Audit tenure, auditor specialization and audit report lag

Abstract

Purpose-This paper aims to examine the association between audit firm tenure and audit report lag (ARL) and the impact of auditor industry specialization on the association between audit firm tenure and ARL. Design/Methodology/Approach-Using Habib and Bhuiyan's (2011) method of measuring auditor industry specialization, the authors examine the sample of 7,291 firm-year observations from 2008 to 2010. Findings-The authors find that auditor industry specialization (regardless of city-level, national-level and joint city-and national-level industry specialization) weakens the positive association between ARL and short audit firm tenure, suggesting that auditor industry specialization complements the negative effect of short audit firm tenure on ARL. Originality/value-First, the authors add to the literature by answering the question of whether hiring industry auditor specialists is an effective way to shorten ARL created by short audit tenure. The authors provide some evidence that the concern of short audit tenure leading to longer ARL is reduced by hiring an industry-specialized auditor. Prior research mainly focuses on identifying the determinants of ARL without going further to find out which are the effective ways to reduce the audit delay. Second, their findings can somehow resolve the debate on whether audit firm rotation should be mandatory. A new auditor's lack of knowledge of clients' business operations during the early years of audit engagements results in longer ARL, which eventually influences the clients' financial performance. The authors' result suggests the firms can reduce this adverse consequence by hiring an industry-specialized auditor. Finally, their findings may provide helpful information to firms in selecting external auditors, public accounting firms in selecting a differentiation strategy and regulators in mandating audit firm rotation.

Determinants of audit report lag: A meta‐analysis

“…Significantly positive and negative associations are found in six and five studies respectively, with the remaining seven providing insignificant results. Some studies have categorized audit tenure into short versus long tenure, to derive more specific hypotheses on these two categories (Dao & Pham, ; Habib & Bhuiyan, ; Lee et al, ). The FSN for audit tenure results is 480.28, much greater than the CN drawer of 100, hence raising less concern for publication bias.…”

Audit Committee Characteristics and Audit Report Lag: Evidence From Oman

“…Leverage (LEV) measured as the ratio of the total debt to total assets (Khlif & Samaha, 2016). Companies which are greater financed by debts have a higher business risk, hence, they are subjected to rigorous audits and take a long time (Abbott, Parker & Peters, 2012;Dao & Pham, 2014). Finally, Profitability (PROF), measured as the net income to total asset (Baatwa et al, 2015a;Alfraih, 2016).…”

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

“…On the contrary, they did not find a significant relationship between ARL and auditor tenure. On the other hand, Lee et al (2009) and Dao and Pham (2014) both documented that longer audit tenures are associated with shorter ARL. A related stream of research has found that companies that change their public accounting firm during the year required more days to complete their financial statement audit (Schwartz & Soo, 1996;Henderson & Kaplan, 2000;Ettredge et al, 2006).…”

“…However, they also noted a positive association between ARL and both the relative size of the office and the importance of the client. Dao and Pham (2014) incorporated industry specialization into the association between ARL and auditor tenure. While they found that auditors with shorter tenures tend to have longer ARL, they also observed that this association was somewhat attenuated for industry specialist auditors.…”