International Journal of Auditing doi:10.1111/ijau.12033 Int. J. Audit.

: (2014)

Audit Committee Characteristics and Audit Report Lag

Nigar Sultana, Harjinder Singh and J-L. W. Mitchell Van der Zahn School of Accounting, Curtin
University
This study seeks to determine whether audit committee compositional features are associated with the timeliness of
financial reporting by Australian firms. Timeliness of financial reporting by firms, of which the length of an audit is
a fundamental component, adds information content and impacts firm value, making an examination of audit report
lag determinants important. Results indicate that audit committee members with financial expertise, prior audit
committee experience and those who are independent are associated with shorter audit report lag. Results suggest
that legislation mandating audit committee financial expertise and independence are effective also in improving the
timeliness of financial reporting. More importantly, our results suggest that there may be benefits in constituting
audit committees with other compositional features such as prior committee experience in overall efforts to improve
the timeliness, and therefore quality, of financial reporting by firms.
Key words: Audit report lag, audit committee, financial reporting quality
INTRODUCTION
Schwartz & Soo, 1996; Blankley, Hurtt & MacGregor,
A double-edged information relevance-reliability dilemma has long plagued external auditors. Prior literature suggests that delays
in the timely reporting of accounting information significantly undermine the quality of earnings, increase information
asymmetry, critically affect the chances of investors being defrauded, enable well-informed investors to further utilise private
information to exploit less-informed investors and increase uncertainty regarding investment evaluations and expected payoffs
(Hakansson, 1977; Bushman & Smith, 2001). Provision of unverified financial accounting statements and associated information,
however, automatically undermines the value of timely information. There is, therefore, pressure on the external auditor to
complete the audit, and issue the audit report without undue delay.
Emerging technology and new media forums only serve to amplify the external auditors information relevance-reliability
dilemma in todays highly reactionary news-driven society. Reductions in capital flow barriers, increased market integration and
the development of high-frequency trading platforms enable investors to participate in a broader set of investment markets.
However, these developments may also contribute to greater market volatility. Consequently, the demand for auditor-verified
financial statements and associated financial accounting information is ever more essential. Understanding factors influencing the
time taken by the external auditor to issue the audit report (termed audit report lag) is therefore an important area of
investigation. Such understanding can enhance the development of effective corporate governance and reporting protocols and
procedures within firms that enhance the delivery of timely, reliable financial information to capital market participants.
Timeliness of financial reporting by firms is a fundamental component of quality general purpose reporting. Prior research has
shown that timely financial reporting adds information content and consequently affects firm value (Beaver, Lambert & Morse,
1980;
2014). The length of the annual audit has been identified as the single most important determinant of timely financial reporting
by firms (Whittred, 1980b; Givoly & Palmon, 1982; Knechel & Sharma, 2012). Therefore, the timely disclosure of financial
reporting through audited financial statements plays an important role in firm value and in reducing the information asymmetry
of financial information (Jaggi & Tsui, 1999; Lee, Mande & Son, 2009). Due to recent high-profile accounting disasters,
legislators and investors have both become increasingly concerned with the timeliness as well as the quality of financial
reporting. As such, research into the factors that reduce audit report lag merit scholarly attention and provide the motivation for
this study. Furthermore, given the clamour for information in the timeliest period possible by demanding users of financial
information in the current decade, audit report lag and its determinants certainly require in-depth investigation.
Although there is a rich and lengthy history of research into determinants of audit report lag, the bulk of the prior literature
focuses on client qualities (e.g., size, profitability, internal control, industry type), audit function features (e.g., risk and
complexity of the audit) or external auditor characteristics (e.g., audit firm size, expertise, specialisation, non-audit services).
Research examining the influence of a firms corporate governance structure on audit report lag has been less forthcoming with
the overwhelming focus on the board of directors. The underlying corporate governance structure of many firms worldwide has
shifted dramatically during the past two decades. Whilst the board of directors maintains overall responsibility for financial
statements and information issued, reformists, regulators, investors and scholars alike continuously emphasise and reinforce the
need to delegate central oversight, accountability and monitoring of the financial reporting process to an audit committee.
Corporate governance reforms, new legislation and best practice guidelines introduced globally during the past several decades
have bolstered the audit committees role and responsibilities in the financial reporting process. Emergence of the audit
committees importance is likely to directly influence the
Correspondence to: Harjinder Singh, Curtin University, GPO Box U1987, Bentley 6845, Perth, Western Australia, Australia.
Email: h.singh@curtin.edu.au
actions and activities of the external auditor, including time taken to issue the audit report. Nonetheless, despite such importance,
Bedard and Gendron (2010) conclude
2014 John Wiley & Sons Ltd ISSN 1090-6738
2 N. Sultana et al.
2014 John Wiley & Sons Ltd Int. J. Audit. : (2014) (based on a comprehensive literature review) that an audit
committee from an information timeliness empirical analysis of any association is virtually
perspective and this has direct resourcing implications
for non-existent.
the management of firms. Results lend credence to the The
primary objective of this study, therefore, is to
belief that effective corporate governance mechanisms
address the imbalance in the literature by examining
increase the timeliness and, therefore, the quality of the
association between audit report lag and key audit
financial reporting by firms. Our analysis also fills a gap
committee characteristics found in the past literature
in the extant literature where empirical evidence of to
most significantly influence audit committee
how the audit committee influences audit report lag is
effectiveness. The six audit committee characteristics/
scant. This is particularly important as regulators and
features examined in this study are audit committee
reform advocates continue to promote the role and
member financial expertise, prior audit committee
responsibilities of the audit committee in improving
experience, gender diversity, audit committee size, audit
the quality of financial reporting, including its timeliness.
committee member independence and audit committee
This study also introduces improvements to the prior
diligence. Results from our examination will assist
literature by collectively examining six key audit
regulators and reform advocates develop and re-focus
committee features found to dominate audit committee
audit committee guidelines that yield greater benefits to
effectiveness. Finally, results further enhance an all
capital market participants.
understanding of audit report lag determinants and raise
Data is hand-collected using a final pooled-sample of
implications for the potential introduction of regulations
494 firm-year observations from Australian Securities
governing such factors. Exchange (ASX) listed and
incorporated firms (selected
The remainder of the paper is organised as follows.
The using a stratified-random selection approach to control
next section reviews the literature on audit committees
for firm size bias) across the period 1 January 2004 to
and audit report lag and is followed by the development
31 December 2008. Aside from using contemporaneous
 of this studys hypotheses. The data and research audit
committee data, analysis is extended to the
methodology is then outlined, before we go on to report
influence of lagged audit committee features on audit
descriptive statistics, correlations, main results and report
lag. Our analysis is further extended to determine
sensitivity tests. The final section concludes by if the six
audit committee composition features are also
summarising findings, discussing implications from our
associated with a change in audit report lag.
results, identifying limitations and making suggestions
Consistent with expectations, our analysis supports a
for future research. significant negative association
between audit committee financial expertise, prior audit committee experience and audit committee independence with audit
report lag. Our

