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Relationship between Selected Corporate Attributes and Timeliness in Developing

Countries: Empirical Evidence from Bangladesh

Dr. Monirul Alam Hossain

Professor in Accounting E-mail: monirulhossain@yahoo.com

And

Professor Peter Taylor Manchester Business School

Email: peter.taylor@mbs.ac.uk

(*Correspondence to be made to the First Author)

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Relationship between Selected Corporate Attributes and Audit Delay/Timeliness in Developing Countries: Empirical Evidence

from Bangladesh

Abstract

Timeliness of annual reports is an important attribute of their usefulness. There is a lack

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, Bangladesh. The objectives of this study are two-fold. First, to

measure the extent of audit lag in Bangladesh and to establish the impact of selected

corporate attributes on audit delays in Bangladesh. Both univariate and multivariate

analyses are performed to test the hypotheses of the study. The audit delay for each of

the 78 listed sample companies ranged from a minimum interval of 41 days to a

maximum interval of 546 days. Bangladeshi listed companies take approximately 171

days 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 Bangladeshi

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 78 listed Bangladeshi companies showed that audit delay was

only significantly related to the industry variable. Other six corporate attributes found

not to be significantly associated with audit delay.

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Examination of Audit Delay: Evidence from

Bangladesh

1 INTRODUCTION

The usefulness of published corporate reports depends on their accuracy and their

timeliness. Timeliness was first identified by the American Accounting Association

(AAA, 1954 and 1957) as one of the qualitative attributes of usefulness in accounting

information. Subsequently, the Accounting Principles Board (APB) in the USA, the

Institute of Chartered Accountants of Canada (ICAC) and the Institute of Chartered

Accountants of England and Wales (ICAEW) followed the AAA path recognising

timeliness as one of the most important characteristics of financial statements. 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). The

usefulness of information disclosed in company annual reports will decline as the time

lag between year end and publication 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 certain interested investors.

There are evidence that there is a relationship between the security prices and the

timeliness disclosure (Givoy and Palmon, 1984 and Chambers and Penman, 1984). It has

been argued that the shorter the time between the end of the accounting year and

publication date of accounting reports, the more benefit can be derived from audited

annual reports (Abdulla, 1996). Legal or other accounting regulations may not permit

publication of financial reports unless they have been certified by an external auditor.

Even in the absence of such restrictions, managers of reporting firms may be unwilling to

publish financial reports without audit certification due to agency cost considerations.

Thus, publication of annual reports by companies may be delayed by the need is that the

accounts need to be audited. Time lag in financial report publication and audit delay are

intertwined and frequently used interchangeably in the financial reporting literature. As

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a result, in many cases timeliness timeliness have actually dealt with audit delays. The

length of the audit lag has been regarded as the ‘single most important determinant of the

timeliness of the earning announcements’ (Givoy and Palmon; 1982, p.419).

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. The present study has adopted this

definition of audit delay. The objectives of this study are two-fold. First, to measure the

extent of audit lag in a developing country, . Second, to establish the impact of selected

corporate attributes on audit delays in Bangladesh. This study possesses at least two

unique characteristics. First, Ashton et al. (1989) has argued for the inclusion of

additional variables to increase the predictive ability of audit delay studies. This study has

included two new company characteristics (audit fee and multinationality of the

companies) which never considered in prior research. Secondly, there is a paucity of

research about the timeliness of published audited accounts of the companies in

developing countries in general and a particular shortage of developing country studies of

audit delay. There are two only two studies which focused on the timeliness of corporate

annual reports in 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 is the first which

attempts to establish an association between a set of corporate attributes and audit delay

in Bangladesh.

The next section reviews existing research on reporting delay and audit delay. A model of

audit delay is presented in section 3, 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.

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LITERATURE REVIEW

Stock exchanges in different countries have certain requirements for listed companies to

publish their annual audited accounts within a specified period after the end of their

accounting period. In developed countries, the filling requirements for listed companies

vary from 90 days (in the USA and New Zealand), four months in the case of Australian

listed companies and six months (in the UK) after the balance sheet date (Davis and

Whittred, 1980; and Dayer and McHugh, 1975).

