Factors Associated with Internal Audit Function Involvement with XBRL

International Journal of Accounting Information Systems 25 (2017) 45–56

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Factors associated with internal audit function involvement with MARK XBRL implementation in public companies: An international study

Mohammad J. Abdolmohammadia, Steven M. DeSimoneb, Tien-Shih Hsiehc, ⁎ Zhihong Wangd, a Department of Accountancy, Bentley University, 175 Forest St. Waltham, MA 02452, USA b Department of Accounting, University of Massachusetts Lowell, 1 University Avenue, Lowell, MA 01854, USA c Charlton College of Business, University of Massachusetts Dartmouth, 285 Old Westport Road North Dartmouth, MA 02747, USA d Graduate School of Management, Clark University, 950 Main Street, Worcester, MA 01610, USA

ARTICLE INFO ABSTRACT

Keywords: We examine the relationships of national legal system, company size, and corporate governance Internal auditors quality with internal audit function (IAF) involvement with eXtensible Business Reporting Public companies Language (XBRL) implementation in public companies. Our data source is The Institute of XBRL implementation, common law, civil law Internal Auditors' Global Internal Audit Common Body of Knowledge (CBOK) database, from which we extract responses from 692 chief audit executives (CAEs) for our investigation. We find evidence of differential effects of company size on IAF involvement with XBRL implementation, depending on the national legal system. In civil law countries, IAFs of small companies have significantly higher levels of XBRL involvement than do IAFs of large companies, whereas, in common law countries, IAFs of large companies have higher levels of involvement than do those of small companies. Finally, we find evidence that corporate governance quality is positively associated with IAF involvement with XBRL implementation.

1. Introduction

Since the introduction of eXtensible Business Reporting Language (XBRL) in 1999, the adoption and implementation of this technology are increasing globally, as it is mandated for use in financial reporting by many countries, including China (2009), India (2008), and the United States (2009) (Trites, 2010). Efendi et al. (2016) examine the importance of XBRL disclosure and suggest that XBRL-formatted financial reports provide investors with more incremental information than do traditional HTML filings. Nevertheless, XBRL implementation also presents potential challenges and risks (Capozzoli and Ali, 2009; Gunn, 2007; Janvrin and No, 2012; Shin, 2003) that, to resolve, require in-depth knowledge and understanding of the business reporting processes. Internal auditors are among the parties who possess this specialized knowledge and, therefore, can play an important role in XBRL implementation within their companies (PricewaterhouseCoopers, 2011). According to The Institute of Internal Auditors (IIA)'s definition of internal auditing, internal auditors may evaluate and improve risk management and control processes related to XBRL implementation (IIA, 2016a). For example, the internal audit function (IAF) may be involved in the evaluation of certain risks of XBRL adoption, such as incorrect tagging, inconsistencies in amounts, missing data, lack of confidential information safeguards, and noncompliance with complex rules and deadlines. At the planning stage, internal auditors can design controls to mitigate such risks (PricewaterhouseCoopers, 2011). Then, at the implementation stage,

