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:MSRYDMAH@fs1.acc.man.ac.uk

and

Peter J. TaylorSenior Lecturer

School of Accounting & FinanceThe University of Manchester

Oxford RoadManchester M13 9PLPhone:0161-275-4004Fax :0161-275-4023

E-mail:P.Taylor@man.ac.uk

(Comments are invited. Please do not quote as this is a preliminary draft)

Draft: February, 1998

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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.

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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,

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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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

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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.

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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

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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.

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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.

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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)

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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.

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