Do Lengthy Auditor Tenure and the Provision

of Non-Audit Services by the External Auditor

Reduce Audit Report Lags?
Ho-Young Lee, Vivek Mande, and Myungsoo Son
International Journal of Auditing 13: 87-104 (2009)
Purpose of this paper
• To examine whether audit report lags (audit delays)
decrease as auditor tenure increases
• To study whether the provision of non-audit services by
the external auditor reduces audit report lags

Studying the determinants of audit delays is important

because the delays are directly associated with the
timeliness of companies’ announcements of audited annual
earnings.

An audit report lag (ARL) is the period between a

company’s fiscal year-end and the audit report date.

INTRODUCTION
Two reasons that studying factors that affect ARL is important

1. Increase our understanding of the audit process

ARL is one of the few externally observable variables that are associated
with audit efficiency (Bamber et al., 1993)

2. ARL is directly associated with the timeliness of

announcements of companies’ earnings (Givoly & Palmon, 1982)
A long ARL implies a delay in the release of earnings information to
investors and decreases the informational efficiency of markets – an issue
of great concern to regulators
Those in favor of mandatory auditor rotation claim that
changing auditors brings ‘fresh eyes’ to the engagement and
increases investor confidence in the auditing profession
(Seidman, 2001; Biggs, 2002; Healey & Kim, 2003).

• Lengthy auditor tenure leads to auditor entrenchment and

loss of audit quality.
• Discretionary accruals decrease as auditor tenure
increases, sugesting a positive association between tenure
and audit quality (Myers et al., 2003)
• Lengty auditor tenure is associated with fewer audit
reporting failures (Geiger & Raghunandan, 2002) and fewer
restatements (Lazer et al., 2004; Myers et al., 2005)
• The provision of non-audit services increases an external
auditor’s learning about client operations.

• Knowledge spillovers from the joint provision of non-

audit and audit services that increase audit efficiency,
resulting in shorter audit delays.
There is, however, only scant evidence in the literature on the relationship
between the provision of non-audit services and ARLs
• The length of an audit (ARL) is cited as the single most
important factor affecting the timeliness of an earnings
announcement (Givoly & Palmon, 1982).
SEC has taken action to
Recognizing the important
accelerate the filing of
of timely reporting
earnings reports

SEC issued its final rule on the

‘Acceleration of Periodic Report Filing Dates’

Requiring phased recudtions in filing deadlines from

90 days after the financial year end to 60 days (SEC, 2005)

AUDIT REPORT LAG

LITERATURE REVIEW AND DEVELOPMENT OF HYPOTHESES
A number of studies have examined the determinants of ARL

Variety Research Methods Foreign Audit Contexts

These studies have used a variety The studies have also been
of research methods: examined in foreign audit contexts:

• Surveys (Ashton et al., 1987) • Canadian firms (Ashton et al.,

• Proprietary databases (Knechel
& Payne, 2001)
• Industry-specific panel data
(Henderson & Kaplan, 2000)
1989)
• New Zealand companies
(Carslaw & Kaplan, 1991)
• Hongkong Firms (Jaggi & Tsui,
1999)

The above studies suggest that ARL is related to :

1. The amount of audit work required
2. The Incentives for client to provide timely financial information
• It takes auditor at least two to three years to become adequately
acquainted with a client’s operations (Gao, 2003)

• Short-tenured auditors ( two to three years) are associated with

lower-quality audits when compared to auditors with tenures of
four to eight years (Johnson et al., 2002)

• Reporting delays are longer with new clients due to the start-up
time required for an auditor to become familiar with a new
audit client’s records, operations, internal controls and the prior
period working papers (Ashton et al., 1987)

AUDITOR TENURE
LITERATURE REVIEW AND DEVELOPMENT OF HYPOTHESES
This study expect that firms with short-tenured auditors will
have longer ARLs due to the fact that the auditors of these
firms must spend more time learning about their client’s
operations in the initial years of the engagement.
Therefore, our first hypothesis is :

H1 : There is a negative association between audit reporting

lags (ARLs) and auditor tenure
• In order for audits to be efficient, an auditor must understand
all aspects of a client’s strategy and operations, and that
consulting services help an audit firm acquire a deeper insight
into a client’s operations (Gifford & Howe, 2004)

• The provision of NAS increases an auditor’s expertise,

competence, and professional judgment during the conduct of
an audit (Simunic, 1984)

• Audit report lag is reduced by the potential synergistic

relationship between management advisory services (MAS)
and audit services, but there is a positive association between
audit delay and tax services (Knechel and Payne, 2001)

NON-AUDIT SERVICES
LITERATURE REVIEW AND DEVELOPMENT OF HYPOTHESES
If auditor learning through NAS reduces audit set-up costs
and or makes auditors more efficient and informed about
client operations, we should expect that as NAS increases,
there will be proportionate reductions in ARLs

H2 : There is a negative association between audit reporting

lags (ARLs) and non-audit services (NAS)