The Effect of IT on Tax-Related Material Weaknesses and Tax Planning

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Abstract

In this paper, we investigate whether the quality of the information technology (IT) environment affects the reporting and planning of the corporate tax accrual. We begin by showing a relation between tax-related material weaknesses (MW) and IT-related MW. This relation is the foundation connecting the IT environment with the reporting of corporate tax. We find that having an IT-related MW in either the current or preceding fiscal year increases the probability of having a tax-related MW in the current year. We then examine whether an IT-related MW in the current or preceding year influences tax planning. We use a measure of cash effective tax rate, GAAP effective tax rate, and book-tax difference to proxy for tax planning. We find that having an IT-related MW in either the current fiscal year increases the effective tax rate but decreases the book-tax difference. We also test whether having a CFO with IT expertise influences tax planning. We find that having a CFO with IT expertise decreases the effective tax rate and increases the book-tax difference. This finding is consistent with the idea that when companies have higher quality information technology environments as evidenced by better IT resources (i.e., IT expertise), companies can effectively tax plan. These findings are consistent with our hypothesis that the IT environment is positively related to a company’s tax planning.

Authors

• Sabrina Chi, University of Arkansas

• Jaclyn Prentice, University of Arkansas

• Vernon J Richardson, University of Arkansas