Unintended Consequences of Accelerated Filings: Are Mandatory Reductions in Audit Delay Associated with Reductions in Earnings Quality?

The unintended consequences of PCAOB auditing Standard Nos. 2 and 3 on the reliability of preliminary earnings releases

“…Difficulties in applying new accounting guidance are more likely to be 20 Bryant-Kutcher et al (2009) find that the quality of accounting information released by accelerated filers declined, as measured by an increased incidence of financial statement restatements following this first phase-in of accelerated filing deadlines. In addition, Lambert et al (2009) show that firms that had to substantially reduce their audit lag to meet the expedited filing deadline reported poorer quality earnings as proxied by discretionary accruals, meeting or beating analyst forecasts, and accounting conservatism. 21 Following Lambert et al (2009), we examine the potential effect of the accelerated filing deadlines by identifying 252 firms with a fiscal year ending between 12/15/2002 and 12/14/2003 that have an audit report lag greater than the 75-day mandatory accelerated filing deadline.…”

“…In addition, Lambert et al (2009) show that firms that had to substantially reduce their audit lag to meet the expedited filing deadline reported poorer quality earnings as proxied by discretionary accruals, meeting or beating analyst forecasts, and accounting conservatism. 21 Following Lambert et al (2009), we examine the potential effect of the accelerated filing deadlines by identifying 252 firms with a fiscal year ending between 12/15/2002 and 12/14/2003 that have an audit report lag greater than the 75-day mandatory accelerated filing deadline. We would expect these firms to have difficulty meeting the first phase-in of the accelerated filing rules in the following fiscal year.…”

The Impact of Internal Audit Function Quality and Contribution on Audit Delays

“…Both preparers and auditors expressed concern over their ability to accurately compile and effectively audit the reports within the shorted time frame, especially given the expanded attestation requirements. Consistent with these concerns, Lambert et al (2011) and Bronson et al (2011) suggested that managers face a tradeoff between the accuracy of accounting information and the timeliness with which information is reported. In particular, Bronson et al (2011) documented that SOX 404 and AS 3 increased audit delay; yet, firms did not correspondingly alter the timing of preliminary earnings announcements (PEAs).…”

“…The auditing literature has long recognized the importance of audit delay research because audit delays affect the timeliness with which financial and audit information is publicly disclosed (Givoly and Palmon 1982). Current interest in audit delay stems from recent accelerations in reporting deadlines and the implementation of Section 404 of the Sarbannes-Oxley Act (SOX), which together require auditors to perform more work in less time (U.S. Congress 2002;Ettredge et al 2006;Bronson et al 2011;Lambert et al 2011).…”

Comments by the Auditing Standards Committee of the Auditing Section of the American Accounting Association on the PCAOB Rulemaking Docket Matter No. 34: PCAOB Release No. 2011-003,Concept Release on Possible Revisions to PCAOB Standards Related to Reports on Audited Financial Statements.

“…In other words, if any additional roles require substantial time and effort, the possibility exists that post year-end audit effort related to the traditional audit may be sacrificed. Lambert et al (2011) find that SEC-mandated accelerations of 10-K filings that required a substantial ( ten days) reduction in post-fiscal year-end audit time led to reductions in earnings quality. This effect was more pronounced for smaller accelerated filers (versus large accelerated filers).…”