LITERATURE REVIEW
results therefore suggest that audit committee members
Timely release of financial information by firms is an
with financial expertise, prior committee experience and
important aspect of financial reporting playing a who are
independent of management are most likely to
fundamental role in the information marketplace and in
increase audit committee effectiveness and, in turn, may
the investment decisions made by users. Audit report lag
be able to significantly reduce the time taken for the
jeopardises the quality of financial information by not
auditor to issue the audit report. Contrary to predictions,
providing timely information to key stakeholders. In we
find no evidence of a relation between audit report lag
principle, it is argued that there is an inverse relationship
and audit committee gender diversity, size and meeting
between information value and the time taken to prepare
frequency.
financial statements, specifically the longer the time taken
Australia provides an interesting setting for examining
by the auditor to complete the audit, as reflected in the
the audit committee determinants of audit report lag. For
audit report lag, the stronger the signal to the market as
instance, audit committees have a relatively new history
there may be negative issues arising from the audit. in
Australia but have been a prime focus in the past
Acknowledging the theoretical and practical importance
decades with the introduction of key corporate
of timely financial information to the decision-making
governance reforms (i.e., ASX Corporate Governance and
 process of capital market participants, regulators such
Recommendations, Common Law Economic Reform
as the Securities and Exchange Commission (SEC) and
Program ((CLERP) 9). The limited history of audit
the ASX have established mandatory time periods within
committees in Australia may assist in identifying more
which firms are required to provide audited financial
clearly the reforms introduced recently that were likely
statements to shareholders and other key stakeholders to
have been of greater benefit to the market. Also, studies
via statutory filing requirements. Past studies have
suggest greater diversity of audit firms participating
determined that delays in the timely release of financial
in the Australian audit market and such diversity may
reports can adversely impact firm value (Givoly &
provide unique insights into the audit committee/
Palmon, 1982; Blankley et al., 2014). Specifically,
Beaver audit report lag linkage. Finally, litigation risk is more
et al. (1980) pointed out that investors postponed
subdued in Australia than other institutional settings
transactional activity of securities until earnings such as
the United States (US). Consequently, the audit
announcements were made. Similarly, Givoly and
committees importance in ensuring that disclosed
Palmon (1982) determined that the share price reaction
to financial information is timely and reliable is heightened
early earnings announcements was more significant than
given that litigation is not ordinarily used as a mechanism
the reaction to late announcements, suggesting that the to
influence the quality of reported financial information
early release of financial performance data was viewed
by firms, as users tend to look instead towards the audit
more favourably. Blankley et al. (2014) found that,
committee to ensure the quality of financial reporting.
compared to non-restating firms, firms that eventually
Overall, this study makes several key contributions.
restate their financial statements have longer abnormal
Findings highlight to regulators and reform advocates the
audit report lags. The corporate governance framework
impact of enforcing specific composition requirements on
within firms, particularly audit committees, should
Audit Committee Characteristics and Audit Report Lag 3
2014 John Wiley & Sons Ltd Int. J. Audit. : (2014) therefore ensure that all material financial reporting Scholars,
corporate governance reformists and matters be made on time, including information relating
regulators alike have increasingly promoted the pivotal
to financial performance and governance, to key
role of the audit committee in the financial reporting
investors and other participants.
process as evidenced by the swath of empirical research,
Research on audit report lag has a lengthy history
corporate governance pronouncements (Cadbury
spanning 30 years. Seminal research in Australia on the
Report, 1992; Blue Ribbon Committee, 1999; Petra,
timeliness of annual financial reporting by firms traces
2006) and introduction of legislation, policies and back
to early work undertaken by Dyer and McHugh
recommendations (e.g., Sarbanes-Oxley Act in 2002 and
(1975) and Whittred (1980b). Dyer and McHugh (1975)
CLERP 9 in 2004). As the SEC (1999, p. 1) states, audit
suggest the existence of three principal lags in the
committees play a critical role in the financial reporting
timeliness of financial reporting: preliminary lag (interval
system by overseeing and monitoring managements and
between year-end and receipt of preliminary final
the independent auditors participation in the financial
statements by the Sydney Stock Exchange); auditors
reporting process. Audit committees can, and should, be
signature lag (interval between year-end and date of
the corporate participant best able to perform that
auditors report); and total lag (interval between year-end
oversight function. and receipt of published annual
report by the Sydney
The audit committee serves as a major communication
Stock Exchange). Since then, preliminary lag has become
intermediary between major parties in the financial
largely irrelevant given that preliminary final statements
reporting process (e.g., board of directors, corporate are
no longer lodged. As such, only audit report lag
management, internal auditors and external auditors)
remains of current research interest. The concept and
by providing a key monitoring oversight function (e.g.,
consequences of audit report lag are generally universally
via reviews to nominate auditors, scope of external and
accepted within the literature and as such, the
internal audit work, implementation of internal controls).
overwhelming focus of the majority of research is on
 Also, the audit committee is charged with protecting
identifying audit report lag determinants. The
investor interests by ensuring the high quality of
financial predominant setting for the majority of audit report lag
information disclosed; monitoring accounting policy
determinant studies are developed markets in North
choices; hiring, performance managing, if appropriate,
America (Givoly & Palmon, 1982; Knechel & Payne, 2001;
and maintaining the independence of the external Lee et
al., 2009; Blankley et al., 2014), Europe (Soltani,
auditor; compliance with regulatory requirements; 2002;
Owusu-Ansah & Leventis, 2006) and Oceania
monitoring and oversight of the internal audit function;
(Davies & Whittred, 1980; Carslaw & Kaplan, 1991). In
and evaluation of risk management practices (Collier &
the past decade, however, audit report lag determinant
Gregory, 1999; Goodwin, 2003). studies in emerging
markets have garnered greater
As many of the audit committees roles and attention
(Jaggi & Tsui, 1999; Haw et al., 2003).
responsibilities are directed towards improving the Client
firm-level characteristics (e.g., firm size,
financial reporting process, scholars inevitably highlight
industry type, profitability, leverage, financial statement
the audit committees likely impact on the quality of
content and restatements) have been the primary
accounting earnings. Klein (2002), for example, stated
concentration of prior audit report lag determinant
that the central role of the audit committee is to reduce
studies (Davies & Whittred, 1980; Ashton & Wright, 1989;
the magnitude of abnormal accruals, thereby enhancing
Ettredge, Li & Sun, 2006; Munsif, Raghunandan &
earnings quality. In ensuring the quality of earnings, the
Dasaratha, 2012; Blankley et al., 2014). Another major
audit committee is likely to pay attention to the
timeliness audit report lag determinant research stream involves the
of reported information, and whether disclosed
examination of external auditor features such as auditor
information (where necessary) has been effectively size,
structure of the external auditor, provision of
verified. Thus, audit report lag is likely to be a non-audit
services, auditor tenure, audit firm technology,
consideration within the purview of the audit committee
audit partner rotation and auditor changes (Bamber,
to enhance the quality of earnings. Bamber &
Schoderbek, 1993; Jaggi & Tsui, 1999; Lee et al.,
Various incentives may underpin why an audit 2009;
Tanyi, Raghunandan & Barua, 2010; Knechel &
committee may be motivated to minimise protracted
Sharma, 2012).
audit report lags. For instance, earnings quality is cited as
Whilst corporate governance has received enormous
a key benchmark of an audit committees success and
attention from scholars, advocacy groups and the
reputation (including its individual members). Ensuring
popular media during the past several decades, studies
the disclosure of reliable information to the marketplace
examining links with audit report lags are scarce. Of the
in a timely manner will best aid in preserving the quality
audit report lag studies to have considered corporate
of earnings and better enable users to make effective
governance determinants, ownership structure (Jaggi &
decisions. Protracted delays in issuing the audit report
Tsui, 1999; Ettredge et al., 2005) and internal controls
will undermine the quality of earnings and diminish
(Ashton, Willingham & Elliot, 1987; Ettredge et al., 2006;
the audit committees reputational capital with users
Munsif et al., 2012) have received the greatest attention.
possibly assessing the sub-committee as being
ineffective Despite prior research linking the structure of key
in its intermediary role. Individual audit committee
corporate governance mechanisms (e.g., board of
members (particularly independent directors) are likely
directors, audit committee, remuneration committee) to
to favour shorter audit report lags to maintain individual
major financial accounting issues (e.g., disclosure levels,
reputational capital, minimise litigation risks and to
earnings quality, management and manipulation of
enhance future board appointment opportunities.
earnings), studies of their influence on audit report lag is
Prior research suggests that the audit committees
lacking. According to Bedard and Gendron (2010), the
ability to accomplish any required and/or perceived
examination of the audit committee characteristics/audit
roles and responsibilities is dependent on the report lag
linkage has been less than forthcoming (if not
sub-committees effectiveness. The extant literature non-
existent).
details a number of factors thought to affect audit
4 N. Sultana et al.
committee effectiveness (McMullen & Raghunandan,
management disagreements, thereby ultimately reducing
1996; Blue Ribbon Committee, 1999; DeZoort et al., 2002;
audit report lag. Furthermore, members with financial
Klein, 2002). DeZoort et al. (2002), in particular, who
expertise will assist the audit committee develop more
complete a synthesis of the empirical audit committee
effective internal controls and risk management
literature, suggest that factors influencing audit
processes (McDaniel, Marint & Maines, 2002; Cohen et
al., committee effectiveness can be categorised into four
2013). In supporting the presence of financial experts on
major groups: (a) arrangement (i.e., audit committee
the audit committee, resource dependency advocates
independence, size and duality); (b) resources (i.e.,
argue such a presence enables the sub-committee to
financial expertise, committee experience); (c) authority
retain greater power over financial accounting (i.e.,
power enshrined in the committee); and (d)
information and audit judgements. Without financial
diligence (i.e., frequency of committee meeting). Broadly
expertise, the audit committee is heavily reliant upon the
speaking, the overwhelming majority of factors thought
external auditor providing assurance that key financial to
influence audit committee composition dominate
accounting figures (e.g., earnings) are reliable and the
sub-committees effectiveness. Six audit committee
relevant to external decision makers (DeFond, Hann &
composition factors that have received extensive
Hu, 2005; Sultana & Van der Zahn, 2013).1 The
following attention in the extant literature are committee financial
hypothesis is proposed in examining the relationship
expertise, committee experience, gender diversity,
between audit committee financial expertise and audit
committee size, committee independence and committee
report lag: diligence (Goodstein, Gautam & Boeker,
1994; Huse, 1998; DeZoort et al., 2002; Ingley & Van der Walt, 2002).
H
1

