Title: Internal Control Framework of a Compliant ERP System

Transcription

1 Title: Internal Control Framework of a Compliant ERP System Author: Jing Fan Pengzhu Zhang David C. Yen PII: S (13) DOI: Reference: INFMAN 2675 To appear in: INFMAN Received date: Revised date: Accepted date: Please cite this article as: J. Fan, P. Zhang, D.C. Yen, Internal Control Framework of a Compliant ERP System, Information & Management (2013), This is a PDF file of an unedited manuscript that has been accepted for publication. As a service to our customers we are providing this early version of the manuscript. The manuscript will undergo copyediting, typesetting, and review of the resulting proof before it is published in its final form. Please note that during the production process errors may be discovered which could affect the content, and all legal disclaimers that apply to the journal pertain.

2 Internal Control Framework of a Compliant ERP System Abstract After the occurrence of numerous worldwide financial scandals, the importance of related issues such as internal control and information security has greatly increased. An internal control framework that can be applied within an enterprise resource planning (ERP) system is developed in this study. A literature review is first conducted to examine the necessary forms of internal control in information technology (IT) systems. The control criteria for the establishment of the internal control framework are then constructed. A case study is conducted to verify the feasibility of the established framework. This study proposes a 12- dimensional framework with 37 control items aimed at helping auditors perform effective audits by inspecting essential internal control points in ERP systems. The proposed framework allows companies to enhance IT audit efficiency and mitigates control risk. Moreover, companies that refer to this framework and consider the limitations of their own IT management can establish a more robust IT management mechanism. Keywords: internal control framework, enterprise resource planning, IT control Page 1 of 44

3 1. Introduction The popularity of information technology (IT) applications has increased reliance on computers in processing business transactions. Companies adopt IT systems to improve their operations. The surveys on the collaborative operations of IT systems conducted by the Market Intelligence and Consulting Institute [42] indicate that enterprise resource planning (ERP) system is the most adopted IT system among large companies. Given that ERP is a popular and all-encompassing information system utilized by many organizations and owing to the increased consideration of the risks associated with IT, information system security and internal control related to information systems have greatly increased [17, 45, 63, 75]. The Committee of Sponsoring Organizations of the Treadway Commission (COSO) defines internal control as a process, effected by an entity s board, management, and other personnel, designed to provide reasonable assurance regarding the achievement of objectives such as effectiveness and efficiency of operation, reliability of financial reporting, and compliance with regulation [15]. The internal control related to information systems is commonly referred to as IT control, which is composed of controls (i.e. policies and procedures) over organizational IT infrastructure and systems [47, 63]. IT control consists of general and application controls. General controls refer to these relevant controls designed to ensure an entity s control environment is well managed, and applied to all sizes of systems ranging from large mainframe systems to client/server systems and to desktop and/or laptop computer systems. Whereas application controls include input, processing, and output control based on the flow of data processing. In other words, application controls focused on the accuracy, completeness, validity, and authorization of the data captured, entered in the system, processed, stored, transmitted to other systems, and reported [54]. Further, general controls can be used to support the application controls and hence, allow information system be smoothly operated [22]. Given that financial reporting in many entities is based on information systems such as ERP systems, IT controls help entities achieve the objective of internal control. Similar to information security, IT controls can also Page 2 of 44

4 manage and protect information and information systems from unauthorized access, use, disclosure, disruption, modification, or destruction [68]. An attack on information generally leads to theft of confidential data, financial fraud, incapacitated web server, and corrupted operation data [27], which all influence the accuracy and reliability of financial data derived from the information system [75]. If entities fail to establish proper information security, they cannot guarantee the accuracy and reliability of financial data [51]. ERP built-in control features may prove to create a positive impact on the effectiveness of internal controls over financial reporting. However, ERP does not necessarily safeguard against some deliberated systems manipulations, for example, a few of the control features might not be activated in a timely manner on the implementation stage [45]. Further, in order to manipulate the date for performing the earning management, top managers may attempt to override some control features [6]. Following a number of reported business scandals, investors are beginning to question the accuracy of financial reports, including those generated by major companies in the world. In fact, the confidence of investors in the accuracy of financial reports and the shared holding positions of large companies has collapsed over the recent years [56]. Durfee [18] emphasizes that the announcement of material weakness in the internal control system may result in a drop in stock prices, increase in share volume, and loss of chief financial positions. Goel and Shawky [26] also indicate that announcements of security breaches would decrease the market share of firms. Conversely, effective internal control can help firms achieve their expected financial goals, maintain precise records of daily transactions, and produce accurate financial statements [20]. The accuracy and reliability of data within the ERP system are critical to ensure the transparency of the company s situation at all times, help rebuild investor confidence, and ensure low cost of capital [3]. Software vendors establish built-in control in ERP systems [45]. Companies also have an internal control framework in their ERP systems. Management is required to establish the framework, especially when a company is publicly listed. Companies constantly audit the Page 3 of 44

5 effectiveness of the ERP system s internal control. Thus, an increasing number of companies have started to focus on the implementation of effective controls in their ERP systems while simultaneously providing the management and external auditor a suitable framework to assess the ERP system s internal control. COSO released a report entitled Internal Control- Integrated Framework [15] in 1992 in an attempt to illustrate a systematic framework for internal control. However, the report failed to list supplemental criteria in the implementation and assessment of IT controls [49]. Referring to specific control items would allow the management and auditor to execute IT control procedures [29]. However, IT control procedures not only consider the environment within the entity but also the control related to the external environment [66]. In addition, given the minimal compliance guidance in the use of IT sets by the government, the interpretation of the scope and nature of the IT environment is inconsistent [8]. These limitations increase the difficulty of compliance. Despite the importance of deploying proper internal control frameworks to fully develop the effectiveness of the ERP system, only a few academic studies have assessed this issue. Accordingly, this study derived the main research question, that is, what are the types of internal control that must be considered when auditing an ERP system? The primary objective of this study is to develop a preliminary internal control framework for application in an ERP system. 2. Research Background The growing awareness of IT s role in managing knowledge derived from information systems has caused the production of accurate and relevant information to become the focus of studies on information systems such as accounting information systems (AIS) and management information systems (MIS) [76]. IT governance has been discussed recently and has gained attention; IT governance is used to describe how those persons entrusted with governance of an entity will consider IT in this supervision, monitoring, control, and direction of the entity [32]. Well-defined controls are considered an imperative and necessary part of IT governance. This study attempts to establish good internal control standards for ERP systems by proposing an internal control framework for such systems. Three subtopics are discussed in this section. The first subsection describes the system security and internal Page 4 of 44

6 controls in the ERP system. The second subsection introduces the audit and inspection challenges associated with the ERP system. The third subsection presents and discusses the internal control framework. 2.1 System security and internal controls in the ERP system An increasing number of firms depend on ERP to address operational transactions. Therefore, information system security must be emphasized, especially in financial transactions [70, 73]. Walters [75] states that many information system threats, such as unauthorized access and system vulnerability attacks, influence the accuracy and reliability of financial data derived from information systems. Information security protects and controls IT resources and ensures the accuracy and reliability of information [1]. Van de Riet et al. [69] noted a number of security aspects associated with an ERP system; these aspects include security policy, user authentication, authorization, time restriction, log and trace, and database security. Information security control maintains the reliability of the information system resource and the availability and integrity of financial data. Thus, information security control is closely linked with information security and internal controls. After the occurrence of numerous worldwide financial scandals, company management teams and auditors are now required to take responsibility for their respective financial reports. The effectiveness of internal control has been emphasized in this decade [52]. If firms lack the proper level and type of information security, they cannot ensure the effectiveness of their internal controls and the integrity of their financial data [51]. Thus, identifying the necessary control-related considerations in an ERP system is an important initial task for management and auditors. 2.2 Audit and inspection challenges in the ERP system The introduction of a new information system in a company may generate a risk different from that initially associated with the legacy framework. The risks that accompany new framework operations may not be similar to those of the original system [50]. Reengineering of the business process and organizational changes brought about by the introduction of a new system may also lead to the changes in the control requirements of a company in terms of Page 5 of 44

