Do Material Weaknesses in Information-Technology Related Internal Controls Affect Firms’ 8-K Filing Timeliness and

Compliance? Abstract

Form 8-K reporting represents a different (and relatively unknown) information environment than annual 10-K filings. The current study takes advantage of a unique, comprehensive sample of 118,863 8-K filing event observations to investigate the association between firms’ Form 8-K reporting timeliness/compliance with required reporting deadlines and their internal control weaknesses. In addition, the study investigates the association between firms’ 8-K reporting and their information technology (IT) related internal control weaknesses. Overall, we find strong and robust evidence of a negative relation between the likelihood of the firm reporting a material internal control weakness and the timeliness and compliance of the firms’ 8-K filings. We also find distinguishing effects of weaknesses involving IT-related controls. Given recent interest in IT-related controls and far-reaching reforms with stated objectives of improving disclosure timeliness, increasing the quality of internal controls and improving the quality of accounting information, we believe that results in our study would be of interest to accounting information systems academics, regulators, accounting standard setters and other interested observers. Keywords: Form 8-K Filing Timeliness, Internal Controls, Information Technology, Regulation 1. INTRODUCTION

The past decade has been fraught with US regulatory and institutional reforms targeting

improved quality of firm information through the timeliness of publicly traded financial

disclosures.1 Most of the extant research has focused on 10-Ks, 10-Qs, and earnings

announcements. Yet, when closely considering the timeliness of information disclosure, the

Form 8-K has much stricter requirements (e.g., must be filed within four days of event

occurrence with no extensions) and the 8-K has the critical role of providing a continuous stream

of corporate information (Securities and Exchange Commission (SEC) Accounting Series

Release 306, 1982). Recent research (Lerman and Livnat, 2010; Karim and Pinsker, 2011, 2012)

                                                            1 Beyer et al. (2010) and Kothari et al. (2010) provide seminal reviews of the literature in this area. Consistent with the US Conceptual Framework, timeliness is a necessary component of relevant information. 

 

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finds significant improvement in Form 8-K filing timeliness post-Sarbanes-Oxley Act (SOX),

but it is an open question regarding the reason(s) why.

The current study argues that a potential explanation is the interaction between the

aforementioned regulatory changes in 8-K reporting and a firm’s information environment.

Increased reporting requirements has forced firms to continue to grow the information

technology (IT) involved in their financial reporting processes. Consequently, firms face raised

expectations from regulators and other market participants to fully utilize their IT to disclose

accurate and timely information, while protecting the privacy and security of their information

assets (Li et al., 2007). We contend that the relative strength of a firm’s internal controls,

especially those surrounding IT-related components (e.g., access, processing, reporting), play a

leading role in affecting the timeliness and four day compliance requirement for the Form 8-K.

Our study distinguishes potential effects from IT-related material weaknesses in controls

(ITMW) and other material weaknesses in controls (ICMW; e.g., segregation of duties).

Research suggests that ITMW is much more pervasive and costly to correct than ICMW

(Weidenmier and Ramamoorti, 2006; Canada et al., 2009). Further, ITMW leads to poor future

financial performance, increased restatements, and an increased number of ICMW (Boritz and

Lim, 2008; Klamm and Watson, 2009). Consequently, we also consider any improvement or lack

thereof in internal controls in the subsequent year of analysis (t + 1).

To address our research questions, we analyze a unique and comprehensive sample of

118,863 8-K observations that represents, what we believe is the longest time horizon in the

extant literature (2005-2010).2 Our tests control for firm size, sustainable earnings, growth

                                                            2 As noted by Goh and Li (2012), most of the research on internal control weaknesses have been conducted in the post-Sarbanes Oxley (SOX) period. Section 302 of the Sarbanes Oxley Act of 2002, became effective on August 29, 2002, requiring that management certify in the firm’s 10-Q and 10-K their conclusions about the effectiveness of the firms internal control procedures. Furthermore, Section 404 of SOX, which became effective on November 15, 2004

 

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opportunities, equity based performance, financial health, extreme sales growth, operation

complexity, foreign transactions, restructuring, firm age and leverage. Further, we use Petersen’s

(2009) methodology to analyze the data and calculate two-way cluster robust standard errors

(i.e., robust to both time-series and cross-sectional correlation).

Similar to Li et al. (2012), we argue that stronger (weaker) IT controls over the financial

reporting system (FRS) will lead to greater (lesser) 8-K reporting timeliness; presumably due to

higher (lower) information quality produced by the firm’s information environment. Overall, we

find strong and robust evidence of (1) a positive relation between the likelihood of the firm

reporting a material weakness in internal control and the lack of timeliness of their 8-K filing and

(2) a positive relation between the likelihood of the firm reporting a material weakness in

internal control and the probability of the firm not complying with the four day 8-K filing

requirement. Given our focus on understanding the roles played by a firm’s accounting

information system, we also partition our sample into four other groups: (1) events that are

complicated, (2) non-complicated events, (3) surprising events and (4) non-surprising events.

Our results are robust to these additional classifications.

When considering the nature of the material weaknesses, consistent with prior research in

different contexts, we find that ITMW are positively associated with reporting lag for the entire

group and for the complicated and non-surprising events subgroups when considering firms in

compliance with the four day requirement (the vast majority of our sample). Thus, we find

                                                            for accelerated filers, requires that management attest to the effectiveness of the internal control structure and procedures in the annual report. The firm’s auditor must also attest to management’s assessment. Prior to this regulation, firms (with the exception of the banking industry) were only required to disclose significant internal control deficiencies in Form 8-Ks when disclosing a change in auditors (Ge and McVay 2005; Krishnan 2005; Altamuro and Beatty 2010).  

 

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evidence that ITMW significantly increases Form 8-K reporting lag and, therefore, impacts the

timeliness of Form 8-K reporting.

The context of our study intersects two streams of literature: firms’ information

environment/incentives and mandatory SEC reporting. Management has conflicting incentives to

withhold disclosure of material, negative events (e.g., reputation, bonus, etc.), but also engage in

conservative (i.e., timely loss disclosure) behavior. The growth of highly integrated systems

(e.g., enterprise resource planning (ERP) systems), required reports on internal controls that were

previously unnecessary, and stricter Form 8-K reporting deadline (from 15 calendar days to 4

days) have changed firms’ information environments. Further, as Li et al. (2012, 183) indicate,

there is a lack of archival research that explicitly considers the impact of IT controls on

information quality/timeliness of reporting. Our study also adds to the IT governance literature

by examining relative differences in timeliness of information due to the nature of material

weakness (ITMW and ICMW). Given recent, far-reaching reforms targeting improved timeliness

of management reports and increasing the quality of internal controls, our study and its

accelerated reporting cycle (relative to the 10-K and 10-Q) is relevant to accounting information

systems’ (AIS) academics, regulators, accounting standard setters, capital market participants

and other interested observers.

The study proceeds as follows. Section 2 discusses the institutional and regulatory

background. Section 3 discusses the hypotheses development. Section 4 presents the data and

results. Section 5 presents the conclusion.

 

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2. BACKGROUND AND HYPOTHESES

2.1. Form 8-K Reporting Requirements

The purpose of the Form 8-K is to notify investors of material corporate events.

