Determinants and implications of long audit reporting lags: evidence from China

Audit reporting lag is the single most important determinant influencing the timeliness of the release of financial statements. In this study, we first explore the determinants of audit reporting lags in China where the audit market for listed firms is dominated by non-Big 4 auditors. We then examine the implications of long audit reporting lags in subsequent years. We find that selected measures of audit risk and complexity, and auditor expertise are all associated with the length of audit reporting lags in China. Firms with long audit reporting lags are more likely to have the receipt of non-standard opinions in subsequent periods. There is also evidence that firms with extremely long audit reporting lags tend to have more restatements in the subsequent year. As prior research has not specifically investigated the consequences of long audit reporting lags in subsequent years, this study makes an important contribution to the literature in this area.     

DETERMINANTS OF AUDIT FEES FOR QUOTED UK COMPANIES

This study reports further evidence as to the determinants of the audit fees paid by quoted companies in the UK. It outlines a framework based on the findings from semi-structured interviews with partners in four large audit firms and the results of previous research, and tests this framework by means of multivariate analysis using 1987 data for a large sample of quoted UK companies. A model explaining 87 per cent of the variation in audit fees is constructed. The principal explanatory variables are found to be auditee size, return on shareholders equity, the number of subsidiaries, the lag between the year end and the date of the audit report, the size of the auditor, a measure of auditee diversification, the ownership structure of the auditee, and whether the auditor was based in London, with the last three being new variables introduced in this study.     

Corporate employment,red flags,and audit effort

U.S. regulatory agencies and congressional oversight committees have expressed concerns that auditors often neglect red flags embedded in the operating characteristics of firms that misstate their financial reports. This study examines whether labor employment decisions, a major part of a firm’s operations, help predict accounting improprieties and consequently play a role in audit planning and pricing. We find that negative abnormal employment changes are associated with a higher likelihood of subsequent financial restatements, accounting irregularities, and lawsuits related to accounting fraud, and generally require greater effort from auditors as manifested by higher audit fees and longer audit report lags. Positive abnormal employment changes are associated with subsequent restatements and longer audit report lags, but not associated with fraud or audit fees. Taken together, the results are consistent with auditors recognizing the individual misstatement risks pertaining to companies’ employment decisions. These results suggest that standard setters, regulators, and practitioners should devote more attention to operational statistics to identify potential red flags.     

THE TIMELINESS OF CORPORATE REPORTING: A COMPARATIVE STUDY OF SOUTH ASIA

This study examines the timeliness of corporate annual reporting in three South Asian countries, namely, Bangladesh, India and Pakistan. Based on a large sample of 558 annual reports for the year 1998, it is found that around 90% of the companies’ balance sheet end date falls in June and December in Bangladesh, March in India, and June and September in Pakistan. The audit lag is 162 days, 92 days and 145 days in Bangladesh, India and Pakistan, respectively. While the audit lag, preliminary lag and total lag are significantly lower in India compared to Bangladesh and Pakistan, a substantial proportion of companies take more time than allowed by the Companies Act in each country. A multivariate regression analysis indicates that financial year-end date is a significant determinant in each country. The size of the audit firm, as measured by the factor loading of audit fees, number of reporting entity audited by an audit firm and international linkage, indicates large audit firms take significantly less time in India and Pakistan. Profitability and corporate size are significant determinants only in Pakistan. There is no statistical evidence to support monitoring hypothesis, as proxied by Zmijeski’s financial condition index. The 2nd stage regression results suggests that only audit lag is significantly associated with the time taken by companies to submit their annual reports to the Stock Exchange and to hold the annual general meeting in each country. The results suggest that timeliness can be improved by reducing the delays in verifying the year-end accounts. Possible explanations for these findings along with limitations and implications are provided.     