In developing countries, Bahraini listed companies are required to publish their annual

reports within 165 days from the financial year-end (Abdulla, 1996), while in the cases

of India and Bangladesh the maximum time limit to prepare corporate annual reports or

financial statements for presentation at the annual general meeting is six months and

nine months respectively from the accounting year end.

In Bangladesh, the Companies Act 1913 or 1994 specifies the time limit for the

presentation of the annual report at the annual general meeting as a maximum of six

months after the accounting year end of the company. According to the Bangladeshi

Companies Act 1913 and 1994, listed companies are not required to prepare quarterly or

interim reports and the stock exchanges in Bangladesh do not prescribe any such time

limit other than the requirements of the Companies Act 1994.

During the last four decades the research literature on timeliness has become established

in financial accounting. This literature has been reviewed to provide the background to

formulation of the hypotheses which have been used in this study. As already noted, the

first formal recognition of the importance of timeliness came in 1954 AAA (1955) and

(1957). They observed that, ‘Timeliness of reporting is an essential element of adequate

disclosure’ (AAA, 1955; p.46). Subsequently, many researchers and professional bodies

followed the AAA in acknowledging the role of timeliness in corporate financial

reporting theory and practice (see for example, Accounting Principles Board, 1970;

Courtis, 1976; Givoly and Palmon, 1982; Carlow and Kaplan, 1991).

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A number of empirical studies have been undertaken which seek to explain audit delay

using variables representing selected corporate attributes. Typically most of these studies

have used multivariate regression analysis and a brief review of some of the key studies

follows.

Dyer and McHugh (1975) attempted to discover reasons for the delay in the

publication of annual financial reports of Australian companies. Their model sought to

establish the impact of selected corporate attributes on reporting delays of a sample of

120 companies randomly selected from companies listed on the Sydney Stock Exchange.

Apart from taking time lag data from the annual reports, they distributed questionnaires

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 tend to

support the hypothesis that there is a significant relationship between the time lag and the

company‟s profitability.

Courtis (1976) reported the findings of his results on 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 company, number of

shareholders, and the pagination length of the annual report, with time lag in corporate

report preparation and publication. The influence of business sector was also examined.

He found that the average interval of time between balance sheet date and date of annual

general meeting was 18 weeks, twelve of which is purported to be absorbed by audit

process. He found that slow reporters tended to be less profitable as a group than fast

reporters; and fuel and energy and finance companies, as specific groups tend to be faster

reporters than service industries and mining and exploration companies as specific group.

Mann-Whitney Z and U tests were used which revealed that none of the four corporate

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variables were statistically significant in explaining reporting lags across the whole

sample.

Gilling (1977) argued that Courtis‟s (1976) investigation failed to establish any

statistically significant association between corporate attributes and reporting delays,

because the lag, in his view, was essentially an auditing lag. So, Gilling asserted that

auditor attributes should be examined instead of company attributes in order to find a

meaningful explanation of reporting lag. Gilling (1977) studied 1976 annual reports of

187 New Zealand listed companies, and found that these companies are audited by 50

audit firms and approximately 69% of the listed companies were audited by the seven

largest auditing firms. The average interval between balance sheet date and the date of

the auditors‟ report was 80 days in 1976 and 77 days in 1974. The mean reporting delay

of companies audited by the leading audit firms was significantly less than that of

companies audited by the other 43 firms. More importantly, the mean time lag for the 20

overseas companies in the sample was relatively short at 53 days and for 24 public

companies with assets over 50 millions dollars the mean delay was 70 days. He

suggested that this is because of conscious scheduling of audit work by large public

companies.

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 with industry patterns and

traditions rather than with 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 report.

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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) 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) belonging to six companies in six different

industries. The explanatory variables used in their model were total revenues, firm

complexity (proxied by four variables), industry classification, public/non-public 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 to 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 non-publicly traded..

