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An Examination of Audit Delay: Evidence from Pakistan
Monirul Alam HossainPh.D. Student
School of Accounting and FinanceThe University of Manchester
Oxford RoadManchester M13 9PLPhone:0161-273-8542Fax :0161-275-4023
E-mail:[email protected]
and
Peter J. TaylorSenior Lecturer
School of Accounting & FinanceThe University of Manchester
Oxford RoadManchester M13 9PLPhone:0161-275-4004Fax :0161-275-4023
E-mail:[email protected]
(Comments are invited. Please do not quote as this is a preliminary draft)
Draft: February, 1998
1
An Examination of Audit Delay: Evidence from Pakistan
Abstract
Timeliness of annual reports is an important attribute of their usefulness. There is a
paucity of research about the timeliness of the published audited accounts of the
companies in developing countries in general and audit delays in particular. This paper
empirically examined the relationship between the audit delay and several company
characteristics in a developing country, Pakistan. The objectives of this study are two-
fold. First, to measure the extent of audit lag in a developing country, Pakistan. Second,
to establish the impact of selected corporate attributes on audit delays in Pakistan. Both
univariate and multivariate analyses are performed to test the hypotheses of the study.
The audit delay for each of the 103 listed sample companies ranged from a minimum
interval of 30 days to a maximum interval of 249 days and Pakistani listed companies
take approximately five months on average beyond their balance sheet dates before
they finally ready for the presentation of the audited accounts to the shareholders at the
annual general meeting. This evidence suggests that timeliness may not be an important
concern for Pakistani companies in financial reporting policy. With regard to timeliness
as a qualitative objective of financial statements, this evidence can be regarded as
unsatisfactory. The results for the sample of 103 listed Pakistani companies showed that
audit delay was significantly related to the subsidiaries of multinational companies only.
Other six corporate attributes found not to be significantly associated with audit delay.
2
An Examination of Audit Delay: Evidence from Pakistan
1 INTRODUCTION
The usefulness of published corporate reports depends on their accuracy and their timeliness. Timeliness
as one of the qualitative attributes or characteristics of useful information or relevant disclosure has been
first considered by the American Accounting Association (AAA, 1954 and 1957). Subsequently, the
Accounting Principle Board (APB) in the USA, the Institute of Chartered Accountants of Canada
(ICAC) and the Institute of Chartered Accountants in England and Wales (ICAEW) followed the AAA
path and now timeliness has been recognised as one of the important characteristics of financial
statements by the professional bodies, regulatory authorities, financial analysts, investors and managers
and the academics. Timeliness requires that information should be made available to financial statement
users as rapidly as possible (Carslaw and Kaplan, 1991) and it is a necessary condition to be satisfied if
financial statements are to be useful (Davies and Whittred, 1980; p. 48-49). It has been argued that the
shorter the time between the end of the accounting year and publication date, the more benefit can be
derived from the audited annual reports (Abdulla, 1996). However, it is not possible to release annual
reports unless it is not certified as accurate by professional chartered accountant(s). Put it another way,
one of the most tangible reasons for late publication of annual reports by public limited companies is
that the accounts need to be audited before they can be published. Time lag in financial report
publication and audit delay are intertwined and used interchangeably in financial reporting literature.
As a result, in most cases timeliness have actually dealt with audit delays.
The usefulness of the information disclosed in company annual reports (CARs) will decline as the time
lag increases, and it has been argued by Abdulla (1996) that the longer the period between year end and
publication of the annual report, the higher the chances that the information will be leaked to some
interested investors. The length of the audit has been regarded as the ‘single most important determinant
of the timeliness of the earning announcements’ (Givoy and Palmon; 1982, p.419). Again, there are
evidence that there is a relationship between the security prices and the timeliness (Givoy and Palmon,
1984 and Chambers and Penman, 1984).
There are studies which empirically examined the relationship between the audit delay and several
company characteristics in the developed countries (Ashton, Graul, and Newton, 1989; Ashton,
3
Willingham and Elliot, 1987; Newton and Ashton, 1989; Carslaw and Kaplan, 1991 and Davies and
Whittred, 1980) as well as in developing countries. There is a lag between the end of the reporting
period and the date of auditor’s report. Audit delay is generally defined in these studies as the length of
time from a company’s financial year-end to the date of the auditor’s report. In this study, audit delay
has been considered as the time from a company’s accounting year end to the date of the auditor’s
report.