不利意见、审计费用与意见购买

本文进一步区分上年度不利审计意见的具体类型、审计费用的升降以及审计意见的改善与恶化。研究证实:(1)上年度被出具不利审计意见虽然可能增加本年度收到不利审计意见的可能性,但是亦可能提高审计意见改善的可能性,并和审计意见出现恶化的可能性显著负相关。(2)如果上年度被出具不利审计意见,则异常审计费用与审计意见改善的可能性显著正相关。(3)审计费用的增加能显著降低被出具不利审计意见的可能性,并可有效防止年报审计意见出现恶化。可见,公司管理层可以通过提高审计费用成功地实现审计意见购买动机,在一定程度上规避不利审计意见。     

The effect of seasonal variations in auditor workload on local government audit fees and audit delay

Prior studies of government audit fees and audit delay (elapsed time from fiscal year end (FYE) to date of the audit report) employ a dichotomous variable to control for seasonality. However, a single variable does not appear to fully capture the effects of seasonality on audit fees or audit delay in the US local government sector. We compare the effects of FYEs commonly observed by US local governments (i.e., June 30, September 30, and December 31) on the audit fees and audit delay of 302 cities and counties for fiscal 1993. Our findings indicate that governments with June FYEs incur lower fees than do governments with either September or December FYEs. We also find that June and December governments sustain equivalent (and maximal) audit delay, and that September governments experience minimal delay. The results show that, in terms of fees and delay, December 31 is the least desirable of the FYE dates commonly found in the US local government arena. Our findings further suggest that audit fees may influence audit delay, when considered in a seasonal context.     

The vanishing searches and audit fees: Evidence from Google's withdrawal from China

I investigate the impact of the disruption of free information access via search engines on audit fees using a quasi-natural experiment provided by Google's withdrawal from China. Employing a difference-in-differences design, I document an increase in audit fees for firms with overseas business relative to firms without overseas business after Google's withdrawal. The results are robust to matched samples, placebo tests, alternative specifications, excluding alternative explanations and different event windows. This trend in audit fees suggests that Google's withdrawal hampers firms' foreign information streams and increases audit risk and audit effort. Consistent with this argument, after Google's withdrawal, firms with overseas business conduct more earnings management, pay more abnormal audit fees and experience longer audit report lags. Furthermore, the increase in audit fees is greater for firms with poor information environments, more retail investors or non-Big 4 auditors. My findings suggest a potential auditing cost of restricting the free flow of public foreign information about firms.     

Responses by Australian auditors to the global financial crisis

We examine the impact of the global financial crisis (GFC) on auditor behaviour in Australia. Using a sample of listed companies, we examine whether the GFC impacted the propensity of auditors to issue going concern modifications and increased audit effort as reflected in audit fees and audit reporting lag. Controlling for client characteristics, we find an increase in the propensity to issue going concern opinions during the period 2008–2009 compared with the period 2005–2007 and that Big N auditors responded to the GFC earlier than non‐Big N auditors. In relation to audit effort, we find evidence of increased audit fees during the period 2008–2009 compared with the period 2005–2007. There is, however, no evidence of increased audit reporting lags during the GFC.     

Client Importance and Audit Quality at the Individual Audit Partner,Office, and Firm Levels

We investigate whether audit partner level data provides a more powerful measure than office or firm level measures of client importance. We find that the likelihood of issuing a going-concern opinion (any and first-time) increases, and the absolute value of discretionary accruals decreases, in relation to the proportion of audit fees to the total audit fees received by audit partners from all their clients. We also find that the likelihood of issuing a going-concern opinion (any and first-time) increases, and the absolute value of discretionary accruals decreases, in relation to the proportion of non-audit services fees from a client to total non-audit service fees, and the proportion of total audit and non-audit service fees from a client to total fees from all their clients at the office and firm levels. Our findings provide evidence to regulators, audit clients, and stakeholders that audit partners do not succumb to pressure from economically more important clients as audit quality has a positive association with client importance.     