7 ERP [11]. Problems frequently associated with the ERP system are generally contained. Such issues include business interruption, process interdependency, network security, database security, application security, and overall internal controls [31]. Therefore, many key aspects in the risk control environment must be considered [56]. Glover et al. [25] suggest that internal auditors consider the relevant risks and controls required for system planning based on knowledge of risk management and the internal risks present in the company during the introduction of the ERP system. Auditors and inspectors should first understand the basic architecture of the ERP system to effectively exert internal control over the ERP system [2, 9]. In the comprehensive application of the IT environment, owning the control framework can help auditors evaluate the effectiveness of IT control and decide on an auditing strategy and program. The control framework can also enhance the efficiency of IT control evaluation and mitigate the audit risk for auditors [29]. 2.3 Internal control framework The management and auditors must follow a suitable and holistic internal control framework to ensure the effectiveness of internal control in a firm. COSO released a report entitled Internal Control-Integrated Framework and recommended that this report be utilized by companies, auditors, regulating agencies, and educational institutions [15]. The conceptual model of the report indicates that internal control objectives require five components of control, namely, the control environment, risk assessment, control activities, information and communication, and monitoring. However, the framework provided by COSO focuses on high-level guidance of internal controls and does not provide the detailed control objectives that auditors require in the design of audit tests [49]. Moreover, the framework does not address the specific risks and complexities of IT [14]. An organization and its auditor require a comprehensive framework to adapt properly to the current IT auditing environment and to comply with regulations [66]. Transactions involving information systems require particular control standards and criteria because IT utilization presents difficulties in inspecting the audit trails of business operations. The computerization of business transactions leads to the digitization of audit Page 6 of 44

8 evidence, resulting in difficulties in following audit trails [41]. Thus, IT internal control usually includes the following procedures: (1) general controls, which refers to the relevant control measures associated with EDP; and (2) application controls or the division of input, processing, and output controls based on the flow of data processing. In this digital age, the absence of information security in a certain company implies that the entire company is built on a fragile foundation such that it cannot survive any related internal control tests [4]. Information systems in enterprises require many internal controls owing to the pervasive implementation of IT and the need to minimize problems. The complexity of modern systems can overwhelm auditors and the management if no appropriate guidance is provided [66]. Hence, auditors and the management should increase their understanding of the IT environment and related IT processes and controls because they must perform control procedures periodically [44, 47]. Given that the two control types utilized at present cannot effectively or completely regulate the robustness of an internal control framework especially when incorporated in present information systems, numerous institutions have established their own sets of criteria for information security. A series of standards and criteria such as the British Standard (BS7799) and the Control Objectives for Information and Related Technology (COBIT) is employed by organizations. COBIT complements the COSO enterprise framework in terms of assessing internal control and balanced risks in IT-intensive environments [33, 53]. Huang et al. [29] established an IT control evaluation model that includes control objectives. Referring to specific control items would allow the management and auditor to execute control procedures. However, despite the importance of deploying proper internal control frameworks, only a few academic studies have been conducted to fully develop the effectiveness of the ERP system. The present study aims to develop a preliminary internal control framework for application in ERP systems to bridge such gap. 3. Research methodology and design The research flow presented in this study utilized a theoretical strategy based on the V structure developed by Gowin [48] (Figure 1). The interactions between the two sides of the Page 7 of 44

9 structure (i.e. theoretical and methodological) merge relevant concepts and methods to achieve the proposed research goals [48]. Following the procedures listed on the theoretical side, the items related to IT control were summarized by studying the previous research. A literature review is thus conducted prior to the development of an internal control framework for ERP systems. To this end, two steps were performed in the literature review and they are collecting literature from the related sources and conducting coding procedures. In specific, relevant literature was gathered from the following sources. (1) IT controls for the internal use of companies. The data gathered are expected to be these within the scope of the internal use of companies and can be compiled with the current internal control bylaws of corporate information systems; (2) Information security organization bylaw. This study refers to the regulations and criteria of COBIT and BS7799 in particular and includes all information systems. Both references are important as they have been adopted by many companies worldwide [66]; and (3) Academic literature Insert Figure 1 here Upon the completion of the initially constructed theoretical model and prior to conducting the case study, the control items were established to meet the requirements needed in the application of the model to the ERP system. In fact, expert questionnaires were administered in this process. The main purpose of utilizing the expert questionnaires is to ensure and enhance the content validity of each of the measurement constructs and to bridge the gap between the presented literature for application and these in actual practice. The measurement constructs and item indicators were screened separately to determine the internal control issues prevalent in the ERP system as well as to enhance the quality of the Page 8 of 44

10 examination process and gain deeper insights. Following the procedures outlined on the practical side, an empirical case study was then conducted to investigate the feasibility of the proposed framework derived from literature review and the questionnaires. The case study included how and why questions [79] and a pre-identified company was selected for the case study. In addition, the case study included the steps related to design, preparation, collection, analysis, and sharing [79]. Not only the case design was identified in the design step, but also the unit of case study was described in detail in this step. 4. Construction of the preliminary framework for the internal controls of the ERP system The Science Direct database was utilized to search for academic literature. The main criteria for this search may include the following items. (1) Keywords or abstract sections must have the words information security or internal control ; (2) Literature must be related to information field; and (3) Studies should be published within 2003 to 2007 since numerous financial scandals emerged worldwide were mainly occurred after 2002 and the issue of internal control was happened during this aforementioned period. Consequently, several regulations which requested the management to assess their own enterprise internal control were proposed, and auditors were also asked to determine whether their client s internal control assessment report was adequate. Form the above discussion, the studies collected in this research are limited to this aforementioned period to investigate what have been discussed or explored during this specific time window. Conceptualized results from 30 relevant publications were collected based on the abovementioned criteria. The collected results are shown in Table 1. A detailed analysis was also performed to present a complete and consistent list of internal control items for ERP. The preliminary model was constructed based on the literature review. The entire process was roughly divided into three steps as follows: (1) open coding, (2) axial coding, and (3) Page 9 of 44

11 selective coding Insert Table 1 here Open coding Open coding was performed for the literature contents that satisfied the criteria mentioned above. Section extraction was performed, and the sections identified as relevant to the internal controls of the information operations or those that obviously indicate the components of the IT control of the information operations are coded. Coding was conducted to classify the studies from A to C. The codes derived from IT control for the internal use of companies, information security organization bylaws, and academic literature were classified as A, B, and C, respectively. For example, C Company Computerized Information System ICE includes a section that addresses internal regulations. More specifically, this section states, going online requires test reports or passing of tests. This description can thus be conceptualized and coded into three factors (i.e., A216 whether test documents exist, A217 whether independent test environments exist, or A218 whether they have been verified by users). A total of 670 concepts were derived by this process. Accurate and complex interpretations were established as certain phenomena. For instance, codes A78, A108, A114, A115, A177, A192, A252, B15, B16, B17, B31, B46, B104, B154, B162, C40, C61, C87, C114, C158, C170, and C219 describe anomalies in the information system, how the information department is contacted and informed, how the information department rules out anomalies, and how information security incidents are addressed. Thus, these codes (concepts) were grouped in the domain of whether procedures exist to report disasters. The other concepts were translated into domains according to the same rule; 66 domains were established as internal control key issues based on the 670 concepts determined in the open coding process. 4.2 Axial coding Axial coding is usually conducted after open coding. This stage aims to recompose the Page 10 of 44