Carslaw and Kaplan (1991) extended prior research of audit delays in New

Zealand by seeking to capture both auditor and corporate attributes in their regression

model. The results suggested that only two of nine explanatory variables were

statistically significant. These were corporate size, which was found to be inversely

related and existence of loss which was found to be directly related. Other variables

studied but which proved statistically insignificant were industry, existence of

extraordinary items, audit opinion, audit firm size, year-end, ownership (owner controlled

vs. manager controlled), and debt proportion.

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Ng and Tai (1994) empirically examined the association between audit delay and

ten company characteristics for listed companies in Hong Kong for the years 1990 and

1991. Their results showed that log of sales and degree of diversification were

significantly related to audit delay in both years. However, change in EPS was found to

be significant only in 1990 and reporting of extratraordinary items proved to be

significant only in 1991.

Abdullah (1996) reported empirical evidence on timeliness for a sample of annual

reports of 26 Bahraini companies. He examined association between the time lag and a

set of five determinants. His results show a significant negative relationship between

timeliness of publication and the firm‟s profitability, size, and distributed dividend.

However, the relationship between timeliness and industry membership was insignificant

and the direction of coefficient of relationship between the debt-equity ratio and

timeliness was not as predicted.

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3.0 SAMPLE, DATA SETS, HYPOTHESES

DEVELOPMENT AND MODEL OF AUDIT DELAY

3.1 The sample of Companies

The sample covers listed Bangladeshi companies for the year 1993 on the Dhaka Stock

Exchange (DSE). Lists of companies available for inclusion in the sample were obtained

from address books of the companies listed on the DSE. The populations covers an

estimated 120 companies, however, 78 of the 120 company annual reports were available

in the filings of the DSE. The time audit delay data on each of the 78 sample companies

were taken from their 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 dependent variable, was calculated from the dates supplied in the corporate annual as

the interval of days between the balance sheet date and the date of signature of the

auditor‟s report.

Corporate Attributes and Audit Delay Relationship

This Section examines the corporate attributes affecting audit delay of listed companies

in a developing country, Bangladesh. The dependent variable used in this study is audit

delay (AUD) which has been calculated for each of the companies under study.

Several of the explanatory variables used in the study have been adopted from previous

studies undertaken by other researchers. As noted earlier, two new explanatory variables

have been introduced to investigate audit delay in a developing country context in general

and in Bangladesh in particular. A model of audit delay consisting of seven company

characteristics has been developed from the work of Courtis (1976), Ashton et al. (1989),

Ashton et al. (1987) and Carslaw and Kaplan (1991) with some exceptions. The corporate

attributes examined in this study are size of the company (proxied by log of and assets),

debt-equity ratio, profitability (PROFIT), status as a subsidiary of multinational

companies (MULTICOM), audit fee, industry type (INDUSTRY) and audit firm size

(INLINK). Of the seven explanatory variables, INLINK, INDUSTRY, MULTICOM and

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PROFIT are dummy variables. The following paragraphs provide the rationale for the

hypothesised relationships between each of the seven variables and audit delay.

1. Size of company

There are several studies which have been found that there is a significant association

between the size of the reporting company and 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 et al. (1987; p.660) held that their „analyses indicated that

assets provided greater explanatory power‟. Most early researchers have used total assets

as the measure of company size. A negative relationship between audit delay and the

company size has been confirmed by most empirical studies. However, researchers like

Givoly and Palman (1982) found that there is no significant relationship (either negative

or positive) between the size of the company and the audit delay.

There are several justifications why company size could be negatively related to the

extent of audit delay. Larger companies may be hypothesised 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 ensure the performance of the audit soon after the year end

of the financial year and vice versa. Thirdly, the larger the firm, the more and larger the

audiences who are interested in its affairs (Abdulla, 1996). Dyer and McHugh (1975)

argued that management 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 share price, larger firms tend to

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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 and sales have been used as the measure of company size. The following specific

hypothesis has been tested regarding size of the firm:

H1: firms with greater assets are likely to experience completion of audit of their

accounts sooner than those firms with fewer total assets.

