The Effect of the Information Technology Environment on Tax-Related Material Weaknesses and Tax Planning

• In Event: IS Reporting Environments and Management Control

Abstract

In this paper, we investigate whether the quality of the information technology (IT) environment affects the reporting and corporate income tax planning. The frequently changing and complexity of multi-jurisdictional (i.e. multi-state and/or multi-national) tax requirements require a robust supporting information environment. If the IT environment is not able to handle these tax complexities, it increases the risk of error in the financial reporting of taxes and in tax planning. To investigate the relationship between IT environment and taxes, we begin by investigating a relation between tax-related material weaknesses (MWs) and IT-related MWs. Specifically, 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 the IT environment influences tax planning by considering IT-related MWs and IT expertise on tax planning. We find that having an IT-related MW in the current year hinders tax planning (i.e., an increase in effective tax rate, a decrease in book-tax difference and Wilson (2009)’s measure of tax sheltering). We also test the IT environment by examining whether CFOs with IT expertise influence tax planning. We find that having a CFO with IT expertise decreases the effective tax rate and increases the book-tax difference and tax shelter score. This finding is consistent with the idea that when companies have higher quality IT environments as evidenced by better IT resources (i.e., IT expertise), companies have more effective tax planning.

Authors

• Sabrina Chi, University of Arkansas

• Jaclyn Prentice, University of Arkansas

• Vernon J Richardson, University of Arkansas