HYPOTHESES DEVELOPMENT
The primary theoretical perspective underlying the hypotheses development is agency theory. Insights drawn from resource
dependency theory, however, are also used to complement agency theory perspectives, particularly in regard to audit committee
size and gender. Both agency theory and resource dependency theory advocates emphasise a need for human-actor dependent
corporate governance mechanisms (e.g., board of directors, audit committee) to be designed, balanced and structured to achieve
group cohesion. Agency theory assumes that all corporate contracting parties act in their own self-interests (Jensen & Meckling,
1976; Eisenhardt, 1989). Agency theory advocates argue that human-actor dependent corporate governance mechanisms need to
be structured so as to minimise the ability of agents (i.e., corporate management) to act in their own self-interests at the detriment
of the principals (i.e., shareholders). Resource dependency theory, meanwhile, primarily focuses on the flow and exchange of
resources between firms and its resource suppliers. Advocates of resource dependence theory argue that a firm responds to, and is
dependent upon, actors or organisations in the firms environment that control resources critical to its operations, and over which
it has (at times) tenuous control (Oliver, 1997; Hillman & Dalziel, 2003). The objective and role of human- dependent corporate
governance mechanisms is therefore to maximise the firms resource power (i.e., strength to acquire reliable resource supplies
whilst ensuring others are reliant upon them).

Audit committee characteristics and audit report lag Audit committee financial expertise
A substantial amount of recent audit committee research and debate stresses the need for sub-committee members to be
knowledgeable in financial reporting and auditing (DeZoort, 1998; Beasley & Salterio, 2001). Agency theory advocates argue
that the presence of members with financial expertise enhances the audit committees ability to ensure the external auditors work
is competently undertaken, comprehend audit judgements and understand and mediate during auditor/corporate
2014 John Wiley & Sons Ltd
Int. J. Audit. : (2014) : There is a negative association between audit committee financial expertise and audit report lag.
Audit committee prior experience
Agency and resource dependency theory arguments support the inclusion of individuals on the audit committee with prior
corporate governance and audit committee expertise. From an agency theory perspective, such prior experience increases the
audit committees ability to effectively monitor corporate management and the external auditor. Resource dependence theory,
meanwhile, suggests that the inclusion of members with prior committee experience enables the sub-committee to retain power
over financial accounting information and related disclosures rather than relying on corporate management and the external
auditor. Overall, prior experience enables an audit committee member to be more efficient and effective in understanding the
requirements and responsibilities of the sub-committee and its members (DeZoort, 1998; Beasley & Salterio, 2001). Furthermore,
prior audit committee experience will provide the audit committee with greater knowledge and assurance in negotiations with the
external auditor, and in mediating corporate management/external auditor disagreements, thereby reducing overall audit report
lag (Bedard & Biggs, 1991; DeZoort & Salterio, 2001; DeZoort, Hermanson & Houston, 2003). The following hypothesis is
proposed in examining the relationship between audit committee prior experience and audit report lag:
H
2
: There is a negative association between audit committee prior experience and audit report lag.
Audit committee gender
Agency and resource dependency theories diverge on the potential influence of audit committee gender. Agency theorists suggest
the audit committees effectiveness is dependent upon group cohesion. Prior gender diversity research suggests females are more
financially conservative, ethically bound and risk-averse than males (Levin, Taylor & Chatters, 1993; Powell & Anisc, 1997).
Such attitudinal differences towards key business concepts (e.g., risk, finances) can significantly impact financial accounting and
auditing as group dynamics (particularly in small groups like the audit committee) and cohesion is undermined, making decision-
making processes and corporate governance
Audit Committee Characteristics and Audit Report Lag 5
mechanisms less effective and efficient (Powell & Anisc,
H
4
: There is a significant association between audit
1997). Further, gender differences may fragment small
committee size and audit report lag. group dynamics
leading to the formation of majority and minority sub-groups. Thus, from an agency perspective,
Audit committee independence gender differences may
reduce the audit committees effectiveness.
In contrast, resource dependency theorists subscribe to the view that broader social representation within a group assists in the
importation of different ideas, views and experience. Consequently, key corporate governance mechanisms such as the audit
committee will be able to consider a broader spectrum of financial accounting issues, thereby reducing chances of fraudulent and
misrepresentative accounting practices (Pucheta-Martinez & Fuentes, 2007; Gul, Srinidhi & Ng, 2011). Without gender diversity,
resource dependency advocates argue that boards of directors and sub-committees are prone to the adoption of a groupthink
mentality.2 If all members of the audit committee share very similar mind-sets, the groupthink mentality can lead to major
flaws in assessing and dealing with the sub-committees tasks (such as overseeing the timely release of financial information) as
perceptions are limited (Owusu-Ansah & Leventis, 2006; Gold, Hunton & Gomaa, 2009). Given that the influence of audit
committee gender on audit report lag is mixed in terms of directionality, the following hypothesis is proposed:
2014 John Wiley & Sons Ltd
Int. J. Audit. : (2014) Audit committee independence has been of major interest to reformists, regulators and researchers
(Blue Ribbon Committee, 1999; Abbott, Park & Parker, 2000). Agency and resource dependence theory advocates proclaim
similar views, arguing that an audit committee with a higher proportion of outside directors is less likely to be compromised in
undertaking the sub- committees roles and responsibilities. Furthermore, a more independent audit committee is likely to be
better able to enhance key financial accounting issues such as earnings quality, dealings with the external auditor and mediation
of disputes due to a lack of bias (Klein, 2002; Bedard, Chtourou & Courteau, 2004). Empirical findings generally support the
perception that independent audit committees are more effective in constraining corporate management and reducing fraudulent
and misleading financial statements (McMullen & Raghunandan, 1996; Bedard et al., 2004). Also, prior literature suggests that
audit committees comprising a majority of independent directors are more likely to improve the financial reporting quality of
firms by hiring industry specialist auditors, employing an internal audit function within the firm and engaging in higher levels of
accounting conservatism (Goodwin, 2003). Overall, the actions of a H
3
: There is a significant association between audit
more independent audit committee are therefore likely
committee gender diversity and audit report lag.
to reduce the time taken to issue the audit report. The following hypothesis is proposed in examining the Audit committee size
relationship between audit committee independence and
Agency and resource dependency theorists differ on
audit report lag:
the impact of the audit committees size on its
H
5 effectiveness. Agency theory suggests group
dynamics and cohesion will be enhanced by a smaller audit committee. Advocates (Collier & Gregory, 1999; Hillman & Dalziel,
2003) argue that as size of the audit committee increases, control and monitoring functions are impaired. Furthermore, a larger
audit committee is likely to increase chances for opportunistic behaviour as the sub-committee is bloated, such that formation of
a collective decision-making mind-set is problematic (Mintzberg, 1983). Others (Evans & Dion, 1991; Jensen & Tang, 1993)
suggest that a larger audit committee can lead to a free-member problem with a lack of active participation by some members
undermining cohesion, and ultimately diminishing the audit committees ability to achieve vital consensus on control and
monitoring.
Conversely, resource dependence theory advocates argue a larger audit committee enables the appointment of members with a
broader set of qualities such as expertise, experience, knowledge and connections. According to resource dependence advocates,
the wider set of views offered by a larger committee will enable the audit committee to better assess the role, responsibilities and
work performed by the external auditor (DeZoort et al., 2002; Turley & Zaman, 2007). As such, a larger audit committee will
enable the sub- committee to draw on a wider set of skills to better enable mediation efforts to resolve conflicts such as with the
audit report (DeZoort et al., 2003). Given that the influence of audit committee size on audit report lag is mixed in terms of
directionality, the following hypothesis is proposed:
: There is a negative association between audit committee independence and audit report lag.
Audit committee diligence
It is argued that an audit committee can only fulfil its functions (e.g., ensuring the timely provision of the audit report) through
constant levels of activity. Best practice guidelines (Blue Ribbon Committee, 1999; Corporate Governance Committee, 2001)
suggest that audit committees meet a minimum of three or four times during the firms financial period. By meeting more
frequently, the audit committee will be better placed to actively address the various changing and challenging complexities of the
uncertain business and financial environment (Vafeas, 1999; Bedard et al., 2004; Stewart & Munro, 2007). Also, a more active
audit committee is better equipped to detect and prevent opportunistic behaviour by management, thereby ensuring the integrity
of reported earnings (Vafeas, 1999; Bedard et al., 2004; Stewart & Munro, 2007). Past research also provides evidence that a
more diligent audit committee is less likely to issue fraudulent and misleading statements, use discretionary accruals to manage
earnings and more likely to detect and report internal control weaknesses (Krishnan & Visvanathan, 2007). In general, actions of
a more active audit committee are therefore likely to reduce the time taken to issue an audit report. The following hypothesis is
proposed in examining the relationship between audit committee diligence and audit report lag:
H
6
: There is a negative association between audit committee diligence and audit report lag.
6 N. Sultana et al.