12 distributed data into new methods such that the classifications and sub-classifications become related to one another. The 66 domains of the coded entries were further classified into dimensions. For example, the domains whether relevant control procedures exist regarding system outsourcing and whether contracts are signed for system outsourcing are related to the outsourcing operation control and are imperative in managing system outsourcing for an organization. Therefore, these domains were classified into the dimension of control of outsourced operations. The results of axial coding are summarized in Table Insert Table 2 here Selective coding Axial coding consolidates complex data and is the foundation of selective coding. Selective coding is conducted to explain a selected core category systematically, verify the relationship of the main and other classifications, and fill the gap for supplements or developments required for individual classifications [64]. Based on the internal controls and the analysis of relevant literature, 66 key domains that influence the internal control of information systems were identified. The domains integrated through axial coding were re-classified as single key domains in selective coding. For example, the domains whether anti-virus measures are used and whether firewalls are used, were merged into whether information equipment is protected with security measures given that both are related to the security measures of the information equipment. Subsequently, 51 key domains were established. These domains function as internal control items. 4.4 Expert Questionnaires Upon the construction of the preliminary internal control items based on literature, the methodology and validation process developed by Lawshe [37] was adopted. The adoption of this methodology and validation process enabled the collection of opinions from experts with Page 11 of 44

13 extensive experience in the establishment, maintenance, and auditing processes of the ERP system. Questionnaires were distributed to gather the opinions from experts who are responsible for the corporate functions (including internal audit and information), handle external audits (accounting firms), and work in some partner companies regarding the introduction of an ERP system. The backgrounds of the participating experts are shown in Table 3. The control dimensions and items were screened to determine those suitable for the ERP system. Both theoretical and actual application are expected to increase the validity, extent, and practicality of this study, thereby achieving the research purpose of constructing internal control in an ERP system Insert Table 3 here The questionnaires utilized in this study measures the opinions of the respondents based on an ordinal scale of 5 as follows: very important (5), important (4), ordinary (3), unimportant (2), and very unimportant (1). Each dimension is semi-open so that the respondents can provide relevant feedback on the key items related to internal control in the ERP system. A total of 18 experts responded to the questionnaires. Following the methodology and validation process proposed by Lawshe [37], content validity ratio (CVR) can be calculated as CVR = (n-n/2)/(n/2) where n represents the number of times that experts categorized the items as either very important or important and N represents the total number of experts. The value of CVR should be greater than 0.43 to meet the targeted requirement. However, this study requires that CVR ratio be greater than 0.60 before a control item is adopted to ensure that the control items constructed in this study remain important and feasible for most companies. Table 4 provides a summary of the questionnaire results, including the statistics from the questionnaires and the calculation of CVR. As described previously, a literature review was conducted and 51 key items were Page 12 of 44

14 identified for the internal control of ERP systems. Fourteen items were considered unimportant and were deleted after calculating and comparing the CVR values derived from the questionnaires. The remaining 37 control items were generalized and consolidated. The preliminary internal control items were further modified by referring to the suggestions provided by the expert respondents. Table 5 shows the modified internal control framework Insert Table 4 here Insert Table 5 here Empirical findings on internal control for the ERP system This section provides a brief description of the practices employed by the case company. The selected company was established in 1996 and is dedicated to the development and manufacturing of wireless telecommunication products. The company aspires to become the world leader in the area of wireless telecommunications by exerting efforts in research and development (R&D) which is aimed at improving technology. Its products are divided into three lines; and they are namely, satellite telecommunications, mobile telecommunications, and wireless network equipment. The managers in the company can keep abreast of the key technologies associated with their product lines in accordance with the changes occurred in the marketplace through their extensive experience and background in technology. The company is thus capable of developing the relevant niche products to meet the market demands by quickly integrating telecommunication technologies into their product lines. This company provides the comprehensive wireless and telecommunication products and timely after-sale services to its customers. With its focus on the R&D of new technologies and extensive in-house development of accompanied software and hardware, the company designs Page 13 of 44

15 and develops its own products effectively. In fact, the company has achieved their best economies of scale by establishing an increasingly comprehensive product line. As a result, the company is capable of maintaining its competitive advantage in the wireless telecommunications industry. The computer auditors working for the accountant were invited to participate in this study. Interviews were also conducted to study the actual company s operations with collecting the current internal control information as primary data. The company was asked to provide secondary data (i.e., relevant operation documents and files) for the analysis and synthesis of the research findings. Table 6 summarizes the background of all the interviewees Insert Table 6 here A select group of public companies that introduced ERP systems was filtered for the case study. The company targeted for interview is the one engaged in the tasks of R&D and manufacturing of wireless telecommunication products. The company actually replaced its Baan computer system with the Oracle ERP system in The interviewees comprised an internal auditing supervisor who facilitates two different ERP systems, an assistant manager in the MIS Department who maintains and deploys these two different systems, and a computer auditing manager who works for the accounting firm to audit the information system of this company. In other words, these three individuals are responsible for the ERP audit. All the three interviewees have relevant experience and background in the auditing and maintenance of ERP systems. A case study on a public company with the obtained audited financial reports was conducted. A manufacturing firm similar to this telecommunications company can be regarded as a representative case of companies in other industries. For this reason, this case result can be employed and justified as a rationale for the use of a single case [79]. In specific, the case study protocol was developed in the preparation step. Primary data about the actual operations of the company were gathered on-site in the collection step, while secondary data Page 14 of 44

16 were utilized to address the main objectives of this research. Further, data were gathered, analyzed, and collated prior to conducting the interviews with personnel who are experts in IT control and have worked with the independent accounting firm maintaining a relationship with the company selected in the case study. The feasibility of the internal control items that were applied in the planning of the ERP system was evaluated in the analysis and sharing steps. Finally, the results and findings were presented. The control items and information auditing of the ERP system in the case company were reviewed. The feasibility of the control items constructed for the company were also evaluated. (1) Practices within the case company Two auditors are employed in the audit department of the case company. Their tasks include inspecting domestic and overseas affiliates in the same group. In addition to adjusting the internal control framework originally based on the eight major cycles, the two auditors also perform internal audits and execute special projects assigned by their supervisors because these tasks are part of their job description. In auditing ERP systems, the focus is on soft control. The company s MIS department has established a division called ERP System Services. All seven employees in this division are responsible for the maintenance of the ERP system. Their major responsibilities include maintaining the normal operations of the system, solving all problems raised by users, and meeting the operational demands of users. These employees perform ordinary control tests and passive checks on requests from the auditing department as ERP system audits. (2) Control items within the case company The current audit checklist for ERP systems was originally based on the control items listed by the company headquarters. The checklist was later modified in accordance with the actual situations experienced by the company. The key control items comply with the criteria set by the authority. However, these control items are not fixed and are regularly reviewed for appropriateness. Director Chen said, After the introduction of the new Oracle ERP system in 2006, the Page 15 of 44

17 company conducted timely adjustments to ascertain control items. (3) Information auditing of the ERP system The internal auditors of the case company focus their audit on soft control items in the ERP system such as accounts, passwords, authorization, and remote access. The auditors are equipped to perform only soft audits. Other forms of audits are delegated to the MIS department as the internal auditors perform these tasks through collaborative procedures. The definition of the items pertaining to overall control is modified by referring to previous audit records. For example, each audit is performed on a regular basis (i.e., once a year) to minimize risk. However, the items with poor records have a high-risk profile and are therefore analyzed under strict standards (i.e., conducted quarterly or every semester). Given that financial reports are generated by the company s ERP system, the reporting accounts must be spot-checked as a form of internal control to reduce confirmatory audit risks. The computer audit personnel of the accounting firm check the system setups and the ordinary control measures of the company. Manager Li said, Basically, auditing for the ERP system within the company is mainly focused on general and basic checking of the Oracle ERP architecture in the UNIX operating system, Oracle database, and network. These are the critical points of our audit. If audit results indicate that the internal control of a company is proper, then the accountants may reduce the required number of spot-checking procedures. Auditing procedures should be modified on a timely basis in accordance with the actual demands of companies. The company under study was able to amend system faults and failures pointed out by its external auditors. This review process should be performed continuously to establish a robust internal control structure. The difficulties encountered by the company s ERP system auditors are caused by lack of IT training. Consequently, the company can focus only on software controls. With regard to the other forms of audits, the auditors remain dependent on the MIS department for effectiveness. However, despite the sufficient IT knowledge of the personnel in the MIS department, these personnel cannot perform audits effectively owing to control issues posed Page 16 of 44