The objectives of this study are two-fold. First, to measure the extent of audit lag in a developing
country, Pakistan. Second, to establish the impact of selected corporate attributes on audit delays in
Pakistan. This study possesses at least two unique characteristics. First, Aston et al. (1989) has suggested
for the inclusion of additional variables to increase the predictive ability of audit delay. This study has
included two new company characteristics (audit fee and multinationality of the companies) which have
not been considered in the prior research. Secondly, there is a paucity of research about the timeliness of
the published audited accounts of the companies in developing countries in general and audit delays in
particular. There are two only two studies which focused the timeliness of corporate annual reports in the
developing countries (Abdulla, 1996; and Ng and Tai, 1994). However, there is no study which
specifically examined the relationship between audit delay and selected corporate attributes in the
developing countries. This study may be the first which attempts to establish the association between a
set of corporate attributes and the audit delay in a developing country, Pakistan.
The next section reviews existing research on reporting delay and audit delay. Then a model of audit
delay is presented, and the data used to test the model are described. The results follow, and a concluding
section discusses the limitations of the study and future direction for further research.
2 LITERATURE REVIEW
Stock exchanges and other regulatory bodies require listed companies to publish their audited accounts
within a specified period after the end of their accounting year. In the UK, for example, listed
companies are required to present their annual reports within six months of the balance sheet date.
Listed companies in Australia are required to present their corporate annual reports within four month
of their accounting year end (Davis and Whittred, 1980; and Dayer and McHugh, 1975).
Apart from the developed countries, the listed companies in Bahrain for example are required to
publish their annual reports within 165 days from the financial year-end (Abdulla, 1996). In India, the
4
maximum time limit for the preparation of corporate annual reports their presentation to shareholders is
no more than six months from the accounting year end.
In Pakistan, the Companies Ordinance, 1984 specifies the time limit for the presentation of the annual
reports at the annual general meeting which specified a maximum of six months after the accounting
year end of the companies. According to the Pakistani Companies Ordinance, 1984, the listed
companies in Pakistan did not specify a time limit for preparation of financial statements or their audit.
The ordinance only specified the time limit for the presentation of the annual reports at the annual
general meeting a maximum of six months after the accounting year end of a company. Pakistani listed
companies do not require to prepare any quarterly interim report.
During the last four decades, the literature on timeliness in general has become an established area of
research in financial accounting. Here, some of these studies are reviewed which facilitates background
to formulate the hypotheses which have been used in this study. The first formal recognition of the
importance of timeliness came in 1954 from The American Accounting Association (AAA, 1954). They
observed that, ‘Timeliness of reporting is an essential element of adequate disclosure’ (p.46). Many
researchers and professional bodies followed the AAA in acknowledging the role of timeliness in
corporate financial reporting theory (see for example, Accounting Principles Board, 1970; Courtis, 1976;
Givoly and Palmon, 1982; Carlow and Kaplan, 1991).
One of the most tangible reasons for late publication of annual reports by public limited companies is
that the accounts need to be audited before they can be published. So, time lag in financial report
publication and audit delay are intertwined and used interchangeably in the financial reporting literature.
As a result, in many cases timeliness has been studied together with actually dealt with audit delays.
There are only two studies in the developing countries which empirically examined time lags in
disclosure and several corporate attributes (Ng and Tai, 1994 and Abdulla, 1996). Audit delay is
generally defined in these studies as the length of time from a company’s financial year-end to the date
of the auditor’s report. In this study, time lag has been considered has been defined as the time from a
company’s accounting year end to the date of the annual general meeting. Typically, a multivariate
analysis is applied with multiple regression analysis as the tool, using audit delays as the independent
variable and selected corporate characteristics as explanatory variables. In this study a brief review of
5
such studies is provided.
Dyer and McHugh (1975)
Dyer and McHugh (1975) attempted to discover reasons for the delay in the publication of annual
financial reports of Australian companies. Their model aimed to establish the impact of selected
corporate attributes on reporting delays of a sample of 120 companies randomly selected from
companies listed on Sydney Stock Exchange (SSE). Apart from taking time lag data from the annual
reports, they distributed a questionnaire to the controllers and auditors of the sample firms. The study
revealed that sixty six percent of the mean total lag was consumed in pre-audit delays and year-end audit
examination. Of the three corporate attributes investigated, only corporate size appeared to account for
some of the variations in total lags, but the relationship did not appear to be very strong. The relationship
was, however, inverse as expected. Their results tends to support the hypothesis that there is a significant
negative relationship between the time lag and the company’s profitability. The statistical tools used in
this study were Spearman rank correlation and the Mann-Whitney U test, which are more suitable for
ordinal data.
