A U D I T D E L A Y

Saudi Stock Exchange: Future Prospective King Khalid University - Abha 1212-14 November 2007

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Audit Delay: Evidence from Listed Joint Stock Companies in Saudi Arabia

Saad A. Almosa Mohammed A. Alabbas Department of Accounting King Khalid University

Study Structure
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Abstract Key Words Summary Previous Research Methodology

  

Data Method Variables

  

Results Conclusions Limitations & Implications

Abstract
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Many studies have been conducted investigating the determinants of audit delay in developed countries, but very few in developing countries. This study examines the determinants of audit delay for all listed joint stock companies in Saudi Arabia using their audited annual financial reports for the years 2003, 2004, 2005 and 2006 as the main source of data. By analyzing data pertaining to a number of variables including, size, profitability, sector, type of auditor, and auditor opinion, as well as audit delay, a model is developed of the determinants of audit delay.

Importance of the Study

A U D I T D E L A Y 

Timelines of corporate audited annual financial reports is considered to be a critical and important factor affecting the usefulness of information made available to external users.

Importance of the Study

A U D I T D E L A Y

Timelines of corporate audited annual financial reports is considered to be a critical and important factor affecting the usefulness of information made available to external users.  The length of the audit process highly affects the timelines of corporate financial reporting.


Purpose of the Study

A U D I T D E L A Y 

To investigate the determinants of audit delay for listed joint stock companies in Saudi Arabia.

Purpose of the Study

A U D I T D E L A Y

To investigate the determinants of audit delay for listed joint stock companies in Saudi Arabia.  Audit delay is the length of time from a companys fiscal year end to the date of the auditor report.


Previous Research
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Two Groups:

Previous Research:
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Two Groups:  1- Studies that analyze the relationship between the timing of annual earnings announcements and some companies attributes and its effects on share prices.


Previous Research:
A U D I T D E L A Y

Two Groups:  1- Studies that analyze the relationship between the timing of annual earnings announcements and some companies attributes and its effects on share prices.  2- Studies which concentrate on the audit delay aspect, analyzing the characteristics of the auditor, the auditee, and the audit process and their effects on the timing of the audit report date.


Previous Research:
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First Group: Timing of Announcements  Aimed to measure market reaction to earnings announcements.


Previous Research:
A U D I T D E L A Y

First Group: Timing of Announcements  Aimed to measure market reaction to earnings announcements.  Did not pay much attention to characteristics of the auditor and audit process.


Previous Research:
A U D I T D E L A Y

First Group: Timing of Announcements  Aimed to measure market reaction to earnings announcements.  Did not pay much attention to characteristics of the auditor and audit process.  Pointed to the possible deterioration in the information content of annual report as the reporting delay increases.


Data of the study

A U D I T D E L A Y 

The sample includes all joint stock companies listed on the Saudi Stock Exchange. (n = 91 in 2006)

Data of the study

A U D I T D E L A Y 

The sample includes all joint stock companies listed on the Saudi Stock Exchange. (n = 91 in 2006)  Audited annual reports for the years 2003, 2004, 2005 and 2006 are used.

Data of the study

A U D I T D E L A Y 

The sample includes all joint stock companies listed on the Saudi Stock Exchange. (n = 91 in 2006)  Audited annual reports for the years 2003, 2004, 2005 and 2006 are used.  Variables that describe companies, their auditors, and the various types of interaction between these parties were analyzed in this study.

Variables of the study

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Auditee Size (assets, revenues, inventory)  Profitability (loss vs. non-loss, earnings) non Auditee Sector (financial vs. non-financial) non Auditor Size (Big 4, joint auditor, switching)  Audit Opinion (Unqualified vs. Others)


Hypotheses of the study

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H1: The audits of the accounts of firms with greater assets are likely to be completed sooner than those of firms with fewer assets. assets.

