THE IMPACT OF INFORMATION TECHNOLOGY ON CORPORATE FINANCIAL REPORTING: A CONTINGENCY PERSPECTIVE

British Accounting Review (1996) 28, 203–227

THE IMPACT OF INFORMATION TECHNOLOGY ON CORPORATE FINANCIAL REPORTING: A CONTINGENCY PERSPECTIVE ZE ZHONG XIAO Napier University, Edinburgh

JOHN R. DYSON Napier University, Edinburgh

PHILIP L. POWELL University of Warwick, Coventry Previous studies investigating IT impact on accounting suffer from a lack of theoretical guidance. An examination of the nature of information technology (IT), financial information and corporate financial reporting (CFR) indicates that the evaluation of IT impact on CFR requires a general, flexible and adaptive framework. Analogous to the contingency theory of organizations (CTO), this paper proposes such a framework. Its general assumptions are that the impact of IT on different aspects of CFR varies and the degree and pattern are contingent upon environmental, organizational, and managerial characteristics. Hypotheses have been developed to expand the framework. An evaluation of the framework against criticisms of CTO shows that it avoids several much criticized problems although care must be taken to ameliorate other pitfalls.  1996 Academic Press Limited

INTRODUCTION Both corporate financial reporting (CFR) and information technology (IT) have attracted interest from accounting practitioners and researchers. Though investigated separately, research on their interaction is less advanced. However, applying Porter & Millar’s (1985) model, CFR would seem to be an area where IT plays an important role, since the process of CFR has high information intensity and its products possess high information content. This echoes an expectation that IT will lead to a great change in CFR We are indebted to Dr J. H. Dodgson, Dr P. S. Agutter and Mr D. O. Young, Napier University, and Mr A. Sangster, Aberdeen University for their comments. Correspondence should be addressed to: Dr Z.Z. Xiao, Department of Accounting and Finance, Napier University, Edinburgh, UK. Received 28 August 1995; accepted 23 October 1995. 0890–8389/96/030203+25 $18.00

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(McRae, 1964). From a technical point of view this may be true, but CFR is more than a technical issue; it has complex economic, social and political implications (Beaver, 1986). It follows that evaluation and prediction of IT impact on CFR requires a sophisticated analytical framework. This paper proposes a contingency framework for investigating the impact of IT on CFR. The first part reviews previous evaluative studies, showing that most studies lack theoretical underpinning and more research is needed into the impact on external reporting. Part two explores the nature of IT, financial information and CFR, with a view to eliciting criteria for choosing or establishing a theory. It concludes that a general, flexible and adaptive framework is needed. Part three presents the framework, analogous to the contingency theory of organization. Its general assumptions are that the impact of IT on different aspects of CFR varies and that this impact is contingent on environmental, organizational and managerial characteristics. The next part develops hypotheses to illustrate the framework. The paper concludes with an evaluation of the framework. IT IMPACT ON ACCOUNTING: PREVIOUS STUDIES A number of empirical studies have been undertaken, most since the early 1980’s. The dominant focus has been the impact of IT on individual accountants and the profession, reflecting an increased interest in human and social issues. The aim has been to evaluate IT-made opportunities and threats and to make recommendations. Although a range of topics have been covered, three appear dominant: the use of IT in accounting; the effects of IT use on accountants, accounting function, and accounting firms; and the benefits of IT use. IT Use in Accounting Accounting has always been a front-runner in IT use. Carr (1985) notes that basic accounting systems were the first areas computerized and the analytical aspects of accounting acquired increasing support from financial modelling packages which became available in the 1970’s. The use of IT has now become all pervasive. Clark & Cooper (1985) find all but the smallest business have computerized accounting systems, and that other functions depend on IT. Though IT is extensively used, the quality and mode of use is not always satisfactory. King, Lee, Piper & Whittaker (1991) observe from industrial companies that: IT made book-keeping more comprehensive, accurate, timely and frequent, although IT did not help produce more focused and tailored information; IT saved time in book-keeping, but this was absorbed by growth; the pace of systems integration is slow, though increasing; IT is largely used to computerize existing systems; limited evidence shows that

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IT supports decision making, and this by proactive accountants; and there is limited evidence that IT gives greater access to and wider dissemination of information. Carr (1987) finds that ill-defined systems requirements remained the major reason for IT failure. In small firms, there is a shortage of IT skills and IT development strategy, a reluctance to train and involve staff, and to quantify benefit. Paradoxically, although large firms gained rapid growth in IT consultancy, they lack internal expertise, and are sceptical of benefits. Barras & Swann (1984) find that the accounting profession is slow in adopting IT due to accountants’ propensity to look at the bottom line benefits, a reluctance to accept that accounting craft is capable of being automated, unsuitable technology, and firms’ failure to search for alternative accounting methods more suitable for computer techniques. Carr (1985) observes that accountants in industry and commerce made more use of IT than those in accounting firms. Wilson & Sangster (1992) attribute this to the nature of the tasks: accounting tasks in industry are more algorithmic while those in accounting firms require more judgement and processing of qualitative information. Impact on Accountants, Accounting Function and Accounting Firms The use of IT in accounting provides opportunities for some accountants, but may endanger others. Collier (1984) finds unanimous agreement that the demand for clerical staff has fallen, while that for management accountants depends on factors such as economic prosperity. Carr (1985) is optimistic for qualified accountants since new job categories such as systems accountants would be created. Clark & Cooper (1985) suggest that accountants have the opportunity to contribute their financial and business skills to the formulation of IT strategy and to the process of planning and implementing systems. Collier (1984) finds that the role of management accountants is changing from accumulation, analysis and preparation towards interpretation, evaluation, control and involvement in decision making. McCosh (1986) observes that management accountants are losing their battle to IT for the provision of control information. However, since IT does not change the core management accounting process, they could still play a role in designing reports and in planning. He calls for a change in the management accountant’s role from interpretative to consultative. For King et al. (1991), IT facilitates management accountants to change from the historian to a role combining book-keeping and decision support. The use of IT also affects the relationship between the accounting and other functions. Many organizations are realigning accounting and data processing functions separated by centralization of data processing (Carr, 1985). This is confirmed by the creation of large scale databases, use of fourth generation languages and emergence of end-user computing. McCosh

