audit delay2

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Saudi Stock Exchange: ³Future Prospective´Saudi Stock Exchange: ³Future Prospective´

King Khalid UniversityKing Khalid University -- AbhaAbha

1212--14 November 200714 November 2007



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Audit Delay:Audit Delay:Evidence from Listed Joint Stock Evidence from Listed Joint Stock

Companies in Saudi ArabiaCompanies in Saudi Arabia

Saad A. AlmosaSaad A. Almosa

Mohammed A. AlabbasMohammed A. Alabbas

Department of AccountingDepartment of Accounting

King Khalid UniversityKing Khalid University



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Study StructureStudy Structure

AbstractAbstract

Key WordsKey Words

SummarySummary

Previous ResearchPrevious Research

MethodologyMethodology

DataData

MethodMethod

VariablesVariables

ResultsResults ConclusionsConclusions

Limitations & ImplicationsLimitations & Implications



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AbstractAbstract

Many studies have been conducted investigating theMany studies have been conducted investigating thedeterminants of audit delay in developed countries, butdeterminants of audit delay in developed countries, but

very few in developing countries. This study examinesvery few in developing countries. This study examines

the determinants of audit delay for all listed joint stock the determinants of audit delay for all listed joint stock

companies in Saudi Arabia using their audited annualcompanies in Saudi Arabia using their audited annual

financial reports for the years 2003, 2004, 2005 andfinancial reports for the years 2003, 2004, 2005 and

2006 as the main source of data. By analyzing data2006 as the main source of data. By analyzing data

pertaining to a number of variables including, size, pertaining to a number of variables including, size,

profitability, sector, type of auditor, and auditor profitability, sector, type of auditor, and auditor

opinion, as well as audit delay, a model is developed of opinion, as well as audit delay, a model is developed of the determinants of audit delay.the determinants of audit delay.



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Importance of the StudyImportance of the Study

TimelinesTimelines of corporateof corporate auditedaudited annualannualfinancialfinancial reportsreports is considered to be ais considered to be a

critical and important factor affecting thecritical and important factor affecting the

usefulnessusefulness of information made availableof information made availableto external users.to external users.



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Importance of the StudyImportance of the Study

TimelinesTimelines of corporateof corporate auditedaudited annualannualfinancialfinancial reportsreports is considered to be ais considered to be a

critical and important factor affecting thecritical and important factor affecting the

usefulnessusefulness of information made availableof information made availableto external users.to external users.

TheThe lengthlength of theof the audit processaudit process highlyhighly

affects the timelines of corporateaffects the timelines of corporate

financial reporting.financial reporting.



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Purpose of the StudyPurpose of the Study

To investigate the determinants of To investigate the determinants of auditauditdelaydelay for listed joint stock companies infor listed joint stock companies in

Saudi Arabia.Saudi Arabia.



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Purpose of the StudyPurpose of the Study

To investigate the determinants of To investigate the determinants of auditauditdelaydelay for listed joint stock companies infor listed joint stock companies in


Audit delay is the length of time from aAudit delay is the length of time from acompany¶s fiscal year end to the date of company¶s fiscal year end to the date of

the auditor report.the auditor report.



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Previous ResearchPrevious Research

Two Groups:Two Groups:



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Previous Research:Previous Research:

Two Groups:Two Groups: 11-- Studies that analyze the relationshipStudies that analyze the relationship

between the timing of annual earnings between the timing of annual earnings

announcements and some companiesannouncements and some companiesattributes and its effects on share prices.attributes and its effects on share prices.



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Two Groups:Two Groups: 11-- Studies that analyze the relationshipStudies that analyze the relationship

between the timing of annual earnings between the timing of annual earnings

announcements and some companiesannouncements and some companiesattributes and its effects on share prices.attributes and its effects on share prices.