Courtis (1976)
Courtis (1976) reported the results of his findings of 204 listed New Zealand companies for the year
1974. He examined the association of four corporate attributes including three measures of corporate
size (proxied by book value of total assets, the dollar value of sales revenue and number of employees),
age of the company, number of shareholders, and the pagination (length) of the annual report, with time
lag in corporate report preparation and publication.
He found that the average interval of time between balance date and date of annual general meeting was
18 weeks, 12 of which purport to be absorbed by audit process of corporate annual accounts. He found
that slow reporters tended to be less profitable as a group than fast reporters, and fuel and energy and
finance type companies tended to be fast reporters as specific groups while service industries and mining
and exploration companies tend to be slow reporters as a specific group. Mann-Whitney Z and U tests
were used which revealed that none of the four variables were statistically significant in explaining
6
reporting lags. However, profitability and industry sector were found to be statistically significantly
different between the slow reporters and the fast reporters as groups.
Gilling (1977)
Gilling (1977) argued that Courtis’s investigation failed to established any statistically significant
association between corporate attributes and reporting delays because the lag, in his view, was
essentially an auditing lag. So, he asserted that auditor attributes should be examined instead of company
attributes in order to find any meaningful explanation of reporting lag. He studied 1976 annual reports
of 187 New Zealand listed companies. He found that these companies were audited by 50 audit firms
of which approximately 69% were audited by the seven largest auditing firms. The mean reporting
delay of companies audited by the leading audit firms was found to be significantly less than that of
companies audited by the other 43 firms involved in auditing the sample companies. More importantly,
the mean time lag for the 20 overseas companies in the sample was only 53 days and for the 24 public
companies with assets over 50 millions dollars was 70 days. He suggested that this was because of the
conscious scheduling of audit work by large public companies.
Givoly and Palmon (1982)
Givoly and Palmon (1982) found an improvement in the timeliness of annual reports of 210 companies
listed on the New York Stock Exchange (NYSE) over a period of 15 years from 1960 to 1974. They
focused on the abbreviated audited annual reports published in the earnings digest of The Wall Street
Journal ahead of the full annual report. Corporate size and complexity of operations were used to
explain timeliness. Reporting delays appeared to be more closely associated to industry patterns and
traditions rather than to the company attributes studied. It was however, found that bad news tended to
be delayed and that the degree of market reaction to early and late announcements was differential. Late
announcements appeared to convey less new information than earlier reports. They reported that time
lags decreased over time. Sales as a proxy of size was found to be negatively related to the timeliness of
annual reports.
Whittred and Zimmer (1984)
Whittred and Zimmer (1984) examined the association between time lag and a set of corporate attributes
in Australia. Their study showed that the firms not facing financial distress take less time to publish
annual reports than firms that are facing financial distress. Further, their findings tend to support their
7
hypothesis that company management will strive to delay releasing bad news or to suppress information
that might damage the company.
Ashton, Willingham and Elliott (1987)
Ashton, Willingham and Elliott (1987) examined the relationship between audit delay and 14 corporate
attributes in the USA. Their sample included 488 US annual reports (both public and non public) those
belong to six different industries. The explanatory variables used in their model were total revenues, firm
complexity (proxied by four variables), industry classification, public/nonpublic status, month of
financial year-end, quality of internal control, the relative mix of audit work performed at interim and
final dates, the length of time the company had been a client of the auditor, profitability (proxied by two
variables), and the type of audit opinion issued. The results tend to indicate that five variables were
significantly related with the audit delay, and these were total revenues, one of the complexity measures,
the mix of interim and final dates and the quality of internal control irrespective of the fact that they
were publicly or nonpublicly traded. Their regression model showed that the overall R square was 0.265.
The R2 for the financial and nonfinancial samples were .310 and .388 respectively.
Carslaw and Kaplan (1991)
Carslaw and Kaplan (1991) extended prior research of audit delays in New Zealand by applying
multivariate analysis techniques and capturing both auditor and corporate attributes in their model. The
results suggested that only two of the nine explanatory variables used were statistically significant.
These were corporate size, which was inversely related to time lag, and existence of loss which was
directly related to reporting delays. Other variables studied were industry, extraordinary items, audit
opinion, audit firm size, year-end, ownership (owner controlled vs. manager controlled), and debt
proportion.
Ng and Tai (1994)
Ng and Tai (1994) empirically examined the association between audit delay and ten company
characteristics of listed companies in Hong Kong for the years 1990 and 1991. Their results showed that
8
the log of turnover and the degree of diversification are significantly related to audit delay in both years.
