External reputational penalties for CEOs and CFOs following information technology material weaknesses

Information Technology (IT) serves as the foundation for an effective internal control system. Deficiencies in internal controls related to IT (as evidenced by SOX 404 IT internal control material weaknesses (ITMW)) can diminish the quality of financial reporting and lead to the dismissal of executives. We investigate if the labor market penalizes executives for publicly announced IT failures. Specifically, we examine the employment opportunities that CEOs and CFOs receive following their termination from a firm reporting an ITMW. We find that executives who lose their jobs due to an ITMW are less likely to find an equivalent job compared to executives dismissed for material weaknesses not related to IT. We also determine that this is especially true for the CFO, perhaps suggesting that firms hold the CFO more responsible for IT failures, particularly as it relates to financial reporting and internal controls.