Corporate reputation and the timeliness of external audit and earnings announcement

AuthorEunice S. Khoo,Youngdeok Lim,Gary S. Monroe
Published date01 November 2020
Date01 November 2020
DOIhttp://doi.org/10.1111/ijau.12202
ORIGINAL ARTICLE
Corporate reputation and the timeliness of external audit and
earnings announcement
Eunice S. Khoo
1
| Youngdeok Lim
2
| Gary S. Monroe
2
1
College of Business and Economics,
Australian National University, Canberra,
Australia
2
UNSW Business School, UNSW Sydney,
Sydney, Australia
Correspondence
Eunice S. Khoo, Research School of
Accounting, College of Business and
Economics, Australian National University.
Canberra, Australia.
Email: eunice.khoo@anu.edu.au
We examine the association between corporate reputation and the timeliness of
external audit and earnings announcement. Changes in financial reporting regulation
have resulted in longer audit delay, leading to an increase in the number of firms that
announce earnings prior to audit completion, both of which have implications for the
quality and usefulness of financial information. We find that corporate reputation is
negatively associated with audit report lag, earnings announcement lag, and the likeli-
hood of firms announcing earnings after audit completion. Our results are robust to a
variety of sensitivity tests. We document important benefits in the form of timelier
audits and earnings announcements derived from developing and maintaining a good
corporate reputation. Our findings have implications for client firms and auditors,
particularly given the challenges faced by auditors in terms of more onerous audit
requirements and shorter filing deadlines, as well as demands for timelier information
faced by firms.
KEYWORDS
Corporate Reputation, Earnings Announcement Timeliness, External Audit Timeliness, Time
Constraint
1|INTRODUCTION
Corporate reputation is defined as the observers' collective judg-
ments of a corporation based on assessments of financial, social and
environmental impacts attributed to the corporation over time
(Barnett, Jermier, & Lafferty, 2006). Prior research documents various
effects of corporate reputation on agency costs, financial reporting
quality, and other firm outcomes of interest to academics, regulators,
and financial market participants. High corporate reputation can
reduce agency problems by prompting actions that are in favor of the
principal, even without a formal contract (Weigelt & Camerer, 1988;
Wilson,1985). In addition, prior research finds that a high corporate
reputation has positive effects on financial reporting quality (Cao,
Myers, & Omer, 2012), debt and equity financing costs (e.g., Cao,
Myers, Myers, & Omer, 2015; Diamond, 1991), firm performance
(Roberts & Dowling, 2002), as well as stakeholder perceptions
(Filbeck & Preece, 2003; Pfarrer, Pollock, & Rindova, 2010).
Our study adds to the literature by investigating the association
between corporate reputation and the timeliness of accounting
information, which is an important qualitative characteristic that
enhances the relevance of accounting information to decision makers.
It is important to examine factors associated with audit and financial
reporting timeliness considering the negative consequences of a delay
in the reporting of accounting information, tighter reporting deadlines,
increased complexity in audit and financial reporting requirements,
and implications for financial reporting quality (Bronson, Hogan,
Johnson, & Ramesh, 2011; Givoly & Palmon, 1982; Krishnan &
Yang, 2009).
We begin by examining the association between corporate
reputation and the timeliness of external audit. External audit
timeliness has been a significant area of concern for various
stakeholders, such as shareholders, managers, regulators, and auditors
(Bamber, Bamber, & Schoderbek, 1993; Krishnan & Yang, 2009;
Lambert, Jones, Brazel, & Showalter, 2017). In recent years, regulators
We appreciate helpful comments from Neil Fargher (discussant), Robert Knechel, and
participants at the 2018 European Accounting Association (EAA) annual congress and the
2018 Accounting and Finance Association of Australia and New Zealand (AFAANZ) annual
conference.
Received: 17 April 2019 Revised: 30 June 2020 Accepted: 29 July 2020
DOI: 10.1111/ijau.12202
366 © 2020 John Wiley & Sons Ltd Int J Audit. 2020;24:366395.wileyonlinelibrary.com/journal/ijau
around the world have emphasized the need for financial reporting
timeliness.
1
At the same time, new auditing standards were issued
that significantly widened the scope of audit requirements, thus
making it more difficult for auditors to complete audit engagements in
a timely manner.
2
Tighter reporting deadlines and more complex
auditing standards suggest that auditors are required to perform more
work in a shorter time frame, which could negatively impact audit
quality (Blankley, Hurtt, & MacGregor, 2014). These changes highlight
the importance of examining factors associated with audit timeliness.