RESEARCH METHODOLOGY
Table 1: Sample selection and industry breakdown The
following sub-sections provide details of the sample selected, source documentation, measurement details for all the variables in
this study and specify the statistical models utilised to formally test the hypotheses of this
Panel A: Sample selection
Number of firms listed on ASX
2,128 as at 1 January 2004 study.
Exclusions:
Financial institutions (133) Sample selection
Insurance (10) Utilities (30) Due to the time-consuming task of hand collecting key longitudinal data, analysis is limited to a
stratified-randomly selected sample of 100 firms continuously listed on the ASX from 1 January 2004 to 31 December 2008.3 A
stratified-random approach is used to
IPO firms Trust Foreign incorporated firms Firms that are not continuously listed
(106) (92) (64) (222)
control for potential firm size bias.
Missing data (381) Total Number Excluded: (1,038) The studys initial sample comprises 2,128 firms listed on the ASX as at 1
January 2004. Consistent with prior research (e.g., Ball, Kothari & Robin, 2000; Ruddock,
Sample pool for random selection Number randomly selected by
Quartiles per year
1,090 100*5 500
Taylor & Taylor, 2006), financial (133), insurance (10),
Excluded due to missing data (6)
utilities (30), IPO (106) and trust (92) firms are excluded.
Final useable sample 494 Consistent also with Clifford
and Evans (1997), foreign incorporated and domiciled firms (64) are excluded,
Panel B: Sample firm break down by industry
because their financial statements are not necessarily ASX Industry prepared in accordance with Australian disclosure
No. firm-year observations requirements. To avoid the undue influences of unexpected share price changes, 222 firms not
continuously listed on the ASX throughout the entire observation period (i.e., firms de-listed and subsequently re-listed) were
eliminated. Finally, 381 firms are excluded due to missing data.
Following exclusions, the useable pool to conduct the stratified-random sample selection comprised 1,090 firms that were
ranked by market capitalisation (as at 1 January 2004) before being categorised into quartiles. Following Balvers, Cosimano and
McDonald (1990), 25 firms are randomly selected from each quartile. Annual data spanning a five-year period (20042008) is
collected4 for the 100 selected firms allowing for a maximum of 500 firm-year observations for the final sample. Six firm-year
observations are, however, excluded due to data reliability concerns or incomplete information. Consequently, the main analysis
is based on 494 firm- year observations. Panel A of Table 1 provides a summary of the sample selection process, whilst Panel B
of Table 1 presents an industry breakdown (by firm-year observations) of the final useable sample.

Measurement of all variables

Consistent with prior literature, audit report lag (denoted ARL
it
2014 John Wiley & Sons Ltd
Int. J. Audit. : (2014) % Sample
Consumer Discretionary 80 16.19 Consumer Staples 19 3.85 Energy 35 7.09 Health Care 70 14.17 Industrials 128 25.91
Information Technology 34 6.88 Materials 115 23.28 Telecommunication Services 13 2.63 Total 494 100
Experience
it
takes the value of one if at least one director of the audit committee of firm i in time period t has prior audit
committee experience; and zero otherwise. The variable denoted Female
it
takes the value of one if at least one director of the audit committee of firm i in time period t is
female; and zero otherwise. In relation to audit committee size, the variable denoted Size
it
takes the value of one if the number of members of the audit committee of firm i
in time period t are greater than three; and zero otherwise (ASX Corporate Governance Council, 2007). The variable denoted
Independence
it
takes the value of one if the majority of the audit committee of firm i in time period t are
independent directors; and zero otherwise. Finally, in the case of audit committee diligence, the variable denoted Meetings
it
takes the value of one if the )
is measured as the difference (in number of days)
audit committee of firm i in time period t meets at least
from the end of financial year of firm i in period t to the
four times or more a year (or if the board acts as a day
the external auditor signs the audit report. To
surrogate audit committee, the board then meets 10 times
minimise data loss and extreme values in the regression
or more a year); and zero otherwise (ASX Corporate
analysis, continuous values were winsorised at the 1st
Governance Council, 2007). and 99th percentile.
A number of firm and governance characteristics are
Following prior work (Collier & Gregory, 1996;
used as control variables as they have been found to be
McMullen & Raghunandan, 1996; DeZoort et al., 2002),
associated with audit report lag. Prior research (Ashton
& we use six audit committee variables best proxying audit
Wright, 1989) suggests that larger, well-established audit
committee effectiveness for analysis. In relation to audit
firms have greater resources and specialists to draw
committee financial expertise, the variable denoted
upon, and are therefore associated with shorter audit
F_Expertise
it
is an indicator variable that takes the value of
 reporting delays. To control for audit firm size, the one if
at least one director of the audit committee of firm
variable Big4
it i in time period t has necessary
expertise (based on educational, professional affiliations and/or a for-profit role) to be financially qualified; and zero otherwise.
In the case of audit committee experience, the variable denoted
is scored one if the external auditor appointed to verify the financial statements of firm i for the period t is a
Big4 audit firm (i.e., KPMG, Deloitte, Ernst and Young or PriceWaterhouseCoopers); and zero otherwise. The majority of prior
research also indicates a
Audit Committee Characteristics and Audit Report Lag 7
negative association between audit reporting lag and firm size (Ashton & Wright, 1989; Carslaw & Kaplan, 1991). For firm size,
the variable LnAssets
it
ARL it = 0 + 1 F _
Expertise it 1 +

2 Experience
it

1
is measured as the natural logarithm of the book value of total assets of firm
+
3 Female
it

1
+
4 Size it 1 +

5 Independence
it

1 + 6 Meetings it
1 + 7 Big 4
it
+nAssets

8
L
it i
at end of time period t.
Highly leveraged firms are likely to prompt an auditor to undertake greater care and checks that contribute to longer audit
report lags. The variable Leverage
it
is measured as total assets divided by total assets minus total
+ 9 Leverage it + 10 Growth it + 11 Busy it +

12
Risk
it +

13 Qual _ R it + 14 Industry it +

15
B _ Size
it + 16
Duality it +
Year
+

i t (2)
liabilities of firmiat the end of time periodt.5 Furthermore, a strong growth-centric firm may be perceived by an audit firm as
being of higher risk due to more aggressive opportunistic behaviour of corporate management.
ARL it = 0 + 1 F _
Expertise it + 2 Experience it +

3
Female
it +

4
Size
it + 5 Independence it +

6
Meetings
it + 7 Big 4 it + 8 LnAssets
it
+

9
Leverage
it
Accordingly, more time and effort is allocated to testing
+ 10 Growth it + 11 Busy it + 12 Risk it +

13
Qual _
R
i
t and verifying financial statements leading to an extended audit report lag. Growth opportunity (denoted Growth
it
) is reflected in the market-to-book ratio of firm i for time
+

