Accounting Standards Updates, Investments in Accounting Information Systems, and Firms’ Internal Information Environments

Abstract

While the implementation of new accounting standards requires significant firm resources, the literature is largely silent on how firms allocate resources to comply with new accounting standards. I investigate whether firms make information systems (IS) investments to comply because IS are the primary means through which firms’ economic activities are captured, aggregated, and summarized for managerial decision-making. I use a requirement that firms disclose factors that materially affect their internal controls to identify IS investments. I find that—despite the large direct and indirect costs of IS investments and alternatives to comply with GAAP changes—new accounting standards lead to significant IS investments for the firms most affected by the GAAP changes. Moreover, the IS investments improve firms’ internal information environments. The results suggest that the IS investments and IIE improvements extend beyond the scope of the GAAP changes.