⁎ Corresponding author. E-mail address: [email protected] (Z. Wang). http://dx.doi.org/10.1016/j.accinf.2017.03.002 Received 14 July 2015; Received in revised form 23 December 2016; Accepted 29 March 2017 Available online 25 April 2017 1467-0895/ © 2017 Elsevier Inc. All rights reserved. M.J. Abdolmohammadi et al. International Journal of Accounting Information Systems 25 (2017) 45–56 internal auditors can monitor the efficacy of controls designed to mitigate XBRL implementation risks, as well as assist with employee XBRL skill development (PricewaterhouseCoopers, 2011). Finally, internal auditors can help to ensure the accuracy and completeness of XBRL-based reports, especially when external auditors reluctant to provide assurance on this information due to liability concerns (Janvrin and No, 2012). Thus, involvement in XBRL implementation provides an opportunity for internal auditors to reduce the risks of financial reporting errors and rule and regulation violations (Pinsker, 2003; Burnett et al., 2006). To date, however, research on the factors that influence IAF involvement with XBRL implementation is lacking. This study attempts to address this gap in the research literature by investigating the influence of legal systems and company characteristics (i.e., size and corporate governance quality) on IAF involvement with XBRL implementation. As suggested by the resource-based theory of IT business value, the macro environment generated by country characteristics, such as legal system, interacts with firm characteristics to shape the application of IT. This, in turn, may influence how firms deploy resources to realize competitive advantages through XBRL implementation (Melville et al., 2004). Common and civil law systems differentially influence the financial reporting and risk management activities of public companies (cf., Hope, 2003; La Porta et al., 1998, 1999, 2000; Solomon et al., 2003). Company size also affects corporate financial reporting and risk management issues because large companies attract a greater analyst following that disseminates information to the public (Atiase, 1985; Bhushan, 1989) and, thus, are subject to greater investor monitoring (Doyle et al., 2007) relative to small companies. This increased scrutiny, however, may have asymmetric effects on risk management activities across the two types of legal systems. We predict that, due to the investor protection environment in common law countries, large companies are more likely than small companies to deploy IAF resources to support XBRL implementation. Nevertheless, the civil law system generates weaker investor protection and shareholder rights than does the common law system, resulting in stronger investor demand for activities that reduce information uncertainty and enterprise risk. This is especially likely to occur for small companies due to their weaker corporate governance relative to large companies (Choi and Wong, 2007; Choi et al., 2008). Thus, we predict that in civil law countries, small companies, as compared to large ones, are more likely to involve their IAFs in XBRL implementation. In general, these arguments suggest an asymmetric effect of company size across legal systems on IAF involvement in XBRL implementation. We also investigate the relationship between corporate governance quality and IAF involvement with XBRL implementation. Empirical evidence suggests that corporate governance quality, such as the existence of an audit committee, is positively associated with internal control quality (Hoitash et al., 2009; Krishnan, 2005). DeSimone and Abdolmohammadi (2016) also find that better corporate governance quality leads to increased involvement of IAFs with new activities. Thus, we expect that companies with superior corporate governance are likely to involve their IAFs in XBRL implementation. Using responses from 692 chief audit executives (CAEs) in the IIA's Global Internal Audit Common Body of Knowledge (CBOK, 2010) database, we find that the impact of company size on IAF involvement in XBRL implementation is contingent upon the national legal system. In addition, our results support the prediction that, in common law countries, large companies are more likely to involve their IAFs with XBRL implementation. At the same time, in civil law countries, small companies are more likely to involve their IAFs with XBRL implementation. Results also provide marginally significant evidence that corporate governance quality is positively related to IAF involvement with XBRL implementation. Our study responds to Gramling et al.'s (2004) call for research to investigate organizational characteristics that influence companies' ability to deploy resources for an IAF. We provide empirical evidence that national legal system, company size, and the quality of corporate governance play important roles in determining how IAF resources are deployed and retained for managing an XBRL disclosure risk. The asymmetric effects of firm size on IAFs' involvement in XBRL implementation across different legal systems also indicate the importance of considering the interactive effects of organizational and environmental factors on IAF involvement in other risk management activities. Our research also should be of interest to the IIA when drafting new practice advisories, as the results of our study indicate that IAF best practices for managing technology implementation risks may be contingent on the interactive effects of firm size and legal environment. The rest of this paper proceeds as follows. Section 2 provides the research background and hypothesis development. Section 3 presents the research method. Section 4 contains the empirical findings, and Section 5 concludes with directions for future research.

2. Background and hypotheses

2.1. eXtensible Business Reporting Language (XBRL)

XBRL is a specification based on eXtensible Markup Language (XML) that provides companies with a tool to generate standardized and customizable business reports and data extracts (Cohen et al., 2005). Introduced in 1999, XBRL has received much attention from regulatory agencies worldwide for use in financial reporting by public companies. It is mandated or voluntarily adopted for financial reporting purposes in large economies across the globe (Trites, 2010). Research suggests that XBRL provides opportunities for companies to improve the efficiency, accuracy, and reliability of their financial reporting (Gunn, 2007; Hodge et al., 2004; Wu and Vasarhelyi, 2004). XBRL filings also may provide incremental information to help investors and analysts capture and analyze companies' financial information quickly and cost effectively (Efendi et al., 2016; Securities and Exchange Commission, 2013). Blankespoor et al. (2014) find that, during the first year of mandatory XBRL adoption, information asymmetry increases due to the steep learning curve of using XBRL. Large investors tend, at first, to benefit more from XBRL-based financial information, whereas smaller investors need first to overcome the steep learning curve. This effect, however, tends to decrease as smaller investors gain more knowledge about utilizing XBRL. Academic researchers also benefit from XBRL-based financial reporting as it helps correct the errors in traditional research financial databases (Chychyla and Kogan, 2015).