Information Technology Extensiveness and Standardization on Reporting Quality and Risk

Description

Information technology (IT) has been deeply embedded in firm operations in modern corporations. Researchers and practitioners have established that IT investment leads to a better firm performance by giving firm better competitive advantage (Melville, Kraemer, and Gurbaxani 2004; Wade and Hulland 2004; Piccoli and Ives 2005; Mithas, Ramasubbu, and Sambamurthy 2011; Lim, Stratopoulos, and Wirjanto 2011). However, given the central role of IT systems in firm information gathering, recording, compiling, analyzing, and reporting, it is somewhat surprising that the empirical evidence is scant on how the IT system affects the firm information disclosure practice. In this study, we want to advance this line of research by focusing on how IT resource base can affect firm reporting quality and risk. Accounting information is summarized and populated through IT modules in most firms. Conceptually, firm IT characteristics should be among the underlying factors in determining firm reporting quality, e.g., reliability, relevancy, and timeliness, and reporting risk. In this study, we focus on two dimensions of firm IT resources, IT extensiveness and IT standardization, and examine how reporting quality and risk are affected. To the extent that IT systems could reduce errors and save labor efforts in the information collection and financial reporting process, we argue that more coverage of IT tools and systems can yield more accurate financial reporting, fewer estimation errors, shorter reporting lags, and reduce the overall reporting risk. Also, holding the firm IT coverage constant, the more standardized the IT implementation is, the lower integration costs are required, and better reporting quality and lower reporting risk are expected. We employ IT extensiveness to capture the functional and organizational scope of IT tools and systems used in a firm to support its business activities and IT standardization to capture the extent to which common IT tools and systems are implemented in different business units of a firm to support common organizational activities (Du, 2015). This research makes several contributions. First, it adds to the literature on reporting quality and risk by identifying the effects of IT and helps to further our knowledge for the underlying drivers behind reporting quality and risk, which have a central role in the financial accounting literature. Second, our work helps to understand the potential mechanism of IT value creation. Third, this study has implications for practitioners and managers on how firms may improve their reporting activities through firm IT investment.