22-- Studies which concentrate on the auditStudies which concentrate on the audit

delay aspect, analyzing the characteristicsdelay aspect, analyzing the characteristics

of the auditor, the auditee, and the auditof the auditor, the auditee, and the audit

process and their effects on the timing of process and their effects on the timing of

the audit report date.the audit report date.



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First Group: Timing of AnnouncementsFirst Group: Timing of Announcements Aimed to measure market reaction toAimed to measure market reaction to

earnings announcements.earnings announcements.



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Did not pay much attention toDid not pay much attention tocharacteristics of the auditor and auditcharacteristics of the auditor and audit

process. process.



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Did not pay much attention toDid not pay much attention tocharacteristics of the auditor and auditcharacteristics of the auditor and audit

process. process.

Pointed to the possible deterioration inPointed to the possible deterioration inthe information content of annual reportthe information content of annual report

as the reporting delay increases.as the reporting delay increases.



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Data of the studyData of the study

The sample includes all joint stock The sample includes all joint stock

companies listed on the Saudi Stock companies listed on the Saudi Stock

Exchange. (n = 91 in 2006)Exchange. (n = 91 in 2006)



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Audited annual reports for the yearsAudited annual reports for the years

2003, 2004, 2005 and 2006 are used.2003, 2004, 2005 and 2006 are used.



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Audited annual reports for the yearsAudited annual reports for the years

2003, 2004, 2005 and 2006 are used.2003, 2004, 2005 and 2006 are used.

Variables that describe companies, their Variables that describe companies, their

auditors, and the various types of auditors, and the various types of interaction between these parties wereinteraction between these parties were

analyzed in this study.analyzed in this study.



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Variables of the studyVariables of the study

Auditee SizeAuditee Size (assets, revenues, inventory)(assets, revenues, inventory)

ProfitabilityProfitability (loss vs. non(loss vs. non--loss, earnings)loss, earnings)

Auditee Sector Auditee Sector (financial vs. non(financial vs. non--financial)financial)

Auditor SizeAuditor Size (Big 4, joint auditor, switching)(Big 4, joint auditor, switching)

Audit OpinionAudit Opinion (Unqualified vs. Others)(Unqualified vs. Others)



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Hypotheses of the studyHypotheses of the study

H1: The audits of the accounts of firms H1: The audits of the accounts of firmswith greater assets are likely to bewith greater assets are likely to be

completed sooner than those of firmscompleted sooner than those of firms

with fewer assetswith fewer assets..



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H1: The audits of the accounts of firms H1: The audits of the accounts of firmswith greater assets are likely to bewith greater assets are likely to be

completed sooner than those of firmscompleted sooner than those of firms

with fewer assetswith fewer assets..

H2: The audits of the accounts of firms H2: The audits of the accounts of firms

with positive earnings during the audited with positive earnings during the audited

period are likely to be completed sooner period are likely to be completed sooner

than those of firms with losses during than those of firms with losses during

the audited period.the audited period.



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H3: The audits of the accounts of H3: The audits of the accounts of financial firms are likely to be completed financial firms are likely to be completed

sooner than those of non sooner than those of non--financial financial

firms. firms.



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H3: The audits of the accounts of H3: The audits of the accounts of financial firms are likely to be completed financial firms are likely to be completed

sooner than those of non sooner than those of non--financial financial

firms. firms.

H4: The audit report delay of a company H4: The audit report delay of a company

is shorter where the audit firm is a Saudi is shorter where the audit firm is a Saudi

firm with a Big firm with a Big--4 international 4 international

affiliation.affiliation.



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H5: The audit of the accounts of firms H5: The audit of the accounts of firmswith qualified, adverse or disclaimer with qualified, adverse or disclaimer

auditor opinion are likely to be delayed auditor opinion are likely to be delayed

more than those of firms withmore than those of firms with

unqualified or with remarks auditor unqualified or with remarks auditor

opinion.opinion.