However, change in EPS was found to be significant in 1990 and reporting extratraordinary items proved
to be significant in 1991.
Abdulla (1996)
Abdullah (1996) reported empirical evidence on the attribute of the timeliness annual reports of 26
Bahraini companies. He examined the association between time lag and a set of five determinants. His
results tend to show a significant negative relationship between timeliness of publication and firm’s
profitability, size, and distributed dividend. However, the relationship between timeliness and industry
membership was found to be insignificant and the coefficient of the debt-equity ratio variable, those
significant did not have the expected sign.
3 SAMPLE, DATA SETS, HYPOTHESES DEVELOPMENT AND MODEL OF AUDITDELAY
3.1 The sample
The sample covers the listed Pakistani companies for the year 1993. The total number of corporate
annual reports of the companies listed on the Karachi Stock Exchange (KSE) available was 103. The
time audit delay data on each of the 103 sample companies were taken from their annual reports. The
balance sheet date represents the year end date for which the financial reports were prepared. The profit,
total assets, audit fees, international link of the audit firm and subsidiaries of multinational companies
were extracted from the annual reports. In addition, the figures for shareholder’s equity and debt-
equity ratio were calculated from the information provided in the annual reports. The interval period (i.e.,
audit lag) has been calculated from the dates supplied by the corporate annual reports being the interval
of days between balance sheet date and the date auditor’s report.
3.2 Corporate attributes and audit delay relationship
The present study examined the corporate attributes affecting audit delay of listed companies in a
9
developing country, Pakistan. As this study is a part of the Ph.D. thesis of the first author in which the
listed financial companies were excluded from the sample, this study was restricted to listed non-
financial companies only1. The dependent variables used in this study is audit delay (AUD) which has
been calculated for each of the companies under study. Some of the explanatory variables used in the
study have taken into the account from previous studies undertaken by other researchers. As noted
earlier, two new explanatory variables have been introduced to see whether these can explain the audit
delay in developing countries in general and in Pakistan in particular. Audit delay as defined in the
previous studies as the length of time from a company’s financial year-end to the date of the auditor’s
report which has also been considered in the present study. A model of audit delay consisting seven
company characteristics has been developed from the work of Courtis (1976), Ashton et al (1989) and
Carslaw and Kaplan (1991) with some exceptions. For example, contingent liability variable, type of
company ownership, debt proportion, extra ordinary items, audit opinion and company year end have
been excluded in this model which were used in prior similar research. The corporate attributes
examined in this study are size of the company (log of sales and assets), debt-equity ratio, profitability,
(proxied by rate of return on assets and net profit margin), subsidiaries of multinational companies, audit
fee, industry type and audit firm size. Of the seven explanatory variables, INLINK, INDUSTRY,
MNCS and PROFIT are dummy variables. For the convenience of comparison, we will compare our
results with similar prior research, where possible. The following paragraphs provide the underlying
rationale behind the hypothesized relationship between each of the seven variables and audit delay.
1. Size of the company
There are several studies which have been found that there is a significant association between the size
of the company and the audit delay in both developed and developing countries (Newton and Ashton,
1989; Davies and Whittred, 1980; Ashton et al., 1989; Carslaw and Kaplan, 1991; Garsombke, 1981;
Gilling, 1977 and Abdulla, 1996). For example Ashton, Graul and Palmon (1987; p.660) held the
opinion that their ‘analyses indicated that assets provided greater explanatory power. Most earlier
researchers have used total assets as the measure of company size. There is a negative relationship
between the audit delay and the company size which has been confirmed by most empirical studies.
However, researchers like Givoly and Palman (1982) found that no significant relationship (either
negative or positive) between the size of the company and the audit delay.
1 If the financial companies were included in the sample, the researchers could include one variable(financial/nonfinancial) to establish the relationship between the audit delay and the variable.
10
There are some justifications why company size could be negatively related to the extent of audit delay.