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(1986) observes that management accounting reports do not satisfy the information needs of management. IT enables other people to inform top managers and line managers to inform themselves. Moreover, this effect of IT use may be complicated, politically or socially. King et al. (1991) find that IT developments increase the power of accountants over systems and user managers. However, IT developments could result in managers challenging existing reports or demanding more information. The impact of IT on organizations, especially accounting firms, has been investigated in several studies. The GCA study (Mantle, 1983), investigating the extent of the impact, identified 26 aspects of internal and external services in accounting firms, and found that 13 of them were affected to a major degree, ten to some degree, and only three remained untouched. The conclusion drawn by Bhasker & Williams (1986) is that IT enables small accounting firms to reduce costs, increase efficiency, and provide new services. However, IT might make them vulnerable due to a shortage of expertise, the inability to offer a wider range of services and a lack of credibility. Benefits of IT Use Almost all evaluative studies have tried to identify the benefits of IT use. These include profit increase, cost reduction or displacement, time savings, improved information, professional performance, staff satisfaction, reliability, speedy data transfer, strengthening competitive position, and better or new client services. However, most studies do not distinguish between potential and actual benefits. Thus, in spite of the benefits identified, Carr (1987) finds that large organizations are sceptical about IT gains while small firms do not bother to quantify benefits. The above studies are useful in bringing IT-related issues into focus and increasing awareness of opportunities and threats. Perhaps more importantly their recommendations influence the actions of accountants. For example, IT knowledge is now a part of examinations for professional qualifications. A major advantage of the studies is that they touch on human and social issues. However, they neglect users of accounting information, the organizational environment and external reporting. It may be that they focus too much on accountants (Kaye, 1986). Most studies suffer from other weaknesses. First, their findings are descriptive (characterized by univariate analysis) and they fail to obtain dynamic data. Although Carr (1985, 1987) attempts to overcome this by undertaking two pieces of research at different times, the coherence is questionable given the loosely defined research objectives. Second, with the exception of Clark & Cooper (1985), they over-simplified the relationship between IT and accounting. They usually deal with a one-way impact or relationship, i.e. IT impact on accounting, neglecting the possibility that this may be influenced by factors including accounting itself. Moreover,

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most studies take too simple an approach to data analysis, lack rigorous statistical tests or sufficient data. Finally, these studies lack theoretical guidance. None attempts to devise a theoretical framework. They largely ignore existing accounting knowledge such as positive accounting theory and agency theory. Although the studies by Clark & Cooper (1985) and Carr (1985, 1987) consider some conditional factors, they are largely intuitive. This is understandable because most studies, sponsored by professional bodies, were expected to find solutions to practical problems rather than contribute to theoretical development. Some problems were, however, identified and addressed by King et al. (1991). Their research focuses on management accountants in industrial organizations, aiming to discern whether IT changes the nature of accounting, affects activities and influences role relationships. It adopts a longitudinal case study approach by visiting companies twice, so that the dynamic nature of IT development and its impact can be accommodated. It also follows a more rigid research process by formulating research questions, and deriving and testing hypotheses. Further, it was guided by a conceptual framework consisting of a social interactionist perspective which sees people as a central feature in organizations, a pluralist approach which accommodates both conflict and harmonization, as opposed to a unitarist or radical approach, and a managerialist view which believes that management has the right to determine objectives and manage to achieve them. However, although this research has many advantages, it is limited when it comes to generalizing the findings due to the case study approach. Some methodological problems might be alleviated by theoretical endeavour. For example, a major problem is portraying the dynamic nature of the impact of IT, given the fact that IT develops so fast. The general approach has been an attempt to conduct studies at intervals (Kaye, 1986). However, the effectiveness is doubtful if they are conducted on an ad hoc basis. It is difficult to perceive that the findings from different studies are integrative in any sensible way. A better approach is to organize the studies under a theory so that findings can be generalized, and the knowledge derived used to predict future as well as current impacts.

THE NATURE OF IT, FINANCIAL INFORMATION AND CFR The review clearly indicates a need for research into the impact of IT on external reporting, and more attention to users of financial information. More importantly, it highlights the need for such research to be guided by theory. However, to formulate an appropriate theory it is necessary to examine the nature of IT, financial information and CFR, so that criteria can be established for choice and development.

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The Nature of IT IT is a branch of technology, the function of which is to process and communicate information. Some instances of IT only communicate information—telephones, facsimiles, printing and broadcasting. Others also process information—computer-based technologies—the focus here. To understand better the nature of IT, it is necessary to consider both the technical and social characteristics of IT. IT may be thought of as a tool. A new tool is first an extension of the capabilities of existing tools and/or human capabilities. IT enhances information capabilities of individuals and organizations in terms of speed, accuracy, memory and tolerance etc. At least, IT represents an addition to the existing manual and mechanical information systems. However, IT use provides more possibilities and options in processing and communicating information. An implication is that IT presents itself as a technological attraction—once IT is wisely chosen and applied, it may constitute an irreversible commitment just as some other technologies (Weizenbaum, 1984). The choice and use of a tool is determined not only by technological attraction, but also by many other factors such as information needs, and social, political and economic influences (Langrish, Gibbons, Evan & Jevsons, 1972). The impact of IT is, to some degree, subject to users’ control. Indeed, IT is sometimes subject to misuse and abuse (Xiao, 1990). This implies that a unilateral and determinist view on the relationships between IT and social or organizational change, whether human intention determinism or technological attraction determinism, is inappropriate. IT is, however, not an ordinary tool such as an axe or a spade. It is programmable and reproductive. Moreover, it can be a control tool because it processes and communicates information vital for decision making, organizing and controlling. Beniger (1986) argues that both information processing and communication are inseparable components of the control function, and thus society’s ability to maintain control will be directly proportional to the development of IT. IT may also be seen as a type of model. A model captures some features of what is modelled. By simplifying, it enables the builder or user to gain understanding. Computer-based systems simulate the processes of information production and communication. Knowledge-based systems, neural networks and other artificial intelligent (AI) systems try to simulate the human cognitive processes. By definition, any model has limitations. Some are deliberately imposed by the modeller to simplify complexity. Others result from limited resources and the modeller’s ability. IT as a model shares this characteristic. Monk (1989) summarizes four types of IT limitations—physical, non-computable information, unmanageable, and thus unacceptable IT, and the availability of theoretical knowledge. These limitations are not necessarily technological. For example, Weizenbaum