审计费用的事前确定、异常审计费用与审计质量

实务中,我国部分上市公司年报审计费用采取事前确定方式,也就是在审计工作开展之前的董事会上确定。事前确定审计费用的动机何在,会产生什么样的审计后果?已有国内外文献尚缺乏这方面的研究。本文以2008~2017年全部A股上市公司为样本,通过实证考察审计费用事前确定方式对异常审计费用以及审计质量的影响发现:基于低价揽客或折价维持客户的经济动因,事前确定的审计费用显著偏低。进一步研究表明,在事前确定审计费用方式下,客户的审计质量更低。本文研究丰富和拓展了审计费用及审计质量决定因素的相关文献,同时也为监管机构规范审计费用确定方式提供了经验证据。     

A new measure of accounting quality

This study develops a measure of accounting quality based on audit fees. Adopting a neoclassical view of the audit market, we argue that unexplained audit fees should contain information about accounting quality. We find that our measure of unexplained audit fees correlates positively with other empirical measures of quality. We further show that our measure of accounting quality is incrementally predictive of fraud, restatements, and SEC comment letters, controlling for other measures of quality. Overall, we believe that the information in audit fees can be used to provide an alternative measure of a firm’s accounting quality.     

An Assessment of the Impact of IFRS Adoption on Public Sector Audit Fees and Audit Effort – Some Evidence of the Transition Costs on Changes in Reporting Regimes

While many countries have adopted International Financial Reporting Standards (IFRS) for private sector enterprises, New Zealand (NZ), Australia and the United Kingdom adopted IFRS for all sectors, including the public sector. This approach is consistent with the concept of sector‐neutral accounting standards that gained wide acceptance in NZ and Australia in the early 1990s. Although a number of studies have assessed the impact of IFRS adoption in the private sector, and the public sector has provided some evidence as to the effects of IFRS adoption on financial statements, the costs of adopting IFRS have not been examined. One measure of cost is the change in audit fees in an IFRS reporting environment. The authors examine the impact of IFRS adoption in the NZ public sector on audit fees and audit effort. They obtained data regarding audit fees and audit effort in the NZ public sector and compared the pre‐adoption year with the first year of adoption for all segments. Their results indicate a substantial increase in audit fees and audit effort in the first year of IFRS adoption for all segments, with some variation across the segments. Two sectors, local authorities and energy companies, have had significant increases in audit fees and audit effort. These findings provide some empirical evidence regarding the cost of transition to IFRS and are of interest to researchers and regulators in countries that are currently considering transitioning to IFRS or IFRS‐based International Public Sector Accounting Standards standards in reporting for the public sector.     

The cost of audit qualifications: the role of non-audit services

This study argues that the incremental audit production costs associated with issuing a qualified opinion are difficult for public accounting firms to recoup through audit fees alone. It proposes that audit production costs associated with qualifications may be recouped through non-audit service (NAS) fees in addition to audit fees. Further, it proposes that such recoupment follows a differential timing pattern. Audit fees, because of their more constrained nature, are more likely to be elevated as a consequence of qualification presence in the year subsequent to the qualification. On the other hand, NAS fees, by virtue of their very nature and more flexible billing opportunities provided, are likely to be so affected in the year concurrent with the qualification. The research is based on Australian data, as there are few jurisdictions in the world that require disclosure of both audit and non-audit fees. Using a sample of 270 companies, a significant and positive association is found between the presence of an audit qualification and significantly higher fees paid. This relationship holds both in the case of an audit qualification contemporaneous with the fee charged, and of one occurring in the year preceding the disclosed fee(s). The effect on audit fees, however, occurs only on a lagged opinion basis, while the effect on NAS fees occurs only on a concurrent opinion basis.     

非审计业务对审计市场绩效的影响——基于会计师事务所业务结构的角度

以审计质量和审计收费作为审计市场绩效的衡量指标,从会计师事务所业务结构角度来考察我国注册会计师行业拓展非审计业务对审计市场所带来的影响。实证检验发现,相对于其他事务所而言,非审计业务规模越大和当年非审计业务规模较上年扩大的事务所,其审计质量越好,审计收费也越高。这说明在目前审计服务市场容量有限,竞争过于激烈的环境下,拓展非审计业务有利于增强审计独立性和提高审计收费,是改善行业执业环境的一个重要途径。     

