Abolition of mandated joint‐audit requirements: Impact on audit reporting lag in an emerging capital market

• Published date: 01 January 2023
• Author: J.‐L. W. Mitchell Van der Zahn
• Date: 01 January 2023
• DOI: http://doi.org/10.1111/ijau.12300

ORIGINAL ARTICLE

Abolition of mandated joint-audit requirements: Impact on

audit reporting lag in an emerging capital market

J.-L. W. Mitchell Van der Zahn

Krypt Data Analysis and Research Services,

Dubai, United Arab Emirates

Correspondence

J-L.W. Mitchell Van der Zahn, Krypt Data

Analysis and Research Services, Dubai,

United Arab Emirates.

Email: mitchell.vanderzahn@bgtribecapital.com

Funding information

All funding is from the author with no funding

received from grants, awards and/or prizes.

The study aims to examine how changes in the Kuwait audit market following aboli-

tion of mandated joint-audit requirements impact audit reporting lag. Analysis tests

whether joint-/solo-audit switches (following abolition mandated requirements)

affected the level and change in audit reporting lag. The study also tests if the joint-

audit pair combination is a decisive factor in determining the (a) level and change in

audit reporting lag and (b) audit quality following a switch to a solo-audit. Data is col-

lected from 132 Kuwait-incorporated, nonfinancial firms listed continuously on the

Boursa Kuwait from 2015 to 2019 that provides 660 firm-year observations

(528 firm-years main empirical tests). Analysis indicates that the following abolition

of mandated joint-audit requirements, Kuwait listed firms swiftly switched to solo-

audits, generally leading to a significant increase in audit reporting lag. Tests indicate

that audit reporting lag was significantly less for joint-audits relative to solo-audits.

Additional results show a significant negative association between the quality of

joint-audit pair combinations and audit reporting lag. However, there is no significant

association between audit reporting lag and the quality of solo-audit type. Test

results indicate mixed support for the perception that a joint-audit pair combination

significantly influences the level and change in audit reporting lag following the switch

to a specific solo-audit type.

KEYWORDS

audit quality, audit reporting lag, emerging economy, joint-audit, Kuwait, pair combination, solo-

audit

1|INTRODUCTION

Major global corporate scandals (e.g., Enron, Parmalat, and HIH) at the

turn of the millennium raised major questions about the quality of

independent audits and the impact on the veracity, usefulness and

timeliness of financial statements (Abernathy et al., 2014; Ratzinger-

Sakel et al., 2013). It is argued a potential benefit of the joint-audit

1

is

audit quality could be enhanced, thereby, improving auditor indepen-

dence (Holm & Thinggaard, 2016,2018; Lesage et al., 2017). Joint-

audit

2

debate gained traction (particularly in Europe) following publi-

cation of the European Community's (EC) Green Paper in 2010

(EC, 2010; Quick, 2012). Recent scandals (e.g., Germany's Wirecard

2020, UK's Serco 2018/2019, UK outsourcer Carillion 2018, and

Gupta family businesses South Africa 2017) have further ignited

scholarly, practitioner and policymaker interest in joint-audits. Since

becoming a hotbed of attention, there has been growth in joint-audit

research (e.g., Abdelmoula & Affes, 2019; Guo et al., 2017; Nekhili

et al., 2014; Piot, 2007,2008; Velte, 2017); however, the overall vol-

ume of joint-audit research is scarce relative to other auditing

research fields. Consequently, important empirical and theoretical

questions remain open and in want of investigation (Hay, 2015,2019;

Lesage et al., 2017).

The author has worked in universities in Asia, North America, Australia and the Middle East.

In addition, the author has also worked in the private corporate sector infinancial services,

events management and logistical services.

Received: 28 August 2020 Revised: 5 December 2022 Accepted: 5 December 2022

DOI: 10.1111/ijau.12300

Int J Audit. 2023;27:45–68. wileyonlinelibrary.com/journal/ijau © 2022 John Wiley & Sons Ltd. 45

An interesting issue concerns the impact on auditing outcomes

following the abolition of mandated joint-audit requirements. Studies

(e.g., Holm & Thinggaard, 2014,2016,2018; Lesage et al., 2017;

Ratzinger-Sakel et al., 2013) investigating the impact of the transition

from a mandated to voluntary joint-audit regime have yielded appeal-

ing empirical and theoretical insights providing the foundation for fur-

ther analysis. A limitation of prior studies is reliance on data from a

single national and economic setting. Denmark, one of the few nations

with extensive joint-audit experience, held the rare distinction of

being the first, and until recently, only national jurisdiction to formally

abolish (in 2005) mandated joint-audit requirements (Ratzinger-Sakel

et al., 2013).

3

Questions arise on whether the impact of the abolition

of mandated joint-audit requirements can be generalised to

alternative economic settings. Contrary to prior research, this study

investigates changes in, and the impact on, the Kuwait audit market

following abolition in 2016 of mandated joint-audit requirements. This

differentiates analysis from prior research by focusing on an emerging,

rather than developed, economy (e.g., Holm & Thinggaard, 2018;

Lesage et al., 2017; Ratzinger-Sakel et al., 2013). Institutional and reg-

ulatory structures in Kuwait are less established (Alfaraih, 2016a) rela-

tive to developed Westernised economies, have a contrasting societal

and cultural environment and lack transparency (Al-Ghanem &

Hezazy, 2011; Al-Shammari, 2015). The focus on Kuwait also permits

analysis on more contemporaneous data.

