Abnormal audit delays, earnings quality and firm value in the USA

Abstract

If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service information about how to choose which publication to write for and submission guidelines are available for all. Please visit www.emeraldinsight.com/authors for more information. About Emerald www.emeraldinsight.comEmerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online products and additional customer resources and services.Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. AbstractPurpose -This paper aims to address three questions: Does the abnormal delay in the audit process signal poor earnings quality? Is this information about earnings quality incremental to that contained in earnings report delay? Does the market use this information about earnings quality in valuing the firm? Design/methodology/approach -Data are obtained from four databases: Compustat, Audit Analytics, Compact-Disclosure and I/B/E/S. Complete data are available for 5,298 firms for 22,492 firm-years. The paper uses a two-stage model. In the first stage, a detailed model using determinants from extant research tries to explain the audit delay. In the second stage, the unexplained delay from the first stage is used in the association tests with earnings quality. Findings -The paper presents evidence that abnormal delays in the audit process are inversely associated with earnings quality. When the market values a dollar of reported earnings, it appears to discount the valuation by the extent of abnormal audit delay. Originality/value -The current paper contributes to existing research in several ways. First, it establishes a comprehensive model to explain audit delays and provides a tool to measure abnormal audit delays. Second, it provides evidence of inverse association between abnormal audit delay and seven proxies of earnings quality. Finally, the paper shows that abnormal audit delay creates skepticism among investors about earnings quality and they value the disclosed earnings after discounting for such delay.

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

“…He found longer audit delays were generally associated with lower earnings quality. Asthana's (2014) findings gave perspective on some earlier studies related to ARL and earnings quality. For example, Asthana's findings extended Whittred and Zimmer's (1984) study that examined a sample of Australian companies listed on the Sydney Stock Exchange from 1964 to 1978.…”

“…Asthana (2014) examined ARL with respect to earnings quality, as proxied by abnormal accruals, earnings persistence, earnings timeliness, and earnings predictability. He found longer audit delays were generally associated with lower earnings quality.…”

Abnormal Audit Delay and Earnings Quality in Nigerian Banking

“…Their results show that abnormal audit report delay is positively related with financial restatements. Asthana (2014) investigate the relationship between abnormal audit delay and earnings quality. Their result reveal that there is a negatively relationship abnormal delays in the audit process and earnings quality.…”

The Effect of the Auditors’ Rotation on the Accounting Quality in the Case of Romanian Listed Companies under the Transition to IFRS

“…Kim et al (2015) conclude that the effect of mandatory change of the auditor can lead to a discouraging of the clients to manage the earnings and to a better accruals quality. Another aspect that can negatively feature the auditor's rotation is that this rule slows down the auditing process through the time the new auditor takes to get used to the activities and the features of the audited company (Asthana, 2014 Heliodoro et al (2015) refer to the change of the auditor as an intentioned behavior of listed companies, in order to avoid an unfavorable opinion from the auditor. In the case of the listed Portuguese companies, they conclude that a qualified opinion leads to the change of the auditor in 50% of the cases.…”