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

Fri, March 14, 10:30am to 12:00pm, Sheraton Dallas Hotel, TBA

Abstract

In this paper, we investigate whether the information technology environment effects 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 book-tax difference and the cash effective tax rate to proxy for tax planning. We find that having an IT-related MW in either the current or preceding fiscal year decreases the book-tax difference but increases the cash effective tax rate. This finding is consistent with the idea that the IT environment is a resource used by companies in the planning of the corporate tax accrual and when there is a deficiency in the IT environment companies are unable to plan effectively.

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