1
4 Industry it +

15
B_
Size
it + 16
Duality it +
Year
+

it
(
3) period t measured as a ratio of market value of equity to book value of equity. Empirical evidence (Knechel &
where: Payne, 2001) shows that the larger concentration
of audits
ARL
it
= Number of days from the end of financial year
of clustered around a specific time period (i.e., end of
firm i in period t to the day the external auditor signs
financial year) causes scheduling problems for audit firms
the audit report; leading to longer audit report lags.
The variable Busy
it
is
F_Expertise
it
= Indicator variable that takes the value of
one scored one if the end of financial year of firm i in period t
if at least one director of the audit committee of firm i
is 30 June; and zero otherwise. Firm risk, qualified audit
in time period t has necessary expertise (based on
opinion and the underlying industry nature (e.g.,
educational, professional affiliations and/or a for-
profit industrial, resource, services) is also thought to influence
role) to be financially qualified; and zero otherwise;
audit report lag (Whittred, 1980a). Risk (denoted Risk
it
) is
Experience
it
= Indicator variable that takes the value of
one measured as the ratio of current liabilities to current assets
if at least one director of the audit committee of firm i
of firm i for period t. Meanwhile, the variable Qual_R
it
in time period t has prior audit committee experience;
(representing audit opinion) is scored one if the audit
and zero otherwise; report for the financial statements
of firm i for period t is
Female
it qualified; and zero otherwise. Finally, firm iis
scored one if the entity is defined as being within an Industrials and/or Materials ASX GICS business sector; and zero otherwise.
Corporate governance advocates, investors, regulators and scholars alike argue that board of directors are quintessential in the
effective functioning of major corporate governance mechanisms within firms. Such influence can extend to the issuance of the
audit report. For instance, a more effective board can enhance work undertaken by the auditor by resolving auditor conflicts with
management more swiftly (Beasley, 1996). This study therefore controls for board size and duality. Specifically, the board size
(denoted B_Size
it
2014 John Wiley & Sons Ltd
Int. J. Audit. : (2014) = Indicator variable that takes the value of one if at least one director of the audit committee
of firm i in time period t is female; and zero otherwise; Size
it
= Indicator variable that takes the value of one if the number of members of the audit committee of firm i in time period t are
greater than three; and zero otherwise; Independence
it
= Indicator variable that takes the value of one if the majority of the audit committee of firm i in time period t are
independent directors; and zero otherwise; Meetings
it
= Indicator variable that takes the value of one if the audit committee of firm i in time period t meets at ) of firm i is
least four times or more a year (or if the board acts as
a measured as the total number of individuals on the board
surrogate audit committee, the board then meets 10 at
the end of time period t. Meanwhile, a dichotomous
 times or more a year); and zero otherwise; approach is
used to measure duality (denoted Duality
it
)
Big4
it
= Indicator variable is scored one if the external
with firm i scored one if the same individual holds the
auditor appointed to verify the financial statements
roles of chairperson of the board and CEO at the end of
of firm i for the period t is a Big4 audit firm (i.e., time
period t; and zero otherwise.
KPMG, Deloitte, Ernst and Young or PriceWaterhouse Coopers); and zero otherwise;

Statistical tests and models

LnAssets
it
The main OLS regression tests performed to formally test the hypotheses are based on the models specified by the following
three equations:
ARL F Expertise Experience Female
Size
= Natural logarithm of the book value of total assets of firm i at end of time period t; Leverage
it
= Total assets divided by total assets minus total liabilities of firm i at the end of time period t; Growth
it
= Market-to-book ratio of firm i for time period t measured as a ratio of market value of equity and book
it = 0 + 1 _
it + 2 it +

3
it +

4
it + 5 Independence it +

6
Meetings
it
value of equity; Busy
it
 = Indicator variable is scored one if the end of financial year for firm i for period t is 30 June; and zero + 7 Big 4 it + 8
LnAssets
it
+

9
Leverage
it Growth it Busy it Risk it Qual R
it
otherwise;
+ 10 + 11 + 12 +

13
_+

1
4 Industry +

15
B_
Size
Risk
it
= Ratio of current liabilities to current assets of firm i for period t;
it it
Qual_R
it
= Indicator variable is scored one if the audit + 16
Duality it +
Year
+

it
(1)
report for the financial statements of firm i for period t is qualified; and zero otherwise;
8 N. Sultana et al.
Industry
it
= Indicator variable is scored one if firm i is
as the US, Canada, New Zealand and the UK (Ashton
defined as being within an Industrials and/or
et al., 1987; Schwartz & Soo, 1996). Minimum and
Materials ASX GICS business sector; and zero
maximum ARL
it otherwise; B_Size
it
2014 John Wiley & Sons Ltd
Int. J. Audit. : (2014) values after winsorising are 35 days and 204 days respectively. = Number of members on the board
of directors
On average, nearly one individual (i.e., 0.970) or a third
of firm i at the end of period t;
(i.e., 31.4%) of audit committee members are financial
Duality
it
= Indicator variable is scored one if the same
experts. Across the pooled sample, 77% of firms had
individual holds the positions of chairperson of the
at least one individual on the audit committee with Board
and CEO for firm i at the end of period t; and
financial expertise and the maximum on any single zero
otherwise;
audit committee is three members. In terms of prior audit
Year = Series indicator variables controlling time
committee experience, 1.49 persons or 46.3% of the
temporal differences of reporting periods for firm-year
audit committee members had previously served on the
observations scored one if the financial data of firm i
audit committee of another Australian publicly listed
corresponds to time period t; and zero otherwise;
firm. Overall, 76% of pooled-sample firms had at least
0
= Intercept term;
one member of the audit committee with prior committee

116
= Coefficients on the independent and control
experience. Thirteen per cent of audit committee variables;
 members were female with maximum number being
it
= Error term;
two. t 1 = Each audit committee characteristic lagged
by one
Consistent with prior Australian audit committee year;
and
research (and other international studies), the average
ARL
it
= Change in the audit report lag of a firm by one
audit committee size of pooled-sample firms marginally
year.
exceeds three (i.e., 3.16) (Goodwin, 2003) with the maximum number of individuals on any given audit Equation (1) specifies the
first regression model
committee being six. Overall, 30% of the pooled sample
examining the effect of six individual audit committee
had an audit committee in excess of the minimum ASX
characteristics on audit report lag. If the audit committee
recommendation of three members. On average, 1.73 (or
characteristics are significant predictors in Model 1, the
54.6%) of audit committee members were independent.
coefficients
1,

2,

5
and
6
(equating to H
1
,H
2
,H
5
and H
6
)
Sixty per cent of the pooled sample had audit are
expected to be negative and statistically significant.
 committees comprised of a majority of independent As H
3
are non-directional, the coefficients
3
directors. During the reporting period, audit committees
and
4
met on average 3.4 times. The minimum number of annual meetings is once and the maximum 13. Just over a third (i.e., 35%) of
the audit committees met four times or more.
As for control variables, 57% of the pooled-sample firms engaged a Big4 audit firm. This finding is consistent with prior
Australian capital and audit market research but is slightly lower than in other international settings (Van der Zahn & Tower,
2005). The majority of the pooled-sample firms (i.e., 87%) had financial year-ends coinciding with 30 June. Meanwhile, less than
a tenth (i.e., 9.0%) of the pooled-sample firms received qualified audit reports. Average board size (i.e., 5.27) is marginally lower
than reported in some previous Australian and international corporate governance studies (Van der Zahn & Tower, 2005). In
contrast, the percentage of firms with the same individual serving as the board chairperson and chief executive officer (i.e., 11%)
is lower than other international capital markets in Asia or the US (Donaldson & Davis, 1991; Carcello et al., 2006). Industry
representation is slightly lower than the overall Australian capital market, with only 40% of pooled-sample firms from the ASX
GICS Industrial and/or Materials business sectors.
Correlation analysis (using both Pearson and Spearman correlations) is performed to identify pairwise univariate associations,
and to detect possible multicollinearity problems (Gujarati, 2003). The correlation analysis (Pearson values reported in the
bottom half and Spearman the top half) is shown in Table 3.
Table3 results indicate a negative and significant association between audit report lag (i.e., ARL
it and H
4 are predicted to be statistically significant when the regression based on Model 1 is run (with variables Female
it
included). Equation (2) specifies a second model which examines the lagged impact of the same six audit
committee characteristics on contemporaneous audit report lag. This approach takes into account the possibility that the influence
of a corporate governance mechanism is not immediate but influences future financial accounting events (in this case, audit
report lag). Finally, Equation (3) formulates a third model investigating the influence of the six contemporaneous audit
committee characteristics on the change in audit report lag. Specifically, a logistic regression is performed to determine if the
audit committee characteristics examined are associated with a faster audit report issuance in the current period relative to the
prior period.

EMPIRICAL RESULTS
The following sub-section details descriptive statistics and correlation results followed subsequently with the reporting of the
main multivariate results.

