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

• DOI: http://doi.org/10.1111/ijau.12083
• Author: John L. Abernathy,Michael Barnes,Alexandria Weisbarth,Chad Stefaniak
• Published date: 01 March 2017
• Date: 01 March 2017

An International Perspective on Audit Report Lag: A Synthesis of the Literature

and Opportunities for Future Research

John L. Abernathy,

1

Michael Barnes,

2

Chad Stefaniak

3

and Alexandria Weisbarth

4

1

Kennesaw State University, USA

2

Truman State University, USA

3

University of South Carolina, USA

4

Central MichiganUniversity, USA

Audit report lag (ARL) is the length of time from a company’s fiscal year-end to the audit report date, and is often

viewed as the most important financial reporting timeliness determinant. Given that timeliness is an area of interest

to investors, managers, regulators, auditors and academics, an understanding of ARL determinants is extremely

important. As financial markets become moreglobally oriented, an internationalunderstanding of ARL determinants

becomes even more important. This paper summarizes the extant literature on ARL and its determinants with an

emphasis on international literature. Our review categorizes prior research based on company-specific and audit-

related factors, and explores the associations that have been identified with respect to ARL. Finally, we identify

possible areas of interest not currently present in the literature and speculate on several opportunities for future

research.

Key words: Audit delay, audit report lag, financial reporting timeliness

1. INTRODUCTION

In this paper, we synthesize, compare, and contrast

research regarding the determinants of audit report lag

(ARL) for US and international audits, and then leverage

those findings to suggest opportunities for future research

in ARL. ARL is defined as the length of time from a

company’s fiscal year-end to the date of the auditor’s

report (Ashton, Willingham & Elliot, 1987), and is often

viewed as the most important determinant of financial

reporting timeliness (Abbott, Parker & Peters, 2012).

ARL is an importantmeasure around the world and has

been a longstanding area of interest for investors,

managers, regulators, auditors, and academics for several

reasons (Krishnan & Yang, 2009; IASB, 2010; Abernathy

et al., 2014). First, ARLis often understood to be the ‘single

most important determinant of the timeliness of the

earnings announcement’(Givoly & Palmon, 1982, p. 491).

Second, securities regulators in most countries around the

world do not allow companies to issue their financial

statements until after the conclusion of an external audit.

Toward that end, prior research indicates companies can

experienceconsequences such as negative marketreactions

and higher information asymmetry if the release of the

audited financial statements is delayed (Bamber, Bamber

& Schoderbek, 1993; Krishnan & Yang, 2009; Bronson

et al., 2011). Third, a better understanding of what factors

drive ARL is likely to provide more insights into audit

efficiency.

1

More clearly understanding the factors that

drive ARL can allow stakeholders to identifyand respond

to factors that may be problematic or detrimental to the

audit engagement,audit client or its stakeholders.

In emerging economies, the provision of audited

financial statements can take on higher importance than

in more developedeconomies (Francis, Khurana& Pereira,

2003; Fan& Wong, 2005; Choi& Wong, 2007).In these areas

of the world, where news outlets and financial

intermediaries are not well developed and the regulatory

bodies are not as effective, the assurance provided by an

audit is an important function of developing capital

markets. Therefore, we believe that audit practitioners,

company management, financial statement users, and

standard setters may benefit from identifying ARL

determinants in various settings by being able to

comprehend the causes and implications of ARL as well

as adapt practices to increase audit efficiencies globally.

Our review is particularly salient for international

researchersbecause recent regulation has greatlyimpacted

ARL for US audits. Statement of Financial Accounting

Standards (SFAS) No. 165 (ASC Topic 855) was issued in

2009 and requires companies to evaluate subsequent

events through thedate the financial statements are issued

with the SEC (FASB, 2009). In general, auditorsresponded

to this change in US GAAP by dating the audit report

on the same day financial statements are filed with

the SEC. Glover, Hansen and Seidel (2015, p. 2) argue

that this change ‘limits the ability of financial statement

users to identify auditors facing heightened deadline

imposed time pressure’. This highlights the impact

regulation can have on ARL and its impact on financial

statement users, which makes international research into

ARL, particularly in emerging markets, more important

(cf. Abernathy et al., 2015).

There are two aspects of financial reporting timeliness.

The first concerns the frequency of the interim reports –

whether they areproduced half-yearly, quarterly, monthly,

and so forth. The other refers to the time lag from the

accounting dateof the report to the date of its release, often

referred to as the reporting lag. While regulators around

the world have expressed concern about both aspects

of timeliness, we focus our summary on the latter. Our

review of applicable papers begins with a search of the

ABI/INFORM database for all published papers with

the keywords ‘audit report lag’,‘audit delay’,‘audit

timeliness’,or‘financial report timeliness’in the title,

abstract, keywords, or subject. We further limit our review

to those papers publishedin journals ranked B or higher in

Correspondence to: John L. Abernathy, Kennesaw State University, 560

Parliament Garden Way, Burruss Building Room 203, Kennesaw, GA

30144-5591,USA. Email: jabern21@kennesaw.edu

International Journal of Auditing doi: 10.1111/ijau.12083

Int. J. Audit. 21:100–127 (2017)

©2016 John Wiley& Sons Ltd ISSN 1090-6738

the Australian Business Deans Council Journal Quality

List.

5

Our review follows prior research, which typically

divides the factors that influence ARL into two categories:

company-specificand audit-related factors (Ika & Ghazali,

2012).