Larger companies may be hypothesized to complete the audit of their accounts earlier than smaller
companies for a variety of reasons. Firstly, it has been argued that the ‘larger companies may have
stronger internal controls, which in turn should reduce the propensity for financial statements errors to
occur and enable auditor(s) to rely on controls more extensively and to perform more interim work’
(Carslaw and Kaplan, 1991; p.23). Secondly, larger companies have the resources to pay relatively
higher audit fees to perform soon after the year end of the financial year and vice versa. Hence, it is
likely that the audit of accounts of the larger companies are likely to be finished earlier as compared to
those of smaller companies. Thirdly, the larger the firm the more the audiences who are interested in its
affairs (Abdulla, 1996). Dyer and Mchugh (1975) argued that managements of larger companies may
have incentives to reduce both audit delay and reported delay since larger companies may be monitored
more closely by investors, trade unions and regulatory agencies, and thus face greater external pressure
to report earlier. Therefore, researchers like Davies and Whittred (1980), Ashton et al (1989), Carslaw
and Kaplan (1991) and Abdullah (1996) argued that to reduce uncertainty about performance that might
reduce the share price, the larger firms tend to complete their audit work as soon as possible in order to
release their annual reports. Finally, larger companies may be able to exert greater pressures on the
auditor to start and complete the audit in time (Carslaw and Kaplan, 1991). In this study, log of total
assets has been used as the measures of company size. The following specific hypotheses have been
tested regarding size of the firm:
H1: firms with greater assets are likely to complete audit of the accounts sooner than those firms with
fewer total assets.
2. Debt-equity Ratio
It has been argued that increasing the amount of debt a firm uses, will put pressure on the firm to provide
its creditors with audited financial reports more quickly (Abdulla, 1996). The debt-equity ratio has
been studied empirically by some researchers to assess whether it bears any relationship to audit delay.
However, researchers like Carslaw and Kaplan (1991) and Abdulla (1996) found no significant
association between the debt-equity ratio and audit delay. The nature of the relationship between audit
lag and debt-equity is ambiguous. Companies having more debt in their financial structure, can be
argued to start and complete the audit quicker than those firm with less or no debt. Relatively highly
geared companies have an incentive to complete audit work in order to have the auditor’s report for
facilitating both monitoring by the creditors of the company’s operations and financial position and any
11
implementation of corrective measures (Abdulla, 1996). In addition, such companies may release their
audited annual reports more quickly to reassure equity holders at their earliest opportunity who are likely
want to reduce risk premiums in required rates of return on equity. However, the quick release of the
audited financial statements is not possible unless the audit work accomplished. On the other hand,
there is a possibility that the companies with higher debt-equity ratios may want to disguise the level
of risk and may delay to publish their corporate annual reports and may have an incentive to defer audit
work as longer as possible. Several measures of leverage have been used in previous studies, including
debt to total assets, total debt, debt proportion (Carslaw and Kaplan, 1991) as well as the debt-equity
ratio. The debt-equity ratio has been used as measure of leverage in this study. The following specific
hypothesis has been tested regarding the debt-equity ratio:
H2: firms with higher debt-equity ratios are likely to complete audit of the accounts sooner than firms
with lower debt-equity ratios.
3. Profitability
Profitability has been used by some researchers as an explanatory variable for audit delay (e.g., Dyer an
McHugh, 1975; Carslaw and Kaplan, 1991 and Courtis, 1976). Among these researchers Courtis (1976)
and Dyer and McHugh (1975) found a positive association between profitability and audit delay whereas
Carslaw and Kaplan (1991) found a negative association between the variables. Profitability in this study
is a dummy variable where companies reporting a profit for the period were expected to minimise audit
delay, and were assigned a ‘1, and rest of the companies were assigned a ‘0’ which were sustaining
losses.
There are some reasons behind the profitability variable why this variable should be negatively
associated with audit delay. First, profitability can be considered one indication of whether good news or
bad news resulted from the year’s activity (Ashton, Willingham and Elliott, 1987). If the company
experiences losses, management may wish to delay in releasing the corporate annual report in order to
avoid the discomfort of communicating it as it is ‘bad news’. It has been argued that ‘a company with a
loss may request the auditor to schedule the start of the audit later than usual’ (Carslaw and Kaplan,
1991; p.24). On the other hand, companies having higher profitability may wish to complete audit of
their accounts as early as possible in order to quick release their audited corporate annual reports to
convey the ‘good news’. So, it is likely that if the profitability of a company is high, management likely
12
to hurry to publish the corporate annual report in order to experience the comfort of communicating it as
it is ‘good news’. For profitable companies if the net profit margin or the rate of return on investment
is more than the industry average, the management of a company has an incentive to communicate ‘good
news’ and is likely to hurry to release their corporate annual reports as early as possible. Further, there is
an argument that ‘an auditor may proceed more cautiously during the audit process in response to a
company loss if the auditor’s believes the company’s loss increases the likelihood of financial failure or
management fraud’ (Carslaw and Kaplan, 1991; p.24).
In this study ‘profitability’ is a dummy variable and labelled as PROFIT. Where companies were
reporting a profit for the period were expected to minimise audit delay, and were assigned a ‘1’, and rest
of the companies were assigned a ‘0’ which were sustaining losses. The following specific hypothesis
has been tested regarding profitability:
H3 : firms with profit are likely to complete audit of the accounts sooner than firms those firms with
losses.
