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This study extends prior work by relating audit delay to correction of previously reported interim earnings. Correction of previously reported earnings may be the result of client factors such as poor internal controls or intentional violation of the securities acts by client management. Presence of these factors is expected to lead to increased year-end audit work and auditor/client negotiations about the best disclosure action. Also, increased audit delay for these firms may be induced by the auditor's concern about continued existence of the client which leads to an increased search for possible misstatements.
Data were collected on 85 firms making year-end announcements of corrections of previously reported interim earnings. These were matched by industry to the firms closest in size having the same sign of earnings change. Analyses of audit delay differences between the correcting and matched firms show significant increases in audit delay overall for firms correcting misstatements in previously reported interim earnings. The increase is due primarily to those firms with overstatements of previously reported interim earnings whose earnings are also declining. A multivariate cross sectional regression that relates delay to correction magnitudes as well as sign shows that the intercept for audit delay is significantly positive for firms with interim overstatements and declining earnings, and that audit delay increases with the size of the overstatement of interim earnings.
INTRODUCTION
The term "audit delay" has been used to denote the elapsed time between the close of a fiscal year and the end of audit fieldwork. The latter is normally the date on which substantive audit tests are completed and the auditor leaves the client's premises. It is typically documented by the dating of the auditor's published report. Several prior studies consider the relation of various possibly causal factors to audit delay. Factors that have been investigated include: presence of accounting or disclosure issues such as extraordinary items, loss contingencies, uncertainty audit qualifications and accounting changes (Davies and Whittred 1980; Whittred 1980; Ashton et al. 1987; Newton and Ashton 1989; Ashton et al. 1989), sign of earnings (Ashton et al. 1987), nature, size and complexity of client operations and controls, and proportion of audit work after year end (Ashton et al. 1987), and whether the audit firm tends to follow a structured audit approach...