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

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  • Sharad Asthana

Abstract

Purpose - – This paper aims to address three questions: Does the abnormal delay in the audit process signal poor earnings quality? Is this information about earnings quality incremental to that contained in earnings report delay? Does the market use this information about earnings quality in valuing the firm? Design/methodology/approach - – Data are obtained from four databases: Compustat, Audit Analytics, Compact-Disclosure and I/B/E/S. Complete data are available for 5,298 firms for 22,492 firm-years. The paper uses a two-stage model. In the first stage, a detailed model using determinants from extant research tries to explain the audit delay. In the second stage, the unexplained delay from the first stage is used in the association tests with earnings quality. Findings - – The paper presents evidence that abnormal delays in the audit process are inversely associated with earnings quality. When the market values a dollar of reported earnings, it appears to discount the valuation by the extent of abnormal audit delay. Originality/value - – The current paper contributes to existing research in several ways. First, it establishes a comprehensive model to explain audit delays and provides a tool to measure abnormal audit delays. Second, it provides evidence of inverse association between abnormal audit delay and seven proxies of earnings quality. Finally, the paper shows that abnormal audit delay creates skepticism among investors about earnings quality and they value the disclosed earnings after discounting for such delay.

Suggested Citation

  • Sharad Asthana, 2014. "Abnormal audit delays, earnings quality and firm value in the USA," Journal of Financial Reporting and Accounting, Emerald Group Publishing Limited, vol. 12(1), pages 21-44, July.
    • Handle: RePEc:eme:jfrapp:v:12:y:2014:i:1:p:21-44
    DOI: 10.1108/JFRA-09-2011-0009
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    Citations

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    Cited by:

    1. Husaini, 2019. "The Substitution Role of Audit Committee Effectiveness and Audit Quality in Explaining Audit Report Lag," GATR Journals afr171, Global Academy of Training and Research (GATR) Enterprise.
    2. Ioan-Bogdan ROBU & Maria GROSU & Costel ISTRATE, 2016. "The Effect of the Auditors’ Rotation on the Accounting Quality in the Case of Romanian Listed Companies under the Transition to IFRS," The Audit Financiar journal, Chamber of Financial Auditors of Romania, vol. 14(133), pages 1-65, January.
    3. Bryan, David B. & Mason, Terry W., 2020. "Earnings volatility and audit report lag," Advances in accounting, Elsevier, vol. 51(C).
    4. Susana Escaloni & Mercedes Mareque, 2021. "Audit Report Lag. Differential Analysis between Spanish SMEs and Non-SMEs," Sustainability, MDPI, vol. 13(22), pages 1-21, November.
    5. Imen Fakhfakh & Anis Jarboui, 2022. "Earnings Management and Audit Report Lag: The Role of Audit Risk-Tunisian Evidence," Journal of Accounting and Management Information Systems, Faculty of Accounting and Management Information Systems, The Bucharest University of Economic Studies, vol. 21(1), pages 113-135, March.
    6. Malik Abu Afifa & Fares Alsufy & Ahmad Abdallah, 2020. "Direct and Mediated Associations among Audit Quality, Earnings Quality, and Share Price: The Case of Jordan," International Journal of Economics & Business Administration (IJEBA), International Journal of Economics & Business Administration (IJEBA), vol. 0(3), pages 500-516.

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