Corporate governance mechanisms and audit delay in a joint audit regulation
| Pages | 292-316 |
| DOI | https://doi.org/10.1108/JFRC-09-2015-0054 |
| Date | 11 July 2016 |
| Published date | 11 July 2016 |
| Author | Mishari M. Alfraih |
| Subject Matter | Accounting & Finance,Financial risk/company failure,Financial compliance/regulation |
Corporate governance
mechanisms and audit delay
in a joint audit regulation
Mishari M. Alfraih
Department of Accounting, College of Business Studies,
The Public Authority for Applied Education and Training, Kuwait, Kuwait
Abstract
Purpose – This paper aims to examine the inuence of corporate governance mechanisms on audit
delay in companies listed on the Kuwait Stock Exchange (KSE) in 2013. Kuwait has the unusual audit
regulation that listed companies must be jointly audited by two independent auditors who both sign the
report.
Design/methodology/approach – Audit delay is measured as the number of days that elapse
between the end of the company’s nancial year and the date of the audit report. A multivariate
regression model analyzes the association between audit delay and six corporate governance
mechanisms, namely, joint auditor combination, board size, board independence, role duality,
institutional ownership and government ownership.
Findings – There is a wide range in audit delay among KSE companies, ranging from 7 to 159 days.
After controlling for various company characteristics, there is a signicant difference in the timeliness
of audit reports depending on the combination of auditors: audit delay is signicantly reduced when the
audit is performed by Big-4 companies. Moreover, companies with larger boards, a greater number of
independent directors and separate CEO–chairman roles are more likely to produce timely nancial
statements. Higher government ownership levels were associated with greater audit delay, while no
signicant association was found for institutional ownership. These results are robust to a variety of
sensitivity checks.
Practical implications – The ndings highlight the effectiveness of corporate governance
mechanisms in shaping the timeliness of audit reports; thus, these mechanisms should be taken into
account in any regulatory action to reduce audit delay. In addition, the ndings of this study provide
empirical evidence that can be used by regulators and enforcement bodies in their continued campaigns
promoting the role and importance of corporate governance mechanisms in improving the quality and
timeliness of nancial reporting.
Originality/value – The study extends the audit delay literature by investigating the issue in a joint
audit setting. The empirical evidence shows a wide range of audit delay in KSE-listed companies, which
raises questions about the costs and benets of the joint audit regulation for the length of this period.
Keywords Auditing, Annual report, Accounting regulation, Capital markets
Paper type Research paper
1. Introduction
The International Accounting Standards Board’s Framework for the Preparation and
Presentation of Financial Statements states that the objective of nancial statements is
to “provide information about the nancial position, performance and changes of
nancial positions of an entity that is useful to a wide range of users in making economic
decisions” (IASB, 2014). Kothari (2001) observed that market participants seek
The current issue and full text archive of this journal is available on Emerald Insight at:
www.emeraldinsight.com/1358-1988.htm
JFRC
24,3
292
Journalof Financial Regulation
andCompliance
Vol.24 No. 3, 2016
pp.292-316
©Emerald Group Publishing Limited
1358-1988
DOI 10.1108/JFRC-09-2015-0054
high-quality accounting information to mitigate information asymmetry between
company managers and outside investors. However, even high-quality nancial
statements are of little use to market participants seeking to make investment decisions
if they contain stale accounting information (Owusu-Ansah, 2000).
Francis et al. (2004) identify seven desirable attributes of accounting quality: accrual
quality, persistence, value relevance, timeliness, predictability, smoothness and
conservatism. They nd that the timely dissemination of nancial statements, among
other factors, is one of the most important characteristics of accounting quality. Their
ndings are supported by Owusu-Ansah (2000), who claims that the timely
dissemination of nancial statements is an essential ingredient for the proper
functioning of capital markets, as it helps to mitigate the effects of insider trading, leaks
and rumors. Marshall et al. (2015) argue that delays in the publication of audited
nancial statements are associated with investors having less condence in earnings
announcements.
The timeliness of nancial statements has been the focus of increasing attention by
regulatory bodies worldwide (Leventis et al., 2005). For example, the US Securities and
Exchange Commission (SEC) has adopted rules that shorten reporting deadlines for US
companies and require them to le their annual reports no later than 60 days (previously
90 days) after the scal year end, and to le their quarterly reports no later than 35 days
(previously 45 days) after the end of each quarter (SEC, 2002). The issue of timely
reporting has received similar attention from the Commission of the European Union
(EU), reected in the Transparency Directive, which states that, “timely information
about security issuers builds sustained investor condence and allows an informed
assessment of their business performance and assets. This enhances both investor
protection and market efciency” (EU, 2004, Para. 1).
Therefore, both theoretical and empirical evidence suggest that decisions based on
nancial statement information may be affected by the timeliness of its release (Imam
et al., 2001). However, there is an inevitable time gap between the end of the nancial
accounting period and the time when the audited nancial statements are made public
(Bonsón-Ponte et al., 2008). Accounting information must be made available to decision
makers while it is still relevant and can have an inuence on decisions; too late, and it is
no longer useful (IASB, 2014;Davies and Whittred, 1980;Givoly and Palmon, 1982). As
a result of the dramatic changes in both modern technology and business practices
worldwide, Owusu-Ansah and Leventis (2006) argue that the timeliness of accounting
information is more important than ever before.
The literature reports that the shorter the time that elapses between the end of the
company’s nancial year and the release of its nancial statements, the more useful the
information is (Khasharmeh and Aljifri, 2010). Similarly, Knechel and Payne (2001)
argue that the value of nancial statements diminishes as the time between the end of
the company’s scal year and the release of its nancial statements increases (because
competitors obtain information from substitute sources). However, much of this
literature is focused on developed markets, while little attention is given to emerging
markets. It has been argued that audit delay is a particularly critical issue in emerging
capital markets, where audited nancial statements are the only reliable source of
information available to investors (Leventis et al., 2005). In particular, Bushee et al.
(2010) highlight that press coverage signicantly affects the information environment of
businesses, and increases the amount of published information. In Kuwait (unlike the
293
Joint audit
regulation
To continue reading
Request your trial