We use economic dependence theory and reputation protection
theory to explain the relation between a client firm's reputation and
external audit timeliness (e.g., Reynolds & Francis, 2001; Whitworth &
Lambert, 2014). Similar to economically important clients, highly
reputable clients are important to auditors due to their prominence
(Podolny, 1993; Reuber & Fischer, 2005; Stuart, Hoang, &
Hybels, 1999). On the one hand, economic dependence theory
suggests that auditors prioritize their high-reputation clients, which
results in timelier audits for high-reputation clients. On the other
hand, reputation protection theory predicts that auditors may be more
conservative when auditing prominent firms in order to protect their
reputation and avoid litigation, thus resulting in increased audit delay.
Based on these competing arguments, the first research question we
address is: Does corporate reputation have an association with
external audit timeliness?
Next, we examine the association between corporate reputation
and earnings announcement timeliness. Prior studies underscore the
importance of earnings announcement to the market (Ball &
Brown, 1968; Beaver, 1968; Landsman & Maydew, 2002). Investors
place greater reliance on the information included in the earnings
announcement more than that in subsequent regulatory filings, as
evidenced by quicker and greater stock market reactions to the
earnings announcement's timelier release (Kothari, 2001; Li &
Ramesh, 2009; Stice, 1991). Further, since earnings announcements
are not required to be audited, firms are increasingly trading off the
market demand for timeliness against a possible reduction in reliability
(Bronson et al., 2011; Krishnan & Yang, 2009; Schroeder, 2016), so as
to avoid negative consequences associated with deviations in
expected disclosure behaviour (Bagnoli, Kross, & Watts, 2002;
Einhorn & Ziv, 2008; Givoly & Palmon, 1982; Kross, 1981). However,
these trends have negative effects on the reliability of earnings
announcement disclosures (Bronson et al., 2011) and financial
reporting quality (Marshall, Schroeder, & Yohn, 2019). Given the
saliency of earnings announcements and the significance of audit
completeness at earnings announcement date (Schroeder, 2016), it is
important to consider factors that influence a firm's earnings
announcement timeliness and its decision to announce earnings prior
to audit completion.
On the one hand, considering the negative consequences
associated with deviations from expected disclosure behavior and the
existing regulations and market demand for more timely information,
high-reputation firms have more incentives to uphold their reputation
by providing timelier and more consistent earnings announcements.
High-reputation firms may also announce earnings prior to completion
of the audit to ensure timelier earnings announcement. The need for
audit completeness at earnings announcement date is likely to be less
important for high-reputation firms because high-reputation firms
emphasize credibility, trust, and consistency, which signals their
commitment to work for the benefit of stakeholders and to provide
reliable earnings announcements even before the audit is completed.
On the other hand, due to the greater downside risk of reputational
damage in the event of an earnings restatement, high-reputation firms
may act more conservatively by waiting until completion of the audit
before announcing their earnings, resulting in less timely earnings
announcement. Based on these competing arguments, the second
research question we address is: Does corporate reputation have an
association with earnings announcement timeliness?
To examine our research questions, we use a sample of Fortune
1,000 firms that are large accelerated filers during the 10 year period,
20072016.
3
We use four measures of corporate reputation: (1) the
corporate reputation scores from the Fortune's Most Admired
Companies List (MA List); (2) an indicator variable that equals one if
the firm appears on the MA List in a given year; (3) the number of
sample years to date during which the firm appears on the MA List;
and (4) following Erkens and Bonner (2013), a factor score that
includes a firm's market capitalization, the number of firms the focal
firm is connected to through common board members and a firm's
corporate reputation scores from the MA List. Corporate reputation
scores based on the MA list have been widely used as measures of
corporate reputation in accounting studies (e.g., Cao et al., 2012;
2015; Erkens & Bonner, 2013). Further, the list is independent,
publicly available, and includes a substantial number of firms.
We find that firms with a high corporate reputation are
associated with shorter audit report lag and earnings announcement
lag, as well as a lower likelihood of announcing earnings after audit
completion, after controlling for other factors affecting the timeliness
of external audit and earnings announcement.
4
In our test of the
timeliness of earnings announcement, we control for audit report lag
because increased audit report lag may contribute to the timely
earnings announcement. Our results for the associations between
corporate reputation and audit report and earnings announcement
lags are robust to the inclusion of firm fixed effects in our regression
models. Our results suggest that auditors prioritize their highly
reputable clients, thus resulting in timelier audits. Further, our results
emphasize the importance of a timely and consistent earnings
announcement disclosure practice to high-reputation firms. Collec-
tively, our findings highlight the crucial role of corporate reputation
on financial reporting timeliness.
To verify our conjecture that auditors prioritize their highly
reputable clients, we perform two tests. First, we control for auditor
capacity at the industry level, and find that firms with a relatively
higher corporate reputation in an auditor's industry portfolio are asso-
ciated with a timelier audit. Second, consistent with Cao et al. (2012),
we find that high-reputation firms are associated with greater audit
effort. This finding alleviates the concern that the negative association
observed between corporate reputation and audit report lag is a result
of high-reputation firms requiring less audit effort rather than a result
KHOO ET AL.367

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