Originally, the Form had to be filed with the SEC within ten days of the end of any month during

which certain significant events occurred. In June 2002, the SEC proposed a rule that would

increase the number of events reportable on a Form 8-K and to shorten the filing deadline for

most items to two business days (Lerman and Livnat, 2010). Two major reasons were advanced

for the proposed rule changes. One, the SEC was motivated by investors’ increasing demand for

‘‘real-time’’ access to relevant and reliable information. Two, the changes were expected to

reduce opportunities for securities fraud (Lerman and Livnat, 2010).

Similarly, SOX Section 409 mandated that public disclosure be easily understandable and

on a ‘‘rapid and current basis’’ (Karim and Pinsker, 2011). Following its mandate from SOX, the

SEC released its final rule #33-8400 on March 16, 2004, with compliance required by August 23,

2004, and made three major changes to prior guidance (SEC 2004). First, it expanded the scope

of the events that were subject to Form 8-K disclosure. The number of reportable events was

increased to 22 including eight new mandatory items added to the Form 8-K. In addition,

unregistered sale of securities and modifications to the rights of security holders, two items

previously disclosed on the 10-Q and 10-K, were transferred to the 8-K.3

Second, the rule created a new topical format. Finally, and most significant to our

research questions, it shortened the filing deadline. Although the 2002 proposed rule suggested

that filings be made within two business days of the event, many of the comment letters that the

SEC received expressed concern at this short time frame. The combination of existing IT and

                                                            3 Please see the Appendices for a detailed list of categories and items. 

 

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internal control structures made this requirement nearly impossible to comply with for the

relatively smaller firms. In response to these concerns, the SEC decided on four business days

following the occurrence of the event deadline. Given that US publicly traded firms must make

their SEC filings available on EDGAR (the Electronic Data Gathering, Analysis, and Retrieval

system) within one business day of the filing, the current Form 8-K guidance effectively enables

the public to receive information regarding material events within five business days of their

occurrence.

2.2. Internal Controls

Recently, Auditing Standard No. 5 defined internal controls over financial reporting as:

“a process designed by, or under the supervision of, the company's principal executive and

principal financial officers, or persons performing similar functions, and effected by the

company's board of directors, management, and other personnel, to provide reasonable assurance

regarding the reliability of financial reporting (Public Company Accounting Oversight Board

(PCAOB), 2007).” However, the importance of strong internal controls has been recognized as

far back as the Securities and Exchange Acts of 1933 and 1934. After several high profile

financial scandals and frauds, industry followed-up on the federal government’s lead by forming

the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in September

1992. COSO produced a framework that provides a foundation for assessing internal control

effectiveness. This framework was recently updated in 2013 and serves as the primary internal

control framework of the overwhelming majority of US publicly traded firms.

Approximately 10 years following the 1992 COSO internal control framework, SOX

section 302 (404) required management (auditors) of medium-large public firms to provide

documentation (attestation) regarding the effectiveness of their firm’s internal controls (Dechow

 

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et al., 2010). These requirements involve a thorough understanding of controls surrounding even

the most complex accounting estimate. Failure to comply with the SOX requirements results in

potentially severe criminal and civil penalties (Dechow et al., 2010).

Prior to SOX, firms (with the exception of the banking industry) were required to

disclose significant internal control deficiencies in Form 8-Ks only when disclosing a change in

auditors (Krishnan, 2005). At the time, the head of the American Institute of Certified Public

Accountants (AICPA) stated that SOX ‘‘contains some of the most far-reaching changes that

Congress has ever introduced to the business world, which included an unprecedented (partial)

shift in the regulation of corporate governance from the states to the federal government” (Beyer

et al., 2010, 320). Proponents of SOX anticipate that the increased internal control requirements

should mitigate executives’ earnings manipulations and other opportunistic management

behavior; thereby, improving the quality of reported earnings numbers for the market (see Cohen

et al., 2008).

2.3. Hypotheses Development

In this section, we develop the study’s first hypothesis regarding the association between IC

and firms’ Form 8-K filing timeliness and compliance with the stated deadline. Next, given the

recent research in the IT governance context, we examine potential timeliness impacts of IT-

related versus other material weaknesses. Finally, we consider the association between firms’ 8-

K filing timeliness and IC conditional on the asymmetric properties of certain event types.

2.4. Internal Controls and the Timeliness Firms Form 8-K Filings

Statement of Financial Accounting Concepts No. 2 (Financial Accounting Standards

Board (FASB), 1980) states that financial disclosure should be both relevant and reliable. In

order for information to be relevant, it must be available to investors (and other corporate

 

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stakeholders) before it loses its capacity to influence their decisions. Thus, the timeliness of

information disclosure is a key to making it “useful” to investors. Timeliness is an important

discretionary element of mandatory financial disclosure (Dwyer and Wilson, 1989). A significant

amount of quantitative and qualitative information is captured, stored, and processed through a

firm’s accounting information system and, therefore, its viability to meet mandatory reporting

requirements is in large part subject to the strength of reporting-related internal controls. We

contend that this scenario encapsulates a firm’s information environment.

The link between the timeliness of firms’ 8-K filings and the quality of IC is supported by

a segment of the corporate governance literature (Core, 2001; Krishnan, 2005; Ashbaugh-Skaife

et al., 2007), but it also represents a unique perspective with regard to the SEC’s (1982)

contention that timely Form 8-K filings are essential for achieving adequate information

disclosure and to provide a continuous stream of information. A number of studies suggest a

positive relation between strong (weak) corporate governance mechanisms and firm compliance

(non-compliance) with mandatory disclosure regulation (Core, 2001). As noted by Core (p. 442),

“Corporate finance theory predicts that shareholders endogenously optimize disclosure policy,

corporate governance, and management incentives in order to maximize firm value.”

Additionally, Core indicates that the optimal disclosure policy allows some managerial

manipulation of disclosure. However, it is the governance structure that constrains the manager

to follow the optimal disclosure policy. Several studies provide evidence supporting a positive

relation between strong (weak) corporate governance and reduced (higher) information

asymmetry between firm management and outside observers. For example, the extant research

finds that strong corporate governance is associated with less earnings management (Klein,

 

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2002), fewer restatements (Abbott et al., 2004), less fraud (Beasley, 1996), and more voluntary

disclosures (Gul and Leung, 2004).

Krishnan (2005) examined the association between audit committee composition (as a

sample governance mechanism) and the quality of internal controls. For the time period of 1999

to 2001, the author considers Form 8-K auditor change disclosures for two groups of firms: one

with internal control problems and one without internal control problems. In general, results

suggest a negative association between the proportion of independent members on the audit

committee and the existence of internal control problems.

The compressed nature of processing and producing Form 8-K information (relative to

10-K and 10-Q reporting processes) and significantly greater inclusion of non-financial

information compared to the typical 10-K and 10-Q, make the firm’s information environment

especially important in order to produce timely filings. Therefore, if the quality of internal

controls is associated with better governed firms, as discussed above, then we would expect to

observe that these firms report their 8-K filings in a timelier manner. Accordingly, our first

hypothesis is as follows:

H1a: Firms without (with) internal control weaknesses will file their Form 8-Ks in a more (less) timely manner.

H1a defines timeliness broadly, without any reference to complying with regulation. As a

related, but more precise concept, we also consider the current four-day Form 8-K reporting

requirement. Specifically, if internal control quality is important to reporting timeliness, we

expect that firms with higher quality internal controls to be more likely to comply with the four-

day requirement. Our next hypothesis is now stated:

H1b: Firms without (with) internal control weaknesses are more (less) likely to file their Form 8-Ks in conformity with the SEC’s mandatory four-day reporting requirement.