18 by individuals, control measure requirements, and related auditing concepts. External auditors continue to believe that most companies do not have any personnel dedicated to computer audits. Manager Li said, Currently, the competent authority or relevant institutions are not certified with regard to computer audits. In addition, most auditors claim they lack sufficient IT training. Given the limited computer audit talents, very few companies have established a stable computer audit department. In sum, the challenges involving ERP systems include whether auditors can clearly understand the operational flows of the company and its overall information system environment to effectively manage both the behavioral risks caused by human factors and the technical risks integrated in a system. For auditors who do not have expertise in both audit (accounting) and IT, the auditing processes in an ERP environment pose imminent obstacles and challenges. (4) Understanding the feasibility of the control items Both interviewees concurred that the control items constructed in this study meet most of the requirements. However, a suitable list of control items should consider the infrastructure of the company, including the company scale and number of MIS employees. These considerations are important because individual control points have important roles in legacy information architecture. Accordingly, a number of control items cannot completely meet the specifications of the company under study owing to limitations in identifying infrastructure concepts such as whether the responsibilities of MIS personnel are clearly defined. Assistant Manager Lin said, This proposed framework seems suitable for my company, but the premise must consider the company's structure. For example, the company did not do well in distinguishing the responsibilities of IT personnel. The main reason is due to the lack of manpower and information unit personnel. Therefore, some control items within this proposed framework may be excluded. Nevertheless, the framework is still useful for my company. The case company suggested that several control items be transformed to attainable Page 17 of 44

19 targets in the future. The interviewees were requested to state their opinions regarding the appropriateness and importance of the control items to understand the feasibility of the proposed framework. Table 7 provides a summary of the company s evaluation of the control items constructed in this study. The list shows that the MIS department is particularly focused on system development and control over program modifications and access control of programs and data, further proving that the list is applicable and can thus serve as future reference. With respect to the dimension system development and control over program modifications, Assistant Manager Lin said, If the MIS department could manage developed or modified system programs effectively, it could help improve the credibility of information and preciseness of data. Two interviewees presented their views on the dimension access control of programs and data. Director Chen said, Because of the critical nature of the data and program within the company, appropriate control strategies and controls should be set for IT systems through access control policies. Only authorized users should be provided access to information system assets. Assistant Manager Lin said, The current system login in the company is appropriately controlled by access control procedures such as passwords. This form of logical access control over information is primarily required within the company to protect information against acts such as unauthorized creation and modification as well as inadvertent errors. With respect to the audit of control items, auditors believe that in principle, general audits should be conducted annually. However, several dimensions such as access control of programs and data require timely system auditing procedures. Jointly auditing these dimensions and those for the eight-cycle operations is sometimes necessary. Auditing in such situations is conducted not only annually but also rather promptly in conjunction with other procedures. External auditors believe that the current self-control mechanisms of the company s internal IT department involve two dimensions (i.e., system development and control over program modifications and access control of programs and data ), which Page 18 of 44

20 should be audited internally at least on a quarterly basis. As for the other dimensions, auditing may be conducted every semester depending on the impact on the company processes. The interviewees in the case study agreed that the constructed control items could effectively assist the company in the audit and control of its ERP system. Director Chen said, This proposed framework is great and comprehensive. A few control items are not available in the company at the moment, and this framework can be utilized to adjust the present version of the company Insert Table 7 here (5) Discussion of Findings As per earlier discussion, several findings are rather interesting. In general, internal control framework for ERP existed in this case company could help related personnel to perform an effective management and track the outcomes of IT control. This proposed framework is relatively rigorous, complete and more easily acceptable logic-wise. Although some control items are not suitable in the case company, this proposed framework can be used repeatedly to adjust/improve the present version. According to the results of case study, IT general control has reasonably been emphasized since it supports the resulting application processing. However, different industries and company size may provide different perspectives about determining the priority of control items. For instance, small-sized companies often use Office software package to handle business processing, and in this case, some of control items within this proposed framework may need to be amended. Nonetheless, this proposed framework still can be employed to greatly assist the entity to execute IT control and perform IT governance in the case company. 6. Conclusions Given that the ERP system is widely utilized in many organizations, relevant information on security and internal controls must be continuously prioritized. Stakeholders wish to feel Page 19 of 44

21 confident that internal control within the organization is executed effectively to reduce the possibility of business failure or fraudulent financial reporting [38]. However, improper management of control procedures in the computer environment of a company may result in significant financial reporting errors and financial losses for the same company. Thus, this study developed an ERP internal control framework to assist stakeholders in verifying the effectiveness of their respective companies internal control mechanisms. Literature related to IT controls for the internal use of companies, various information security organization bylaws, and academic literature were reviewed. Open, axial, and selective coding were performed to finalize the 51 key items associated with ERP internal control. Questionnaires were administered to confirm whether the abovementioned items are suitable for and essential to the ERP system. Out of the 51 control items, only 37 were utilized in the preliminary model. A case study was then conducted to verify the feasibility of the proposed framework. Our findings have provided some implications on/to future research. The internal control matrix could be regarded as a common method to represent internal controls for specific business processes within the SOX audit environment, which includes the internal control objectives [24]. Only a few studies have developed a structured, systematic approach that stakeholders can utilize. The proposed framework was derived from several rigorous methods and contained necessary control dimensions and items that can be utilized for ERP control and improvement of IT governance. Comparing with the previous studies on internal control frameworks including Jo et al. [34] and Lin et al. [40], case study approach has been recommended for this stream of studies and this is simply because of the need for detailed and contextual information from the entity stakeholders. Further, more extant researches utilized experts from CPA firms as a research subject, this study yet recruited several participants from the case company to disseminate their thoughts. Since this study embraced the application controls to broaden the IT control domain, the obtained outcome may complete Huang s [29] work because of its only focus is placed on the IT general controls. A previous study indicated that existing internal control frameworks do not consider Page 20 of 44

22 important control aspects such as the environment outside the organization [66]. The dimension control of outsourced operations in the proposed framework strengthens the ERP internal control points. A few empirical studies examined IT control weakness and IT operation risk [5, 36, 39]. The study of Li et al. [39] provided empirical evidence regarding IT-related material weakness based on internal and external governance. Further, Klamm and Watson [36] examined IT material weakness based on the internal control-integrated framework proposed by COSO. In summary, this proposed framework may be utilized to assess ERP control. The proposed framework can also be applied to the external auditing profession. External auditors can communicate logically with their clients through this framework. The responsibility of the certified public accountants in attesting to the effectiveness of their clients internal control system has been clearly regulated. An auditor in an IT environment must have a good understanding of internal control. If an auditor does not have a proper understanding of such concept, auditing work may incur many uncertainties and risks. From the perspective of a business entity, acquiring effective internal control is a complex task. However, internal control can be facilitated and maintained if a proper framework is adopted. The proposed framework is a supplement to the COSO framework [15] and provides a comprehensive framework to facilitate the construction of detailed controls for ERP systems. Among the 12 dimensions constructed in this study, only the dimension access control of program and data was unanimously recognized by all interviewees as an important criterion in information risk management. This finding is similar to that of Wallace et al. [73], thereby proving that access control is the most common and prioritized control in practice. When an entity establishes proper access control, the probability of an attacker obtaining unauthorized system access decreases [59]. However, most of the items in the proposed framework were regarded as moderately important. The listed company under study should therefore exercise compliance, and its stakeholders should assume more responsibility to protect the information system. This result confirms the results of Wallace et al. [73]. With the proposed framework, which includes comprehensive control dimensions or Page 21 of 44

