The effect of information technology (IT) material weaknesses in internal control on chief financial officer (CFO) turnover

• Published date: 01 October 2021
• Author: Kazeem O. Akinyele
• Date: 01 October 2021
• DOI: http://doi.org/10.1002/jcaf.22508

Received: 9 February 2021Revised: 10 June 2021Accepted: 18 June 2021

DOI: 10.1002/jcaf.22508

RESEARCH ARTICLE

The effect of information technology (IT) material

weaknesses in internal control on chief financial officer

(CFO) turnover

Kazeem O. Akinyele

University of Wisconsin Oshkosh,

Oshkosh, Wisconsin, USA

Correspondence

KazeemO. Akinyele, University of Wis-

consinOshkosh, 800 Algoma Blvd.

Oshkosh,WI 54901, USA.

Email:akinyelk@uwosh.edu

Abstract

This study examines the relationship between CFO turnover and adverse SOX

Section 404 opinions relating to IT material weaknesses over a 4-year period

after implementation of SOX 404 requirements. Prior research has shown that

IT material weaknesses in internal controls are associated with higher audit fees

than are other types of material weaknesses. Prior research also suggests an asso-

ciation between poor financial performance and CFO turnover. The results of

this study show that companies with IT related material weaknesses are more

likely to have more CFO turnover relative to companies with non-IT related

material weaknesses. These results contribute to the stream of researchexploring

the implications of IT material weaknesses in organizations.

KEYWORDS

chief financial officer, information technology, internal control, material weaknesses, SOX404

1 INTRODUCTION

Following the failures of Enron and Andersen, the U.S.

House of Representatives enacted the Sarbanes-Oxley Act

(SOX) in July 2002 as a reactive measure to the financial

scandals of these big corporations (Rama & Read, 2006;

William et al., 2013). The enactment of SOX in 2002 led

to exceptional scrutiny of Chief Executive Officers (CEOs),

Chief Financial Officers (CFOs) and auditing firms. The

enactment of SOX has been recognized as a regulatory

response to the unreliability of corporate managers, espe-

cially CEOs and CFOs, and auditing firms. There has

been a call for research to reassess both the intended and

unintended consequences of the implementation of the

Sarbanes-Oxley Act of 2002 (Haislip et al., 2016; Weirich

& Rouse, 2007;Zhang,2007). Using agency theory, this

study examines the impact of an adverse internal con-

trol material weakness opinion on CFO turnover over a

4-year period following the implementation of SOX 404.

Specifically, the study investigates whether CFO turnover

is higher when there is an IT material weakness in inter-

nal control compared to when there is a non-IT related

material weakness in internal control. This study is impor-

tant because it sheds light on the effectiveness of SOX 404

and the pervasive nature of IT related internal controls

in organizations. Understanding the influence of IT mate-

rial weaknesses on CFO turnover is particularly impor-

tant because the most interesting section of SOX lies in

the implementation efforts of SOX 404, which requires

management assessment of internal control over financial

reporting (Weirich & Rouse, 2007).

Due to the regulation imposed by SOX requiring CFOs

to ensure that internal controls are working effectively, I

expect a positive relationship between SOX 404 adverse

opinions and CFO turnover. This expectation is in line

with the findings of Li et al. (2010) who investigate whether

CFO turnover and CFO qualifications are associated with

adverse SOX 404 opinions and the correction of internal

control material weaknesses. Li et al. (2010), find that

companies receiving initial adverse SOX 404 opinions

J Corp Account Finance. 2021;32:45–53. © 2021 Wiley Periodicals LLC45wileyonlinelibrary.com/journal/jcaf