 

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2.5. IT-Related Versus Non-IT Material Weaknesses We have motivated our prior hypotheses using both the relevant corporate governance

literature (involving filing timeliness) and the larger information environment argument. A

newer area of this literature involves IT corporate governance (ITG). ITG is defined by

Debreceny (2013, 129) as “the process by which organizations seek to ensure that their

investment in information technology facilitates strategic and tactical goals.” It represents an

increasingly important subset of the broader corporate governance environment. A 2011 ISACA

survey indicates that more than 70 percent of organizations with less than 500 full-time

employee equivalents (FTEs) and 85 percent of organizations with more than 500 FTEs report

the existence of some ITG processes (ISACA 2011).

According to Rathnam et al. (2004-2005), the alignment of both business strategy and IT

strategy has emerged as a critical issue for all firms. Poor alignment can cause costly IT failures

and a steady decline in competitive ability (Liebowitz, 1999). ITG can be considered as the

corporate structure facilitating strategy alignment and IT-related material internal control

weaknesses can be considered the by-product of poor ITG. IT-related controls are distinct from

non-IT controls and receive special attention in professional publications and auditing standards

(Boritz et al., 2013). Particular attention to IT-related controls can help firms focus on the

accuracy and timeliness of disclosure, while also ensuring protection, privacy, and security of

their information assets (Li et al., 2007). Relative to other material control weaknesses, IT-

related weaknesses have been considered by the literature as more pervasive (since IT typically

touches all major components of publicly-traded firms; Canada et al., 2009), more costly to

 

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fix/remediate (Boritz et al., 2012; Bedard et al., 2012; Brown and Lim, 2012; Hammersley et al.,

2013), and more likely to persist into future periods (Klamm et al., 2012).

SOX Sections 302 and 404, highlight the importance of financial reporting controls to

both managers and auditors. Managers, especially, use the information produced in its financial

reporting system to report to firm stakeholders; thus, the quality of IT-related controls appears to

affect this reporting process. Li et al. (2012) provide evidence that IT-related controls affect the

quality of information produced by a firm’s system. Without specific reference to IT-related

versus other internal controls, Doyle et al. (2007) suggest that the impact of internal controls

varies based on the type of material weakness.

In sum, good ITG suggests that strong alignment between IT strategy and business

strategy results in good firm performance. Internal controls are the mechanism to ensure the

alignment. Along these lines, Klamm and Watson (2009) isolate IT internal controls from non-IT

internal controls. This study documented that, for a sample of 490 firms which disclosed material

weaknesses in internal control under Section 404 of the Sarbanes Oxley Act, firms with IT-

related weak components reported more material weaknesses and misstatements than firms

without IT related weak components.4 Overall, the authors interpreted their results as “providing

evidence on the pervasive negative impact of weak IT controls, especially in control

environment, risk assessment, and monitoring.”

Given the above cited literature, it is still unknown whether differences in internal control

weaknesses (IT versus non-IT) would impact a far more frequent form of reporting that primarily

                                                            4 Recent post SOX research examines the relationship between information systems complexity and information systems vulnerability (Cong and Romero, 2013). Their argument centers around increased regulation leading to increase IT controls, but this situation increases complexity, which makes the firm more vulnerable to security-related issues. This finding augments the importance of understanding the pervasive effects of IT-related controls identified in the extant literature.

 

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contains nonfinancial information (i.e., Form 8-K)?5 Partially addressing this question, Klamm et

al. (2012) find firms with IT-related material weaknesses subsequently report more material

weaknesses (both IT and non-IT) in future years, relative to firms which only possessed non-IT

weaknesses, suggesting persistence and pervasiveness of IT-related internal controls. Whereas

this study helps to argue for general differences between types of control weaknesses, it does not

speak to the firms’ mandatory disclosure requirements. Some of the literature cited above

examines corporate filings, but not the more frequent disclosure Form 8-Ks represent relative to

10-Ks, 10-Qs, and earnings announcements. Therefore, we extrapolate the extant ITG literature

to suggest that stronger IT-related controls would be associated with more timely Form 8-K

filings, greater compliance with the four day reporting requirement, and an increase in non-IT

control weaknesses. The last set of hypotheses is as follows:

H2a: Firms without (with) IT-related material internal control weaknesses will file their Form 8-Ks in a more (less) timely manner, after controlling for other types of material weaknesses in internal controls.

H2b: Firms without (with) IT-related material internal control weaknesses are more

(less) likely to file their Form 8-Ks in conformity with the SEC’s mandatory four day reporting requirement, after controlling for other types of material weaknesses in internal controls.

3. METHOD

3.1. Research Design

Our first set of hypotheses investigates whether internal controls are associated with 1)

Form 8-K filing timeliness and 2) compliance with the four-day requirement. To test these

hypotheses, we employ the following model:

                                                            5 Anecdotal evidence indicates that most firms possessing Enterprise Resource Planning Systems store nonfinancial data in different locations within their systems than financial data. 

 

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REPLAGi,t = α0 + α1ICMWi,t-1+ α2 SIZEi,t + α3 LEVi,t + α4ROAi,t + α5RETi,t + α6LOSSi,t + α7AGEi,t + α8Restructurei,t + α9ForeignTransactioni,t + α10ExtremeGrthi,t + α11logSegNumi,t + α12Big4i,t + εi,t Eq. (1)

where the dependent variable, REPLAG, captures the reporting lag. This variable is measured as

the Form 8-K filing date minus the event date. The variable of interest, ICMW, captures the

firm’s internal control quality. It is equal to 1 if the firm has reported a material weakness in

internal control and 0 elsewhere.

The choice of the control variables follows prior research and economic theory. Prior

research suggests that the timeliness of firms’ regulatory filings are related to firm size (SIZE);

(Impink et al., 2012; Carter and Soo, 1999; Alford et al., 1994), leverage (LEV) (Impink et al.,

2012; Carter and Soo, 1999; Alford et al., 1994); audit firm size (Big4) ( Impink et al., 2012; Ge

and McVay, 2005; Doyle et al., 2007)6; incidence of losses (Loss) (Impink et al., 2012; Doyle et

al., 2007); profitability (ROA) (Carter and Soo, 1999); and returns (RET) (Carter and Soo, 1999;

Griffin, 2003). Additionally, consistent with existing literature (e.g. Doyle et al., 2007), we

control for other issues which are both correlated with weak internal controls and are known to

affect a firms overall information environment including: financial health (Loss), Extreme Sales

Growth (ExtremeGrth), Operation Complexity/Number of business segments (LogSegNum),

Foreign Transactions (ForeignTransaction), Restructuring (Restructure) and firm age (Age).

We estimate this model over the six years in our sample period, 2005-2010. We use

pooled time series cross sectional regressions in our analysis. The residuals in the pooled time

series cross sectional analyses may be correlated within firms or over time, leading to biases in

                                                            6 We create an indicator variable (Big4) capturing whether a company hires a Big 4 auditor, because we expect greater pressure from large auditors for timely filing. Schwartz and Soo (1996) suggest that the timeliness of Form 8-K filings divulging an auditor change is affected by whether the new audit firm is a Big N or non-Big N firm. Their study notes that filing delays are bigger and late filing occurs more frequently when non-Big N auditors are involved.

 

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estimates of the coefficient standard errors (Petersen, 2009). Therefore, our t-statistics are

calculated based on standard errors adjusted for firm and year clustering, as recommended by

Petersen. Finally, we include both year and industry fixed effects.

