Additional Evidence on Audit Report Lag

TLDR

Audit report lag reduces the value of audited financial statements, with prior research indicating that timely confirmation is more important than decision usefulness and that delays are linked to lower earnings quality. This study extends the understanding of audit report lag determinants using a proprietary database of 226 audit engagements. The authors examine three controllable audit firm factors—incremental audit effort, resource allocation by audit team rank, and provision of nonaudit services—to assess their influence on lag. Results show that higher audit effort, contentious tax issues, and less experienced staff increase lag, while a synergistic relationship between management advisory services and audit services reduces lag. Sundem et al.

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.