Imperial Journal of Interdisciplinary Research (IJIR)

Vol-3, Issue-10, 2017

ISSN: 2454-1362, http://www.onlinejournal.in

Audit Quality and Audit Report Lag in Malaysia

Braham Rahul Ram1 & Ali Nawari Hassan2
1,2
School of Management, University Science Malaysia

Abstract: The purpose of this paper is to market reaction to earnings announcements

conceptually examine the relation between two (Chambers and Penman, 1994) can prompt auditor
dimensions of auditor quality, namely, auditor switching (Mande and Son, 2011).
industry specialization and auditor reputation and It is very much perceived that the convenience
the audit report lag based on past literature. Given if of audit reports is impacted by various factors.
the empirical research is carried out based on Earlier research on audit report lags have archived
conceptual framework discussed in this paper, the that the delay in audit reports can be ascribed to
insights drawn from this study may be of assistance particular firm qualities and complexities (client firm
to policy makers as they consider the costs and size, number of subsidiaries, client monetary
benefits associated with varying levels of audit condition, foreign operations, and audit fees), audit
market concentration as well as providing a risk (possession structures, financial distress
snapshot of the level of non-compliance on audit indicators, high hazard accounts, and altered audit
timeliness in Malaysia. opinion), audit firm attributes (auditor reputation and
non-audit fees), and corporate governance (board
Keywords Auditor reputation, Auditor industry independence, audit committee independence,
specialization, Audit report lag, Indonesia frequency of boards, and or audit committee
manufacturing listed companies meeting).
The greater part of research in this area stays
Paper type Conceptual paper focused in the USA, yet obviously there is a need to
stretch out this research to another worldwide reach.
1. Introduction This investigation investigates the part of examiner
industry specialization (Habib and Bhuiyan, 2011) in
Alkhatib and Marji (2012) contended that the deciding review report convenience and is a zone of
most dependable source and reference of concentrate that has received little consideration.
bookkeeping related data accessible to outside clients Industry-expert evaluators are relied upon to give
is the audited financial statements. One subjective predominant administrations and validity (Solomon
trademark obviously explained with the Conceptual et al., 1999; Owhoso et al., 2002). Thusly, industry-
Framework for Financial Reporting is pertinence. As authority inspectors are likely ready to lead a more
expressed by FASB, for the financial related successful review and have the capacity to finish the
information to be valuable, it must be both review engagements more practically than non-
appropriate and consistent. specialist auditors. Also, the relationship between
As expressed by Alfredson et al. (2009) "to have reviewer notoriety (proxies by Big 4 inspecting
pertinence, financial information must have a quality firms) and the review report slack also has been
that impacts users financial choice (p. 15)." To be reviewed. It can be contended that enormous
pertinent and of monetary esteem, the financial inspecting firms have more assets (Palmrose, 1986b),
related data contained in the in the year-end final more in danger as far as brand name notoriety
statement should conveyed to clients when (Francis and Wilson, 1988), have higher quality staff
practicable after the financial year-end (Al-Ajmi, (Chan et al., 1993b), and are in this way liable to
2008; Alkhatib and Marji, 2012). give a high-quality audit. At the end of the day, Big
Delays in reporting financial information will 4 auditors are relied upon to give a quicker, efficient
effect on the adequacy of reports. The timeliness of service leading to shorter audit reporting lags.
audit reports is becoming a critical issue as the As said already, the financial importance of an
timing and delivery of the reports will influence the audit report lag is a worldwide issue but then most of
significance of financial statements (Dopuch et al., the research US based utilizing US information (e.g.
1986; Field and Walkins, 1991; Jaggi and Tsui, Asthon et al., 1989; Bamber et al., 1993; Schwartz
1999). In related work, several studies have shown and Soo, 1996; Lee et al., 2009). There has just been
that demonstrated that putting off the revelation and constrained research from outside the USA, for
distribution of the audited financial statements may instance, Egypt (Afify, 2009), Jordan (Alkhatib and
adversely affect securities exchange proficiency Marji, 2012), Bahrain (Al-Ajmi, 2008), and New
(Leventis et al., 2005; Alkhatib and Marji, 2012) and

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-10, 2017
ISSN: 2454-1362, http://www.onlinejournal.in