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(1984) argues that some issues in the debate on computers and people are neither technological nor mathematical, they are ethical. Since the builder must select features for inclusion in the model and users must decide the parameters to use and assign values to them, the model represents human purposes and judgement (in complex situations often political or cultural) (Weizenbaum, 1984). IT as a model also bears this characteristic. Some decisions on IT use may not be whether IT can or cannot do something, rather it is a question of whether the decision-maker is willing to use it. This is likely to be the case in using IT for external reporting. In summary, if IT has an impact on, say, CFR, the impact is likely to be constrained by social and political as well as technological limitations, and is likely to be subject to human judgement and intentions. Finally, IT is essentially information and a body of knowledge; ‘tools and machinery may be stored-up labour, but they are also, and more significantly, store-up information! . . . at the base of advanced technology is knowledge’ (Stonier 1983, p. 11). As information and knowledge, IT is accumulative and interrelated among its specific instances. This means that any new instance of IT is built on existing knowledge and technologies. Technological progress is essentially a process of knowledge absorption, application, recreation and growth. One implication is that IT impact should be cumulative. Hence, three issues need to be addressed: (1) Can IT impact be studied in isolation? If this is possible, the research must have a strategy as to whether to investigate impact at a macro, micro or a level in-between. (2) Is it possible to isolate the impact of a new generation from that of the old? This appears extremely difficult, if not impossible. (3) What time frame is appropriate for the study of IT impacts? There is a danger that IT potential may not have been exploited yet if the impact in a short period is investigated. If too long, a study runs into practical problems such as data availability. As information and knowledge, IT is context dependent. The use and exchange value of information and knowledge are partly determined by factors outside the information and knowledge sets (Monk, 1989). It is also true of IT. Therefore, in studying IT impact on CFR, the political, economic and organizational context must be taken into account. Finally, IT as information and knowledge can substitute for physical resources and flows in economic activities. IT can be used to replace manpower in information processing and communication. This provides a potential for lower cost, and higher efficiency. The Nature of Financial Information Although there is a growing demand for non-financial information, the main product of CFR is still financial. It is therefore necessary to examine the nature of financial information in order to understand CFR. Two approaches may be used.

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The first is to observe the role of financial information in economic activities. Three major roles of financial information for external users have been perceived (ICAS, 1988): assisting overall governance of corporations; allowing interested individuals and organizations to judge the performance of corporate management; and aiding decision-making by users. In an agency setting financial information plays a pre-contracting role (facilitating decision makers in selecting an action among alternatives), and a postcontracting role (enabling contracting between parties relating to a reporting entity) (Beaver, 1986). Thus financial information often means wealth either directly or indirectly. Financial information derived from different accounting methods is different and this directly represents different asset values, incomes, dividends and taxation expenses (Xiao, 1994). Moreover, the disclosure of financial information can have effects on the distribution or transfer of wealth among entities (Beaver, 1986). Besides, financial information also means power. One source of power is the ability to cope with uncertainty. Because information reduces uncertainty, it means an ability to control uncertainty. Financial information thus enables some individuals or units within and outside an organization to have more power. King et al. (1991) suggest that some dissatisfaction shown by internal users of financial information may be seen as politically motivated. An alternative approach is to examine the characteristics of financial information in relation to ownership and value. The ownership of financial information has never been made clear. Is the owner shareholders, the firm, managers, or regulatory bodies? In practice, it is management which decides what information to disclose, how and when, and which has the most access to financial information. Information economics identifies three characteristics of information regarding the ownership issue: information is essentially a ‘public good’, the effort needed to produce a set of information is the same no matter how many users consume it and the producer or seller is not deprived of its possession of information by trade, exchange or communication (Monk, 1989). However, these characteristics do not fit financial information well. First, only after it is disclosed does it become a public good; before, it is proprietary or private. Also, regulators can make it compulsory for companies to disclose only a subset of financial information. Further, although the provider will not be deprived of the information, the opportunities represented by it may be transferred to recipients. As to the value of financial information, the use value has been extensively discussed in terms of qualitative characteristics in the accounting literature (ASSC, 1975; FASB, 1980; IASC, 1989). However, financial information can hardly be treated as a commodity with exchange value because users enjoy it as a public good. They get it free after it is published without referring to the provider. The provider may benefit from disclosure, but the benefits are uncertain and not explicit. More importantly, because no

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economic measure is established for information, it is impossible to develop a practical price system. Therefore the exchange value is difficult to establish. In practice, corporations provide free financial information to external users. Two dilemmas are revealed from the description of financial information: while financial information is proprietary (at least before it is published), it is not clear who is its owner; and although financial information means wealth and power, it is not tradable and is not valued in exchange. These two issues complicate the nature of CFR. They provide a partial explanation for a later argument that the major issue of external reporting may not be how to supply financial information, but whether or not to provide some information. An implication is that IT impact on CFR may be complicated, economically or politically. The Nature of CFR CFR is a process of communicating information (mainly financial) about the resources and performances of a business entity which is useful in decision making and performance monitoring. There are several perspectives on CFR which need consideration. First, a difference can be made between the technical and non-technical system view. Technically, CFR may be seen as a set of methods and procedures, data processing and communication devices, and accountants as system operators. This view envisages that the supply of accounting information is largely determined by capacity, and hypothesizes that IT use will improve the supply of financial information (AAA, 1966) and IT will lead to the use of more sophisticated and mathematically complicated methods (McRae, 1964). In short, IT use would be a major determinant of financial disclosure and accounting choice. However, CFR also involves users with conflicting interests, sets of regulations, reporting strategies, accounting policies, and auditors. Thus the supply of financial information is unlikely to depend merely or mainly on system capacity. Instead financial disclosure is determined by a complex mixture of factors such as regulatory forces, labour and capital market forces, and costs associated with disclosure (Foster, 1986). Similarly, accounting choices are determined by regulations, industrial convention, economic consequences to management and the firm (Foster, 1986) and affected by gearing, size, and management compensation plans (Watts & Zimmerman, 1990). By taking a non-technical view of CFR, the essential issue of CFR, especially external reporting, would be what information is to be supplied to users. This means that the use of IT may produce more and better information, but it is not certain whether this information will reach certain users. Next, a distinction can be made between internal and external reporting. According to Lee (1987), the information needs of external users are similar to those of corporate management, except for reporting frequency and level

