Term Paper on "Use of Technology in Finance"

Term Paper 11 pages (3238 words) Sources: 6

[EXCERPT] . . . .

investing in it

The Use of Technology in Finance

Effects of investing in Information Technology

The wealth effects of investing in information technology)

The study done by Jory and others (2010) examines the reaction of investors to announcements of new information technology or improved existing information technology by companies as a response to the requirements of Section 404 of the Sarbanes-Oxley Act of 2002. This section of the Sarbanes-Oxley Act of 2002, commonly referred to as SOX 404, demands that auditors attest to, and report on, the effectiveness and assessment of the management of the company's internal control systems. This Act was passed due to the increasing number of accounting scandals. The overall reaction was found by measuring several particular effects and reactions. First the short-term stock market reaction was evaluated by measuring the effect of the announcement on Information Technology expenditure related to SOX 404. This was followed by the evaluation of the cross-sectional variation in market reaction, as an internal control variable, in which the market reaction of a firm was related to the control deficiency under Section 404. This also included the investigation of the effect of severity of control deficiency on the market reaction. Firms that had control deficiency, significant deficiency, and material weakness at the time the firm announced SOX-related Information Technology investments were identified. The third aspect also dealt with the cross-sectional variation in market reaction but as a company's risk where four proxies for a company's risk were derived which were the bid-ask spread, the number of analysts following the firm, the dispersion in analysts' earnings forecast, and the firm's beta. Lastly the same cross-sectional variation in market reaction was evaluated with regard to quality of financial reporting.

The Information Technology decisions of companies were put into serious focus by the SOX 404 compliance since it led many firms into implementing new Information Technology to improve their internal controls while others just upgraded their existing Information Technology. This meant that companies were moving from the basic spreadsheets and manual processes to software tools that would assist them in better management of the auditing process and correction of errors. In order to undertake all these changes a lot of investment is required and the article addresses the issue of whether the benefits are more than the related investment. One of the major effects of SOX 404 has been causing a number of firms to remain or go private, additionally some foreign companies who were interested in listing in the U.S.A. have decided to stay offshore. However, the general perception of investors on Information Technology investment is positive and they consider it to be value-enhancing thus the SOX 404-related Information Technology investment is also expected to create a similar positive investor perception.

There is further indication that the more a company devotes resources towards the improvement and evaluation of SOX 404-related Information Technology controls, the more the companies begin to have confidence in their control structure this leads to more investor confidence with regard to the reliability of financial reporting to the market place. This could be an indication that the benefits of SOX 404-related information technology investment are much more beneficial than the costs. Such investment could also be considered to be more beneficial since it achieves the overall goals of improving financial reporting, improving fraud detection and prevention, and providing investors with greater assurance with regard to the accuracy of financial reports. The overall finding of this research is that the response of the market to companies' SOX-related information technology investments is positive and favorable.

The position taken by Jory and others (2010) is that investment in information technology is beneficial to a company but on certain conditions which include strong internal control and the risk levels of the company. It is important that the study focused on how the position of the company can affect the benefits derived from investment in information technology, however, basing the success on the reaction of the stock market alone is a big set back as this leads to a number of assumptions. There are many ways of measuring the business value of investment in information technology, as well, there are many factors that affect the success of such an investment. It is therefore appropriate that when the effects of investing in information technology are to be studied then a wider scope should be covered in order to bring all these factors on board.

There is no doubt that introduction or improvement of information technology has benefits can be considered to be right to the extent of the general view of the advantages of technology. There are benefits that are associated with information technology such as the ability of processing large amounts of information while at the same time presenting the information to the parties concerned in a clear and concise manner. Whenever a company implements any information technology there are a number of benefit anticipations such as productivity improving, profit performance becoming better, and increased degree of accuracy of processing information. There is also a general improvement on the sharing of information among the stakeholders. Apart from the general benefits information technology brings to the company the finance department has particular benefits that it derives, through improvements in information technology company finance officers are able to interweave their financial data with economic data concurrently. This will help them understand and explain the performance of the company (Roberts and Baker, 2010). An improvement in information technology also benefits accountants since they are able to make real time comparison of actual and budgeted results for any account. This is facilitated by the fact that both internal and external auditors can place software agents on the Web that study the auditing concerns and processes of other companies and at the same time carrying out a continuous audit of all internal corporate transactions. In addition to comparing budgets, accountants can also query the entire internet to benchmark the processes of other companies or search for new cost advantages.

The comparison of actual and budgeted results is very important to the company especially when enhanced by external data since the only way a company can know if it is doing well is by comparing itself with other companies. Gill (2011) also mentions the benefits of 'cloud computing' which is also an information technology to include increased speed of deployment, streamlining of business processes, low capital expenditure, lower total cost of ownership, easy upgrades, and the possibility of accessing data anytime, anywhere. All these benefits will lead to increased productivity of a company and more financial gains to the company in the long run. Although there is a general improvement in the productivity of the company there can be some loss experienced during the "learning curve" but the ultimate benefits outweigh the loss at this stage.

There are features of the current information technology that make it have the benefits associated to it. It has to be appreciated that computers have improved over the decades in terms of performance and size and the growing technology has enabled the linking of personal computers across wide geographic areas which result into networks. The resulting networks play a significant role in the performance of a company providing benefits such as data integrity and enhanced productivity. It is possible to share a wider range of information in different forms through a broadband network and even videoconferencing is possible through these networks. The concurrent advancements in both hardware and software have enabled creation of multimedia "documents" which can be easily shared via the internal network, or the internet. All these features of the current information technology work together to form a system that when applied in a company's financial controls yields a lot of benefits.

However, for information technology to have value in the business environment then it has to be related to a work process, there must be people who are competent in using information technology, and the informational purpose must be business-focused. There are high chances that a lot of time is spent in measuring the wrong thing, what should be measured is the business value of information technology management, not information technology itself. It is very common to find the business value of information technology being secondary after the process re-engineering that comes before any information technology implementation. It should be understood that re-engineering is just a pre-requisite for information technology and when the business value is not considered then the result will be a more efficient version of the information technology that existed before thus if it was poor then what the company gets is a poorer system that performs faster which is dangerous. It is therefore necessary to measure the contribution of information technology to business in the right way. There are a number of weaknesses associated with measurement approaches and they include partial investigation of cost and risk, some costs such as human, organizational and management not being accounted for, using budgeting methods that hide costs, exclusion of intangible… READ MORE

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