Zealand (Habib and Bhuiyan, 2011), studies using intrinsically imperceptible, no single attributes or
Malaysian data sets are limited. intermediary is utilized to catch this idea. Past
The remainder of this paper is organized as research has by and large auditor brand name to
follows. The next section presents the significance of mark proxy for audit quality while researchers (e.g.
the paper. Section 3 discusses the relevant related Craswell et al., 1995; Balsam et al., 2003; Krishnan,
literature where else conceptual framework for the 2003b; Chen et al., 2005; Gul et al., 2009) have
paper is discussed in Section 4. Discussion of results contended that auditor industry specialization adds to
and implications for future research are discussed in review quality.
the concluding section which is Section 5. With respect to auditor industry specialization,
analysts (e.g. Craswell et al., 1995; Amber et al.,
2. Significance of the Paper 2003; Chen et al., 2005) have hypothesized that a by-
product of an audit firm choosing to specialize in a
The paper will contribute to the body of knowledge given industry is an improvement in the superiority
on two dimensions of auditor quality, namely, of services provided as well as the credibility
auditor industry specialization and auditor reputation afforded to the auditor. As expressed by Dopuch and
and the audit report lag. The study should Simunic (1982), expert auditors are probably going
particularly be of significance in that it will: to put more in staff enlistment and preparing, data
 This study provides the conceptual framework innovation, and best in class review advancements
for further empirical evidence on the relation than non-specialist auditors.
between auditor quality and audit report lag The utilization of auditors with industry
using data in Malaysia setting. specialization will audit quality and thusly enhances
 Knowledge obtained from this study would the quality of financial reporting (Dopuch and
assist the accounting regulators as they consider Simunic, 1982). The other impact of industry
the expenses and advantages related with specialization is audit fees charged by specialist
differing levels of audit market concentration auditor to their clients. Since the advancement of
and additionally giving a depiction of the level industry-particular abilities and aptitude requires
of non-compliance on audit timeliness in exorbitant speculation, the industry-specialist
Malaysia given the empirical study is being auditors will hope to charge higher expenses
carried out. contrasted with non-specialist auditors (Habib,
2011). Be that as it may, expert learning can likewise
advance creation economies of scale into the review
3. Review of Related Literature procedure and turn out to be more productive and
prompt lower cost makers of audit works (Craswell
The audited financial statements contained in the et al., 1995; McMeeking et al., 2006). Palmrose
yearly report are viewed as a dependable wellspring (1986a) consequently contends that the subsequent
of data for users of financial data. A gap does, in any generation of economies of scale enables specialist
case, exist between the finish of the financial year auditors to charge relatively lower fees to their
and the publication of the financial statements and in clients.
spite of the fact that a gap is important to empower
the creation of value data, any broadened deferral Likewise, O'Reilly and Reisch (2002) declare that
may effect on the usefulness and relevance of the auditors with an inside and out information of an
information. The issue of timeliness of financial industry's operation and qualities might be better
reporting has attracted extensive consideration from ready to perceive unique problems and issues for
professional bodies, researchers, regulatory agencies, clients operating in that industry. The audit issues
and users of accounting information as an important relate to unique industry features (e.g. accounting
qualitative characteristic of financial accounting systems, tax rules, and special reporting
information. Convenient bookkeeping data will requirements); thusly, customer particular learning
prompt speculator certainty and in this enhance assumes a critical part in a compelling and
market efficiency (Leventis et al., 2005). As productivity review task (Gul et al.,
mentioned previously, users of financial statements 2009).Subsequently, industry expertise auditors will
consider timeliness as one of the key determinants of advance a higher audit quality through audit
audit quality (Leventis et al., 2005; Al-Ajmi, 2008). effectiveness as well as enhance audit efficiency
The standard part of auditing is to guarantee the through economies of scale. Industry-pro auditors
quality of the corporate earnings in this way enabling require a shorter time to wind up noticeably
stakeholders to rely on financial statements s with acquainted with with client’ financial reporting
certainty. Contrasts in auditor quality are thought to systems and to resolve complex accounting issues
prompt varieties in credibility, objectivity employed, compared to non-specialist auditors (Habib and
and the quality of the earnings provided by clients. Bhuiyan, 2011). In like manner, industry-expert
Given examiner quality is multidimensional and auditors will be able to complete the audit of a

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-10, 2017
ISSN: 2454-1362, http://www.onlinejournal.in