A positive (negative) α1 in equation (1) above is consistent with material weaknesses in

internal control negatively (positively) affecting firms’ Form 8-K filing timeliness. However, this

test is not informative as to whether material weaknesses in internal control are associated with

firms’ overall compliance with the four-day 8-K regulation guidelines. Therefore, the more

precise test for H1b investigates the association between compliant/non-compliant 8-K filers and

material weaknesses in internal controls. To test this association, we use the following logistical

specification of equation (1):

Prob (NonConformit =1) REPLAGi,t = α0 + α1ICMWi,t-1+ α2 SIZEi,t + α3 LEVi,t + α4ROAi,t + α5RETi,t + α6LOSSi,t + α7AGEi,t + α8 Restructurei,t + α9ForeignTransactioni,t + α10ExtremeGrthi,t + α11logSegNumi,t + α12Big4i,t + εi,t Eq. (2)

where the dependent variable, NONCONFORM, equals 1 if the 8-K filing exceeds the

mandatory four day requirement, and 0 otherwise. All other variables are measured as described

above. Similar to the previous test, we estimate this logit model over the seven years in our

sample period. Our z-statistics are calculated based on the standard errors adjusted for firm and

year clustering (Petersen, 2009). A positive (negative) β1 is consistent with material weaknesses

in internal control negatively (positively) affecting firms’ Form 8-K filing compliance. More

specifically, a positive coefficient would indicate that ICMW are more likely to cause managers

to file their Form 8-Ks late.

Our second set of hypotheses predicts that firms’ Form 8-K filing timeliness/compliance

will be associated with the existence of IT material weaknesses in internal controls, even after

 

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controlling for all other types of material weaknesses in internal controls. To test these

hypotheses we modify equations (1) and (2) as follows:

REPLAGi,t = α0 + α1ITMWi,t + α2OTHER_MWi,t + αn Controlsi,t+ εi,t Eq. (3)

Prob (NonConformi,t =1) = β0 + β1ITMWi,t+ β2OTHER_MWi,t + …+ εi,t Eq. (4)

In the above specifications, ITMW is equal to 1 if the firm has an IT-related internal

control material weaknesses, otherwise ITMW is equal to 0. OTHER_MW is equal to 1 if the

firm has an internal control material weaknesses other than an IT-related internal control

weakness and 0 otherwise. All other variables are measured as described above. Similar to the

previous model, our t-statistics (OLS regressions) and z-statistics (logit regressions) are

calculated based on the standard errors adjusted for firm and year clustering (Petersen, 2009). A

positive (negative) α1 and β1 is consistent with IT-related material weaknesses in internal control

having additional explanatory power in reducing the timeliness/compliance related to firms’

Form 8-K filing.

3.2. Sample Composition

Panel A of Table 1 summarizes the sample selection procedures. First, we used

DirectEDGAR (2008) to identify firms that filed 8-K reports for the time period spanning 2005

to 2010. We focus on filings with calendar year filing days. Then, the fiscal year (i.e., which

fiscal year the filing belongs to) is generated and we merge the resulting database with the

COMPUSTAT database.7 We start with a total of 370,204 observations in our sample. We then

deleted 226,814 observations with missing information. Our final sample is composed of

118,863 observations that have available data.

                                                            7 Note that historical CIK before 2007 is not available in COMPUSTAT, so we use 2007 CIK as the historical CIK for firms filing 8-Ks during the 2005 to 2006 time periods.

 

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Table 1 – Sample Construction Panel A. – Sample selection

8K filings in calendar year for 2005-2010 370,204 (-) In Edgar’s database but not in Audit Analytics8 226,814 (-) Observations not in our sample period (fiscal year 2005-2010) 7,486 (-) Missing variables necessary for our analyses 17,041 Final Sample: 118,863

Panel B. – Distribution of our sample CompEvents NonCompEvents

Year Freq. Percent Freq. Percent 2005 10,713 30.63 12,442 14.83 2006 6,073 17.36 16,226 19.34 2007 5,556 15.88 17,850 21.28 2008 3,634 10.39 10,739 12.80 2009 5,274 15.08 15,326 18.27 2010 3,729 10.66 11,301 13.47

Total 34,979 100 83,884 100 Notes: CompEvents = complicated events; NonCompEvents = other events Panel C. – Distribution of our unique sample firms

fyear Freq. Percent Cum.

2005 2,300 15.95 15.95

2006 2,354 16.32 32.27

2007 2,590 17.96 50.23

2008 2,306 15.99 66.22

2009 2,483 17.22 83.44

2010 2,389 16.56 100

Total 14,422 100

                                                            8  Data on ICMW, ITMW, and OTHER_MW is collected from Audit Analytics.  

 

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Panel D. – Sample distribution across different events (DocTag) Doctag Freq. Percent Cum. 1.01 ENTERAGREE 28,684 24.13 40.67 1.02 TERMAGREE 2,029 1.71 98.16 1.03 BANKRUPTCY 20 0.02 3.96 2.01 ACQDISPCOMPLETE 3,407 2.87 3.18 2.03 DIROBLIG 6,971 5.86 16.32 2.04 ACCELEROBLIG 371 0.31 0.31 2.05 EXITCOST 1,652 1.39 42.32 2.06 MATIMPAIR 709 0.6 42.92 3.01 DELIST 1,856 1.56 10.45 3.02 UNREGSALE 2,179 1.83 100 3.03 RIGHTSMODIF 1,420 1.19 96.45 4.01 AUCHANGE 912 0.77 3.95 5.01 CONTROLCHANGE 553 0.47 8.89 5.02 OFFDIRCHANGE 33,324 28.04 70.95 5.03 CHGARTICLES 5,304 4.46 8.42 5.04 EBPSUSPEN 263 0.22 16.54 5.05 ETHICS 308 0.26 40.93 5.06 SHELL 2 0 96.46 6.02 SERVTRUST 5 0 96.45 6.03 CREDITENHANC 2 0 8.89 6.04 NODIST 1 0 42.92 6.05 UPDATEDISCL 4 0 100 7.01 RFDDISCLOS 28,887 24.3 95.26 Total 118,863 100

Panel B of Table 1 presents the sample distributions across years. In order to facilitate our

subsequent analyses and to sharpen our understanding of the roles played by a firm’s AIS, we

divided our sample into two groups: events that are complicated (CompEvent) or otherwise

(NonCompEvent). That is, we presume ITMW play a larger role in decreasing a firm’s reporting

timeliness if an event to be reported is complicated, because such an event would take more

coordination with the firm’s AIS and related resources (i.e., interaction with the firm’s

 

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information environment) than is otherwise required. We contend that this is a more reasonable

categorization of events with regard to our sample than other categorizations (e.g., Klamm and

Watson’s [2009] grouping based on the COSO framework or Masli et al.’s [2009] grouping of 25

specific events into seven arbitrary categories).

Panel C of Table 1 shows that our unique sample firms are equally distributed across

years during our sample period: 2005-2010. Additionally, the mean coefficient (and t-statistics)

show that the by-year regression is not significant.

Panel D of Table 1 provides the sample distribution across the different 8-K events.

Consistent with Lerman and Livnat (2010), many of our sample firms filed Form 8-Ks to report

the entry into material definitive agreements (ENTERAGREE; 28,684 observations) and the

resignation of directors/officers and Regulation Fair Disclosure events (OFFDIRECHANGE;

33,324 observations).