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of aggregation. Unlike external reporting, internal reporting is not subject to regulation and confidentiality poses fewer problems. However, this does not mean that internal reporting is a purely technical issue free from economic, political and other influences. In reality, management frequently has to settle for compromises in the key indicators used for internal reporting. There are also conflicts between senior management and divisional management. For example, Markus (1983) documents a case of political confrontations over the implementation of a new accounting system between group and divisional accountants. In addition, the ownership or control of information is a major source of power; being informed makes a difference. Finally, different accounting methods result in different performance measures influencing individuals’ economic interests, promotion and other sensitive matters. Therefore, an accounting choice in internal reporting represents a political process just as in external reporting. When contrasting internal and external reporting, the dual role of management should not be ignored. Management is the user internally, but a provider of information externally. This dual role is the root of many issues in CFR such as information asymmetry. Self-interested managers are often cited as one rationale for regulation (Beaver, 1986). Lee (1987), however, suggests that the interests of collective management and shareholders groupings may be close in terms of survival of the firm and its long-term health and progress. However, this does not deny information asymmetry between management and external users. This suggests that research should distinguish the impact of IT on internal and external reporting, and consider whether self-interest influences the impact of IT. In addition, CFR consists of both procedural and decisional systems (Ginzberg, 1980). At the low level are transaction systems where information processing is well structured and easily programmable. There is little uncertainty and few exceptions involved. At the high level, CFR involves formulating reporting strategies and policies, simulating accounting changes, and forecasting earnings and cash flows. Information processing here requires human judgement and knowledge, and is only semi-structured or even unstructured. An implication is that in the former, IT can easily substitute manual operations, while in the latter IT may only play a supporting role. Finally, the performance of CFR can be evaluated at three levels, efficiency, effectiveness and strategic significance. Efficiency means time and labour savings while producing the same financial information. Effectiveness represents an improvement to financial reporting by producing more and better information. Strategic significance involves long-term effect of CFR on users of financial information. For example, CFR can provide strategy-specific information to management and thus influences the formulation and implementation of business strategies, e.g. cost leadership, differentiation and focusing. In addition, financial information is an important factor determining and affecting share price. It is used to increase investor confidence, gain financing benefits from the financial market, promote public

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image, get participation by employees and strengthen business contacts (Hussey & Everitt, 1991). IT use is very likely to improve CFR efficiency and effectiveness, but the question remains as to the ability of IT to enhance CFR strategic significance. The discussion on the nature of CFR shows that it is not a purely technical phenomenon, rather it is a social, economic and political process. It follows that the use of IT in such a process also bears social, economic and political implications. However, IT is only one factor which plays a role in CFR. Its impact may be constrained by other factors and should not be overstated. Finally, because CFR consists of different dimensions, any research should take account that if IT has an impact, the impact on different dimensions is unlikely to be of similar magnitude.

TOWARD A CONTINGENCY FRAMEWORK Apart from raising methodological issues, the previous section brings up two major points which are particularly relevant to this paper: (1) A deterministic view of IT impact on CFR is not justifiable whether approached from the nature of IT (a combination of technological attraction and human intentions) or from the nature of CFR (economic, social and political as well as technological implications). This indicates that the evaluation of IT impact on CFR requires both technical and non-technical analysis. (2) Since IT impact is likely to be constrained by ethical, social, political, economic and technological limitations and since the impact of IT on different facets of CFR is unlikely to be the same, a theoretical framework is needed which is general yet flexible enough to enable the researcher to delineate the degree and pattern of impact. In search of a theory to use for this, a more substantial but relevant research area, IT and organizational change, requires investigation. No reliable generalizations about the relationships between IT and organizational change, however, have been established yet, largely resulting from the use of conflicting, narrow, inflexible and often extremist theoretical approaches. Markus & Robey (1988) distinguish three approaches which explain relationships between IT and organizational change: technological imperative, organizational imperative and emergent theories. Markus (1983) further distinguishes two variants of emergent theory: socio–technical system theory and organizational politics. These theories are conflicting. On one hand, technological imperative sees IT as an exogenous force which determines or strongly constrains the behaviour of individuals or organizations. On the other, organizational imperative assumes almost unlimited choices over technological options and almost unlimited control over the consequences. While these two imperative approaches start from extreme angles, and take a universalist view, emergent

