Real Earnings Management, Accounting Restatement, And Audit Report Lags:an Empirical Investigation

This study investigates the factors that affect audit report lags and the effect of audit report lags on audit quality using data of non-financial listed firms in China during the period 2007-2013. Audit report lag is defined as the number of days between the date of audit report and the fiscal year-end. To examine the two research questions, this study includes two main models. The first multivariate model examines the relationship between audit report lags and real earnings management. Despite the fact the audit report lag has been well documented in prior research, the effect of real earnings management on audit report lags remains unclear. The results of this study show that real earnings management is positively related to audit report lags, suggesting that the existence of real earnings management may extend the audit report lags. In other words, firms that engaged in real earnings management are more likely to delay the disclosure of their annual report, which is consistent with the phenomenon in Chinese market that "good news disclosed early while bad news disclosed later". The second model examines the effect of audit report lags on audit quality, denoted by accounting restatement, using logistic regression. Accounting restatement indicates that the prior annual report issued by a listed firm contains material misstatements due to error or fraud, and thus it is strong evidence of low audit quality. The results suggest that the audit report lags is positively associated with the likelihood of future accounting restatement, indicating that time pressure may undermine audit effect. Overall, this study finds that real earnings management is positively associated with audit report lags. In addition, the findings provide empirical evidence for recent research, which states that time pressure may impair the effect of audit effect on audit quality.