4. RESULTS

4.1. Descriptive Statistics

Table 2, Panel A shows the descriptive statistics for the full sample. The mean, standard

deviation, minimums and maximums are reported. In addition to the variables of interest which

include REPLAG, NONCONFORM, ICMW, IT_MW, OTHER_MW, IT_IMPROVE and

IT_ADVERSE, we include other variables used in our models as described above.

 

19  

Table 2 – Descriptive Statistics Panel A. Summary Statistics of Main Variables CompEvents NonCompEvents Variable N Mean Median Std.Dev. N Mean Median Std.Dev. REPLAG 34,979 3.039 3 4.873 83,884 2.212 1 3.921 NONCONFORM 34,979 0.050 0 0.218 83,884 0.036 0 0.187 ICMW 34,979 -0.817 -1 0.577 83,884 -0.842 -1 0.538 ITMW 34,979 -0.947 -1 0.321 83,884 -0.954 -1 0.298 OTHER_MW 34,979 0.065 0 0.247 83,884 0.056 0 0.230 IT_IMPROVE 28,357 0.017 0 0.128 73,283 0.014 0 0.117 IT_ADVERSE 28,357 0.009 0 0.092 73,283 0.008 0 0.089 SIZE 34,979 6.600 6.569 1.639 83,884 6.831 6.830 1.720 LEV 34,979 0.713 0.384 1.005 83,884 0.753 0.417 1.044 ROA 34,979 -0.007 0.034 0.166 83,884 0.010 0.039 0.146 RET 34,979 0.176 0.086 0.594 83,884 0.152 0.065 0.581 AGG_LOSS 34,979 0.318 0 0.466 83,884 0.271 0 0.444 GROWTH 34,979 0.178 0.094 0.472 83,884 0.136 0.078 0.402 M2B 34,979 3.002 2.168 2.650 83,884 2.890 2.128 2.504 AGE 34,979 10.092 10 4.470 83,884 10.323 10 4.364 RESTRUCTURE 34,979 0.297 0 0.457 83,884 0.312 0 0.463 FOREIGNCURRENCY 34,979 0.130 0 0.336 83,884 0.135 0 0.342 EXTREMEGRTH 34,979 0.091 0 0.288 83,884 0.095 0 0.293 LOGSEGNUM 34,979 2.413 2.485 0.741 83,884 2.466 2.565 0.740 BIG4 34,979 0.795 1 0.404 83,884 0.816 1 0.387 Notes: CompEvents = complicated events; NonCompEvents = other events

 

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Panel B. Pearson Correlation of Regression Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17)(1) REPLAG (2) NONCONFORM 0.71 1 (3) ICMW 0.03 0.02 1 (4) ITMW 0.00 0.00 0.52 1 (5) OTHER_MW 0.03 0.02 0.83 -0.02 1 (6) IT_IMPROVE 0.00 0.00 0.13 -0.04 0.16 1 (7) IT_ADVERSE 0.00 0.00 0.34 0.64 0.02 0.01 1 (8) SIZE -0.03 -0.02 -0.14 -0.10 -0.10 -0.06 -0.07 1 (9) LEV -0.03 -0.01 -0.00 0.01 0.01 0.02 0.00 0.12 1 (10) ROA -0.00 0.00 -0.08 -0.07 -0.04 -0.04 -0.05 0.39 -0.01 1 (11) RET -0.02 -0.01 -0.07 -0.06 -0.04 -0.01 -0.02 0.10 0.03 0.11 1 (12) AGE 0.00 0.00 -0.01 -0.01 -0.00 -0.01 -0.01 0.05 -0.03 0.07 -0.06 1 (13) RESTRUCTURE 0.00 -0.00 0.02 -0.00 0.03 0.00 -0.01 0.11 0.06 -0.04 -0.05 0.07 1 (14) FOREIGNCURRENCY 0.00 0.00 0.03 0.03 0.01 0.03 0.02 0.05 -0.00 0.02 -0.01 0.03 0.10 1 (15) EXTREMEGRTH 0.00 0.00 0.00 -0.00 0.01 0.01 0.00 -0.09 -0.00 -0.11 -0.06 0.04 0.05 -0.00 1 (16) LOGSEGNUM 0.00 -0.00 -0.00 -0.00 -0.00 0.00 0.01 0.34 0.05 0.23 -0.09 0.09 0.22 0.17 -0.03 1 (17) BIG4 -0.02 -0.02 -0.12 -0.12 -0.06 -0.09 -0.10 0.50 0.12 0.17 0.01 -0.03 0.12 0.00 -0.01 0.18 1

The boldfaced font represents statistical significance at 5% level.

 

21  

The distributions are similar to those reported in the existing literature. We find that our

sample firms, in general, file timely disclosure of Form 8-K material events, with 95% of our

complicated event sample filing within four business days of the event date and about 96% of

our non-complicated event sample filing within the required time frame. On average, our

complicated event sample firms take about three days to file their 8-Ks (Mean REPLAG of

3.039). Our non-complicated event firms take about two days to file their 8-Ks (Mean REPLAG

of 2.212). These findings are comparable to that found by Lerman and Livnat (2010), but

somewhat lower than Karim and Pinsker’s (2012) post-SOX results.

Our average (median) sample returns, RET, 0.176 (0.086) are comparable to existing

literature (e.g., Goh and Li [2011] report 0.19 (0.06), for this variable). Conversely, our firms

seems to be more highly leveraged than would be expected. We report average leverage, LEV, of

0.713 (.384), which is considerably higher than the 0.18 (.12) reported by Goh and Li (2011).

Our sample means (medians) for firm age, Age, 10.092 (10.000), restructuring charges,

Restructure, 0.297 (0.000) Foreign Transactions, ForeignCurrency, 0.130 (0.000), and business

segments, LogSegNum 2.413 (2.485), are all comparable to existing literature (e.g., Doyle et al.

[2007] report 8.274 (8.00), 0.032 (0.000), 0.208 (0.000), 3.440 (4.000), respectively for these

variables). Extreme Sales Growth 0.091 (0.000) for our sample firms is somewhat lower than has

been previously reported (e.g., Doyle et al. [2007] report 0.193, (0.000) for this variable).

Table 2, Panel B shows the correlation matrix for the variables used in the study. Of

course, ICMW is significantly positively correlated with its two components: ITMW (0.52) and

other non-IT material weakness (Other_MW; 0.83). We also observe positive and significant

correlations between ICMW and both IT_Improve (0.13) and IT_adverse (0.34). The

significantly negative Pearson correlations between the size (-0.14), ROA (-0.08), returns (-

 

22  

0.07), Firm Age (-0.01), Big4 (-0.12) and the likelihood of the firm reporting a material

weakness in internal control are all as expected and consistent with extant literature as suggested

above. We also report significantly positive Pearson correlations between Restructuring charges

(0.02), Foreign Transactions (.03) and the likelihood of the firm reporting a material weakness in

internal control.9

4.2. Main Empirical Results

H1a and H1b investigate whether internal controls are associated with firms’ Form 8-K

filing timeliness and compliance with the four-day requirement, respectively. Specifically, we

are interested in whether internal controls affect the 8-K reporting lag. Tables 3 and 4 show the

coefficients from the estimation of the regression in Equations (1) and (2) for the period from

2005 to 2010.