Hypotheses of the study

A U D I T D E L A Y

H1: The audits of the accounts of firms with greater assets are likely to be completed sooner than those of firms with fewer assets. assets.  H2: The audits of the accounts of firms with positive earnings during the audited period are likely to be completed sooner than those of firms with losses during the audited period.


Hypotheses of the study

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H3: The audits of the accounts of financial firms are likely to be completed sooner than those of non-financial nonfirms.

Hypotheses of the study

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H3: The audits of the accounts of financial firms are likely to be completed sooner than those of non-financial nonfirms.  H4: The audit report delay of a company is shorter where the audit firm is a Saudi firm with a Big-4 international Bigaffiliation.


Hypotheses of the study

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H5: The audit of the accounts of firms with qualified, adverse or disclaimer auditor opinion are likely to be delayed more than those of firms with unqualified or with remarks auditor opinion.

Model
A U D I T D E L A Y

Audit report delayi = 0 + 1 + 2 + 3 + 4+ 5+  Audit report delayi = 0 + 1 (Auditee size) + 2 (Profitability) + 3 (Auditee sector) + 4 (Auditor size) + 5 (Auditor opinion) +


Table 2 : Descriptive analysis for entire sample (n=352) Mean* Median* S. Deviation* Maximum* Minimum* ASSETS 11358586 1264493 27914885.91 166588820 41059 REVENUES 2426326.4 414024 75457 37582.5 45 9127534.132 2260797.668 1215447.69 24.89 86237862 20293942 13658245 176 662 -1039915 0 4 -

A U D I T D E L A Y

INCOME

670663.6

INVENTOR 270168.88 Y DELAY 46.45 LOSS BIG4 JOINTAUD OPINION NONFIN YEAREND AUDITSWC
y y y y y y y *

12% 54% 21% 16% 12% 6% 33%

DELAY = number of days from t he company's accounting year-end t o the date of audit report. OP INION = (1 if qualified, Disclaimer or Adverse, 0 if clean or except for) YEAREND = (1 if company's year end out calendar year, 0 ot herwise) JOINT AUD = (1 if two audit ors, 0 otherwise) BIG4 = ( 1 if auditor is one of Big 4, 0 otherwise) LOSS = (1 if company get losses, 0 otherwise) NONFIN = (1 if company is financial one, 0 otherwise) In t housands

Table 3 descriptive statistics for sectors of the sample

Financial* Telecom* Agri* Electric* Services* Cement* Industrial*

No. Observations ASSETS*

42 54078280.5 2977210.3 1888660.7 0 23.12 0% 100% 100% 0% 0% 17.50%

6 34840476.3 23364453.7 7255810.3 134735.2 44.16 0% 66% 18% 0.00% 0% 25%

36 153669.6 42148.05 19697.6 51.08 17% 19% 0% 33% 0% 37%

4 18470603 3869946.5 1439755 52 0% 0% 0% 0% 0% 33%

98 419832.6 78016.3 56856.6 55.66 20% 18% 11% 18% 0.00% 36.20%

32 718354.1 394497.9 133608.5 34.59 0% 19% 0.00% 0.00% 0.00% 32%

134 3164434.2 645353.03 503332.1 48.54 10% 18% 15% 19% 0.00% 36.90%

430834.6 115861647 2022252.4 1912901.1 5817472.5

A U D I T D E L A Y

REVENUES* INCOME* INVENTORY* DELAY LOSS BIG4 JOINTAUD OPINION YEAREND AUDITSWC
y y y y y y *

DELAY = number of days from the company's accounting year-end to the date of audit report. OPINION = (1 if qualified, Disclaimer or Adverse, 0 if clean or except for) YEAREND = (1 if company's year end out of calendar year, 0 otherwise) JOINT AUD = (1 if two auditors, 0 otherwise) BIG4 = ( 1 if auditor is one of Big 4, 0 otherwise) LOSS = (1 if company get losses, 0 otherwise) In thousands