Descriptive statistics and correlations

Table2 presents descriptive statistics for the pooled sample of 494 firm-year observations. The mean (median) ARL
it
and Size
it
value of 80.67 days (87.00 days) is slightly higher than prior audit report lag studies using Australian data (Lai & Cheuk,
2005). In terms of percentiles, firms below the 25th percentile had a maximum ARL
it
value of 60 days
 )
and: (a) with all firms above the 75th percentile taking more than
audit committee member financial expertise (i.e., the
statutory maximum time of 90 days to complete their
F_Expertise
it audit. Relative to international research,
findings reinforce the perception that the audit report lag in Australia is greater than other developed economies such
); (b) prior audit committee experience (i.e., Experience
it
); (c) audit committee independence (AS_Independence
it
); and (d) diligence (i.e., Meetings
it
). On a univariate basis, these findings are as predicted in H
1
,
Audit Committee Characteristics and Audit Report Lag 9
Table 2: Descriptive statistics
Variables Meana Median Std. Dev. Minimum Maximum
ARL #No_F_Expertise
it
Pro_F_Expertise
it
80.67 87.00 44.38 35.00 204.00 0.97 1.00 0.89 0.00 3.00
F_Expertise #No_Experience
it
Pro_Experience
it
it
2014 John Wiley & Sons Ltd
Int. J. Audit. : (2014) 0.31 0.33 0.29 0.00 1.00 0.77 1.49 1.00 1.18 0.00 5.00
Experience #No_Female Pro_Female it
it
it
0.46 0.50 0.33 0.00 1.00 0.76 0.18 0.00 0.42 0.00 2.00
Female #No_Size
it
it
0.13 0.00 0.12 0.00 0.67 0.16
Size #No_Independence
it
it
Pro_Independence
it
3.16 3.00 0.94 1.00 6.00 0.30 1.73 2.00 1.30 0.00 6.00
Independence #No_Meetings it
it
0.55 0.67 0.38 0.00 1.00 0.60
Meetings Big4 Total it
Assets it
it (AUD$000) 3.40 3.00 1.95 1.00 13.00
0.35 0.57 555,325 38,175 1,552,852 567 8,003,883 LnAssets Leverage Growth
it
it
17.73 17.46 2.37 13.25 22.80 2.23 1.84 2.80 1.33 18.76
Busy Risk Qual_R
it
it
it
3.48 2.13 6.93 5.47 32.81 0.87
Industry B_Size Duality
it
it
it
it
0.96 0.66 2.90 0.02 7.35 0.09 0.40 5.27 5.00 2.02 3.00 12.00 0.11
aFor variables measured using a dichotomous scoring approach, the mean value is to be interpreted as the proportion of the
pooled-sample being awarded a score of one for the respective dichotomous measure. For variables measured using a
dichotomous approach, the median, standard deviation, minimum and maximum are not reported as such detail is primarily
irrelevant t to the day given the external the nature auditor of a dichotomous signs the audit measure. report; ARL
it
= Number of days from the end of financial year of firm i in
period i in time period t with the necessary expertise (based #No_F_Expertise
on educational, it
professional = Number of affiliations members and/or of the audit a for-profit committee role) of to firm be financially necessary
qualified; Pro_F_Expertise
expertise (based on educational, it
= Proportion professional of the audit committee of firm affiliations and/or a i in time period t of members with the for-profit
role) to be financially qualified; F_Expertise t has necessary it
= Indicator expertise variable (based on that educational, takes the value professional of one if at affiliations least one and/or
director a of for-profit the audit role) committee to be financially of firm i in qualified; time period and zero otherwise;
committee #No_Experience
it
= Number of members of the audit committee of firm i in time period t that has prior audit
committee experience; Pro_Experience
it
= Proportion of audit committee of firm i in time period t of members with prior audit
of firm i in experience; time period Experience
t has prior it audit = Indicator committee variable experience; that takes and the zero value otherwise;
of one if members of at least one director of the audit committee
#No_Female
it
= Number of audit
committee are female; firm i in time period t that are female; Pro_Female
it
= Proportion of audit committee of firm i in time period t
who period t is Female
female; it
= and Indicator zero variable that takes the value of one if at least one director of the audit committee of
firm i in time Size t are it
greater = Indicator variable that otherwise; takes the value #No_Size
of one it
= if Number the number of members of members of the audit committee of firm i in time period t; of the audit committee of firm
i in time period period t than that are independent three; and zero otherwise; #No_Independence
it
= Number of members of the audit committee of firm i in
time period t that are independent directors; Pro_Independence
it
= Proportion of members of the audit committee of firm i in
time committee of firm i directors; in time period t are Independence
independent it
= Indicator variable that takes the value of one if the majority of the
audit committee meetings held by the audit committee of directors; firm i during and time zero period otherwise; #No_Meetings
it
= Actual number
of audit value of one if the audit committee of firm i in time period t meets at least four t; times Meetings
or more it
= Indicator a year (or variable if the board that takes acts as the a surrogate the audit committee then meets 10 times external
auditor appointed to verify the or more a year); and zero otherwise; financial statements of firm i for the period Big4 it
= t Indicator is a variable is scored one if Big4 audit firm (i.e., KPMG, Deloitte, total end of assets time Ernst of period firm and i
Young at end or of PriceWaterhouseCoopers); time period t; Leverage
it
= Total and zero assets otherwise; divided by LnAssets
total assets it
= Natural minus logarithm total liabilities of the of book firm value i at the of
and book value t; Growth
it
= Market-to-book ratio of firm i for time period t measured as a ratio of market value of equity
and zero otherwise; scored one if of equity; the audit Risk it
Busy
it
= Indicator variable is scored one if the end of financial year for firm i for period t is June 30; = Indicator report for the financial
statements of firm i for period t is qualified; and zero variable is otherwise; Industry
it
= Ratio of current liabilities to current assets of firm i for period t; Qual_R
it
= Indicator variable is scored one if firm i is defined as being within an Industrials and/or Materials ASX GICS
business sector; and zero otherwise; Duality firm i at it
= the Indicator end of period variable t; is scored B_Size
it
= Number of members on the board of directors of firm i at the end of period t; and and zero one if the same
individual holds the positions of chairperson of the Board and CEO for
otherwise.
H
2
,H
5
and H
6
. Inconsistent with expectations for H
3
and
reveals significant correlations between all six variables
H
4
, gender diversity (i.e., Female
it
) and audit committee
excepting audit committee Size
it
with Independence
it
a
nd size (i.e., Size
it
) are not significantly associated with audit
Meetings
it
. Table 3 also indicates a number of
significant report lag (albeit on a univariate basis). With respect to
pairwise correlations involving control variables. the six
audit committee characteristics examined, Table 3
However, none of the highest pairwise correlations for
10 N. Sultana et al.
Int. J. Audit. : (2014) 2014 John Wiley & Sons Ltd
Audit Committee Characteristics and Audit Report Lag 11
any variable examined exceed the critical threshold of
characteristics constant. Similarly, if the firm has a 0.80
that would raise multicollinearity concerns (Hair
director on the audit committee who is independent, the
et al., 1995).
audit report lag of that firm decreases by almost 4 days