Table 3 The Effect of IC Weakness on Reporting Timeliness – Complicated vs. Non-complicated Events Columns (1)-(3) are from the OLS regression and columns (4)-(6) are estimates from the Logit regression. We have three sets of the subsamples. The baseline model shows how our control variables are associated with the full sample (column (1) and (4)), the CompEvents subsample deals with 4 types of events: “ENTERAGREE, MATIMPAIR, ACQDISPCOMPLETE, UNREGSALE”, and the NonCompEvents are the noncomplicated events, which are the rest of the sample. Year and Industry fixed effects are included. Robust t-statistics in parentheses; *** p

 

23  

(1) (2) (3) (4) (5) (6) OLS Logit Variables Baseline CompEvents NonCompEvents Baseline CompEvents NonCompEvents Restructure 0.017*** -0.024*** 0.033*** -0.019 -0.086 0.019 (3.175) (-2.635) (5.228) (-0.536) (-1.445) (0.414) ForeignTransaction -0.005 0.014 -0.010 0.097** 0.216*** 0.035 (-0.782) (1.096) (-1.254) (2.236) (3.079) (0.624) ExtremeGrth -0.021*** -0.014 -0.019** -0.012 -0.008 -0.016 (-2.813) (-1.057) (-2.105) (-0.234) (-0.088) (-0.252) logSegNum 0.011*** 0.035*** 0.004 0.038 0.049 0.037 (3.294) (5.741) (0.933) (1.595) (1.262) (1.243) Big4 -0.008 -0.049*** 0.012 -

0.226***-0.338*** -0.156***

(-1.146) (-4.175) (1.576) (-5.400) (-4.890) (-2.962) Constant 1.075 0.931*** 0.370*** -

2.430***-2.480*** -2.346***

(.) (5.868) (3.728) (-7.726) (-5.438) (-5.334) Observations 118,863 34,979 83,884 118,846 34,893 83,871 Adj-R2 0.027 0.021 0.030 Pseudo-R2 0.016 0.022 0.015

Table 4 The Effect of IC Weakness on Reporting Timeliness – Surprising vs. Non-surprising Events Columns (1)-(2) are from the OLS regression and columns (3)-(4) are estimates from the Logit regression. We have two sets of the subsamples. The SurpEvents subsample deals with 4 types of events: “ACCELEROBLIG, CREDITENHANC, EBPSUSPEN, UNREGSALE”, and the NonSurpEvents are the non-surprising events, which are the rest of the sample. Year and Industry fixed effects are included. Robust t-statistics in parentheses; *** p

 

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Adj-R2 0.022 0.027 Pseudo-R2 0.058 0.016

We report results for baseline models (columns 1 and 4 in Table 3 include the entire

sample) and sets of subsamples. The complicated events (CompEvents) subsample covers four

types of events: “ENTERAGREE, MATIMPAIR, ACQDISPCOMPLETE, UNREGSALE”, and

the non-complicated events (NonCompEvents), subsample includes the non-complicated events,

which include firms reported one or more of the other types of events. ENTERAGREE refers to

“Entry into a Materially Definitive Agreement,” MATIMPAIR refers to Material Impairments,

ACQDISPCOMPLETE refers to “Completion of Acquisition or Disposition of Assets”, and

UNREGSALE refers to “Unregistered Sales of Equity Securities.” All other events are defined

in Appendix B.

In Table 4, we further divide our sample into surprising events (SurpEvents), and non-

surprising events (NonSurpEvents). Unlike the previously-cited categorization studies, we

contend that surprising events represent the biggest challenge for firms to comply with the strict

Form 8-K reporting guidelines if they possess ICMW. Four types of events are classified as

surprising: ACCELEROBLIG (Triggering Events which Accelerate or Increase a Direct

Financial Obligation under an Off-Balance Sheet Arrangement); CREDITENHANC (Change in

Credit Enhancement or Other External Support); EBPSUSPEN (Temporary Suspension of

Trading Under Registrant’s Employee Benefit Plans); and UNREGSALE (Unregistered Sales of

Equity Securities). The remaining observations are coded as unsurprising events. Overall, we

interpret the results in Tables 3 and 4 as supporting hypotheses 1a and 1b: existence of ICMW

reduces the timeliness of Form 8-K reporting and compliance with the stated, four-day reporting

requirement.

 

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The internal control measure loads positive and significant in both the OLS and logistic

specification models.10 This result is invariant to whether the events are complicated or non-

complicated, or surprising or unsurprising. To reiterate, we interpret this result as suggesting that

the presence of material weaknesses in internal control are likely to cause delays in Form 8-K

filings. Our regressions range from a total of 118,863 observations in the baseline models to

2,815 observations in the surprising events subsamples.

Turning our attention to the control variables, we observe that, as expected, the

coefficient on Size is significantly negative for all but one model (in each table), consistent with

larger firms having smaller reporting lags.11 The coefficient on leverage (Lev) is also

significantly negative for all but one model, consistent with more levered firms having shorter 8-

K reporting lags. The coefficient on extreme sales growth (ExtremeGrwth) is significantly

negative for all but one model, consistent with extreme growth firms having shorter 8-K

reporting lags. Finally, we observe a reliably negative association between the presence of Big 4

auditors and the firm reporting timeliness. This result suggest that firms with Big 4 auditors have

shorter 8-K reporting lags.

Our second set of hypotheses predicts that firms’ Form 8-K filing timeliness/compliance

with the four-day requirement is associated with the existence of IT material weaknesses in

internal controls, even after controlling for all other types of material weaknesses in internal

controls. Tables 5 and 6 report the effect of IT related (IT_ MW) and other weakness (Other_

MW) on reporting timeliness.

                                                            10 Recall that an ICMW equal to 1 indicates that the firm has reported a material weakness in internal control versus 0 elsewhere. 11 This is expected because larger firms are likely to be more mature, with richer information environments (usually with more analyst following these firms) and higher levels of corporate governance, which reduces the overall uncertainty and other information asymmetries (Khan and Watts 2009).

 

26  

Table 5 – The Effect of IT Weakness and Other Weakness on Reporting Timeliness - Complicated vs. Non-complicated Events Columns (1)-(3) are from the OLS regression and columns (4)-(6) are estimates from the Logit regression. We have three sets of the subsamples. The baseline model shows how our control variables are associated with the full sample (column (1) and (4)), the CompEvents subsample deals with 4 types of events: “ENTERAGREE, MATIMPAIR, ACQDISPCOMPLETE, UNREGSALE”, and the NonCompEvents are the noncomplicated events, which are the rest of the sample. Year and Industry fixed effects are included. Robust t-statistics in parentheses; *** p

 

27  

Table 6 The Effect of IT Weakness and Other Weakness on Reporting Timeliness - Surprising vs. Non-surprising Events Columns (1)-(2) are from the OLS regression and columns (3)-(4) are estimates from the Logit regression. We have two sets of the subsamples. The SurpEvents subsample deals with 4 types of events: “ACCELEROBLIG, CREDITENHANC, EBPSUSPEN, UNREGSALE”, and the NonSurpEvents are the non-surprising events, which are the rest of the sample. Year and Industry fixed effects are included. Robust t-statistics in parentheses; *** p

 

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material weaknesses in internal control are more likely to be associated with less timely Form 8-

K filings than ITMW for these two types of events.