2. Debt-equity ratio

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. It has been argued that increasing the amount of debt used, will put pressure

on the firm to provide its creditors with audited financial reports more quickly (Abdulla,

1996). Companies having more debt in their financial structure can start and complete

the audit quicker than firms 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 creditors and implementation of any corrective measures

(Abdulla, 1996). In addition, such companies may release their audited annual reports

more quickly to reassure at the earliest opportunity equity holders who may reduce risk

premiums in required rates of return on equity. However, the quick release of audited

financial statements is not possible unless the audit work is accomplished. On the other

hand, there is a possibility that companies with higher debt-equity ratios may want to

disguise the level of risk and may delay publishing their annual reports. Thus, they 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 a measure of leverage in this study. The following specific

hypothesis has been tested regarding the debt-equity ratio:

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H2: firms with higher debt-equity ratios are likely to experience completion of audit

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 and 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.

There are arguments in favour of the profitability variable being 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 releasing the

annual report in order to avoid the discomfort of communicating „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 release quickly their audited annual reports to convey the „good

news‟. So, it is likely that if the profitability of a company is high, management is likely

to hurry to publish the corporate annual report in order to experience the comfort of

communicating it if 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 may constitute „good

news‟ as may profits greater than market expectation. 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 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 treated as a dummy variable and is labelled PROFIT.

Where companies were reporting a profit for the period they are expected to minimise

audit delay, and have been assigned a „1‟, and rest of the companies were which were

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sustaining losses assigned a „0‟. The following specific hypothesis has been tested

regarding profitability:

H3: firms with profit are likely to experience completion of the audit of their accounts

sooner than firms with losses.

4. Status as a Subsidiary of a Multinational Company

It may be argued that 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 inclusion of this variable. The subsidiaries of multinational companies may have

to prepare their accounts very soon after the end of the accounting period for

consolidation purpose. Hence, it is very important for such subsidiaries of multinationals

to prepare and complete the audit of their accounts as early as possible.

Apart from this, the shares of the subsidiary companies may be viewed as „blue chips‟ or

high-grade corporate securities in the domestic markets. Hence, the subsidiaries of

multinational companies may be motivated to communicate information more quickly to

the capital market than their domestic counterparts. In addition, it has been found that the

audits of multinational companies are more likely to be performed by international

auditing firms or “Big Five” firms may be relatively quick and efficient in finishing their

audit work. This variable is the first in studies relating to audit delay literature which

seeks to establish an association between status as a subsidiary of a multinational

company and audit delay. The following specific hypothesis was tested regarding this

variable:

H4: firms with mutinationality connections (subsidiaries of multinational companies) are

likely to experience completion of the audit of their accounts sooner than their

domestic counterparts.

5. Audit firm size

There are studies which have examined empirically the relationship between the size of

audit firm (or international link of the auditing firm) and audit delay (e.g., Carslaw and

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Kaplan, 1991 and Gilling, 1977). Whereas Gilling (1977) found a significant positive

relationship between the audit delay and size of audit firms, Garsombke (1981), Carslaw

and Kaplan (1991) and Davis and Whittred (1980) found no significant association.

It can be argued that the larger audit firms in developing countries (hence, international

audit firms) have a stronger incentive to finish their audit work more quickly than smaller

audit firms in order to maintain their reputation. Otherwise, they may loose

reappointment as the auditor of their client companies in the coming year(s). The larger

and better known audit firms tend to have more human resources than smaller firms and

it has been argued that the former may be able to perform their audit work more quickly

than smaller audit firms.