Main results
(i.e., 3.70), ceteris paribus. Overall, Table4, Column 1, results using Model 1 support H
1
,H
2
and H
5
but not H
3
,
Regression analyses are reported in Table 4, Columns 13,
H
4
and H
6
. using regression models 13.6 In terms of
individual audit
Findings reported in Table 4, Column 1, also show
that, committee characteristics, coefficients on F_Expertise
it
in general, the actual directionality of the coefficients for
and Experience
it
are negative and statistically significant
respective control variables versus predicted directions in
Table 4, Column 1 (t = 2.77, p < 0.01 and t = 1.98,
are mixed. For instance, the estimated coefficients on p <
0.05, respectively). Furthermore, the coefficient on
Growth
it
and Risk
it
(B_Size
it
 ) are positive (negative)
across Independence
it
is also negative and statistically significant
the regression results reported in Table 4, Column 1, as
in Table 4, Column 1 (t = 1.99, p < 0.05). In contrast, the
predicted. In contrast, the estimated coefficients on Big4
i
t coefficient on Female
it
is positive but insignificant. The
and Leverage
it
are positive contrary to the predicted
coefficients on Size
it
and Meetings
it
are negative but
negative directionality. Aside from firm size, all the
insignificant in Table 4, Column 1. In terms of
coefficients on the control variables are insignificant
from interpreting the reported audit committee coefficients in
zero. The significance of firm size supports prior Table4,
Column 1, as an example, if the firm has a
assertions that larger firms may be able to assert greater
director on the audit committee with prior committee
pressure on audit firms to complete the required audit
experience, the audit report lag of that firm decreases by
work faster or have greater resources to enable the
almost 7 days (i.e., 6.98) holding other audit committee
completion of a swifter audit. Despite the insignificance
Table 4: Main results
Variables Expected
sign
2014 John Wiley & Sons Ltd
Int. J. Audit. : (2014) Model 1 Model 2 Model 3 Coefficient t-statistic Coefficient t-statistic Coefficient Wald
p-
Intercept 164.81 7.87 147.11 6.27 0.66 0.55 F_Expertise Experience Female
it
it
 1.53 2.77** 1.48 2.27** 0.35 0.00** 6.98 1.98* 7.56 1.84* 0.43 0.06
Size Independence
it
it
Meetings
it
? 2.59 0.440 4.89 0.70 0.26 0.39 ? 4.46 0.954 5.46 1.06 0.01 0.97
3.70 1.99* 0.90 1.750 0.05 0.03*
Big4 LnAssets
it
it
1.37 0.29 2.97 0.55 0.33 0.04* 8.60 1.80 6.80 1.22 0.20 0.46
Leverage Growth
it
it
4.61 3.72*** 3.82 2.70** 0.13 0.05 0.30 0.35 0.24 0.25 0.02 0.67
Busy Risk Qual_R
it
it
it
+ 0.04 0.11 0.17 0.44 0.03 0.21 + 0.43 0.07 7.86 1.054 0.01 0.97 + 0.17 0.25 0.26 0.33 0.11 0.35
B_Size Duality it
it
3.04 0.41 1.06 0.45 0.82 0.06 0.34 0.23 0.61 0.37 0.11 0.17
Industry Year it
it
+ 1.50 0.23 1.73 0.22 0.14 0.72 + 4.08 1.00 8.96 1.89* 0.07 0.75
NR NR NR NR NR NR Adjusted R2 0.49 0.47 F statistic (sig.) 7.27*** 6.02***
Cox & Snell R2 0.29 Nagelkerke R2 0.39 Observations 494 395 395
***, **, *, = 0.1%, 1%, 5% and 10% significance with one-tailed significance level where direction of sign on coefficient
predicted, otherwise two-tailed. See Table 3 for dependent, independent and control variable definitions. Year = Series indicator
variables controlling time temporal differences of reporting periods for firm-year observations with firm i scored one if financial
data corresponds to time period t; otherwise scored zero. For Model 2, t1 = Each audit committee characteristic lagged by one
year. For independent Model and 3, control ARL
it variables; = Change
0 in = the intercept audit term; report and lag
of it
= a error firm term.
by one year. For models 13,
116
= coefficients on the
Model 1 (Main results)
ARL it = 0 + 1 F _
Expertise it + 2 Experience it + 3 Female it +
4
Size
i t + 5 Independence it + 6 Meetings it + 7 Big 4
it +

8
LnAssets
it +

9
L
everage it + 10 Growth it + 11 Busy it + 12 Risk it + 13 Qual _ R
it
+
14
Industry it + 15 B _
Size it + 16
Duality it +
Year
+

it
(1)
Model 2 (Lagged audit committee characteristics results)
ARL it = 0 + 1 F _
Expertise it 1 + 2 Experience it 1 + 3 Female
it

1
+

4 Size it 1 + 5 Independence it 1 + 6 Meetings it

1 + 7 Big 4 it + Assets
8
Ln
it
+ 9 Leverage it + 10 Growth it + 11 Busy it + 12 Risk
it
+
13
14 15 16

(
2) Model 3 (Lagged ARL
it
Qual _ R it + Industry it + B _ Size it + Duality it + Year
+
it
results) ARL it = 0 + 1 F _
Expertise it + 2 Experience it + 3 Female it
+
4
Size
it + 5 Independence it + 6 Meetings it + 7 Big 4
it +