Finally, we observe insignificant associations between ITMW and the non-conforming

dependent variables for all five reported models. Overall, we interpret the results in Tables 5 and

6 as partial support for our hypotheses indicating that ITMW are more likely to negatively affect

filing timeliness in the Form 8-K reporting process for surprising events and, consequently,

negatively affect compliance with the four-day reporting requirement for complicated events. In

addition, non-IT material weaknesses appear to be a better predictor of why filing timeliness is

hampered in the other subsamples.

4.3. Robustness Checks

The extant literature suggests that remediation (deterioration) in the quality of IT internal

controls may be positively (negatively) associated with firms’ Form 8-K filing processes (e.g.,

see Li et al., 2012). To investigate this issue, we modify equations (1) and (2) as follows:

REPLAGi,t = α0 + α1IT_IMPROVEi,t + α2 IT_ADVERSE i,t + … εi,t Eq. (5)

Prob (NonConformi,t =1) = β0 + β1IT_IMPROVEi,t+ β2IT_ADVERSEi,t +… εi,t Eq. (6)

where IT_IMPROVE is equal to 1 if the firm has ITMW in year t, but has no IT_MW in year

t+1, and 0 otherwise. IT_ADVERSE is equal to 1 if a firm has ITMW in both year t and t+1, and

0 otherwise. All other variables are measured as described above. Tables 7 and 8 present the

results of estimating equations (5) and (6). As previously stated, we estimate versions of the

models focusing on both complicated and non-complicated events.

Consistent with findings from the extant material weakness remediation literature (e.g.,

Bedard et al., 2012; Hammersly et al., 2013), a positive (negative) α1 and β1 would suggest that

 

29  

remediation in IT-related material weaknesses in internal control is effective at reducing

(increasing) the timeliness of firms’ Form 8-K filings. A positive (negative) α2 and β2 would

suggest that a remediation (deterioration) in the quality of IT-related internal controls increases

(reduces) the probability that firms will comply with the four-day Form 8-K filing requirement.

Table 7 – The Effect of Improvement or Worsening of IT Weakness on Reporting Lag - Complicated vs. Non-complicated Events Columns (1)-(3) are from the OLS regression and columns (4)-(6) are estimates from the Logit regression. We have three sets of the subsamples. The baseline model shows how our control variables are associated with the full sample (column (1) and (4)), the CompEvents subsample deals with 4 types of events: “ENTERAGREE, MATIMPAIR, ACQDISPCOMPLETE, UNREGSALE”, and the NonCompEvents are the noncomplicated events, which are the rest of the sample. Year and Industry fixed effects are included. Robust t-statistics in parentheses; *** p

 

30  

Table 8 – The Effect of Improvement or Worsening of IT Weakness on Reporting Lag - Surprising vs. Non-surprising Events Columns (1)-(2) are from the OLS regression and columns (3)-(4) are estimates from the Logit regression. We have two sets of the subsamples. The SurpEvents subsample deals with 4 types of events: “ACCELEROBLIG, CREDITENHANC, EBPSUSPEN, UNREGSALE”, and the NonSurpEvents are the non-surprising events, which are the rest of the sample. Year and Industry fixed effects are included. Robust t-statistics in parentheses; *** p

 

31  

For all models we observe an insignificant coefficient on the remediation in the quality of

IT-related internal control variable (IT_IMPROVE). We interpret this result as suggesting that

improving the IT-related internal control has no effect on firms’ Form 8-K reporting timeliness.

Similarly, we observe insignificant coefficients on the deterioration in the quality of IT-related

internal control variable (IT_ADVERSE) for all models. Overall, the results from Tables 7 and 8

suggest that neither improving nor deteriorating IT weaknesses are associated with Form 8-K

reporting lags. However, both of these tests require more restrictive assumptions. In order to

calculate the deterioration (remediation) in our IT material weaknesses we need to use lag (lead)

observations which greatly reduces the power of our tests. Therefore, we believe the lack of

results here is (at least partially) driven by the constrained samples. Similar to the previous

model, our t-statistics (OLS regressions) and z-statistics (logit regressions) are calculated based

on the standard errors adjusted for firm and year clustering (Petersen, 2009).13

Our final robustness check separates complying versus non-complying firms (see Table

9). We only list the results for complying firms as they represent the overwhelming majority of

the sample (over 100,000 observations relative to 127 observations for non-complying firms).

Results indicate that ICMW play a major role for almost all event categories in firms who

comply with the four-day Form 8-K reporting requirement – again, most of our sample of firms.

Conversely, for firms who do not comply with the four-day requirement, ICMW only has an

impact on surprising events. This result makes sense given our earlier explanation of the

                                                            13 Our sample period coincides with the financial crisis episode. Consequently, there is some concern that our overall results are potentially misrepresented by the inclusion of this turbulent period. In untabulated tests, we control for the financial crisis period and find that our primary results are qualitatively similar.

 

32  

resources required for surprising versus all other events. In sum, this particular test adds

credibility to our linking the quality of internal controls to Form 8-K reporting.14

Table 9. The Effect of IC Weakness on Reporting Lag - Compliance Firms Only Dependent Variable: Reporting Lag (1) (2) (3) (4) (5)

compliance sample VARIABLES All CompEvents NonCompEvents SurpEvents NonSurpEvents ICMW 0.023*** 0.029*** 0.024*** 0.012 0.023***

(6.765) (5.324) (5.648) (0.702) (6.619)

Size -

0.020*** -0.012*** -0.019*** -0.038*** -0.020*** (-13.118) (-4.346) (-10.104) (-3.573) (-12.639)

Lev -

0.022*** -0.002 -0.030*** 0.018 -0.023*** (-10.973) (-0.499) (-12.683) (1.519) (-11.460)

Roa -0.044** 0.042 -0.083*** 0.072 -0.045** (-2.529) (1.556) (-3.833) (0.922) (-2.517)

Ret -0.004 -0.002 -0.010** -0.012 -0.004 (-1.048) (-0.369) (-2.089) (-0.522) (-1.052)

Loss 0.045*** 0.014 0.050*** 0.007 0.045*** (7.667) (1.414) (7.044) (0.210) (7.546)

Age 0.001 -0.001* 0.002*** 0.001 0.001 (1.569) (-1.935) (3.291) (0.226) (1.550)

Restructure 0.018*** -0.017** 0.030*** 0.003 0.018*** (3.981) (-2.231) (5.602) (0.100) (3.986)

ForeignCurrency -0.014** -0.007 -0.014** 0.036 -0.015*** (-2.549) (-0.720) (-2.110) (0.995) (-2.702)

Extremegrth 0.021*** -0.008 -0.021*** -0.045 -0.020*** (-3.236) (-0.710) (-2.708) (-1.102) (-3.048)

logSegnum 0.008*** 0.032*** -0.000 0.000 0.008*** (2.600) (6.371) (-0.066) (0.016) (2.629)

big4 0.006 -0.023** 0.019*** -0.069** 0.009 (1.014) (-2.469) (2.703) (-2.200) (1.597)

Constant 0.764*** 0.878*** 0.676*** 1.826*** 0.935 (5.880) (5.310) (3.960) (25.349) (.)

Observations 114,075 33,237 80,838 2,688 111,387 R-squared 0.031 0.021 0.039 0.055 0.031 Adj-R2 0.030 0.019 0.038 0.024 0.031

                                                            14 We also regressed ITMW and replicated the empirical scheme in Table 9 and untabulated results are consistent with our results when we regressed ICMW. 