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theories pursue a particularist approach. They hold that the use and consequences of IT emerge unpredictably from complex social or political interactions (Markus & Robey, 1988). In addition, each variant only focuses on one aspect, either social or political. Because of these, the emergent theories may have rather limited capability in guiding policy making in practice. Interesting work is, however, emerging on the relationship between IT and organizational structure, which takes a contingency perspective. For instance, Raymond, Pare´ & Bergeron (1993), investigating the relationship between organizational structure, IT use and organizational performance, conclude that, for small- and medium-sized firms, structural sophistication and IT sophistication are related irrespective of the contingent variables of organizational size and environmental uncertainty. However, IT and performance are only related when size, uncertainty and structure effects are removed. Similarly, Sabherwal & King (1992) identify the need for a contingency approach to the issues of strategic information system development. They consider context factors such as the industry environment (stability, information intensity), the organizational structure (centralization, formalization) and the state of the information systems function (maturity). While the development of such contingency models is interesting and to be welcomed, they are of restricted use here and judging from the criteria derived earlier, the approaches do not seem appropriate for evaluating the impact of IT on CFR. A contingency perspective is proposed. It is analogous to the contingency theory of organization (CTO) which attempts to explain structural and process differences among organizations and finds that environment, technology, size, strategy and culture are factors that shape organizations. In spite of criticism, it has been seen as a unifying and general framework which has occupied an important position in modern organization theories (Luthans & Stewart, 1977; Kast & Rosenzweig, 1985; Ford, Armandi & Heaton, 1988). It has three general principles: (1) there is no one best way to organize; (2) different ways to organize are not equally effective; and (3) the best way to organize depends on the nature of the environment to which the organization relates (Lawrence & Lorsch, 1967; Galbraith, 1973; Scott, 1987). The first challenges the universalist wisdom that general principles applicable to organizations in all times and places can be developed, while the other two challenge the particularist ‘know-nothing’ position that, given the complexity and variety of organizations, it is futile to search for any underlying principles to guide design. These principles are used to develop analogies for perspectives on the relationships between IT and CFR: (1) IT use does not have a universal effect on CFR in every organization or on every aspect of CFR; (2) the pattern and degree of IT impact on CFR differ among organizations; (3) the pattern and degree of the impact depend on CFR environment factors. These suggest that the impact of IT on different aspects of CFR varies, and

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the impact is conditional on environmental, organizational and managerial characteristics. Thus the proposed perspective requires an identification of contingent factors when investigating the relationship between IT and CFR. It is not intended to find a universal effect of IT use, but to determine the pattern and degree of IT use in different situations. The perspective so formulated is expected to be flexible, adaptive and general. It admits that IT may have an impact, but it does not follow the technological imperative’s view that IT is universally deterministic. Rather, IT impact is constrained and modified by other factors. It appreciates the importance of individual and organizational choice, but it differs from the organizational imperative in that the rational intentions of individuals and organizations cannot always determine the consequences of IT use. Unexpected and even undesirable results from IT use may occur. The perspective recognizes the conflicting side of individuals and organizations, but unlike the emergent theories it believes the possibility of predicting, to some extent, the impact of IT on CFR. One reason is that IT represents technological attraction as discussed. This provides incentives to use IT and meet people’s intentions and purposes. Therefore, people who use IT must have some understanding of the possible consequences of use. Also, as detailed above, some CFR aspects may be technically oriented while others more politically or socially complicated. So, it is possible to foresee that IT plays a different role in different aspects of CFR. Another reason lies in that contingent factors can be made known through organizational learning and research and the ability of organizations to predict the impact of IT can thus be enhanced. Apart from the disadvantage of a pessimistic view, the emergent theories suffer from narrow focus on either political issues or social issues. In contrast, the contingent perspective allows analysis of IT impact from different angles. The perspective involves three components: IT, CFR and contingent factors. IT may be seen to consist of three dimensions, that is, IT availability, future developments of IT, and IT use. This paper focuses on IT use. CFR may also be examined along several dimensions: components, output (internal and external reporting), performance in terms of efficiency, effectiveness and strategic significance, and level of systems (procedural or decisional systems). Contingent factors are variables differentiating the association between IT use and CFR and thus can be used to depict the pattern and degree of impact. They may be a business environment, organizational or managerial characteristic, and can be political, social, and economic as well as technological. The term ‘impact’ implies a causal relationship. However, a change to CFR may not be caused by IT use, yet IT can still play an important role. For instance, IT may enable a change of accounting method, but the change is caused by a change of regulation. However, although it may be extremely desirable to distinguish the different roles of IT, this is difficult if not impractical. This paper thus redefines ‘impact’ as IT-related CFR changes

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which includes both roles of IT (cause and facilitator) on the grounds that both are important. Moreover, taking a dynamic view, an association between IT use and CFR changes may be better seen as the result of some successive and cumulative interactions between IT use and CFR changes. On this basis, it could be argued that IT use is both the cause and the facilitator of the CFR changes. In an actual investigation, IT-related changes can be observed either by (1) questioning what changes are caused by IT use, (2) asking about the importance of IT in any changes or (3) examining the correlations between IT use and CFR changes. The first requires the isolation of IT impact if a change is caused by multiple factors, while the second requires a knowledge of all factors and their relative importance. Both are difficult to meet practically, hence the third approach is adopted here. A relationship between IT use and a change in CFR may be conditional upon one or more contingent factors. In other words, the association between IT use and a change in CFR may be strong at one level, but weak at another level of the contingent factor(s), or it may be positive at one level but negative at another of the contingent factor(s). Thus, a contingent factor may specify, clarify, or modify a relationship between the two original variables. By way of this, the pattern and degree of IT impact on CFR may be made clear. In addition, the impact may be better predicted because the contingent factors are made known. HYPOTHESIS DEVELOPMENT To use the framework, an important task is to search for contingent factors. For this, existing accounting knowledge such as information economics, agency theory, and positive accounting theory provide assistance. Information economics and agency theory are concerned with information asymmetry between managers and external users. Following this, user type can be seen as a contingent factor. Moreover, studies under agency theory and positive accounting theory attempt to find factors that affect financial disclosure and accounting policies, and size, listing and leverage are identified. Since IT is instrumental to financial reporting, it is possible that these also affect the impact of IT on CFR. Informed by these theories, a number of hypotheses are developed as an extension of the proposed perspective. Hypothesis 1: IT Use is Associated More with Internal Reporting Change (IRC) than with External Reporting Change (ERC) Information asymmetry between corporate managers and external users such as shareholders has long been a concern. According to information economics and agency theory, social benefits can arise from removing or reducing such asymmetry by increasing public disclosure of financial

