Does Greater Access to Employees with Information Technology Capability Improve Financial Reporting Quality?

Abstract

While information technology (IT) plays an essential role in financial reporting, many companies today lack sufficient human capabilities to utilize IT competently. We examine the association between a firm’s access to IT-capable labor and financial reporting quality (FRQ). We proxy for access to IT-capable labor using workforce measures in the metropolitan statistical area (MSA) where the firm operates, including (1) the number of IT-related college degrees relative to the total active workforce, (2) the level of education of IT graduates, (3) the income level of IT graduates, and (4) a composite measure. We find that firms in MSAs with a higher IT-competent labor force are associated with fewer financial reporting misstatements and internal control issues. This study contributes to the emerging literature stream examining the influence of geographic labor characteristics on firm-level outcomes and the research on the impact of IT capability on financial reporting processes. We also inform the current movement of integrating IT knowledge into the education curriculum.

Keywords: information technology, financial reporting quality, IT capability, employee IT competency