Table 4 descriptive statistics for sample of years for all variables whole obs ervations 2003 No. Observations 87 9964340 2136638.439 534385.494 240082.736 49.73 12% 50.57% 20.60% 9% 33% 2004 86 10050665.94 2160921.012 538464.488 242859.012 49.69 12% 51.16% 22% 18% 30% 2005 88 11418075.74 2505647.131 749857.477 271398.102 44.4 0.12% 56.80% .19.3% 19% 29% 2006 91 13870073.02 2869881.506 849303.791 323553.198 42.23 0.13% 58.24% .21.9% 15.38% 39%

A U D I T D E L A Y

ASSETS* REVENUES* INCOME* INVENTORY* DELAY LOSS BIG4 JOINTAUD OPINION AUDITSWC
y y y y y y *

DELAY = number of days from company's account ing year-end t o dat e of audit report . OP INION = (1 if qualified, Disclaimer or Adverse, 0 if clean or except for) YEAREND = (1 if company's year end out calendar year, 0 ot herwise) JOINT AUD = (1 if t wo audit ors, 0 ot herwise) BIG4 = ( 1 if audit or is one of Big 4, 0 ot herwise) LOSS = (1 if company get losses, 0 ot herwise) In t housands

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Table 5 descriptive statistics of audit delay for the years of the study sample 2003 No. observations Mean S.Deviation Maximum Minimum 87 49.73 29.4 176 10 2004 86 49.69 29.57 176 10 2005 88 44.4 21.08 116 4 2006 91 42.23 17.09 94 12

T able 6 correlation matrix DELAY DELAY 1 . REVENUES 0.064 0.241 -0.14 0.009 INVENT OR INCOME BIG4 AUDIT SWC 0.114 0.032 -0.027 0.612 -0.077 0.149 0.11 0.06 LOSS -0.256 0 -0.246 0 YEAREND1 0.082 0.126 OPINION NONFINAN 0.134 0.012 -0.347 0 y y y y y y 1 . 0.657 0 0.902 0 0.942 0 0.163 0.003 -0.022 0.717 0.085 0.12 0.108 0.05 -0.053 0.331 -0.107 0.051 0.027 0.617 1 . 0.579 0 0.708 0 0.248 0 -0.101 0.084 0.1 0.061 0.41 0 -0.095 0.074 -0.139 0.009 0.568 0 1 . 0.744 0 0.074 0.167 -0.01 0.866 0.059 0.266 -0.033 0.537 -0.031 0.557 -0.081 0.129 -0.081 0.13 1 . 0.215 0 -0.047 0.427 0.117 0.028 0.247 0 -0.065 0.22 -0.124 0.02 0.199 0 1 . -0.046 0.433 0.075 0.158 0.432 0 0.237 0 -0.123 0.021 0.32 0 1 . -0.087 0.136 -0.016 0.788 -0.098 0.096 -0.006 0.924 -0.133 0.023 1 . 0.079 0.141 0.057 0.285 -0.21 0 0.106 0.046 1 . 0.04 0.459 -0.184 0.001 0.606 0 1 . 0.147 0.006 -0.095 0.075 1 . -0.158 0.003 1 . REVENUES ASSET S INVENT OR INCOME BIG4 AUDIT SWC LOSS JOINT AUD YEAREND OPINION NONFINAN

A U D I T D E L A Y

ASSET S

JOINT AUD

DELAY = number of days form companies' accounting year-end and date of audit report. OPINION = (1 if qualified, Disclaimer or Adverse, 0 if clean or except for) YEAREND = (1 if company's year end out calendar year, 0 otherwise) JOINT AUD = (1 if two auditors, 0 otherwise) BIG4 = ( 1 if auditor is one of Big 4, 0 otherwise) LOSS = (1 if company get losses, 0 otherwise)

Table 6 Results of the three models analysis Non- transformed model Log-transformed model Rank-transformed model Beta T-test P-Value Beta T-test P-Value Beta T-test P-Value