It has been argued by Gilling (1977) that audit delay for companies with an international

audit firm as auditor is expected to be less than for audits from other audit 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, Bangladeshi auditors are classified into two groups- international auditing

firms including Big Six, and domestic audit firms. Most domestic audit firms in

Bangladesh can be characterised as sole proprietorship firms (although there exists some

partnership audit firms) and hence, they are small in size. Hence, the international link of

the audit may also proxy for size of audit firm. The „INLINK‟ variable used in this study

is a dummy variable representing „1‟ if the auditor is an international audit firm and „0‟ if

not. There is a negative relationship hypothesised between INLINK and AUD. The

following specific hypothesis has been tested regarding international link of the audit

firm:

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H5: firms that engage audit firms with international links are likely to complete audit of

the accounts sooner than those firms that engage smaller domestic audit firms.

6. Audit fees

There are no studies which have found that there is a significant association between the

size of the audit fees of a reporting company and its audit delay in both developed and

developing countries. There are several reasons why audit fee size could be negatively

related to the extent of audit delay. The audit fees for the large manufacturing

corporations are higher as compared to smaller corporations. The audit work for the large

manufacturing corporations takes usually longer time because of the absolute amount of

inventory and receivables, and the proportion of assets in inventory and receivables and

number of subsidiaries within and outside the country. The following specific hypothesis

has been tested regarding the audit fees size:

H6: firms with lower audit fees are likely to have the audit of their accounts completed

sooner than those firms with higher audit fees.

7. Industry Type

Some earlier researchers have used industry type as an explanatory variable for audit

delay. One industry may have complex manufacturing process while others may not. The

adoption of different industry-related accounting measurement, valuation and disclosure

techniques and policies may cause delay in preparing accounts and audit of complex

industries. Therefore, the time to perform the audit work may be longer for the companies

having complex manufacturing process than other companies. For example, audit delay is

expected to be shorter for the trading companies or companies with simple manufacturing

process because such companies typically have little or no inventory. Inventories are

difficult to audit and represent an area where material errors frequently occur (Carslaw

and Kaplan, 1991, p. 24). Earlier researchers divided industries into two categories

(financial and non-financial) for purposes of analysis. However, in this study, companies

having complex operations have been assigned „1‟ and „0‟ otherwise. The following

specific hypotheses has been tested regarding industry type:

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H7: firms with less complex operations are likely to experience completion of the audit of

their accounts sooner than companies having complex manufacturing process.

3.1 Multiple Regression Model for Audit Delay

Multiple linear regression technique has been used to test the hypotheses of the study. In

the model, time lag has been used as the dependent variable.

Y= PROFIT + MUTICOM + DERATIO + LOGASSETS + INLINK +

AUDITFEE + + INDUSTRY

where, Y= audit delay (in days).

the constant, and

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.

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Table 1

Definition of Corporate Attributes and Expected Effect on Audit Delay in the Regression

Variable

Labels

in the OLS

Corporate Attributes Definition Expected

Relationship

with Audit

Delay

INLINK

International link of auditing

firms

The international link of audit firms represented

by a dummy variable; companies with the

international link assigned a „1‟ and otherwise

a‟0‟.

Negative

PROFIT Profitability of the firm Profitability represented by a dummy variable;

companies with positive net profit assigned a „1‟;

otherwise „0‟.

Negative

MULTICOM Subsidiary of a multinational

company

A multinational parent company having more

than 51% shares of the company

Negative

LOGASSETS Log of total assets Log of total assets of the company on the

balance sheet date

Negative

DERATIO Debt to equity ratio Long term debt divided by shareholders‟ equity

at the end of the financial year

Positive

AUDITFEE Audit fees paid by the

company

The amount paid to the audit firm for the audit,

Positive

INDUSTRY Industry type Industry type has been represented by a dummy

variable; industries having complex

manufacturing process assigned a „1‟; otherwise

a „0‟.

Positive

4 Results of the Study

The results are presented in three sections. In the first section summary of the descriptive

statistics of the dependent variable (AUD) and the seven independent variables has been

presented. This is followed by a multivariate analysis of correlation coefficients and

finally, the results of our multiple regression model of audit delay and seven corporate

attributes are presented.

