Audit committee ownership and audit report lag: evidence from Australia

• DOI: https://doi.org/10.1108/IJAIM-09-2018-0107
• Pages: 96-125
• Date: 28 January 2020
• Published date: 28 January 2020
• Author: Md. Borhan Uddin Bhuiyan,Mabel D’Costa
• Subject Matter: Accounting/accountancy,Accounting & Finance

Audit committee ownership and

audit report lag: evidence

from Australia

Md. Borhan Uddin Bhuiyan and Mabel D’Costa

School of Accountancy, Massey University, Auckland, New Zealand

Abstract

Purpose –This paper aims to examine whether audit committee ownership affects audit report lag.

Independent audit committees are responsible for overseeing the f‌inancial reporting process,to ensure that

f‌inancial statements are both credible and released to external stakeholders in a timely manner. To date,

however, the extent to which auditcommittee ownership strengthens or compromises member independence,

and hence, inf‌luencesaudit report lag, has remained unexplored.

Design/methodology/approach –This paper hypothesizes that audit committee ownership is

associated withaudit report lag. Further, the author hypothesize that boththe f‌inancial reporting quality and

the going concernopinions of a f‌irm mediate the effect of audit committee ownership on auditreport lag.

Findings –Using data from Australian listed companies,the author f‌ind that audit committee ownership

increases audit report lag. The author further documentthat f‌inancial reporting quality and modif‌ied audit

opinions rendered by external auditors mediate this positive relationship. The results are robust to

endogeneity concerns emanating from f‌irms’deliberate decisions to grant shares to the audit committee

members.

Originality/value –The study contributes to both the audit report timeliness and the corporate

governanceliteratures, by documenting an adverse effect of audit committeeownership.

Keywords Australia, Financial reporting quality, Audit report lag, Audit opinion,

Audit committee ownership

Paper type Research paper

1. Introduction

This research examines the impact of audit committee ownership on audit report lag in

Australia, and whether f‌inancial reportingquality and modif‌ied audit opinions rendered by

external auditors mediate this association.Audit report lag is def‌ined as the period between

a company’sf‌iscal year-end and the audit report date and is one of the few externally

observable audit output variables available for estimating audit eff‌iciency (Bamber et al.,

1993). As the audit report contains the auditor’s opinion regarding the credibility of the

f‌inancial statements, investorsprefer that the audit report be released within a short period

following the end of the f‌iscal year. Audit delays may lead to delayed earnings

announcements, reduce earnings informativeness and generate a lower market response to

earnings (Whittred and Zimmer, 1980). A substantial body of academic research has

investigated the likely determinants of audit report lag, including f‌irm-level

corporate governance mechanisms, for example, board characteristics, CEO duality,

audit committee existence andindependence (Abernathy et al.,2017). However, the effect of

audit committee ownershipon audit report timeliness remain unexplored.This is surprising,

given the role audit committeesplay in strengthening the corporate governance mosaic,and

the growing debate on compensating audit committee members with company shares

(Archambeault etal.,2008;Bedardand Johnstone, 2010;Bolton, 2014).

IJAIM

28,1

96

Received18 September 2018

Revised26 January 2019

9 February2019

Accepted21 February 2019

InternationalJournal of

Accounting& Information

Management

Vol.28 No. 1, 2020

pp. 96-125

© Emerald Publishing Limited

1834-7649

DOI 10.1108/IJAIM-09-2018-0107

The current issue and full text archive of this journal is available on Emerald Insight at:

https://www.emerald.com/insight/1834-7649.htm

Corporate governance best practice codes require or encourage companies to form audit

committees, comprising independent members with f‌inancial expertise, to s atisfy public

expectations of improved f‌inancial reporting quality (Bedard et al.,2004;Dewally and Peck,

2009;Hunton and Rose, 2008;Karamanou and Vafeas, 2005;Mustafa and Meier, 2006;

Pucheta-Martínez and De Fuentes, 2007) and improved audit quality (Abbott et al., 2003a,

2003b; Boo and Sharma, 2008;Chen andZhou, 2007;Lee et al.,2004;Lennox and Park, 2007).

Bronson et al. (2009)evidence that to ensure audit committee effectivenessthe members must

be completely independent. However, there is debate as to whether audit committee

ownership threatens audit committee member independence. Both regulators and the Press

have expressed serious concerns, arguing that equity-based compensation compromises

audit committee independence, because stocks and options tie members’wealth to f‌irms’

short-term and long-term f‌inancial performance (Barrier, 2002;Higgs, 2003;Millstein, 2002;

New York Times, 2007;Financial Reporting Council, 2003). Onthe other hand, however, the

corporate governance literature suggests that equity ownership by outside directors aligns

the incentives of directors with those of the shareholders. Jensen (1989) suggests that

shareholdings by non-executive directors can strengthen monitoring oversights and,

consequently, company performance (Bolton, 2014). If share ownership compromises

independence,then audit committee membersmay be less inclined to challengemanagement

regarding questionable accounting practices. This will affect f‌inancial reporting quality

adversely, requiring auditors to spend additional time and effort in detecting f‌inancial

misstatements, thus increasing audit report lag. Financial misstatements may eventually

lead auditors to express a qualif‌ied audit opinion: an action that prior research has

convincingly documented as increasing the audit report lag (Abernathy et al.,2017).

Conversely, if audit committee ownership provides additional motivation for members to

exercise effective oversight, then we should expect a shorter audit report lag. We test these

competingarguments by using auditreport lag as an observableproxy.

Our sample consists of the top 1,500 Australian listed f‌irms for which the data required

to calculate audit committee ownership is available from the Securities Industry Research

Centre of Asia-Pacif‌ic (SIRCA)[1]for the period 2001 to 2015. We began in 2001 because the

data coverage for periods prior to 2001 was not comprehensive. The f‌irst Corporate

Governance code in Australia was releasedin March 2003 and comprises ten principles, two

of which were related to the audit committee(Principle 4 and 7), and one to timely disclosure

of f‌inancial information and documents (Principle 5). In 2007, the code was modif‌ied, and

then again in 2014. The principles were developed from the f‌irst version to the current

amended version, on a “comply or explain”basis.

With respect to the existence of audit committees, Recommendation 4.1 of the Code

stipulates that a listedentity should have an audit committee but also notes:

The boards of some listed entities may decide that they are able to oversee the corporate reporting

process ef‌f‌iciently and ef‌fectively without establishing a separate audit committee. If they do, the

entity should disclose [...][...]that it does not have an audit committee and explain the processes

it employs that independently verify and safeguard the integrity of its corporate reporting [...]

[...].

(p. 22). The code did not mandate the appointment of audit committee members with

f‌inancial expertise but notes that: “[...][...] its members between them should have

accounting and f‌inancial expertise and a suff‌icient understanding of the industry in which

the entity operates [...][...]”(p.22). However, the Australian Stock Exchange (ASX) listing

rules require thatcompanies included in the ASX All Ordinaries index (whichconsists of top

500 market capitalized companies) must have an audit committee. As will be detailed in

Audit

committee

ownership

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