A U D I T D E L A Y

Constant ASSETS INVENTOR INCOME AUDITSWC BIG4 LOSS JOINTAUD YEAREND1 OPINION NONFINAN R F
2

55.005 0.113 0.115 -0.045 0.06 0.061 -0.193 -0.04 0.058 0.083 -0.393

13.624 1.028 1.171 -0.457 1.129 0.977 -3.547 -0.55 1.034 1.492 -4.195

0 0.305 0.243 0.648 0.26 0.329 0 0.583 0.302 0.137 0 0.24 9.09

2.593 0.49 -0.065 -0.402 0.03 0.031 -0.072 0.11 -0.059 -0.043

6.23 3.856 -0.671 -3.539 0.429 0.386 -0.929 1.479 -0.767 -0.603

0 0 0.503 0.001 0.669 0.7 0.354 0.141 0.444 0.547 0.91 2.109

0.507 0.409 0.112 -0.391 0.071 -0.008 -0.08 -0.117 0.075 0.056 -0.28

8.671 4.072 1.537 -3.73 1.389 -0.134 -1.248 -1.598 1.351 1.002 -2.919

0 0 0.126 0 0.166 0.893 0.213 0.111 0.178 0.317 0.004 0.29 11.69

y y y y y y

DELAY ( number of days form companies' accounting year-end and date of audit report) is the dependent variable. OPINION = (1 if qualified, Disclaimer or Adverse, 0 if clean or except for) YEAREND = (1 if company's year end out calendar year, 0 otherwise) JOINTAUD = (1 if two auditors, 0 otherwise) BIG4 = ( 1 if auditor is one of Big 4, 0 otherwise) LOSS = (1 if company get losses, 0 otherwise)

Conclusions of the study

A U D I T D E L A Y

Audit delay, on average and maximum limit, has been decreasing in the sample study (the period 2003-2006). 2003 This supports the results of other studies (Aljabr 2007) about timeliness of earnings announcements.


Conclusions of the study

A U D I T D E L A Y

Three out of the ten explanatory variables are significant. Those include total assets, income, and financial sector.

Conclusions of the study

A U D I T D E L A Y

Three out of the ten explanatory variables are significant. Those include total assets, income, and financial sector.  The coefficients for all these three variables are in the predicted direction.


Conclusions of the study

A U D I T D E L A Y

Audit delay was positively associated with total assets (proxy of size), whilst negatively associated with income (as proxy of profitability), and financial vs. nonnon-financial dummy variable (control for financial sector characteristics).

Conclusions of the study

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The audit delay increases as auditee size increase. On the other hand, a decrease in audit delay was observed with financial companies, and as companies gain profits.

Limitations of the study

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First, the explanatory power of the regression model of this study could be improved by including other variables which are derived from data not publicly disclosed till now in Saudi Arabia. Examples: The audit fees The extent of non-audit fees nonthe work load and risk factors for the auditor qualifications of the audit team

Limitations of the study

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Second, it is assumed in audit delay studies that the functional form is linear. However, Non-linear models might Nonreveal other aspects of the audit report delay determinants.

Limitations of the study

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Third, Audit delay comprises two components; company delay (the time taken in preparation of the financial accounts), and audit firm delay (time taken by the audit work). Measuring both types could provide more plausible explanation. Though appropriate data may not be readily available. (Leventis, 2005, p.56)

Limitations of the study

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Fourth, the issue of Multicollinearity  Some of the explanatory variables were highly correlated with each other.


Opportunities for further research

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Access to the audit fees of companies included in this study or more superiorly the cost of the audit hour could provide some more interesting and rewarding explanatory variables for the model of the study.

Opportunities for further research

A U D I T D E L A Y 

carrying out similar studies within a different group of firms in the Saudi economy, such as limited liability companies or partnerships and proprietorships which are not under the jurisdiction of the CMA could provide some interesting explanations for issues raised in this study.

End
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Thank You.