Another differentiating feature is the concentration on audit

reporting lag. Previous research of the impact of the abolition of man-

dated joint-audit requirements focuses on audit quality (e.g., abnormal

accruals) or audit fees (El Assy, 2015; Velte, 2017). Empirical and the-

oretical research infers the timeliness of the release of financial state-

ment information, which significantly impacts user decision-making

(Carcello & Li, 2013; Gul et al., 2017; Khoufi & Khoufi, 2018). There is

an inevitable time gap between the end of the financial accounting

period and the release of audited financial statements, due to auditing

regulatory requirements. The need for accounting information to be

presented to users whilst relevant for decision-making purposes

places pressure on the audit firm to complete the auditing process in

a timely manner (Rusmin & Evans, 2017). Delays in issuance of the

independent audit report ultimately lead to a less timely release of the

financial statements. This means that there is less relevant accounting

information negatively impacting the decision-making of users

(Sultana et al., 2015). Whilst feeling obligated to issue the audit report

as swiftly as possible, an audit firm must also balance a fiduciary duty

to ensure that the audit is completed with sufficient audit precision to

avoid a failure to detect and report financial misstatements (Gul

et al., 2017). Prior research (e.g., Abernathy et al., 2017; Leventis

et al., 2005) suggests that auditor quality is negatively associated with

audit reporting lag; that is, audit firms of higher quality issue the inde-

pendent audit report in a timelier manner than lower quality audit

firms. Higher quality audit firms have a greater technological effi-

ciency allowing the audit firm to achieve the desired audit precision in

a timelier manner than lower quality counterparts (Deng et al., 2014;

Holm & Thinggaard, 2018; Sultana et al., 2015). If abolition of man-

dated joint-audit requirements impacts auditor quality or a firm's

decision to switch from a joint-audit to a solo-audit

4

(or vice versa)

influences auditor quality, this may have implications for audit

reporting lag.

Overall, the study's primary aims are threefold. First, the study

aims to document how the composition of the Kuwait audit

market altered the following abolition of mandated joint-audit

requirements (enacted January 2016). Second, the study looks to

determine if the length of time to issue the audit report also altered

(both in terms of level and change) the following abolition of mandated

joint-audit requirements and the switching by Kuwait listed firms from

joint-audits to solo-audit engagements. Third, additional analysis aims

to establish post-abolition of mandated joint-audit requirements if

there are significant differences in the level and change in audit report-

ing lag between (i) joint-audits and solo-audits; (ii) joint-audit pair

combinations; and (iii) solo-audit types. Data are collected from

132 Kuwait-incorporated firms continuously listed on the Boursa

Kuwait

5

(BK) during the observation period 2015 to 2019 and with

31 December financial year ends.

6

The main regression analysis is

based on 528 firm-year observations from 2016 to 2019. Findings

show that between 2016 and 2019, 116 of the 132 sample firms

switched to solo-audits.

7

Non-Big4 audit firms are shown to capture a

higher proportion of the market than Big4 counterparts. Results sug-

gest audit reporting lag generally increased year-on-year following

abolition of mandated joint-audit requirements. Analysis shows that

audit reporting lag is significantly higher amongst solo-audits than

joint-audits with tests indicating that the quality of the joint-audit

(solo-audit) is significantly (not significantly) associated with audit

report lag. Finally, level and change regression analysis indicate limited

and weak linkages between joint-audit pair combinations and the level

and change in audit reporting lag following a switch to a solo-audit. A

possible implication of these findings is that in the Kuwait audit mar-

ket some localised/regionalised audit firms may be perceived to be of

a similar (or potentially higher) quality than Big4 audit firms operating

in Kuwait.

8

This study makes several contributions. First, the study adds to

the existing understanding of how the audit market adjusts following

the abolition of mandated joint-audit requirements. Prior research

(e.g., Holm & Thinggaard, 2018) relies on data from a developed eco-

nomic setting. Drawing on more contemporaneous data from an

emerging economy, this study illustrates that audit market changes

following the abolition of mandated joint-audit requirements are

applicable to an alternative setting. That is, this study shows that

Kuwait firms generally switched to solo-audits within several years

following abolition of mandatory joint-audit requirements just as evi-

denced in a developed economy setting. However, this study indi-

cates, in contrast to evidence from a developed economy, that a

higher proportion of Kuwait firms engaged with Non-Big4 auditors fol-

lowing the switch to solo-audits. Second, analysis expands debate of

the impact on auditing outcomes of differences between joint- and

solo-audits. Prior joint-audit research predominantly focuses on

whether audit type (i.e., joint- vs. solo-audit) influences audit fees,

market concentration and audit quality (traditionally measured by

earnings quality). Results from this study imply that policymakers

46 VAN DER ZAHN