Additional Evidence on Audit Report Lag

Abstract

The process for providing accounting information to the public has not changed much in the last century even though the extent of disclosure has increased signifi-cantly. Sundem et al. (1996) suggest that the primary benefit of audited financial statements may not be decision usefulness but the discipline imposed by timely confirmation of previously available information. In general, the value of information from the audited financial statement will decline as the audit report lag (the time period between a company's fiscal year end and the date of the audit report) increases since competitively oriented users may obtain substitute sources of information. Furthermore, the literature on earnings quality and earnings management suggests that unexpected reporting delays may be associated with lower quality information. The purpose of this paper is to extend our understanding about the determinants of audit report lag using a proprietary database containing 226 audit engagements from an international public accounting firm. We examine three previously uninvestigated audit firm factors that potentially influence audit report lag and are controllable by the auditor: (1) incremental audit effort (e.g., hours), (2) the resource allocation of audit team effort measured by rank (partner, manager, or staff), and (3) the provision of nonaudit services (MAS and tax). The results indicate that incremental audit effort, the presence of contentious tax issues, and the use of less experienced audit staff are positively correlated with audit report lag. Further, audit report lag is decreased by the potential synergistic relationship between MAS and audit services.

The Association between Earnings News and The Timing of Annual Earnings Announcements

“…More sophisticated investors may obtain substitute sources of information and thus incur higher costs as earnings announcements are delayed. The literature on earnings quality suggests that unexpected reporting delays may be associated with lower quality information (Knechel & Payne, 2001). What is clearly evident from prior studies is that good news is announced earlier than bad news.…”

“…The more diverse and complex the client's operations, the greater the amount of audit work that must be performed (Newton & Ashton, 1989;Bamber et al, 1993;Whittred, 1980;Butler et al, 2004;Knechel & Payne, 2001). We expect the number of segments (NUM), extraordinary items (EXTR), negative earnings (LOSS), and an auditor's opinion (OPIN) to be positively related with LAG (Ashton et al, 1987;Schwartz & Soo, 1996).…”

Finding determinants of audit delay by pooled OLS regression analysis

“…Consistent with prior literature [3,17], audit delay or audit reporting lag is measured as a function of the number of days that elapse from the closure of the accounting period until the date of the audit report. In order to investigate the association between audit reporting lag and selected independent variables, the following model is developed:…”

An International Perspective on Audit Report Lag: A Synthesis of the Literature and Opportunities for Future Research

“…For example, Newton and Ashton (1989), Bamber et al (1993), and Jaggi and Tsui (1999) all documented that structured audits tended to have longer ARL. On the other hand, Knechel and Payne (2001) found that more audit testing procedures completed by the public accounting firm in advance of the annual audit (i.e., interim testing) was associated with improved timeliness.…”

“…Knechel and Payne (2001), Lee et al (2009), and all documented a negative association between non-audit services and ARL, indicating that non-audit services may create knowledge spillover benefits that result in shorter ARL. However, observed that this association no longer appears to be present for US companies following the passage of SOX, and that companies that paid higher non-audit fees prior to SOX experienced greater ARL following SOX.…”