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ModelModel

Audit report delayAudit report delayii = = 00 + + 11 + + 22 + + 33 ++44 + + 55 + +

Audit report delayAudit report delayii = = 00 + + 11 (Auditee(Auditee

size) + size) + 22 (Profitability) + (Profitability) + 33 (Auditee(Auditeesector) + sector) + 44 (Auditor size) + (Auditor size) + 55 (Auditor (Auditor

opinion) + opinion) +



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Mean* Median* S. Deviation* Maximum* Minimum*

ASSETS 11358586 1264493 27914885.91 166588820 41059

REVENUES 2426326.4 414024 9127534.132 86237862 662

INCOME 670663.6 75457 2260797.668 20293942 -1039915

INVENTOR 270168.88 37582.5 1215447.69 13658245 0

DELAY 46.45 45 24.89 176 4

LOSS 12% - - - -

BIG4 54% - - - -

JOINTAUD 21% - - - -

OPINION 16% - - - -

NONFIN 12% - - - -

YEAREND 6% - - - -

AUDITSWC 33% - - - -

y DELAY = number of days from the company's accounting year-end to the date of audit report.

y OPINION = (1 if qualified, Disclaimer or Adverse, 0 if clean or except for)

y YEAREND = (1 if company's year end out calendar year, 0 ot herwise)

y JOINTAUD = (1 if two auditors, 0 otherwise)

y BIG4 = ( 1 if auditor is one of Big 4, 0 otherwise)

y LOSS = (1 if company get losses, 0 otherwise)

y NONFIN = (1 if company is financial one, 0 otherwise)

* In thousands

Table 2 : Descriptive analysis for entire sample (n=352)



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Financial* Telecom* Agri* Electric* S ervices* Cement* Industrial*

No. 42 6 36 4 98 32 134

ASSETS* 54078280.5 34840476.3 430834.6 115861647 2022252.4 1912901.1 5817472.5

REVENUES* 2977210.3 23364453.7 153669.6 18470603 419832.6 718354.1 3164434.2

INCOME* 1888660.7 7255810.3 42148.05 3869946.5 78016.3 394497.9 645353.03

INVENTORY* 0 134735.2 19697.6 1439755 56856.6 133608.5 503332.1

DELAY 23.12 44.16 51.08 52 55.66 34.59 48.54

LOSS 0% 0% 17% 0% 20% 0% 10%

BIG4 100% 66% 19% 0% 18% 19% 18%

JOINTAUD 100% 18% 0% 0% 11% 0.00% 15%

OPINION 0% 0.00% 33% 0% 18% 0.00% 19%

YEAREND 0% 0% 0% 0% 0.00% 0.00% 0.00%

AUDITSWC 17.50% 25% 37% 33% 36.20% 32% 36.90%

y DELAY = number of days from the company's accounting year-end to the date of audit report.


y YEAREND = (1 if company's year end out of calendar year, 0 otherwise)


y BIG4 = ( 1 if auditor is one of Big 4, 0 otherwise)


* In thousands

Table 3 descriptive statistics for sectors of the sample



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2003 2004 2005 2006

No. Observations 87 86 88 91

ASSETS* 9964340 10050665.94 11418075.74 13870073.02

REVENUES* 2136638.439 2160921.012 2505647.131 2869881.506

INCOME* 534385.494 538464.488 749857.477 849303.791

INVENTORY* 240082.736 242859.012 271398.102 323553.198

DELAY 49.73 49.69 44.4 42.23

LOSS 12% 12% 0.12% 0.13%

BIG4 50.57% 51.16% 56.80% 58.24%

JOINTAUD 20.60% 22% .19.3% .21.9%

OPINION 9% 18% 19% 15.38%

AUDITSWC 33% 30% 29% 39%

y DELAY = number of days from company's accounting year-end to date o f audit report


y YEAREND = (1 if company 's year end out calendar year, 0 otherwise)

y JOINT AUD = (1 if two auditors, 0 otherwise)

y BIG4 = ( 1 if audito r is one of Big 4, 0 otherwise)