4. Subsidiaries of Multinational Companies
The subsidiaries in developing countries of parent multinational companies from developed countries are
likely to start and complete the audit of their accounts more quicker than their local counterparts. Several
justifications may be offered for the inference this ‘subsidiaries of multinational companies variable’.
The subsidiaries of multinational companies has to prepare their accounts very soon after the end of the
accounting period for consolidation purpose. So, it is very important for these subsidiaries of the
multinationals to prepare and complete the audit of their accounts as early as possible.
Apart from this, the shares of the subsidiary companies are called ‘blue chips’. The subsidiaries of
multinational companies are motivated to communicate information more quickly to the capital market
than their domestic counterparts. In addition, it has been found that the audit of multinational
companies are performed by international auditing firms or more likely “Big Six” who are very quick
and efficient in finishing their audit work. This variable is the first in the studies relating to the audit
delay literature which seek to establish association between subsidiaries of multinational companies and
the audit delay. The following specific hypothesis has been tested regarding the subsidiaries of
multinational companies:
H4: firms with the mutinationality connections (subsidiaries of multinational companies) are likely to
13
complete audit of the accounts sooner than their domestic counterparts.
5. Audit Firm Size
There are studies which have examined empirically the relationship between the characteristics of the
audit firm (size of audit firm or international link of the auditing firm) and audit delay (Carslaw and
Kaplan, 1991 and Gilling, 1977). Whereas Gilling (1977) found a significant positive relationship
between the audit delay and the size of the auditing firms, Garsombke (1981), Carslaw and Kaplan
(1991) and Davis and Whittred (1980) found no significant association between the audit firm size and
audit delay.
It is more likely that the larger audit firms (hence, international audit firms) have a stronger incentive to
finish their audits work more quicker in order to maintain their reputation. Otherwise, they might loose
the reappointment as the auditor of their client companies in the coming year(s). As the larger and more
well known audit firms have more human resources than smaller firm, it has been argued that these audit
firms may be able to perform their audit work more quicker than smaller audit firms.
It has been argued by Gilling (1977) that audit delay for companies with an international firm is
expected to be less than for audits from other audit firms and international firms, because they are larger
firms, might be able to audit more efficiently, and have greater flexibility in scheduling to complete
audits in time (Carslaw and Kaplan, 1991). Further it has been argued by Ashton, Willingham and Elliott
(1987; p.602)
‘It may be reasonable to expect that larger audit firms would complete audits on a moretimely basis because of their experience … …Large firms may be able to audit suchcompanies more efficiently than small audit firms’.
In this study, the auditors are classified into two groups- international auditing firms including Big Six,
and domestic audit firms. Most domestic audit firms in Pakistan can be characterised as sole
proprietorship firms (although there exists some partnership audit firms) and hence, smaller in size. The
‘INLINK’ variable used in this study is a dummy variable representing ‘1’ if it is an international audit
firm and ‘0’ if not. There is a negative relationship between INLINK and AUD. The following specific
hypothesis has been tested regarding the audit firm size or international link of the audit firm:
H5 : firms that engage larger audit firms are likely to complete audit of the accounts sooner than those
firms that engage smaller audit firms.
14
3.3 Multiple regression model for audit delay
Multiple linear regression has been used to test the hypotheses of the study. In the model, the time lag
has been used as the dependent variable as in equation (1):
Y= a + b1 PROFIT + b2 MULTICOM + b3 DERATIO + b4 LOGASSETS + b5 INLINK +b6 AUDITFEE + + b7 INDTYPE e .................(1)
where, Y= audit delay (in days).
a = the constant, and
e = the error term.
The definitions of the seven corporate attributes and their expected effect on audit delay in the regression
model along with expected signs and relationships are presented in Table 1.
Table1Definition of Corporate Attributes and Expected Effect on Audit Delay in the regression
VariableLabels
in the OLS
Corporate Attributes Definition ExpectedRelationshipwith Audit
DelayINLINK International link of auditing
firmsSign of the international link of audit firmsrepresented by a dummy variable; companieswith the international link assigned a ‘1’ andotherwise a’0’.
Negative
SALES Total of sales Total sales at the end of the financial year Negative
PROFIT Profitability of the firm Sign of profitability represented by a dummyvariable; companies with positive net profitassigned a ‘1’ ; otherwise ‘0’.