6

However, given the subjective nature of these

categorizations, our review is less concerned with the

proper categorization (i.e., audit-related or company-

specific) of the determinants of ARL, but rather with

concisely summarizing a broad literature stream that can

inform auditors, auditees, investors, and regulators about

the factors that can influence ARL, as well as comparing

and contrasting US factors with international factors and

providing opportunities for future research. Table 1

summarizes papersdiscussed in Sections 1 and 2.

The next section of the paper provides background

on the regulatory environment surrounding financial

reporting timeliness. Section 3 reviews the literature

regarding company characteristics and ARL. Section 4

reviews the literature on audit firm/engagement

characteristics and ARL, and Section5 concludes the paper.

2. BACKGROUND ON FINANCIAL

REPORTING TIMELINESS AND THE

REGULATORY ENVIRONMENT

Financial reporting timeliness has been emphasized by

standard setters for many decades. For example, US

standardsetters have recognized timeliness as a qualitative

characteristic of financial reporting (FASB, 1980). In 2010,

the IASB and FASB completed the first phase of a

Conceptual Framework for Financial Reporting 2010,which

underscored the importance of timeliness as an enhancing

qualitative characteristic of relevant financial information

(IASB, 2010). Recently, the EU released the Transparency

for Listed Companies Directive to improve the transparency

of financial information for market participants. The

Directive states that:

The disclosure of accurate, comprehensive and timely

information about security issuers builds sustained

investor confidence and allows an informed assessment

of their business performance and assets. This enhances

both investor protection and market efficiency. …

Making it easier to compare annual financial reports is

only of use to investors in securities markets if they can

be sure that this information will be published within a

certain time after the end of the financial year

(European Parliament and Council, 2010).

Regulators around the world have also emphasized the

need for financial reporting timeliness.

1

For example, in

2003, the SEC mandated a tiered reduction in filing

requirements,resulting in a 60-day filingdeadline for large

accelerated filers beginning in 2006 (SEC, 2004). Such

measures to improve timeliness have not been without

controversy, however. There issome debate about whether

financial reports can be prepared and audited without

compromising quality, specifically their reliability (Bryant-

Kutcher, Peng & Weber, 2013).

Bryant-Kutcher et al. (2013) examined this debate by

investigating the effects of reduced filing deadlines on the

probability of future restatement. Using a sample of 1,128

US companies subject to accelerated filing deadlines, they

found the likelihood of issuing financial statements that

are later restated increases for companies thatare required

to file more quickly, relative to companies thatare not. In a

concurrent study, Blankley, Hurtt and MacGregor (2014)

foundsimilarresultsusingasampleof2,530clientsofBig

4 auditors from 2004to 2007. They concluded that the time

pressures associated with shorter filing deadlines increase

the likelihood of subsequent restatements. However,

Krishnan and Yang (2009), also using US data, examined

the impact of accelerated filing deadlines on audit and

filing efficiency by examining 1,393 audit reports and

1,077 earnings announcements, longitudinally, for 2001–

2002 (i.e., the two years prior to SEC accelerated filing

requirements) and for 2003–2006 (i.e., the first three years

after a new policy). Interestingly, they found that more

companies began releasing earnings before completion of

their audit. Importantly,they found the quality of earnings

and accruals were not affected by delays, except for those

companies that reported earnings before the completion

of their audits. Morerecently, Lambertet al. (2016) asserted

that these SEC filingdeadlines increased time pressuresfor

auditors of accelerated filers. As an apparent result,

companies that wereunprepared to meet these accelerated

filing deadlines frequently filed their 10-K’slateand

experienced reductions in earnings quality.

As more countries and exchanges begin to implement

accelerated filing deadlines, one potential future research

opportunity is to examine whether the tradeoff between

timeliness and reliability differs across countries. That

is, research can investigate whether certain countries

have better or worse ‘early’or ‘late’filers, and whether

this tradeoff varies with certain country characteristics

(economic infrastructure, legal regime, corporate

governance mechanisms, etc.). Another potential study

could examine how acceleration in the US influenced

international competito rs’filing dates. For example, a

potential research question could be: How did the US

accelerated filing requirements influence global filing

efficiency? Specifically, how were the ARL for companies

that do not list in the US, but are competitors of US

companies affected by the US accelerated filing mandate?

Additionally, researchers could examine what factors

within the subpopulation of companies that report

earnings before the completion of their audits are

associated with reduced earnings quality. Finally, future

research could investigate whether a shorter ARL

decreases or increases the negative market response to a

misstatement. That is, does the market penalize the

company more harshly forreleasing ‘too soon’?

3. COMPANY CHARACTERISTICS

A robust stream of research investigates a common set of

company characteristics as determinants of ARL. In this

section, we identify and categorize these company

characteristics and propose future research questions in

each of these categories. Table 2 provides a summary of

the papers reviewed in this section.

Size

The earlyresearch on the determinantsof ARL investigated

company characteristics that influenced the timeliness of

the annual report. One company-specific factor that has

been shown to be consistently associated with ARL is

company size. One of the first studies to examine the

determinants of financial reporting timeliness was

performed in an Australian setting. Specifically Dyer and

McHugh (1975) found a negative association between

reportinglag and company size for Australiancompanies.

2

An International Perspectiveon Audit Report Lag: A Synthesis of the Literature and Opportunities for Future Research 101

©2016 John Wiley & Sons Ltd Int. J. Audit. 21:100–127 (2017)