Since Information Technology (IT)-based internal controls are pivotal in providing access to, and security of, financial records, we argue that an IT-related material weakness (ITMW) is a significant threat to organizational legitimacy. Prior research suggests that firms work to repair legitimacy by disassociation with executives blamed for the deficiency and the establishment of a monitoring mechanism to ensure the problem is addressed (Suchman 1995). As a test of disassociation, we find that, relative to a propensity-score-matched sample of non-ITMW firms, ITMW firms experience higher CEO, CFO, and director turnover. As a test of the establishment of a monitoring mechanism to repair organizational legitimacy, we find that ITMW firms hire CEOs, CFOs, and directors with higher levels of IT expertise, and make significant IT system upgrades. We find evidence that ITMW firms remediate deficiencies in a more timely fashion when they appoint a new CFO with IT expertise or upgrade their financial reporting system. Collectively, our results suggest that firms make significant monitoring changes to reestablish organizational legitimacy after receiving an ITMW.
- Corporate governance
- Information technology
- Internal control material weakness