4.1 Descriptive statistics

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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.

Table 2

Descriptive Statistics for Bangladeshi companies

Variable N Minimum Maximum Mean Standard

Deviation

AUDITFEE (in thousand Tk.) 78 3.20 655.48 86.271 142196.8

LOGASSETS (natural log) 78 6.55 9.60 8.30 .48

INDUSTRY 78 .00 1.00 3.59 2.49

DERATIO 78 .00 23.12 1.42 3.15

INLINK 78 .00 1.00 .22 .42

MULTICOM 78 .00 1.00 8.974E-02 .29

PROFIT 78 .00 1.00 .69 .47

AUD (days) 78 41 546 171.14 142.2

Table 2 shows that the total time lag for each of the 78 listed companies ranged from a

minimum interval of 41 days to a maximum interval of 546 days. Bangladeshi listed

companies take approximately 6.5 months beyond their balance sheet dates before they

finally present their audited accounts to the shareholders at the annual general meeting.

An obvious question is why it would take a company 546 days after the balance sheet

date to make a report. Like Bangladeshi sample companies, this evidence also suggests

that timeliness may not be an important concern for Bangladeshi companies in financial

reporting policy. One may speculate that determined higher benefit investors will gain

from an annual report issued 546 days after the end of the accounting year and on what

basis investors could decide to trade in a stock if the available annual report covered a

period which ended one year and six months prior.

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4.2 Correlation analysis

To examine the correlation between independent variables, Pearson product moment

correlation coefficients (r) were computed. Three correlation matrixes for all the values

of r for the explanatory variables along with the dependent variable were constructed for

the three countries under study and are reported in Tables 9.3 (a), 9.3 (b) and 9.3 (c)

respectively .

To examine the correlation between the dependent and 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 reported in Table 3. The Pearson product-moment coefficients of the

correlation between log of assets and audit fees variables is higher than the coefficient of

the correlation between every two of the other corporate attributes. Table 3 shows a

noteworthy collinearity ( p 0.01) between certain variables (i.e., between log of assets

and audit fees variables (.419), between debt-equity and profitability variables (-.345), and

between subsidiary of a multinational company and international link of audit firms

(.377)). It is evident from the table that the magnitude of the correlation between variables

seems to indicate no severe multicollinearity problems.

21

Table 3

Spearman Rank Correlation for Bangladeshi companies

VARIABLES AUDITFEE DERATIO INDUSTRY INLINK LOGASSETS MULTICOM PROFIT

AUDITFEE 1.000

DERATIO -.240* 1.000

INDUSTRY .085 -.151 1.000

INLINK .231* -.086 .109 1.000

LOGASSETS .419** -.026 .095 .154 1.000

MULTICOM .316* -.263* .075 .377** .216 1.000

PROFIT .077 -.345** -.042 -.199 .171 .209 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)

22

4.3 Results of Regression Analyses

Because assets and sales variables were correlated, OLS regression using assets as the

proxy for the size variable (but excluding sales) was estimated for the model. Then, a

second OLS regression using sales as a proxy for the size variable (excluding assets) was

estimated. For all countries under study, the results of the regression that included assets

(but not sales) showed a higher R2

than the regression which included sales (but not

assets). Consequently, log of assets variable (LOGASSETS) was used as proxy for size.

Table 6 (b) indicates that the actual sign of four of the variables (INLINK, ASSETS,

DERATIO and INDUSTRY) were not in the direction predicted. It was hypothesised that

for the sample companies, except debt-equity ratio variable, size (log of assets),

profitability, subsidiary of multinational companies, audit fees and international link of

the audit firm would be positively associated with audit delay variable. However, it was

found that only the relation between audit delay and industry differences were significant

at 5% level and the mutinationality variable (subsidiary of a multinational company) was

significant at 10% level (see Table 6 (a). The association between audit delay and

profitability (PROFIT) variable was found to be significant only at a 20% level. The

relationship between audit delay and other four variables were found not to be significant.