company’s financial statements faster than those earnings management. Based on evidence gained, In
non-specialist counterparts. general, Big 4 auditors provide more effective audit
services than non-Big 4 auditors.
On the basis of the above discussion, our first Afify (2009) and Cohen and Leventis
hypothesis is: (2013) stated that Big 4 accounting firms have a
tendency to have a more grounded impetus to
H1. The audit report timeliness of audits complete their review work more rapidly so as to
conducted by an industry-specialist auditor is keep up their brand name. Likewise, worldwide
shorter than those conducted by a non-industry- subsidiary audit firms have more incentives to be
specialist auditor. more aggressive by providing a faster service in
order to increase their audit market share (Leventis et
al., 2005). What's more, it is contended that Big 4
It is generally acknowledged that the quality of audit firms have more assets (Palmrose, 1986a),
audit work varies among audit firms (DeAngelo, higher quality and better prepared staffs (Chan et al.,
1981; Francis et al., 1999). The Big 4 audit firms 1993a), and propelled review innovation (William
higher audit quality than those non-Big 4 (DeAngelo, and Dirsmith, 1988), and can lead audit all the more
1981; Watts and Zimmerman, 1986; Beckeret al., proficiently and convenient (Gilling, 1977; Hassan,
1998; Caneghem, 2004), as they have solid 2016). A few past studies s (e.g. Abdulla, 1996;
motivating forces to give a high review quality level Leventis et al., 2005; Owunsu and Leventis, 2006)
because of the reality that they have: more qualified have documented that organizations will likely to
staff, a more noteworthy number of clients, greater report on a timely basis if their financial statements
chance to convey critical resources to auditing are audited by one of the Big 4 auditing firms.
(enrollment, preparing, and innovation), and more in Based on a sample of 171 publicly listed
risk, for example, client termination of services firms from the Athens Stock Exchange, Leventis et
contract and loss of reputation (Chan et al., 1993b; al. (2005) found that audit delay is diminished by
Caneghem, 2004; Chung et al., 2005). Leventis et al. appointing a big international accounting firm. In a
(2005) find that because of the utilization of better another study conducted by Owunsu and Leventis
qualified and prepared staff together with the (2006) uncovers that companies listed on Athens
utilization of unrivaled review innovation, Big 4 Stock Exchange are that audited by Big 4 accounting
accounting firms take less time to conduct audit have shorter final reporting lead-time compared to
engagements. companies audited by local accounting firms.
However, no such studies have been undertaken for
It has been recorded in the literature that Big 4 Indonesia companies (Maijoor and Vanstraelen,
auditors are positively associated with higher quality 2006).
of financial reporting. Findings reported in various
examinations clearly support that Big 4 auditor Based on the above discussion, our second
serves as an earnings management constraint (a hypothesis is:
proxy of financial reporting quality). Based on US
data, Becker et al. (1998) showed that clients of Big H2. The audit reports produced by Big 4 auditors are
4 auditors report relatively less discretionary accruals timelier than those reports produced by non-Big 4
than the discretionary accruals reported by clients of auditors.
non-Big 4 audit firms.
According to Krishnan (2003b), Big 4 4. Conceptual Framework
auditors are able to constrain aggressive and
opportunistic reporting of discretionary accruals by Based on the literature review, that explains or
their clients compared to non-Big 4 auditors. Francis describe briefly regarding factors that could lead to
et al. (1999) stated that even though clients of Big 4 shorter audit duration, this proposed or designed
firms report higher level of total accruals, they have framework able to be followed to identify some
lower amounts of discretionary accruals. Gore et al. variables that can be used to test the hypotheses
(2001) suggested on the basis of UK sample that in identified in the previous section.
the case where high level of non-audit services are
provided, Big 4 firms are more able to constrain
earnings management. Chen et al. (2005) found that
Big 4 auditors are associated with less earnings
management for Taiwan IPO firms. However based
on sample of Belgian publicly listed firms,
Bauwhede et al. (2003) stated that the superior
performance of Big 4 auditors over non-Big 4 Figure 1- Conceptual framework
auditors is only in the case of income-increasing

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Imperial Journal of Interdisciplinary Research (IJIR)
Vol-3, Issue-10, 2017
ISSN: 2454-1362, http://www.onlinejournal.in

5. Conclusion 8. Asthon, R.H., Graul, P.R. and Newton, J.D. (1989),

“Audit delay and the timeliness of corporate
reporting”, Contemporary Accounting Research, Vol.
One important factor in measuring of 5 No. 2, pp. 657-673.
transparency and quality of financial reporting is
timeliness thus the shorter the time is take to audit 9. Ashton, R.H., Paul, R.G. and James, D.N. (1989),
the financial statement the better it is for its “Audit delay and timeliness of corporate reporting”,
Contemporary Accounting Research, Vol. 5 No. 1, pp.
stakeholders.
657-673.
This study can be further used to obtain empirical
evidence on the current relation between auditor 10. Balsam, S., Krishnan, G.V. and Yang, J.S. (2003),
quality and audit report lag using data in Malaysia “Auditor industry specialization and earnings
setting. This would disclose the current situation of quality”, Auditing: A Journal of Practice & Theory,
auditor quality and audit report lag in Malaysia. Vol. 22 No. 2, pp. 71-97.
If empirical research is carried out based on this 11. Bamber, E.M., Bamber, L.S. and Schoderbek, M.P.
conceptual framework, the knowledge that shall be (1993), “Audit structure and other determinants of
expected to be obtained from study would assist the ARL: an empirical analysis”, Auditing: A Journal of
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market concentration and additionally giving a (2003), “Audit firm size, public ownership, and firms’
depiction of the level of non-compliance on audit discretionary accruals management”, The
timeliness in Malaysia. International Journal of Accounting, Vol. 38 No. 1,
pp. 1-22.

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