* In thousands

Table 4 descriptive statistics for sample of years for all variables whole observations



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2003 2004 2005 2006

No. observations 87 86 88 91

Mean 49.73 49.69 44.4 42.23

S.Deviation 29.4 29.57 21.08 17.09

Maximum 176 176 116 94

Minimum 10 10 4 12

Table 5 descriptive s tatistics of audit delay for the years of the study sample



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NONFINANOPINIONYEARENDJOINTAUDLOSSAUDITSWCBIG4INCOMEINVENTOR ASSETSREVENUESDELAY

1DELAY

.

10.064REVENUES

.0.241

10.657-0.14ASSET S

.00.009

10.5790.9020.114INVENTOR

.000.032

10.7440.7080.942-0.027INCOME

.0000.612

10.2150.0740.2480.163-0.077BIG4

.00.16700.0030.149

1-0.046-0.047-0.01-0.101-0.0220.11AUDITSWC

.0.4330.4270.8660.0840.7170.06

1-0.0870.0750.1170.0590.10.085-0.256LOSS

.0.1360.1580.0280.2660.0610.120

10.079-0.0160.4320.247-0.0330.410.108-0.246JOINTAUD

.0.1410.788000.53700.050

10.040.057-0.0980.237-0.065-0.031-0.095-0.0530.082YEAREND1

.0.4590.2850.09600.220.5570.0740.3310.126

10.147-0.184-0.21-0.006-0.123-0.124-0.081-0.139-0.1070.134OPINION

.0.0060.00100.9240.0210.020.1290.0090.0510.012

1-0.158-0.0950.6060.106-0.1330.320.199-0.0810.5680.027-0.347 NONFINAN

.0.0030.07500.0460.023000.1300.6170

y DELAY = number of days form companies' accounting year-end and date of audit report .


y YEAREND = (1 if company's y ear end out calendar year, 0 otherwise)

y JOINTAUD = (1 if two auditors, 0 o therwise)

y BIG4 = ( 1 if auditor is one of Big 4, 0 ot herwise)


Table 6 correlation matrix



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Table 6 Results of the three models analysis

P-Value

Constant 55.005 13.624 0 2.593 6.23 0 0.507 8.671 0

ASSETS 0.113 1.028 0.305 0.49 3.856 0 0.409 4.072 0

INVENTOR 0.115 1.171 0.243 -0.065 -0.671 0.503 0.112 1.537 0.126

INCOME -0.045 -0.457 0.648 -0.402 -3.539 0.001 -0.391 -3.73 0

AUDITSWC 0.06 1.129 0.26 0.03 0.429 0.669 0.071 1.389 0.166

BIG4 0.061 0.977 0.329 0.031 0.386 0.7 -0.008 -0.134 0.893

LOSS -0.193 -3.547 0 -0.08 -1.248 0.213JOINTAUD -0.04 -0.55 0.583 -0.072 -0.929 0.354 -0.117 -1.598 0.111

YEAREND1 0.058 1.034 0.302 0.11 1.479 0.141 0.075 1.351 0.178

OPINION 0.083 1.492 0.137 -0.059 -0.767 0.444 0.056 1.002 0.317

NONFINAN -0.393 -4.195 0 -0.043 -0.603 0.547 -0.28 -2.919 0.004

R 2

F

y DELAY ( number of days form companies' accounting year-end and date of audit report) is the dependent variable.


y YEAREND = (1 if company's year end out calendar year, 0 otherwise)


y BIG4 = ( 1 if auditor is one of Big 4, 0 ot herwise)


Non- transformed model Log-transformed model Rank-transformed model

Beta T-test P-Value Beta T-test Beta

9.09 2.109 11.69

T-test P-Value

0.24 0.91 0.29



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Conclusions of the studyConclusions of the study

Audit delay, on average and maximumAudit delay, on average and maximum

limit, has been decreasing in the samplelimit, has been decreasing in the sample

study (the period 2003study (the period 2003--2006).2006).