23 items, internal auditors and MIS department chiefs can verify the effectiveness of internal control through a complete mechanism to comply with government regulations. In other words, internal auditors and MIS department chiefs can develop their relationship and communicate the effectiveness of internal control by referring to the proposed framework. According to Wallace et al. [73], a good relationship between an organization s internal auditors and MIS department chiefs helps the organization comply with IT-related internal control requirements. Several control items are considered high-priority items. Perhaps stakeholders should prioritize high-risk control points. This process not only enhances audit efficiency also easily identifies the weakness of internal control. Companies must consider the limitations inherent in their infrastructures in terms of internal control management to determine the most important control points [58]. These recommended improvements can enable companies to build robust auditing structures. Small and medium-sized enterprises (SMEs) need to implement information systems in their operations to cooperate with large firms. Most large firms request to review and audit downstream SMEs to ensure system security. SMEs may therefore consider the proposed framework and adjust several control items following their own characteristics to determine their IT control weaknesses in advance. The present study has limitations. Thirty relevant studies were selected and reviewed to construct the ERP system internal control framework. This study did not prove that the coding process reached saturation; other control items might have been missed. Furthermore, despite recruiting 18 qualified experts to confirm the control items derived from the literature review, other experts might have concluded otherwise. Another limitation of this study is external validity. The explanatory power of this study may be limited because single case method is adopted herein. This proposed framework with control items developed in this study is generic in nature. In other words, it could be applied to the majority of entities regardless of the size or industry. A few industries with a higher security consideration of IT environment (i.e., banking sector) will be able to expand this framework and add other new control Page 22 of 44

24 dimensions and items to provide additional insights to this subject area. Several future research avenues are discussed as follows. First, given the increasing number of published studies on ERP internal control, follow-up research may analyze these streamed studies to add control items and refine the proposed framework. Second, several control items in the proposed framework may be extended to other systems, organizations (i.e., government agencies), and industries. Future studies could examine the usefulness and feasibility of the proposed framework. Page 23 of 44

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29 Table 1. Related literature on IT internal control No. Author Literature Title Literature Source 1 A company Computerized Process: Internal Control A company 2 B company Computerized Process: Operation B company 3 C company Computerized Process: Internal Control C company 4 British Standards Institution Information Security Management Part 2: Specification for Information Security Management Systems; British British Standards Institution (BSI) [7] Standards Institution. 5 IT Governance Institute [33] Control Objectives for Information and Related Technology (COBIT 4.0) Information Systems Audit and Control Association 6 Cerullo and Cerullo [10] Business Continuity Planning: A Comprehensive Approach Information Systems Management 7 Chau [12] Application Security: It All Starts from Here Computer Fraud and Security 8 Coe [13] Trust Services: A Better Way to Evaluate IT Controls Journal of Accountancy 9 Daveiga and Eloff [16] An Information Security Governance Framework Information Systems Management 10 Eloff and Eloff [19] Information Security Architecture Computer Fraud and Security 11 Flowerday and Von Solms Continuous Auditing: Verifying Information Integrity and Providing Assurances for Financial Reports Computer Fraud and Security [21] 12 Gorge [28] USB and Other Portable Storage Device Usage: Be Aware of the Risks to Your Corporate Data Take Pre-emptive and/or Corrective Action Accepted Manuscrip Computer Fraud and Security 13 Hunter [30] Card Systems: Four Million Hacked Under the Spotlight Computer Fraud and Security 14 Jones [35] The Convergence of Physical and Electronic Security Computer Fraud and Security 15 Marks [43] The More Things Change Internal Auditor 16 Myler and Broadbent [46] ISO 17799: Standard for Security Information Management Journal 17 Saint-Germain [55] Information Security Management Best Practice Based on ISO/IEC Information Management Journal 18 Stephenson [60] Incident Analysis and Recovery Computer Fraud and Security 19 Stephenson [61] Ensuring Consistent Security Implementation within a Distributed and Federated Environment Computer Fraud and Security 20 Stewart [62] On risk: perception and direction Computers and Security Toward an Information Security Competence Maturity Model 21 Thomson and Von Solms [65] Computer Fraud and Security 22 Tyson and Bean [67] System Access Hotspots: Are Auditors Ignoring Danger? Journal of Corporation Accounting & Finance 23 Volonino and Gessner [71] Holistic Compliance with Sarbanes: Oxley Communication of AIS 24 Von Solms [72] Information Security Governance: Compliance Management vs. Operational Management Computers and Security 25 Wallace et al. [74] Understanding software project risk: a cluster analysis Information and Management 26 Williams [77] Performing a Successful Unix Audit Computer Fraud & Security 27 Flowerday and Von Solms Real Time Information Integrity = System Integrity + Data Integrity + Continuous Computers and Security [22] Assurances 28 Walters [75] A Draft of an Information System Security and Control Course Journal of Information Systems 29 She and Thuraisingham [57] Security for Enterprise Resource Planning Systems Information System Security 30 Wilson [78] Risk Control: A Technical View Computer Fraud and Security Nos. 1 to 3 are classified as A (IT control for the internal use of companies) Page 28 of 44

30 Nos. 4 to 5 are classified as B (information security organization bylaws) Nos. 6 to 30 are classified as C (academic literature) Accepted Manuscrip Page 29 of 44

31 Table 2. Results of axial coding Category Domain Codes (From open coding) References Whether clear definitions of the responsibilities of maintenance personnel in the MIS department exist A1, A30, A121, A193, B12, B32, B112, C17, C33, C49, C81, C94, C151, C179 A company, B company, British Standards Institution [7], Cerullo and Cerullo [10], Eloff and Eloff [19], IT Governance Institute [33], Jones [35], She and Thuraisingham [57], Stephenson [61], Volonino and Gessner [71], Von Solms [72], Walters [75] Whether application procedures exist A43, A45, A124, A152, A155, A209, A company, B company, C company, British Standards Institution [7], Cerullo for the system accounts A224, A232, A236, B65, C42, C72, C106, and Cerullo [10], Gorge [28], Stephenson [60], Volonino and Gessner [71], (authorization) C109, C194, C196 Walters [75] Definition of Whether system accounts functions and (authorization) should be approved A47, A210, A223, A237, C18, C48, C147 A company, C company, Cerullo and Cerullo [10], Jones [35], Von Solms [72] responsibilities by related unit heads of data Whether accounts are cancelled after A46, A63, A153, A195, A225, B66, A company, B company, C company, British Standards Institution [7], IT processing employees leave B117, C150, C197 Governance Institute [33], Jones [35], Walters [75] department Whether accounts are modified A company, B company, C company, Cerullo and Cerullo [10], IT Governance simultaneously when employees A64, A196, A226, A228, B118, C47 Institute [33] change job responsibilities Whether user authorization is constantly reviewed A62, A102, A126, A156, B69, B113, C34, C149, C199 A company, B company, British Standards Institution [7], Cerullo and Cerullo [10], IT Governance Institute [33], Jones [35], Walters [75] Whether a dedicated team is responsible for the maintenance of the hardware and software of the A51, A73, A97, A107, A125, A200 A company, B company, C company system System development Whether application procedures exist for requests to modify system A4, A23, A71, A127, A142, A212, B98 A company, B company, C company, British Standards Institution [7] and control programs over program Whether modification specifications modifications are confirmed by the MIS A5, A8, A22, A24, A140, A143, B120, department and the department that B127, B132, B142, C13 A company, B company, IT Governance Institute [33], Von Solms [72] submits such requests Whether system program modification documents are A7, A21, A213, C50, C176 A company, C company, Marks [43], Walters [75] approved by related unit heads Whether SA and SD program A16, A42, A129, A137, B60, B64, B99, A company, B company, British Standards Institution [7], IT Governance documents relevant to the B123, B133, B143 Institute [33] modifications are available Whether independent environments exist for development A15, A141, A217, C121, C180 A company, B company, C company, Chau [12], Walters [75] Whether independent environments B35, B40, B58, B93, B147, C181 British Standards Institution [7], IT Governance Institute [33], Walters [75] Accepted Manuscrip exist for tests Whether relevant test documents and records on program developments exist A10, A18, A26, A38, A128, A135, A138, A216, A221, B41, B61, B92, B124, B134, B144, C22, C122, C182, C209 A company, B company, C company, British Standards Institution [7], Chau [12], Flowerday and Von Solms [22], IT Governance Institute [33], Stewart [62], Walters [75] Page 30 of 44