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information. This has been seen as a major rationale for financial reporting and the regulation of financial reporting (Beaver, 1986). Given IT is instrumental to CFR, has its use reduced or increased asymmetry? Use of IT has improved internal reporting in terms of comprehensiveness, accuracy, timeliness and frequency (Mantle, 1983) and relevance (Banyard, 1982). Legitimately, management has full access to this improved information. However, this is not the case for external users, because, as discussed, the major problem in external reporting seems to be whether, when and how to disclose certain information. In the long run, IT use may benefit external users. For example, the use of IT may lead to more sophisticated computerized networks which allow more frequent and online reporting (ITG, 1989). Moreover, IT availability and IT use will increase the expectations of external users and regulators regarding CFR, resulting in increased requirements of disclosure or use of IT as evidenced by EDGAR implemented in the Securities and Exchange Commission (SEC) (Coffey, 1994). EDGAR requires listed companies to file financial reports electronically and when fully operational, this information will be available to anyone with an Internet connection. However, several barriers prevent external users from enjoying as many benefits as managers. Managers not only have to protect proprietary information, but are also able and have incentives to suppress some nonproprietary information, especially bad news (Dye, 1985). Moreover, while financial reporting is costly, an accepted price system for exchanging information does not exist. Therefore, managers have difficulty in identifying the benefits from a disclosure and, unless they foresee a benefit such that they believe the firm may be undervalued (Verrecchia, 1983), they are reluctant to disclose information beyond minimum requirements. Even if they are willing to share with external users the improved information obtained through IT use, the cost and complexity of the technology required to deliver it to a large number of external users is prohibitive. Consequently, improvements in internal reporting through greater use of IT are not likely to be incorporated on the same scale in external reporting and, as a result, not only is it likely that asymmetry exists, but it is likely to have been enlarged. Hypothesis 2: The Relationship Between IT Use and Internal Reporting Change (IRC) is Stronger in Small Companies than in Large Ones Company size can be seen as a proxy for the degree of complexity. The larger the organization, the greater its complexity, the greater the control and co-ordination needed, and the greater the volume of information that needs to be handled. It is likely that IT is used to cope with this complexity in large companies. Further, by implication, information systems are more complex in large companies than in small ones. Hence any change or improvement to existing systems tends to be more difficult than for smaller

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companies. Moreover, although large companies have more resources than small ones to invest in IT, this advantage may not be as significant as might be thought. The move of IT toward higher performance and low price may free smaller companies from the constraints of limited resources and thus a greater relative improvement in internal reporting may be obtained from IT. Finally, empirical evidence suggests that large companies are sceptical of the benefits of IT use (Carr, 1987). Consequently, it is expected that the relationship between IT use and IRC is stronger in small companies than in large. Hypothesis 3: The Relationship Between IT Use and External Reporting Change (ERC) is Stronger in Large Companies than in Small Ones Large firms disclose more extensive external information than small ones (Singhvi & Desai, 1971). Reasons include: large companies enjoy economy of scale in information production and the use of IT; in contrast, processing and communicating information is more costly for small firms. Large firms are financed more through financial markets, and more disclosure will increase financing benefits. Large companies are more closely scrutinized by the public and government agencies, and therefore greater and better disclosure may reduce public criticism and undesired pressure or intervention from the government. Small companies are likely to feel more than large ones that full disclosure could endanger their competitive position. Size, therefore, can be seen as affecting demand for information, intention to supply information, and capacity for processing and communicating. In an agency setting, if a company does not disclose sufficient information, a number of agency costs occurs. First, if potential investors have to obtain their own information they will seek compensation by discounting the price of the company’s security. Second, by adverse selection existing claim holders and potential investors may opt for other securities, resulting in the firm’s loss of investing opportunities or leaving the firm under-financed. Moreover, inadequate reporting may lead to qualified audit reports, or draw political attention. Since large companies depend more on external finance and tend to draw more political attention, potential agency costs are higher than smaller ones. According to Chow (1982), the amount of potential wealth transfer increases with firm size, thus the benefits of monitoring and bonding (including financial reporting) to the agent are positively related to firm size. On the other hand, many costs in establishing a monitoring or bonding mechanism appear to be fixed and once the mechanism is established, the marginal cost of operation is likely to decrease with firm size. For these reasons, and in view of the likely resistance to increasing external reporting discussed in Hypothesis 1, large companies are more likely than small ones to use IT to improve financial reporting to meet the greater demand for information. It is thus expected that the relationship between IT use and ERC is stronger in large companies than in small ones.

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Hypothesis 4: The Relationship Between IT Use and External Reporting Change (ERC) is Stronger in Listed Companies than in Unlisted Ones Listing status is found to be associated with the extent and quality of external disclosure (Singhvi & Desai, 1971). Two reasons have been suggested: first, listed firms are aware of financing benefits from adequate disclosure, and thus have more incentive to use IT to improve external reporting than unlisted ones; second, listed companies have to comply with stock exchange regulations, which means that minimum requirements are more stringent than for non-listed companies. From the perspective of agency theory, stock exchange listing is an externally institutionalized monitoring/bonding device (Hill & Jones, 1992). To comply with listing rules and additional reporting requirements, listed companies may incur monitoring or bonding costs, but this is overweighed by great capital liquidity and low financing cost arising from more extensive reporting. Further, listed companies have to compete for greater capital liquidity and lower capital cost on the financial market. This gives them an incentive to improve disclosure. The incentive also arises from the effect of adverse selection. Companies with high quality securities have to signal to the market, otherwise the market may undervalue them. Moreover, market regulators may promote IT use by either requiring listed companies to implement a type of IT or by directly implementing IT applications and requiring companies to use them. This is evidenced by EDGAR. For these reasons, it is predicted that the relationship between IT use and ERC is stronger in listed companies than in unlisted. Hypothesis 5: The Relationship Between IT Use and ERC is Conditional Upon Financial Reporting Strategy Gibbins, Richard & Waterhouse (1990) hypothesize that disclosure strategy is one factor influencing disclosure output. It is defined as a relatively stable preference for the way disclosure is managed, consisting of two dimensions: ritualism, a propensity towards uncritical adherence to prescribed disclosure norms such as rules and standards; and opportunism, a propensity to seek firm specific advantage in financial reporting. The disclosure strategy variable is used here, but its second dimension is thought of as taking two different directions—suppressing information versus disclosing additional information beyond minimum requirements. This amendment creates an ordinal variable with three levels: suppressing information, especially unfavourable; strictly complying with the minimum disclosure requirements; and reporting additional information where confidentiality allows. Companies with different strategies exhibit different reporting behaviour. As a result, the extent and quality of information reported are not the same. It is also unlikely that these different companies have the same attitudes and behaviour towards the use of IT in external reporting. Companies adopting a suppressing strategy may not be interested in using IT to improve