This supports the results of other studiesThis supports the results of other studies

(Aljabr 2007) about timeliness of (Aljabr 2007) about timeliness of




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Three out of the ten explanatory variablesThree out of the ten explanatory variables

are significant. Those include total assets,are significant. Those include total assets,

income, and financial sector.income, and financial sector.



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Three out of the ten explanatory variablesThree out of the ten explanatory variables

are significant. Those include total assets,are significant. Those include total assets,

income, and financial sector.income, and financial sector.

The coefficients for all these threeThe coefficients for all these three

variables are in the predicted direction.variables are in the predicted direction.



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Audit delay was positively associatedAudit delay was positively associated

with total assets (proxy of size), whilstwith total assets (proxy of size), whilst

negatively associated with income (asnegatively associated with income (as proxy of profitability), and financial vs. proxy of profitability), and financial vs.

nonnon--financial dummy variable (controlfinancial dummy variable (control

for financial sector characteristics).for financial sector characteristics).



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The audit delay increases as auditee sizeThe audit delay increases as auditee size

increase. On the other hand, a decrease inincrease. On the other hand, a decrease in

audit delay was observed with financialaudit delay was observed with financialcompanies, and as companies gaincompanies, and as companies gain

profits. profits.



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Limitations of the studyLimitations of the study

First, the explanatory power of the regressionFirst, the explanatory power of the regressionmodel of this study could be improved bymodel of this study could be improved by

including other variables which are derivedincluding other variables which are derived

from data not publicly disclosed till now infrom data not publicly disclosed till now in


Examples: The audit feesExamples: The audit fees

The extent of nonThe extent of non--audit feesaudit fees

the work load and risk factors for the auditor the work load and risk factors for the auditor qualifications of the audit teamqualifications of the audit team



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Second, it is assumed in audit delaySecond, it is assumed in audit delaystudies that the functional form is linear.studies that the functional form is linear.

However, NonHowever, Non--linear models mightlinear models might

reveal other aspects of the audit reportreveal other aspects of the audit reportdelay determinants.delay determinants.



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Third, Audit delay comprises twoThird, Audit delay comprises twocomponents; company delay (the timecomponents; company delay (the time

taken in preparation of the financialtaken in preparation of the financial

accounts), and audit firm delay (timeaccounts), and audit firm delay (timetaken by the audit work). Measuring bothtaken by the audit work). Measuring both

types could provide more plausibletypes could provide more plausible

explanation. Though appropriate dataexplanation. Though appropriate data

may not be readily available.may not be readily available.

(Leventis, 2005, p.56)(Leventis, 2005, p.56)



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Fourth, the issue of MulticollinearityFourth, the issue of Multicollinearity

Some of the explanatory variables wereSome of the explanatory variables were

highly correlated with each other.highly correlated with each other.



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Opportunities for further researchOpportunities for further research

Access to the audit fees of companiesAccess to the audit fees of companies

included in this study or more superiorlyincluded in this study or more superiorly

the cost of the audit hour could providethe cost of the audit hour could provide

some more interesting and rewardingsome more interesting and rewardingexplanatory variables for the model of theexplanatory variables for the model of the

study.study.



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Opportunities for further researchOpportunities for further research

carrying out similar studies within acarrying out similar studies within a

different group of firms in the Saudidifferent group of firms in the Saudi

economy, such as limited liabilityeconomy, such as limited liability

companies or partnerships andcompanies or partnerships and proprietorships which are not under the proprietorships which are not under the

jurisdiction of the CMA could provide jurisdiction of the CMA could provide

some interesting explanations for issuessome interesting explanations for issues

raised in this study.raised in this study.



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EndEnd

Thank You.Thank You.

audit delay2

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