring, client-provided assurance assistance, and information technology governance.

This study extends current literature related to nonaudit services by investigating internal audit outsourcing to the external auditor. We posit that certain types of internal audit outsourcing (i.e., those which are nonroutine, and thus tend to be nonrecurring in nature) are unlikely to lead to economic bonding, while offering significant potential for improvements in audit coverage and scope when provided by the external auditor. Alternatively, outsourcing routine internal audit tasks is more likely to lead to economic bonding, as well as potentially threatening internal auditor independence. Our results are consistent with firms with independent, active, and expert audit committees being less likely to outsource routine internal auditing activities to the external auditor. However, the outsourcing of nonroutine internal audit activities such as special projects and EDP consulting are not negatively related to effective audit committees. Additionally, outsourcing of either type of internal audit activity to an outside service provider other than the external auditor is not related to effective audit committees. Collectively, we interpret these findings as supportive of an effective audit committee's ability to monitor the sourcing of the firm's total (i.e., internal and external) audit coverage, while simultaneously exhibiting concern for external auditor independence.