Big Tech, Cloud Computing, and Accounting

Abstract

Modern firms routinely store and process their financial accounting data using cloud computing and other third-party enterprise technologies. This practice puts the integrity of the financial statements at risk, and accounting standard setters provide guidance for a special type of audit that evaluates this risk. This study provides some of the first large-sample evidence that quantifies the market for these audits. Using hand-collected data from public companies, I find that 29 percent of firms in the S&P 500 receive these audits. I also find that a firm's business-model exposure to providing technology services is predictive of its decision to receive these audits, and the scope of these audits includes customer-relevant internal controls over data security and processing integrity. These audits are also associated with a large increase in audit-related fees that is highly economically significant. These findings highlight the economic significance of non-financial audits in our attempts to understand the audit fee environment, and support theory that predicts that financial statement audits may not meet the needs of all stakeholders.

Keywords: Audit; big data; corporate governance; internal control; technology

JEL Classification: M40, M49, O33