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external reporting. On the contrary, it is possible that they use IT to implement their suppressing strategies or even to deceive external users as evidenced in the Equity Funding Corporation of America case (Singleton, Flesher & Cassidy, 1993). Companies with a ritualism strategy may passively use IT for this purpose driven by legal or professional requirements. In contrast, those pursuing additional disclosure may actively seek IT-derived advantage and exploit its potential for improving external reporting, or even use IT as a strategic weapon in reinforcing a specific reporting strategy such as pre-emptive publication before rumours prevail. Therefore, it is likely that the relationship between IT use and ERC is stronger in companies with an informational strategy than those with other strategies. Hypothesis 6: The Relationship Between IT Use and ERC is Stronger in Companies with a Long-term Management Compensation Plan (MCP) than in those With a Short-term One A central issue in agency theory is moral hazard. An approach to this is the use of MCP which aim to induce management to act in the interests of stakeholders. Without such plans, managers (the agent) would adopt shortterm horizons and be risk averse in decision making for their own benefit. There are two types of MCP, short-term and long-term schemes (Smith & Watts, 1982). Bonus plans are predominantly short-term plans while share options are long-term. Two links between MCP and the relationship between IT use and CFR can be identified. First, the adoption of different incentive plans may influence manager’s decisions on IT use, especially when IT requires a great deal of resources. When an IT project is large, it is possible that the project will have negative cashflows in early years but positive earnings later and a positive overall net present value. Given that managers are naturally risk averse, they may not be keen on such an investment if no incentive plans exist or if a bonus plan is in use. However, the managers are more likely to accept such a project if a long-term compensation plan is adopted. Larcker (1983) obtained empirical results which support this. The second link concerns how the presence of different incentive plans may influence management decisions on financial reporting. Full disclosure will reduce the difference between market price and the intrinsic value of a security (Friend & Herman, 1964). In particular, when the firm is believed by the managers to be undervalued by the market, managers have incentives to disclose more information (Verrecchia, 1983). Moreover, an increase in financial disclosure can increase the liquidity of the company’s shares and reduce costs of capital by attracting increased demand from large investors (Diamond & Verrecchia, 1991). Therefore, managers who have more of a stake in the company will disclose more in order to maximize the value of the firm and realize their own benefits. Following this, the presence of a share option scheme should give management more incentive to disclose

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more and better information. Consequently, the relationships between IT use and ERC is expected to be stronger in companies with a long-term scheme. Hypothesis 7: The Relationship Between IT Use and ERC is Stronger in Companies with High Gearing than in those Without or With Low Gearing Companies with a loan, especially a large loan, tend to disclose to creditors more information in addition to formal reports, and this gives IT a role to play. It is argued in agency theory that, as the gearing ratio increases, managers have a greater incentive to transfer wealth from creditors to themselves and existing shareholders given the existence of information asymmetry (Fama & Miller, 1972; Jensen & Meckling, 1976). However, potential wealth transfer is positively related to residual loss since creditors would anticipate manager’s opportunistic activities and thus seek compensation by discounting the firm’s security. Therefore, if managers and shareholders agree not to exercise opportunistic behaviour, they would benefit from a higher security price and an increase in firm value because such agreements reduce the probability of suboptimal investments. Although managers and shareholders have to bear the costs of establishing and executing these contracts, the costs are relatively small compared with the residual loss. Financial reporting plays a central role in many debt covenants because accounting numbers are used and extensive disclosure is often required by creditors, thus financial reporting itself becoming a monitoring or bonding device. When gearing ratio is very high, the extent and frequency of financial disclosure reach a point where IT becomes essential.

CONCLUSIONS In light of research on IT impact on accounting, and drawing upon the nature of IT, financial information and CFR, this paper proposes a contingency framework for evaluating the impact of IT on CFR which assumes that the degree and pattern of this impact are conditioned upon contingent factors, and this impact on different aspects of CFR varies. The proposed framework is flexible and general. It is flexible because, unlike the universalist perspectives, it does not take an extremist or determinist view. The universalist perspectives either assume that IT has unlimited power (IT imperative), or postulate that organizational forces have unlimited control over IT use (organizational imperative). The proposed framework admits the power of IT which attracts people to use it, but its use is, to some extent, subject to human judgement and control. While admitting that people and organizations have some control over IT use, it holds that the consequences of IT use may not always be as expected. It is