8
LnAssets it +

9
Leverage it Growth it Busy it Risk it Qual R
it + 10 + 11 + 12 + 13 _
+
1
4 Industry it + 15 B _
Size it + 16
Duality it +
Year
+
it
(3)
12 N. Sultana et al.
2014 John Wiley & Sons Ltd Int. J. Audit. : (2014) of the majority of control variables, results from Model 1
characteristics included: (1) number of members with in Table 4, Column 1, are robust for goodness-of-fit with
financial expertise; (2) number of members with audit an
explanatory power (i.e., adjusted R2) of 49%.
committee experience; (3) number of women on the
Findings reported in Table4, Column 1, are based
audit committee; (4) number of members on the audit on
contemporaneous audit committee characteristics.
committee; (5) number of independent members; and (6)
Some researchers argue that the influence of a corporate
number of audit committee meetings per year. Finally,
governance mechanism or feature is not immediate
in respect to control variables, firm size was measured
but influences future financial accounting events,
using total sales, the quick ratio for leverage and auditor
transactions and reports (Zahra & Pearce, 1989; Dalton
industry specialisation8 for auditor quality. Regression et
al., 1999). Thus, tests are performed again using lagged
analysis performed again using alternative proxy data for
all six audit committee features (e.g.,
measures for the dependent, independent and control
F_Expertise
it1
as opposed to F_Expertise
it
) as predictors
variables yield findings highly consistent with the results
of contemporaneous audit report lag. Results of the
reported in Table 4.9 The consistency in findings despite
regressions re-run using the lagged audit committee
using alternative measures reinforces conclusions data
(i.e., Model 2) is reported in Table4, Column 2.
regarding the testable hypotheses as highlighted by the
Results reported in Table4, Column 2, closely mirror
main results. the main findings in Table4, Column 1.
Lagged
A further robustness test was to analyse the potential
audit committee member financial expertise (i.e.,
lagged effect between the audit committee features
F_Expertise
it1
), lagged prior audit committee experience
examined in this study and audit report lag. Specifically,
it (i.e., Experience
it1
) and lagged audit committee
is possible that most of the interactions between the audit
independence (i.e., Independence
it1
) are all found to be
committee and the external auditor occur after the year-
negative and significantly associated with the dependent
end when the auditor starts and finishes the audit and, as
variable (i.e., ARL
it
). Lagged audit committee member
such, it may not be appropriate to examine the
relationship financial expertise (i.e., F_Expertise
it1
) is the most
between audit committee characteristics and audit report
significant audit committee feature in reducing audit
lag in the same period. Therefore, we re-ran our
regression report lag (see Table 4, Column 2, t = 2.27 respectively,
results by examining audit committee variables in the
time p < 0.01). Meanwhile, lagged gender diversity (i.e.,
period t + 1 to account for the possibility that although
Female
it1
), size (i.e., Size
it1
) and diligence (i.e., Meetings
it1
)
audit report lag may occur in a particular time period, as
are not significantly associated with contemporaneous
audit committee and external auditor interactions audit
report lag.
frequently also occur after the year-end, audit committee
The influence of contemporaneous audit committee
variables should also be examined in the subsequent
features on the change in audit report lag is also
period (i.e., t + 1 or, for example, regressing 2009 audit
examined. Specifically, a logistic regression was
committee characteristics against 2008 audit report lag).
performed to determine if the six specific audit
Results remain significantly similar to the main results
committee composition characteristics were associated
reported, suggesting that such lagged audit committee
with a faster audit report issuance in the current period
characteristics did not change the timeliness of financial
relative to the prior period. Results of the logistic
reporting by Australian firms. regression performed (i.e.,
Model 3) are shown in Table 4,
To control for the effect of the issuance of an
emphasis Column 3. Again, findings presented in Table 4, Column
of matter and other matter opinion, regressions are 3, are
highly similar to those presented in Table4,
re-run using a dummy variable that equals one where
Columns 1 and 2. The presence on the audit committee of
such an opinion was issued (43 such firm-year a member
with financial expertise (i.e., F_Expertise
it
),
observations out of a total of 494 firm-year
observations); prior audit committee experience (i.e., Experience
it
) and
and zero otherwise. Results remain significantly similar
independence (i.e., Independence
it
) are shown to be the
to the main results reported suggesting that the issuance
main factors driving the negative association between
of an emphasis of matter and other matter opinion did
audit committee characteristics and change in audit
not change the timeliness of financial reporting by report
lag. Audit committee gender and size (i.e., Female
it
Australian firms. This is unsurprising given that, in the
and Size
it
) are found to be non-significant predictors of
main results, the issuance of a qualified opinion by the
the change in audit report lag from time period t 1 to t.
auditor was also not significant in all regressions run in
However, more frequent audit committee meetings (i.e.,
Table 4. Meetings
it
) are less likely to be associated with a greater
As an additional check, extra tests were performed
audit report lag from time period t 1 to t than less
to determine if main findings persist after allowing
frequent audit committee meetings (see Table 4, Column
for the endogenous relationship between corporate 6;
Wald p < 0.05).
governance and audit report lag. Consistent with Frankel, Kothari and Weber (2006) and Wooldridge (2008), a Sensitivity
analysis
two-stage least squares (2SLS) approach is adopted to control for potential endogeneity problems. The 2SLS Extensive
sensitivity analysis was undertaken to validate
requires the identification and use of Z instruments the
main results. For instance, all main regressions were
(exogenous variables) in the first stage which have an re-
run using alternative proxy measures for the
impact on audit report lag only through the six audit
dependent, independent and control variables. In the case
committee characteristics examined without having any
of the dependent variable, following Bamber et al. (1993),
direct influence on audit report lag (Wooldridge, 2010).
abnormal audit report lag is calculated as the difference
In the corporate governance literature, it is not feasible
between the firms audit report lag and the firms median
to get a perfect exogenous Z instrument (Hentschel &
audit report lag, where the latter median is calculated
Kothari, 2001; Wooldridge, 2010; Brown, Beekes &
over the observation window.7 Alternative variables
Verhoeven, 2011). Therefore, Hentschel and Kothari
measures for the six individual audit committee
(2001) recommend that a reasonably crude measure of
Audit Committee Characteristics and Audit Report Lag 13
2014 John Wiley & Sons Ltd Int. J. Audit. : (2014) the endogenous variable can, nevertheless, be used as of firms is to
be released in as little time as possible to an instrumental variable because it is likely to capture
a highly reactionary news-driven society demanding the
level of the variable, but not the endogenously
reliable information as quickly as possible. Analyses
determined variation around those levels. Therefore,
focus on six audit committee characteristics: financial
consistent with Krishnan and Visvanathan (2008), this
expertise, prior audit committee experience, gender, size,
study uses a 3-year average of (i.e., year t 1 to t 3)
independence and diligence. The tenets of both agency
specific governance and firm-specific characteristics (i.e.,
theory and resource dependency theory are drawn upon
total assets, leverage, current ratio, market-to-book ratio,
in the development of testable hypotheses. industry,
return-on-equity, return-on-assets, board size,
Based on analysis using 494 firm-year observations of
board independence, board financial expertise, board
data obtained from ASX publicly listed firms from 2004
to meetings, CEO duality and Big4 auditor) as instrumental
2008, this study finds evidence of a significant negative
variables. This is because, although the year t values of
association between an audit committee members
specific governance and firm-specific characteristics are
financial expertise, prior audit committee experience and
likely to affect audit report lag thereby causing
member independence with reduced audit report lag.
endogeneity problems, the average values of year t 1 to
Audit committee gender, size and meeting frequency do
year t 3 are less likely to be endogenous to the audit
not appear to be significant determinants of audit report
report lag in year t (Greene, 1999).
lag. Main findings are found to be robust to alternative The
2SLS regressions are run for all models based
measures of audit report lag, the six audit committee on
all six (i.e., F_Expertise
it
, Experience
it
, Female
it
, Size
it
,
predictor variables, control variables, industry effects
Independence
it
and Meetings
it
) characteristics of audit
and endogeneity bias. Overall, results are partially
committees. In the first stage, it is estimated whether
consistent with, and support, theoretical expectations
each of the audit committee characteristics is associated
of agency and resource dependency theories. Findings
with selected governance and firm-specific
suggest alternative theoretical explanations may be
characteristics. Then, the predicted values (i.e.,
necessary in defining linkages between the gender and
P_F_Expertise
it
, P_Experience
it
, P_Female
it
, P_Size
it
,
size of the audit committee and audit report lag.
P_Independence
it
and P_Meetings
it
) are obtained for each
Overall, this study makes several key contributions.
type of audit committee characteristic. Subsequently, the
Findings highlight to regulators and reform advocates
predicted values of the audit committee characteristics
the impact of legislating specific composition from the
first stage are then regressed against audit report
requirements on audit committees from an information
lag in the second stage of the 2SLS. Results of the second
timeliness perspective and this consequently has stage
test, after allowing for endogeneity, remain mostly
substantial resourcing implications for the management
comparable to the results reported in Table4. Also,
of firms. Results lend credence to the view that effective
in order to determine if our models suffer from
corporate governance mechanisms increase the
heteroskedasticity, the DurbinWuHausman test was
timeliness and, therefore, the quality of financial also
employed to determine if there is a serial correlation
reporting by firms. Our analysis also fills a gap in the of
the residuals. Results indicate that the residuals behave
extant literature where existing empirical evidence of
randomly and that our models fit the data well and
how the audit committee influences audit report lag is
consequently do not suffer from model misspecification.
scant. This is particularly important as regulators and
Finally, the time period (i.e. 20042008) of our study
reform advocates continue to promote the importance of
transcends the International Financial Reporting System
the audit committee in improving the quality of financial
(IFRS) adoption by Australian firms in 2005. Therefore,
reporting, including its timeliness. This study also to
control for the potential effect of IFRS adoption on
introduces improvements to the prior literature by the
association between the six audit committee
examining six key audit committee features in aggregate
characteristics examined and audit report lag, another
found to most consistently affect audit report lag.
Finally, sensitivity test was performed to determine whether
results enhance an understanding of audit report lag
firms in the pre-IFRS period were timelier in their
determinants and raise implications for the potential
financial reporting than in the post-IFRS period. As such,
introduction of regulations governing such factors as the
data are partitioned between pre-IFRS (20042005)
prior audit committee experience. and post-IFRS (2006
2008) periods and regressions
Results are subject to limitations. Whilst control re-
run. Regressions are also re-run using IFRS as an
variables included in the regression models are all
indicator variable equalling one for fiscal years 20062008
validated by prior archival research, there may exist
other and zero for fiscal years 20042005. Results remain
variables impacting audit report lag excluded from our
significantly similar to the main results reported,
analysis. Future research can examine the impact of other
suggesting that IFRS adoption did not change the
 corporate governance mechanisms thought to potentially
timeliness of financial reporting by Australian firms.
impact audit report lag such as internal auditors. In Overall,
the sensitivity tests provide further support to
addition, the association between audit report lag and the
main findings reported in Table4 having yielded
other financial measures such as earnings management
similar results both in terms of directionality and
and cost of equity/debt can also be undertaken.
significance.

ACKNOWLEDGEMENTS CONCLUSION
The authors gratefully acknowledge the valuable This
study examines whether audit committee
comments of two anonymous reviewers. The authors
compositional features are associated with the timeliness
also acknowledge the many helpful suggestions from of
financial reporting (i.e., audit report lag) by Australian
both the discussant and participants at the Accounting
publicly listed firms. An examination of audit report
& Finance Association of Australia and New Zealand lag
determinants is essential if the financial performance
2013 conference and seminar participants at both the
14 N. Sultana et al.
2014 John Wiley & Sons Ltd Int. J. Audit. : (2014) Macquarie University Accounting and Corporate our main analysis
only includes the Big4 variable with Governance research seminar series 2014 and the Curtin
the auditor specialisation variable used in our School
of Accounting research seminar series 2014.
sensitivity analysis. 9. Given that our main results report the greatest NOTES
association between reduced audit report lag and audit committee financial expertise (see Table4, 1. The importance of audit
committee members with
p-value < 0.01), we sought to further check the financial
expertise is also underscored by the
robustness of this result by re-running our main
Sarbanes-Oxley Act (SOX) 2002 passed by the US
results using a percentage of audit committee Congress
mandating the disclosure by firms whether
members with financial expertise variable. Regression
their audit committee includes a financial expert
analysis using this alternative audit committee
(Securities and Exchange Commission, 1999). The
financial expertise measure yields results entirely
primary objective of SOX 2002 was to restore
consistent with our main Table 4 results. We thank an
credibility to the US financial reporting system already
anonymous reviewer for this suggestion. tarnished by a
number of well-publicised accounting scandals. As such, it is expected that, pursuant to SOX 2002 requirements, the presence of
financial experts on
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