Negative
MULTICOM Subsidiary of a multinationalcompany
Subsidiaries of the multinational parentcompanies having more than 51% shares of thecompany
Negative
ASSETS Total assets Total assets of the company on the balance sheetdate
Negative
DERATIO Debt to equity ratio Long term debt divided by shareholders’ equityat the end of the financial year
Positive
AUDITFEE Audit fees paid by the company The amount paid to the audit firm for the audit, Negative
15
4 RESULTS OF THE STUDY
The results are presented in three sections. In the first section the summary of the descriptive statistics of
the dependent variable (AUD) and seven independent variables has been presented followed by a
multivariate analysis of correlation coefficient and finally, the results of our multiple regression model of
audit delay and seven corporate attributes are presented. Spearman rank-correation co-efficients, and
Ordinary Least Square (OLS) regression were used to test the hypotheses of the study.
4.1 Descriptive Statistics
It has been noted that in this study the audit lag i.e., the interval of time after the balance sheet date and
the date of auditor’s report when the auditors formally present their report to the company has been
considered. In this study the audit lag has been considered i.e., the total interval of time between the
balance sheet date and the date of auditor’s report when the auditors formally present their report to the
company. For example, if a company has June 30 as its balance sheet date and if the date of auditor’s
report is on December 26 (1993), the total lag will be 178 days.
16
Table 2
Descriptive Statistics
Variable N Minimum Maximum Mean Standard
Deviation
AUDITFEE (in thousand Rs.) 103 10.00 1638.00 171.79 274.60
LOGASSETS (natural log) 103 6.52 9.97 8.53 .64.
INDUSTRY 103 .00 1.00 .72 .45.
DERATIO 103 .00 4.16 .70 .84
INLINK 103 .00 1.00 .18 .38
MNCS 103 .00 1.00 .13 .33
PROFIT 103 .00 1.00 .69 .47
AUDITLAG (days) 103 30.0 249.00 143.28 41.05
The overall results of this study indicate that the total interval of time between balance sheet date and the
date of annual general meeting averages 197 days. Whereas American auditors reports were available
approximately 40 days after their clients’ balance sheet dates, New Zealand and Australian auditors took
approximately 80 days (Stamp, 1966). The audit delay for each of the 103 listed sample companies
ranged from a minimum interval of 30 days to a maximum interval of 249 days. This means that
Pakistani listed companies take approximately five months on average beyond their balance sheet dates
before they finally ready for the presentation of the audited accounts to the shareholders at the annual
general meeting. This evidence suggests that timeliness may not be an important concern for Pakistani
companies in financial reporting policy.
4.2 Correlation analysis
To examine the correlation between independent variables, Pearson product moment correlation
coefficients (r) were computed. A correlation matrix of all the values of r for the explanatory variables
along with the dependent variables was constructed and is shown in Table 3. The Pearson product-
moment coefficients of the correlation between the subsidiaries of the multinational companies and
international link of the audit firms variables is higher than the coefficient of the correlation between
every other corporate attributes. Table 3 suggests that the correlation between the subsidiaries of the
multinational companies and international link of the audit firms variables may be an issue while
collinearity across the other variables is not. Table 3 shows noteworthy collinearity (p £ 0.01) between
the subsidiaries of the multinational companies and international link of the audit firms variables (.749),
17
between log of assets and audit fees (.552), between audit fees and international link of the audit firms
variables (.372), between the subsidiaries of the multinational companies and audit fees variables (.441),
between international link of the audit firms and debt-equity variables (-.336), between log of assets and
debt-equity variables, between log of assets and industry variables (.309), between profitability and
industry variables and profitability and between log of assets variables (.327). However, Kaplan (1982)
suggests that multicullinearity may be a problem when the correlation between independent variables is
0.90 or above. However, Emory (1982) considered more than 0.80 to be problematic. It is evident from
the table that the magnitude of the correlation between variables seems to indicate no severe
multicollinearity problems.
18
Table 3
Spearman Rank Correlation
VARIABLES AUDITFEE DERATIO INDUSTRY INLINK LOGASSETS MNCS PROFIT
AUDITFEE 1.000
DERATIO -.45 1.000
INDUSTRY .081 .084 1.000
INLINK .372** -.336** .061 1.000
LOGASSETS .552** .324** .309** .169 1.000
MNCS .441** -.310 .108 .749** .214* 1.000
PROFIT .174 -.94 .223* .143 .327** .192 1.000** coefficient of correlation significant at 1% level or better (p £0.001) *coefficient of correlation significant at 5% level or better (p £0.05)
19
4.3 Results of regression analyses
It was hypothesised that for the sample companies audit fees, log of assets, profitability, subsidiaries of
multinational companies, audit fees and international link of the audit firm would be negatively
associated with audit delay and debt equity ratio should be positively associated with audit delay
variable. It was found that only the relationship between the audit delay and the subsidiaries of
multinational companies (MNCS) was significant at 5% level (see Table 4). The association between
audit delay and profitability variable was found to be significant at only 20% level. However, the
relationships between audit delay and other three explanatory variables such as audit fees, debt-equity
ratio, industry type, log of assets and international link of the audit firm were found to be insignificant.