 

33  

Robust t-statistics in parentheses *** p

 

34  

invariant to whether the events are complicated or non-complicated or surprising or unsurprising

events and suggests that ICMW impact the firms’ ability to timely file their Form 8-Ks.

Our second set of hypotheses examines the association between firms’ Form 8-K filing

timeliness/compliance with the four-day requirement and the presence of IT-related material

weaknesses in internal controls (and other, non-IT related controls). For complicated events we

find evidence that IT-related material weaknesses in internal controls are more likely to cause

delays in 8-K reporting even after controlling for all other types of material weaknesses in

internal controls. For non-complicated events, we find no association between IT-related

material weaknesses in internal controls and the 8-K reporting timeliness after controlling for

other types of material weaknesses in internal controls. Additionally, we add to the extant

internal control literature by finding strong results involving non-IT related material internal

control weaknesses and lack of Form 8-K filing timeliness/compliance for non-complicated and

surprising events. In aggregate, the different findings dependent on event subsample add to our

argument that the information environment within a firm affects the Form 8-K reporting process

and needs to be closely studied. Further, following prior research using Form 10-K data, we also

investigate if remediation (deterioration) in the quality of IT-related internal controls is

associated with firms’ 8-K filing timeliness/compliance. We are unable to find any association in

this regard.

As Li et al. (2012, 183) indicate, there is a lack of archival research that explicitly

considers the impact of IT controls on information quality. Our study adds to Li et al.’s (2007,

2012) and Boritz et al.’s (2013) results specifically and more generally to the budding IT

governance literature by examining relative differences in timeliness/compliance with the four-

day requirement incorporating disclosures based either possessing material weaknesses of

 

35  

internal controls (ICMW) or decomposed into types of weaknesses (ITMW versus

OTHER_MW). Although we do not classify specific IT-related controls, we still find a pervasive

effect in a novel context. Future research should continue along this path to examine even more

reporting contexts/information environments.

Additionally, our context of Form 8-K reporting is understudied relative to Form 10-Ks,

10-Qs, and earnings announcements. The SEC (1982) indicates that the Form 8-K represents a

more continuous/frequent disclosure of material information relative to the other forms mandated

to be reported. As noted by Beyer et al. (2010): “The introduction and implementation of new

non-GAAP earnings disclosures rules, including Regulation G, amendments to Item10 of

Regulation S–K, and the addition of Item 12 to Form 8-K provide opportunities for future

research. We encourage researchers to use the new SEC reporting regimes to study whether the

information content and usefulness of periodic reports (i.e., 10-Ks and 10-Qs) changed as a result

of the more detailed and expansive timely 8-K disclosures” (p. 29) The significantly quicker

deadlines for Form 8-K disclosure and consequent penalties for late disclosure put pressure on

firms to comply. Our findings of the vast majority of our sample complying with the four-day

requirement can be perceived as good news to the marketplace, but with non-compliance should

come increased scrutiny on the firms’ information environment of which internal control quality

is a key component. Time is money, even for the complying firms; therefore, future research

should investigate a potential linkage between Form 8-K reporting timeliness and cost of capital

considerations. The implication is that even complying firms could reduce their cost of capital if

they reduce their filing lag (e.g., from four days to one day). Finally, our study is confined by the

standard limitations associated with archival research.

 

36  

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Appendix A Variable Definitions Variable Description Dependent Var.

REPLAG Reporting lag. It is measured by number of business days between the event and corresponding Form 8-K filing

NONCONFORM Non-conforming event that takes a value of 1 if 8k filing exceeds the mandatory 4-business day requirement and 0 otherwise.

Internal Control Weakness ICMW Internal control quality that takes a value of 1 if internal control quality related weakness is

reported, 0 if no disclosure in the fiscal year, and -1 if no internal control quality related weakness is reported.

ITMW IT-related internal control material weaknesses that take a value of 1 if IT related internal control material weakness is reported, and 0 otherwise.

OTHERMW 1 if firm has internal control material weaknesses other than IT related, and 0 otherwise. ITIMPROVE 1 if firm has ITMW in year t-1 but has no ITMW in year t, and 0 otherwise. ITADVERSE 1 if a firm has ITMW in both year t-1 and t, and 0 otherwise.

Firm Characteristics SIZE Measured by logarithm of market value of equity (MVE) LEV Leverage, =(long-term debt + short-term debt)/MVE ROA Return on Assets, = NI / [(Total Assetst+ Total Assetst-1)/2] RET Compounded annual abnormal return. Abnormal return is market adjusted return. Age Firm age, = fiscal year – IPO year.

Big4 Big four auditor indicator. = 1 if the firm is audited by one of the big four audit firms, and = 0 if otherwise.

Financial Health Loss Loss indicator, = 1 if NI < 0, and = 0 if otherwise.

ExtremGrth Extreme growth indicator, = 1 if sales growth of the firm is at the top decile of the industry, and = 0 if otherwise.

Operation Complexity LogSegNum Natural logarithm of the number of a firm’s operation and geographic segments.

ForeignTransaction Foreign transaction indicator. = 1 if a firm has foreign currency adjustment (i.e., abs(FCA) >0 ), and = 0 if FCA = 0

Restructure Restructure expenses, = item RCP * -1.

 

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Appendix B DocTag Definitions DocTag Description 1.01 ENTERAGREE Entry into a Materially Definitive Agreement 1.02 TERMAGREE Termination of a Materially Agreement 1.03 BANKRUPTCY Bankruptcy or Receivership 2.01 ACQDISPCOMPLETE Completion of Acquisition or Disposition of Assets

2.02 OPERATIONS Results of Operations and Financial Condition

2.04 ACCELEROBLIG Triggering Events which Accelerate or Increase a Direct Financial Obligation under an Off-Balance Sheet Arrangement

2.03 DIROBLIG Creation of a Direct Financial Obligation or an Obligation under and Off-Balance Sheet Arrangement of a Registrant 2.05 EXITCOST Costs Associated with Exit or Disposal Activities 2.06 MATIMPAIR Material Impairments

3.01 DELIST Notice of Delisting or Failure or Satisfy a Continued Listing Rule or Standard; Transfer of Listing 3.02 UNREGSALE Unregistered Sales of Equity Securities 3.03 RIGHTSMODIF Material Modifications to Rights of Security Holders 4.01 AUCHANGE Changes in Registrant’s Certifying Accountant 5.01 CONTROLCHANGE Changes in Control of Registrant

5.02 OFFDIRCHANGE Resignation of Registrant’s Directors or Officers 5.03 CHGARTICLES Amendments to Articles of Incorporation or Bylaws; Change in Fiscal Year 5.04 EBPSUSPEN Temporary Suspension of Trading Under Registrant’s Employee Benefit Plans

5.05 ETHICS Amendments to Registrant’s Code of Ethics or Waiver of a Provision of the Code of Ethics 5.06SHELL Change in Shell Company Status 6.01 ABSINFO ABS Informational and Computational Material 6.02 SERVTRUST Change in Servicer or Trustee 6.03 CREDITENHANC Change in Credit Enhancement or Other External Support 6.04 NODIST Failure to Make a Required Disclosure 6.05 UPDATEDISCL Securities Act Updating Disclosure

7.01 RFDDISCLOS Regulation FD Disclosure )Prior to 8.23/04, this item dealt solely with sales of equity securities pursuant to Regulation S) 8.01 OTHER Other Events 9.01 FINANCIALSTMTS Financial Statements and Exhibits