32 Category Domain Codes (From open coding) References A13, A14, A25, A134, A139, A218, B59, Whether updated (newly added) A company, B company, C company, British Standards Institution [7], Chau [12], B97, B100, B122, B130, B136, B146, programs are assessed by users IT Governance Institute [33], Stewart [62], Walters [75] C21, C123, C130, C186 Whether relevant control measures A29, A122, C58 A company, B company, British Standards Institution [7] exist for changes in system flows Whether coding management is executed on the documents in A6, A32, A144, A214 A company, B company, C company relation to program modifications (updates) Whether documents are updated and A11, A20, A27, A31, A36, A41, A53, A company, B company, C company. British Standards Institution [7], Flowerday modified by version after the A54, A132, A145, A190, A219, A222, and Von Solms [22], IT Governance Institute [33], She and Thuraisingham [57], modifications (additions) of B84, B101, B126, B137, B145, C23, Control over Stewart [62], Walters [75] programs C187 the Whether review documents are compilation of A company, British Standards Institution [7], Chau [12], IT Governance Institute improved after the programs have A17, B83, B88, B125, C105, C124, C183 system [33], Stephenson [61], Walters [75] been developed documents Whether dedicated personnel A28, A33, A34, A35, A39, A149, A215, A company, B company, C company, British Standards Institution [7], Coe [13], safeguard the documents in relation A220, B24, B173, C54 IT Governance Institute [33] to the systems Whether only certain personnel can access (modify) the documents in A37, A40, A194, B94, B164, C55, C192, A company, B company, British Standards Institution [7], Coe [13], IT relation to the system programs or C210 Governance Institute [33], Walters [75] the original library A61, A83, A159, A165, B33, B74, B76, A company, B company, British Standards Institution [7], Cerullo and Cerullo B91, B155, B174, C26, C31, C39, C43, [10], Chau [12], Coe [13], Daveiga and Eloff [16], Eloff and Eloff [19], IT Whether authority controls exist C56, C69, C77, C95, C108, C125, C131, Governance Institute [33], Jones [35], She and Thuraisingham [57], Stephenson C148, C195 [60], Stephenson [61], Volonino and Gessner [71], Walters [75] British Standards Institution [7], Daveiga and Eloff [16], Flowerday and Von B68, B70, B78, B89, C64, C100, C136, Whether password controls exist Solms [21], Myler and Broadbent [46], Stephenson [61], Walters [75], Williams C138, C144, C145, C198, C202, C225 [77] Access control of programs and data Accepted Manuscrip Whether different access authorizations exist pursuant to the nature of users Whether the transfer of external data into the system has undergone verification by relevant programs Whether control over remote access to the system mainframes exists Whether dedicated personnel are responsible for the maintenance of the system databases A49, A55, A207, A227, A231, B52, B54, B63, B67, B70, B75, B79, B156, B169, C2, C5, C27, C46, C71, C146, C203, C224, C226 A company, C company, British Standards Institution [7], Cerullo and Cerullo [10], Flowerday and Von Solms [21], Gorge [28], IT Governance Institute [33], Myler and Broadbent [46], Saint-Germain [55], Von Solms [72], Walters [75] A56, B55, C193 A company, British Standards Institution [7], Walters [75] A257, B72, B175, C25, C29, C96, C134, C135, C137, C200, C201 A2, A50, A130, A151, A154, A157, A234, C3, C44, C65, C66, C73 C company, British Standards Institution [7], Cerullo and Cerullo [10], IT Governance Institute [33], Stewart [62], Stephenson [61], Walters [75], Williams [77] A company, B company, C company, Cerullo and Cerullo [10], Daveiga and Eloff [16], Gorge [28], Von Solms [72] Page 31 of 44

33 Category Domain Codes (From open coding) References Whether application files exist for system data filing A60 A company Whether original documents exist for input data A65, A158, A205, C36 A company, B company, C company, Cerullo and Cerullo [10] Whether numbering of the documents is generated by the A67, A208 A company, C company system Control of data Whether verification procedures A66, A77, A146, A162, A206, A235, A company, B company, C company, British Standards Institution [7], Chau [12], inputs and exist for the data input/output B53, B85, B86, B87, B135, B165, C103, IT Governance Institute [33], Myler and Broadbent [46], Stephenson [61], outputs interface C126, C207, C227 Walters [75] Whether appropriate control A company, B company, British Standards Institution [7], Cerullo and Cerullo A68, A147, A160, A163, B49, B51, B62, measures are present for output [10], Coe [13], Gorge [28], IT Governance Institute [33], Myler and Broadbent B90, B166, C37, C53, C70, C104, C229 confidential data [46], Stephenson [61] Whether records exist for any A company, B company, British Standards Institution [7], Eloff and Eloff [19], IT changes in data additions A48, A161, B77, B157, C80, C208 Governance Institute [33], Walters [75] (modifications) Whether relevant flows exist to A3, A52, A59, A69, A70, A81, A166, A company, B company, C company, British Standards Institution [7], Chau [12], manage the changes in data A233, B34, C4, C127 Von Solms [72] modification A86, A101, A111, A112, A131, A164, Control of data A company, B company, C company, British Standards Institution [7], IT Whether data are regularly backed A167, A178, A186, A244, A247, A251, processing Governance Institute [33], Myler and Broadbent [46], Stephenson [60], Von up B44, B81, B151, B167, C11, C92, C156, Solms [72], Tyson and Bean [67], Walters [75] C189, C205, C228 Whether backup data are supported by another location A88, A168, A245, B152, B170, C93, C159 A company, B company, C company, IT Governance Institute [33], Stephenson [60], Tyson and Bean [67] Security Whether information equipment is A95, A106, A148, A183, B4, B11, B28, A company, B company, British Standards Institution [7], Cerullo and Cerullo control of files listed and managed C35, C84, C168 [10], Eloff and Eloff [19], Walters [75] and equipment A57, A58, A90, A185, A204, A241, A company, B company, C company, Cerullo and Cerullo [10], Coe [13], Whether information equipment is A256, A258, C24, C30, C32, C41, C57, Flowerday and Von Solms [22], Saint-Germain [55], Stephenson [61], Stewart protected with security measures C97, C188, C214 [62], Walters [75] Whether anti-virus measures are British Standards Institution [7], Hunter [30], Saint-Germain [55], Von Solms B102, C7, C112, C116, C212 present [72] British Standards Institution [7], Daveiga and Eloff [16], Eloff and Eloff [19], Whether firewalls are present B48, B73, B159, C6, C67, C74, C78, C90, Hunter [30], IT Governance Institute [33], Myler and Broadbent [46], Saint- C99, C111, C213, C230 Germain [55], Stephenson [60], Stephenson [61], Thomson and Von Solms [65], Von Solms [72] Accepted Manuscrip Whether the system mainframe is placed in facility rooms Whether access control over facility rooms is present B18, B20, C85, C132, C171, C221 A94, A150, A173, A184, A201, A230, B19, B21, B171, C86, C133, C154, C172, C223 British Standards Institution [7], Eloff and Eloff [19], Saint-Germain [55], Williams [77], Walters [75] A company, B company, C company, British Standards Institution [7], Eloff and Eloff [19], IT Governance Institute [33], Saint-Germain [55], Tyson and Bean [67], Walters [75], Williams [77] Page 32 of 44