The R2 under the model was .354, which indicate that our model is capable of explaining 35.40% of
the variability in the delay of audit in the sample companies under study. The adjusted R2 indicate that
30.60 percent of the variation in the dependent variable in our model is explained by variations in the
independent variables. The R2 can be compared favourably with those reported by Ng and Tai (1994),
Ashton and Colleages (1987), Carslaw and Kaplan (1991) and Abdulla (1996). The F-ratio indicates that
the model significantly explains the variations in the audit delay in Pakistan. The Durbin-Watson (DW)
statistics indicate that there is no severe autocorrelation.
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Table 4
Summary of the regression output
Coefficient of multiple regression (Multiple R) .595
Coefficient of determination (R2) .354
Adjusted R2 .306
Standard Error 34.1878
Analysis of Variance
D.F. Sum of Squares Mean Squares
Regression 7 60856.62 8693.802
Residual 95 111036.2 1168.802
F ratio = 7.438
------------------ Variables in the Equation ------------------
Unstandardized Coefficients Standardized
Coefficients
Variable B Standard Error Beta T Sig T
(constant) 111.655 52.116 2.142 .035
AUDITFEES -1.9E-03 .015 -.13 -.126 .900
DERATIO 3.585 4.594 .073 .780 .437
INDUSTRY .816 8.013 .009 .102 .919
INLINK 1.320 13.739 .012 .096 .924
LOGASSET 5.226 6.657 .081 .785 .434
MNCS -68.212 16.867 -.555 -4.044 .000
PROFIT -10.620 8.240 -.120 -1.289 .201
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5 CONCLUSION, LIMITATIONS AND FUTURE DIRECTIONS FORFURTHER STUDY
The multivariate tests of audit delay of the Pakistani listed companies show that the subsidiaries of
multinational companies tend to start and complete their audit work earlier. The multinational attribute is
a new variable used in the studies of audit delay proved to be significantly negatively associated with
audit delay. Other new variable ‘audit fees’ failed to established any relationship with the audit delay.
However, other five corporate attributes found not to be significantly associated with audit delay. From
the results of this study the following conclusions can be drawn.
Firstly, there appears to be an unusually audit delay made by the Pakistani listed companies soon after
the balance sheet date. The average interval of time between balance sheet date and the date of
auditor’s report is 4.77 months. Although the minimum audit delay is very low (30 days), the average
audit lag is 143 days as against approximately 40 days after their clients’ balance sheet dates in the USA,
and approximately 80 days in the case of the listed companies in New Zealand and Australia. So,
Pakistani companies are taking relatively more time to complete audit of their accounts. As a result the
appeal of the information provided by the company annual reports can not help the users to take their
decision in time if it takes another 143 days to arrange annual general meeting in another 143 days. With
regard to timeliness as a qualitative objective of financial statements, this evidence can be regarded as
unsatisfactory.
The findings of this study may be generalized after taking into consideration certain limitations. This
study considers the annual reports for a single year. Further research can be undertaken to measure audit
delay longitudinally to determine whether the trend of audit delay has improved over time. Such a study
would provide additional insights on the underlying causes for the audit delay in developing countries in
general and in Pakistan in particular. This study does not consider non-listed or financial companies.
Further research can be undertaken taking into consideration both groups of companies. However, if
anyone includes listed financial companies in the sample, can attempt to examine the relationship
between audit delay and industry type i.e., financial as ‘1’ and non-financial as ‘0’.
The results may be different if the number of company characteristics were increased or another set of
variables were examined. Although the sample includes 103 companies from Pakistan is reasonable, further
22
research can be undertaken with a larger sample (more than 300 companies for each of the country). This
might be useful with respect to the stability of the regression equation. Market value of companies could
be the proxy for the size of the companies. However, market value of the companies was not readily
available at the time of preparation of this paper. The information regarding ownership structure of the
companies was not available. This variable could be a potentially important explanatory variable in
relation to developing countries like Pakistan where majority of the ownership of many companies are
closely held often by families.
23
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