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general since to some extent it can accommodate both the IT and organizational imperative views. From a contingency perspective, IT may have a greater impact on some aspects of CFR such as procedural systems, efficiency, effectiveness and internal reporting than on other aspects such as decisional systems, strategic significance and external reporting. Thus the contingency perspective tends to be consistent with the IT imperative view in the former aspects, and with the organizational imperative view in the later aspects. The particularist views maintain that the consequences of IT use are unpredictable, because of the influence of social factors (social–technical systems theory) or political factors (organizational politics). While also considering the influence from various factors, the proposed framework holds that the consequences of IT use are, to some extent, predictable, although this requires a knowledge of key contingent factors. Moreover, while the two emergent theories focus either on social or political factors, the contingency perspective allows an examination of different types of factors in a single study. Here, the factors considered (user type, listing status, size, leverage, management incentive plan, financial reporting strategy) represent political, economic and social/cultural influences. Therefore, compared with emergent theories, the proposed framework is more general, and offers flexibility in selecting factors. Since the impact of IT on CFR is conditional, the discovery of contingent factors that specify the degree or pattern of IT impact becomes the focus. This provides an interface to information economics, agency theory and positive accounting theory. The contingent factors hypothesized are drawn from these on the assumption that since IT is instrumental to CFR, the factors that affect financial disclosure and accounting choice must also affect the relationship between IT use and CFR. These have also been used as a basis of reasoning in developing the hypotheses. This use of existing accounting knowledge overcomes a limitation of previous evaluative studies. The contingency perspective is analytical, as it allows a breakdown of the relationship between the two original variables into component associations. This is achieved in two ways. One is by examining the role of IT in different aspects of CFR which enables the specification of the relative importance of IT. The first hypothesis is illustrative. An advantage here is that a separate investigation into the relationship between IT use and IRC and that between IT use and ERC brings IT use into the context of information asymmetry between managers and external users. If the hypothesis is supported, an implication is that IT use plays a role in the exacerbation of information asymmetry and that IT in accounting needs monitoring and controlling at a societal level, thus raising the question of the role of financial reporting regulators in the use of IT in accounting. The second is by identifying contingent factors which specify the pattern and degree of impact of IT on CFR. This encourages a contingent analysis based on sub-samples, as opposed to an overall analysis based on the whole

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sample, leading to the specification of the conditions under which IT has played a role in CFR. The hypotheses other than the first illustrate this. Such an analysis may demonstrate that IT use is more important in some sub-samples than in others, and has no impact at all on IRC or ERC in still others. Such an analytical approach enhances the understanding and ability to predict the impact of IT. If hypotheses 3 to 7 are supported, one would not generally predict that IT has or has not an impact on external reporting without distinguishing the levels of the contingent factors. Therefore if regulators are to monitor and control IT use in accounting, this line of enquiry would be of use to them. The contingency perspective is also operational. First, it can be formulated into a specific and testable hypothesis, once a contingent factor is determined. Next, the contingency framework is statistically viable. Depending upon the type of variable which is involved, well-accepted methods such as contingency table analysis, correlation analysis, and regression can be used. The contingency perspective is proposed here for the evaluation of the impact of IT on CFR. There is no reason, however, why it cannot be applied in the study of the impact of IT on other aspects of accounting. The assumption that the impact of IT is conditional is widely applicable. For example, it could be hypothesized that the impact of IT on accounting organization (centralized or decentralized, independent or absorbed into a larger DP function) is conditional upon factors such as size, culture, managerial style, and organizational structure. Similarly, it could be hypothesized that the impact of IT upon individual accountants (substituted, endangered, de-skilled, bewildered, helped, or enriched) is conditional upon age, education and position. The proposed framework may be evaluated further with reference to criticisms of the contingency theory of organization, since it is developed analogously from it. Schoonhoven (1981) points out that CTO lacks theoretical clarity in presenting the relationship between structure and contingencies. Its followers often fail to make explicit interactions between contingencies and structure, and thus fail to specify a form of interaction such as multiplicative or matching that is studied. Analytically, linear and monotonic relationships between contingent factors and the original variables (structure and effectiveness) are often assumed unquestioningly. Child (1972) argues that CTO underplays the significance of choice in structuring organizations and neglects the importance of internal consistency of organizational design. Miller (1981) criticizes its failure to incorporate the equifinality property of open systems, meaning many ways exist for the organization to succeed in a given environment. While these critics attempt to improve CTO, Wood (1980) proposes a break away from it because of: its problematic conception of change (unproblematic and progressive), politics (a matter of gaining acceptance of change), and power (residing in knowledge and skill); its deterministic view which renders organizational choice redundant; its seeing organizations as structured systems managed

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by a homogeneous team; and its treatment of social scientists as, instead of being informants, both theorists and promoters of new ideas and participants in organizational change. Some of these problems have been overcome to various degrees. Strategy is now treated as an important contingency; internal consistency is considered along with external factors; three concepts of ‘fit’ have been distinguished (Drazin & Van De Ven, 1985); two- or three-way interactions are investigated; and non-monotonic assumptions can be found. Despite these developments, CTO still faces many charges such as the oversimple conceptualization of organizational effectiveness, environment and organizational fit (Tosi & Slocum, 1984); the problematic assumption of linear relationships, a static perspective of adaptation, and use of static models built upon cross-sectional studies, use of inconsistent units of analysis, definitions of effectiveness, structures and contingent factors (Zeithaml, Varadarajan & Zeithaml, 1988); and a failure to examine contingent factors in a collective manner (Tayeb, 1988). A strength of the proposed framework is that it encourages the segmentation of the sample into sub-samples according to the specified contingent factors and examination of contingent relationships in sub-samples. This eludes the much criticized linear assumption often made in CTO between contingent factors and the original variables. Also, the framework specifies a multiplicative form of the interaction between a contingent factor and the two original variables (IT use and IRC or ERC), thus avoiding the confusion between alternative function forms. Finally, non-monotonic assumptions are recognized in hypotheses 2, 3, 4, 5, 6 and 7. However, danger exists that the proposed framework may suffer from some of the problems of CTO. First, if data about the contingent factors (or most of them) are nominal or ordinal, not interval or ratio, it would be difficult to examine them in a collective manner and thus their combined effect cannot be discerned. This is because more sophisticated techniques such as regression or partial correlation analysis which enable the examination of contingent factors in a collective manner are not applicable to nominal and ordinal data. Second, if cross-sectional investigation is undertaken, then only a static test of the proposed perspective can be obtained. To test fully the framework, a longitudinal or anthropologically anchored approaches may be needed, although a robust theory should withstand empirical investigation from either (Gordon & Narayanan, 1984). Therefore, a hybrid research design is more appropriate. Finally, it is possible that some of the contingent factors identified are correlated, and thus control of this interdependence should be exercised. References AAA (1966). A Statement of Basic Accounting Theory, Sarasota, American Accounting Association.

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