34 Category Domain Codes (From open coding) References Whether fire, water, and temperature A87, A91, A92, A93, A174, A175, A239, control facilities are present in A company, B company, C company, Saint-Germain [55], Tyson and Bean [67] A246, C153, C155, C222 facility rooms Whether UPS facilities are present B22, B23, B172, C10, C152, C173 British Standards Institution [7], IT Governance Institute [33], Tyson and Bean [67], Von Solms [72], Walters [75] Whether control procedures exist to destroy the backup data A169, A229, B26, B50, C175, C191 B company, C company, British Standards Institution [7], Walters [75] A company, B company, British Standards Institution [7], Cerullo and Cerullo Whether the prevent abnormal A44, A187, B43, B158, C28, C38, C91, [10], IT Governance Institute [33], Myler and Broadbent [46], Saint-Germain invasion measure exists C141, C215, C231 [55], Stephenson [60], Wilson [78] Whether dedicated personnel A company, B company, C company, British Standards Institution [7], IT responsible for the maintenance of A74, A80, A188, A238, B96, B139 Governance Institute [33], Wallace et al. [74] software updates are present A company, British Standards Institution [7], IT Governance Institute [33], Whether regular inspections of A75, B39, B80, B141, C20, C101, C139, Myler and Broadbent [46], Stephenson [61], Von Solms [72], Wilson [78], hardware daily logs are conducted C140, C177, C190, C204, C232 Walters [75] Control over A82, A98, A133, A171, A203, A242, A company, B company, C company, British Standards Institution [7], Coe [13], Whether the software and hardware the A248, B38, B82, B109, B138, C9, C15, Flowerday and Von Solms [22], IT Governance Institute [33], Hunter [30] are regularly maintained procurement, C60, C113, C174 Volonino and Gessner [71], Von Solms [72], Walters [75] use, and Whether records exist to note the A76, A99, A172, A191, A202, A243, A company, B company, C company, British Standards Institution [7], IT maintenance maintenance of and changes in A249, B30, B42, B140 Governance Institute [33] of hardware hardware and system software Whether the system software/program update is approved A136 B company by the MIS department chief Whether records exist to note the A company, British Standards Institution [7], Coe [13], IT Governance Institute maintenance of and changes in A100, B95, B148, C59, C102 [33], Stephenson [61] software A121, A189, A211, A250, A259, B108, A company, B company, C company, British Standards Institution [7], IT Whether the system software is legal B129, B161, C8, C16 Governance Institute [33], Von Solms [72] Whether regular tests are conducted A company, B company, C company, British Standards Institution [7], IT A89, A113, A116, A180, A253, B105, for system recovery procedures in Governance Institute [33], Stephenson [60], Tyson and Bean [67], Von Solms B106, B153, B168, C12, C88, C157 the face of disaster [72] Whether procedures exist to report A78, A108, A114, A115, A177, A192, A252, B15, B16, B17, B31, B46, B104, A company, B company, C company, British Standards Institution [7], Cerullo and Cerullo [10], Coe [13], Hunter [30], IT Governance Institute [33], Saintdisasters B154, B162, C40, C61, C87, C114, C158, Germain [55], She and Thuraisingham [57], Stephenson [60], Tyson and Bean C170, C219 [67], Walters [75] System recovery plans/systems and control of testing programs Control over the processes of information Accepted Manuscrip Whether relevant maintenance records and documents exist in case of abnormal situations Whether dedicated personnel responsible for reporting procedures are present A79, A109, A179, B45, B47, B107, B163, C89, C117, C178, C206 A118, A119, A197, A company, B company A company, B company, British Standards Institution [7], IT Governance Institute [33], Hunter [30], Stephenson [60], Walters [75] Page 33 of 44

35 Category Domain Codes (From open coding) References disclosure on the websites Whether the reports are pursuant to the regulations A117, A120, A198, A261, A262, B6, C163 A company, B company, C company, British Standards Institution [7], Walters [75] assigned Whether backups of the reporting data exist A199 B company A123, A181, A255, B2, B5, B7, B29, B company, C company, British Standards Institution [7], Coe [13], Eloff and Whether system security planning is B57, B110, B114, B131, C1, C52, C76, Eloff [19], Hunter [30], IT Governance Institute [33], Saint-Germain [55], present C79, C82, C98, C115, C120, C142, C160, Stephenson [61], Thomson and Von Solms [65], Von Solms [72], Wilson [78], C216, C218 Walters [75] Independent Whether dedicated personnel British Standards Institution [7], Cerullo and Cerullo [10], Hunter [30], IT B3, B111, B115, B176, C19, C45, C107, information responsible for the regular audits on Governance Institute [33], Saint-Germain [55], Stephenson [60], Von Solms [72], C119, C143, C162, C164, C217 audit units information security exist Walters [75], Wilson [78] A company, B company, C company, British Standards Institution [7], Daveiga Whether promotions and training A85, A182, A254, A260, B1, B13, B14, and Eloff [16], Eloff and Eloff [19], Hunter [30], IT Governance Institute [33], programs targeted at internal staff on B27, B56, B116, B160, C14, C68, C75, Stephenson [60], Thomson and Von Solms [65], Von Solms [72], Walters [75], information security exist C83, C110, C118, C161, C169, C220 Saint-Germain [55] Whether control procedures on A96, A103, A105, A110, A170, A240, hardware outsourcing exist B10, B25, B37, C63 A company, B company, C company, British Standards Institution [7], Coe [13] Whether evaluations of system B8, B119, B121, B150, C128, C165, British Standards Institution [7], Chau [12], IT Governance Institute [33], Walters Control of outsourcing are conducted C184 [75] outsourced Whether the contracts are signed for British Standards Institution [7], Chau [12], IT Governance Institute [33], Walters operations B9, B36, B149, C129, C166, C177, C185 system outsourcing [75] Whether relevant control procedures A9, A12, A19, A72, A84, A104, A176, A company, B company, British Standards Institution [7], Coe [13], IT regarding system outsourcing exist B103, B128, C51, C62, C211 Governance Institute [33], Marks [43], Walters [75] Accepted Manuscrip Page 34 of 44

36 Table 3. Backgrounds of participating experts Group Type No. of people Positions Average years of service Senior Auditors * 4 Audit 6 14 Audit Specialists * 2 Experts within Manager, MIS * 1 companies IT 5 Assistant Manager, MIS * 3 11 Deputy Project Manager, MIS * 1 Computer Audit, Manager * 1 Computer Audit, Assistant Manager * 1 Experts outside companies Professional firms 5 Computer Audit, Assistant VP * 1 Audit, Manager * 1 Audit, Director * 1 6 ERP consultants 2 Consultants * 2 7 Page 35 of 44

37 Table 4. Questionnaire analysis Types Groups Dimension CVR, Perception CVR, CVR, CVR, No CVR, CVR, ERP Screen difference Control items CVR, all external internal. CPA Audit consult results between MIS experts experts experts firm ant groups Whether clear definitions of the responsibilities of maintenance 1 personnel in the MIS department exist Yes No Definition of functions Whether application procedures for the system accounts 2 and responsibilities of (authorization) exist Yes No data processing 3 Whether accounts are cancelled after employees leave Yes No department 4 Whether user authorization is constantly reviewed Yes No Whether a dedicated team responsible for the maintenance of the 5 hardware and software of the system exists No Yes Whether application procedures are present for requests to modify 1 system programs Yes No Whether modification specifications are confirmed by the MIS 2 department and the department that submits such requests Yes No Whether SA and SD program documents relevant to the System development Yes Yes modifications exist and control over 4 Whether independent environments for development and tests exist Yes No program modifications Whether relevant test documents and records on program No Yes developments are present 6 Whether updated (newly added) programs are assessed by users Yes No Whether relevant control measures for changes in system flows are 7 present Yes No Whether coding management is executed on the documents in 1 relation to program modifications (updates) No No Whether documents are updated and modified by version after the Control over the Yes No modifications (additions) of programs compilation of system Whether dedicated personnel safeguarding the documents in relation documents No Yes to the systems are present Whether only certain personnel can access (modify) the documents 4 in relation to the system programs or the original library No Yes Access control of 1 Whether password controls exist Yes No programs and data Whether different access authorizations pursuant to the nature of 2 users exist Yes No Whether the transfer of external data into the system has undergone 3 verification by relevant programs Yes No Accepted Manuscrip Page 36 of 44