The R2

under the model was .1920, which indicates that the model is capable of

explaining 19.20% of the variability in the delay of publishing annual reports of sample

Bangladeshi companies under study. The adjusted R2 indicate that 11.10 percent of the

variation in the dependent variable in the model used here is explained by variations in

the independent variables. The R2 compares favourably with those reported by Ng and

Tai (1994), Ashton et al. (1987), Carslaw and Kaplan (1991) and Abdulla (1996). The F-

ratio indicates that the model significantly explains the variations in the timeliness of

annual reports in Bangladesh.

23

Table 6 (a)

Summary of the regression output for Bangladeshi companies

Coefficient of multiple regression (Multiple R) .438

Coefficient of determination (R2) .192

Adjusted R2 .111

Standard Error 86.6356

Analysis of Variance

D.F. Sum of Squares Mean Squares

Regression 7 124902.6 8693.802

Residual 70 7505 1168.802

F ratio = 2.377

------------------ Variables in the Equation ------------------

Unstandardized Coefficients Standardized

Coefficients

Variable B Standard Error Beta T Sig T

(constant) 316.611 178.474 1.774 .080

AUDITFEES -9.6E-05 .000 -.148 -1.280 .205

DERATIO -.690 3.412 -.024 -.202 .840

INDUSTRY 9.768 4.278 .254 2.283 .025

INLINK 15.271 27.356 .069 .558 .578

LOGASSETS -18.194 22.137 -.095 -.822 .414

MULTICOM -75.605 39.054 -.237 -1.936 .057

PROFIT -24.285 24.055 -.123 -1.010 .316

24

Table 6 (b)

Relationship between audit lag and corporate attributes for Bangladeshi Sample

companies

Variable labels Expected sign Actual sign Significance level

INLINK

PROFIT

MULTICOM

ASSETS

DERATIO

AUDITFEE

INDUSTRY **

** Significance level at 1%

25

5 Conclusion It can be argued that the timeliness of annual reports is an area in which developed

markets differ from developing markets. It has been said that the timeliness of annual

reports is an area in which developed markets differ from developing stock markets. The

multivariate tests of audit delay of the Bangladeshi listed companies show that the

subsidiaries of multinational companies, companies with higher debt equity ratio and

larger companies in terms of assets tend to start and complete their audit work earlier.

The multinational attribute, a new variable for the first time used in the studies of audit

delay has proved to be significantly negatively associated with audit delay. Other new

variable „audit fees‟ failed to establish any relationship with the audit delay. Other three

corporate attributes also found not to be significantly associated with audit delay. The

multivariate tests of the timeliness of published reports of the Bangladeshi listed

companies show that industry type influences delay in completing audit work. The

INDUSTRY attribute proved to be significantly negatively associated at a 5% level. The

other variables were found to not be significantly associated with audit delay.

From the results of this study the following conclusions can be drawn. Firstly, there

appears to be evidence of an unusually long audit delay made by the Bangladeshi listed

companies included in this study. The average interval of time between balance sheet

date and the date of auditor‟s report is 5.7 months for Bangladeshi companies. Although

for the Bangladeshi companies 41 days, the average audit lag for Bangladeshi companies

171 days as against shorter audit delays reported for other developed countries. With

regard to timeliness as a qualitative objective of financial statements this evidence can be

regarded as indicating unsatisfactory position regarding financial reporting in

Bangladesh. This may call into question the regulatory awareness and procedures in the

sample countries under study and may suggest concerns about the role of public

disclosure of audited accounting information versus that of insider trading of accounting

information. The lack of significance of a range of corporate attributes may suggest a

generalised delay in reporting audited accounting information across Bangladeshi

companies.

26

The findings of this study may be generalised across the developing and developed

countries after taking into consideration certain limitations. This study considers 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 changed over time. Such

a study would provide additional insights to the underlying causes for the audit delay in

developing countries in general and in Bangladesh in particular. In addition, useful

comparisons could be made with comparable countries such as Sri Lanka.

27

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