An Examination of Audit Delay: Evidence from Pakistan

Monirul Alam Hossain

Ph.D. Student School of Accounting and Finance The University of Manchester Oxford Road Manchester M13 9PL Phone:0161-273-8542 Fax :0161-275-4023 E-mail:MSRYDMAH@fs1.acc.man.ac.uk

and Peter J. Taylor

Senior Lecturer School of Accounting & Finance The University of Manchester Oxford Road Manchester M13 9PL Phone:0161-275-4004 Fax :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 Please do not quote as this is a preliminary draft)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

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 twofold. 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.

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,

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 auditors report. Audit delay is generally defined in these studies as the length of time from a companys financial year-end to the date of the auditors report. In this study, audit delay

has been considered as the time from a companys accounting year end to the date of the auditors 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

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 companys financial year-end to the date of the auditors report. In this study, time lag has been considered has been defined as the time from a companys 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

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 companys 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

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 Courtiss 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. of 187 New Zealand listed companies. He studied 1976 annual reports

He found that these companies were audited by 50 audit firms The mean reporting

of which approximately 69% were audited by the seven largest auditing firms.

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. conscious scheduling of audit work by large public companies. He suggested that this was because of the

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

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

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 firms 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 DELAY

AND MODEL OF AUDIT

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 shareholders equity and debtequity 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 auditors report.

3.2 Corporate

attributes and audit delay relationship

The present study examined the corporate attributes affecting audit delay of listed companies in a

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 nonfinancial 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 companys financial year-end to the date of the auditors 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.

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.

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 auditors report for facilitating both monitoring by the creditors of the companys operations and financial position and any

10

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. there is a possibility that the companies with higher debt-equity ratios On the other hand,

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 years 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 auditors believes the companys 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 more timely basis because of their experience Large firms may be able to audit such companies 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) Y= audit delay (in days). a = the constant, and e = the error term.

where,

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. Table1 Definition of Corporate Attributes and Expected Effect on Audit Delay in the regression
Variable Labels in the OLS INLINK Expected Relationship with Audit Delay International link of auditing Sign of the international link of audit firms Negative firms represented by a dummy variable; companies with the international link assigned a 1 and otherwise a0. Total of sales Profitability of the firm Total sales at the end of the financial year Negative

Corporate Attributes

Definition

SALES PROFIT

Sign of profitability represented by a dummy Negative variable; companies with positive net profit assigned a 1 ; otherwise 0.

MULTICOM Subsidiary of a multinational Subsidiaries of the multinational parent Negative company companies having more than 51% shares of the company ASSETS Total assets Total assets of the company on the balance sheet Negative date Long term debt divided by shareholders equity Positive at the end of the financial year Negative

DERATIO

Debt to equity ratio

AUDITFEE

Audit fees paid by the company The amount paid to the audit firm for the audit,

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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 auditors 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 auditors 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 auditors 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.) LOGASSETS (natural log) INDUSTRY DERATIO INLINK MNCS PROFIT AUDITLAG (days) 103 103 103 103 103 103 103 103 10.00 6.52 .00 .00 .00 .00 .00 30.0 1638.00 9.97 1.00 4.16 1.00 1.00 1.00 249.00 171.79 8.53 .72 .70 .18 .13 .69 143.28 274.60 .64. .45. .84 .38 .33 .47 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 productmoment 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),

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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 multicollinearity problems. seems to indicate no severe

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Table 3 Spearman Rank Correlation

VARIABLES AUDITFEE DERATIO INDUSTRY INLINK LOGASSETS MNCS

AUDITFEE 1.000 -.45 .081 .372** .552** .441**

DERATIO

INDUSTRY

INLINK

LOGASSETS

MNCS

PROFIT

1.000 .084 -.336** .324** -.310 1.000 .061 .309** .108 1.000 .169 .749** 1.000 .214* .327** 1.000 .192 1.000

PROFIT .174 -.94 .223* .143 ** 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) Coefficient of determination (R ) Adjusted R2 Standard Error

2

.595 .354 .306 34.1878

Analysis of Variance D.F. Regression Residual F ratio = 7.438 ------------------ Variables in the Equation -----------------7 95 Sum of Squares 60856.62 111036.2 Mean Squares 8693.802 1168.802

Unstandardized Coefficients

Standardized Coefficients

Variable (constant) AUDITFEES DERATIO INDUSTRY INLINK LOGASSET MNCS PROFIT

B 111.655 -1.9E-03 3.585 .816 1.320 5.226 -68.212 -10.620

Standard Error 52.116 .015 4.594 8.013 13.739 6.657 16.867 8.240

Beta

T 2.142

Sig T .035 .900 .437 .919 .924 .434 .000 .201

-.13 .073 .009 .012 .081 -.555 -.120

-.126 .780 .102 .096 .785 -4.044 -1.289

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5 CONCLUSION, LIMITATIONS AND FUTURE DIRECTIONS FOR FURTHER 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. the results of this study the following conclusions can be drawn. From

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

auditors 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

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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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