38 Dimension Control of data inputs and outputs Control of data processing Security control of files and equipment Control over the procurement, use, and maintenance of hardware and system software System recovery plans/systems and control of testing programs Types Groups CVR, Perception CVR, CVR, CVR, No CVR, CVR, ERP Screen difference Control items CVR, all external internal. CPA Audit consult results between MIS experts experts experts firm ant groups Whether control over the remote access to the system mainframes 4 exists Yes No Whether dedicated personnel responsible for the maintenance of the 5 system databases are present Yes No 1 Whether original documents for input data exist Yes No Whether numbering of the documents generated by the system is 2 present Yes No Whether verification procedures for the data input/output interface 3 exist Yes Yes Whether appropriate control measures for confidential output data 4 exist Yes Yes Whether records on any changes in data additions (modifications) 5 exist Yes No Whether relevant flows exist to manage the changes in data 1 modification Yes No 2 Whether data are regularly backed up Yes Yes 3 Whether backup data are supported by another location Yes Yes 1 Whether information equipment is listed and managed No Yes 2 Whether information equipment is protected with security measures Yes No 3 Whether access control over facility rooms exists Yes Yes 4 Whether facility rooms are protected with security measures Yes Yes 5 Whether control procedures exist to destroy backup data Yes Yes Whether dedicated personnel responsible for the maintenance of 1 software updates are present No Yes 2 Whether regular inspections of hardware daily logs are conducted No Yes 3 Whether the software and hardware are regularly maintained No Yes Whether records to note the maintenance of and changes in 4 hardware and software are present No Yes 5 Whether the system software is legal Yes Yes Whether regular tests on system recovery procedures in the face of 1 disaster are conducted Yes Yes 2 Whether procedures to report disasters exist No Yes Whether relevant maintenance records and documents exist in case 3 of abnormal situations Yes Yes Accepted Manuscrip Page 37 of 44

39 Dimension Control over the processes of information disclosure on the assigned websites Independent information audit units Control of outsourced operations Types Groups CVR, CVR, CVR, CVR, No CVR, CVR, ERP Screen Control items CVR, all external internal. CPA Audit consult results MIS experts experts experts firm ant Whether dedicated personnel responsible for reporting procedures 1 exist Yes Yes 2 Whether reports are pursuant to the regulations Yes No 3 Whether backups of the reporting data exist Yes Yes Accepted Manuscrip Perception difference between groups 1 Whether system security planning exists No Yes Whether dedicated personnel responsible for regular audits on 2 information security are present Yes No Whether promotions and training programs targeted at internal staff 3 on information security exist No Yes Whether relevant control procedures regarding system outsourcing 1 exist Yes No 2 Whether evaluations of system outsourcing are present No Yes 3 Whether contracts are signed for system outsourcing Yes No Page 38 of 44

40 Dimension Definition of functions and responsibilities of data processing department System development and control over program modifications Control over the compilation of system documents Access control of programs and data Control of data inputs and outputs Control of data processing Security control of files and equipment Control over the procurement, use, and maintenance of hardware and system software Table 5. Modified internal control framework Control Items Whether clear definitions of the responsibilities of maintenance personnel in the MIS department exist Whether application procedures exist for system accounts (authorization) Whether accounts are cancelled after employees leave Whether user authorization is constantly reviewed Whether application procedures exist for requests to modify system programs Whether modification specifications are confirmed by the MIS department and the department that submits such requests Whether SA and SD program documents relevant to the modifications exist Whether independent environments for development and tests exist Whether updated (newly added) programs are assessed by users Whether relevant control measures for changes in system flows exist Whether the documents are updated and modified by version after the modifications (additions) of programs Whether password controls exist Whether different access authorizations pursuant to the nature of users exist Whether the transfer of external data into the system has undergone verification by relevant programs Whether control over the remote access to the system mainframes exists Whether dedicated personnel responsible for the maintenance of the system databases exist Whether original documents for input data are present Whether numbering of the documents generated by the system is present Whether verification procedures for the data input/output interface exist Whether appropriate control measures for confidential output data exist Whether records for any changes in data additions (modifications) exist Whether relevant flows exist to manage the changes in data modification Whether data are regularly backed up Whether backup data are supported by another location Whether information equipment is protected with security measures Whether access control over facility rooms is present Whether facility rooms are protected with security measures Whether control procedures to destroy backup data exist Whether the system software is legal System recovery Whether regular tests on system recovery procedures in the face of disaster are conducted plans/systems and control Whether relevant maintenance records and documents exist in case of abnormal situations of testing programs Control over the Whether dedicated personnel responsible for reporting procedures are present processes of information Whether reports are pursuant to the regulations disclosure on the assigned Whether backups of the reporting data exist websites Independent information audit units Control of outsourced operations Whether dedicated personnel responsible for regular audits on information security exist Whether relevant control procedures regarding system outsourcing exist Whether contracts are signed for system outsourcing Page 39 of 44

41 Table 6. Background of the interviewees Case Study Function Title Interviewee Experience Audit room Audit Six years in the audit department of the company; eight Director Chen supervisor years of audit experience Company MIS Assistant More than four years of experience in the maintenance Assistant manager and introduction of the ERP system utilized by the Manager Lin company Reporting Information risk accounting management More than six years of experience in computer audit; Manager Manager Li firm and services served more than 200 companies Page 40 of 44

42 Table 7. Appropriateness and importance of control items Audit dimensions Control items Appropriateness Importance Yes No High Medium Low Whether clear definitions of the responsibilities of maintenance personnel in the MIS department Definition of exist functions and Whether application procedures for system responsibilities of accounts (authorization) exist data processing Whether accounts are cancelled after employees department leave Whether user authorization is constantly reviewed Whether application procedures for requests to modify system programs exist Whether modification specifications are confirmed by the MIS department and the department that System submits such requests development and Whether SA and SD program documents relevant control over to the modifications exist program Whether independent environments for modifications development and tests exist Whether updated (newly added) programs are assessed by users Whether independent environments for development and tests exist Control over the compilation of Whether the documents are updated and modified by version after the modifications (additions) of system documents programs Whether password controls exist Whether different access authorizations pursuant to the nature of users are present Whether the transfer of external data into the Access control of system has undergone verification by relevant programs and data programs Whether control over the remote access to the system mainframes exists Whether dedicated personnel responsible for the maintenance of the system databases exist Whether original documents for input data are available Control of data Whether numbering of the documents generated inputs and outputs by the system is available Whether records for changes in data additions (modifications) are available Whether relevant flows to manage the changes in data modification exist Control of data Whether data are regularly backed up processing Whether backup data are supported by another location Whether information equipment is protected with security measures Whether access control over facility rooms exists Security control of files and equipment Whether the facility rooms are protected with security measures Whether control procedures are available to destroy backup data Control over the procurement, use, and maintenance of Whether the system software is legal hardware and software systems Page 41 of 44

43 Audit dimensions System recovery plans/systems and control of testing programs Control over the processes of information disclosure on the assigned websites Independent information audit units Control of outsourced operations Control items Whether regular tests are conducted for system recovery procedures in the face of disaster Whether relevant maintenance records and documents are available in case of abnormal situations Appropriateness Importance Yes No High Medium Low Whether dedicated personnel responsible for reporting procedures exist Whether reports are pursuant to the regulations Whether backups of the reporting data exist Whether dedicated personnel responsible for regular audits on information security exist Whether relevant control procedures regarding system outsourcing are available Whether contracts are signed for system outsourcing Director Chen; Assistant Manager Lin Page 42 of 44

44 Theoretical Philosophies Theories Principles Concepts Literature Review Expert Questionnaire Research Question and Purpose Comparison and Revision Prototype Construction Figure 1. Research flow Methodological Knowledge Claims Interpretations Transformations Data Gathering Case Study Page 43 of 44

45 Authors Jing Fan Management School, Shanghai Jiaotong University, China International Business School, Beijing Foreign Studies University, China Pengzhu Zhang Management School, Shanghai Jiaotong University, China David C. Yen School of Economics and Business, SUNY College at Oneonta, USA Page 44 of 44