Audit fee determinants and auditor premiums: evidence from the micro-firm sub-market

Despite the growing literature on the market for audit services, to date no study has examined the determinants of audit fees for the smallest auditees in the market. This study therefore provides some new theory and evidence on the determinants of the audit fees of micro-firms operating in the UK manufacturing sector. A key finding of the study is that in the highly competitive market under consideration, independent small auditees willingly paid a premium to be audited by a mid-tier or a (then) Big Six auditor, with the latter commanding the higher premium. It is concluded that these findings are consistent with Big Six (and, to a lesser extent, mid-tier) auditors commanding a brand premium stemming from the (perceived) higher quality audit conducted by large auditors, for which small firms are willing to pay a premium in order to benefit from associated ‘reputational’ and ‘signalling’ effects. The common finding that the explanatory power of audit fee models declines as a function of firm size is also examined. The empirical analysis confirms this effect, but evidence is offered that, rather than resulting from model misspecification, it is likely that audit prices of the smallest auditees are relatively insensitive to variations in corporate size, which may result from lower incremental economies of scale and minimum pricing.     

审计收费、审计师变更与意见购买

实证研究表明,虽然变更审计师增加了上市公司年报被出具非标准审计意见和审计意见恶化的可能性,但是审计师变更更为显著地提高了审计意见改善的可能性;审计收费异常增加与被出具非标准审计意见和审计意见恶化的可能性负相关.公司管理层在一定程度上可以成功实现审计意见购买的动机.此外,异常审计收费、审计收费异常增加和异常降低与审计师变更之间不存在显著的交互效应.     

Does the severity of a client’s negative environmental,social and governance reputation affect audit effort and audit quality?

In recent years, investors have begun to value companies’ reputations through their environmental, social, and governance (ESG) practices. ESG risk can affect business processes and controls and can heighten financial risk and threaten a firm’s survival. This study examines whether and how the severity of media coverage of a firm’s negative ESG issues (tainted ESG reputation) is associated with audit effort and audit quality. I find that auditors manage the higher expected engagement risk conveyed by tainted ESG reputation by applying higher audit effort. Next, I observe that the increased effort is associated with auditors likely detecting and requiring adjustments for material misstatements and that tainted ESG reputation is associated with fewer misstatements (i.e., reduces poor audit quality). The association between tainted ESG reputation and audit quality is driven primarily by increased audit report lag, not by increased audit fees. Further, I find that tainted ESG reputation is positively associated with audit effort and reduces poor audit quality for up to three years. The results also show that the audit effort and audit quality effect vary across the three components of ESG.     

Misclassification of audit-related fees as a measure of internal control quality

There is an abundance of literature examining the effects of a poor internal control system on financial reporting quality, decision-making and auditing. However, the most commonly used proxy for internal control quality (i.e., a material weakness in the internal controls over financial reporting) occurs relatively infrequently and has declined in occurrence over the past decade (Chasan, 2013). In this study, we attempt to develop an alternative measure for internal control quality using the information reported in the SK portion of a firm's 10-K. We suggest that a misclassification of audit-related fees in the unaudited disclosures of the annual report is a proxy for low internal control quality. Consistent with lower internal control quality, we find that firms misclassifying audit-related fees are more likely to report a material weakness, are less timely filers (longer report lag) and pay higher audit fees. Our findings suggest that misclassification of audit-related fees correlate with having poor internal control quality.     

Further evidence on the determinants of audit pricing in universities

This study investigates the determinants of audit fees for UK universities, involving an analysis of 451 university-year observations over the period 2007–2010. The study contributes to a fledgling strand of research examining audit pricing in the public sector. In seeking to identify an appropriate model to explain audit fees we interview a number of university auditors and use their insights in conjunction with prior findings from both private and public sector studies of audit pricing. Our findings show that audit fees in UK universities are positively influenced by size, the number of subsidiary companies, the amount of endowments, the level of debtors, being located in England and the use of a London-based auditor. We also find that more research-intensive universities (using a range of measures) and universities with greater operating surpluses pay lower audit fees.