e-sRC

CHAPTER ONE
INTRODUCTION
1.1 Background to the Study
Financial statements communicate important information about the financial health of a
company,hence financial statement must be made available to stakeholders in time so that
they can use the information reported therein to make important decisions. No matter how
informative or well-prepared, the value of a financial report declines if it is not made
available in time for users to make informed decisions (Salem, 2013). Therefore, the
usefulness of published corporate financial statements depends on their timeliness.
The call for high quality and timely financial information has become imperative across the
globe due to the increasing affiliation of business organizations and sale of shares in the
capital market. Accordingly, the business organizations are being obliged to satisfy the
information demands of investors and prospective investors to provide them with timely
information in the annual financial reports. Recognizing the importance of timely release of
financial information, regulatory actsuch as Companies and Allied Matters Act (2004),set
statutory maximum time limits within which registered companies in Nigeria are required to
issue audited financial statements to stakeholders and also file such report with Securities and
Exchange Commission (SEC) and Corporate Affairs commission (CAC). The law required
companies registered in Nigeria, to file their annual reports within 90 days of their accounting
year-end, despite 90 days delay window given by CAMA, most registered companies in
Nigeria found it difficult to report within the period (Dibia&Onwuchekwa, 2013).
The problem of audit delay is particularly pernicious in developing countries particularly
Nigeria, where regulatory norms for the timeliness of audited financial reports are not
enforced properly and where the general business culture is not attuned to observing
punctuality and efficiency in matters like financial reporting (Iyoha, 2012). Premises on the
maximum time limit of 90days required by CAMA (2004), for all companies registered in
Nigeria to issue audited financial statement, audit delay is the number of days lag after
90days of accounting year end to publication date of audited annual report.
Some of the generic variables relating to firm attributeswhich are not limited to;firm size,
firm age, company yearend, industry classification, multinational or local status, listing status
and management attitude, sign of net income, financial difficulties, debt-equity ratio, relative
profitability, business complexity, company growth, total accrual, extraordinary itemsand
market performance,(Al-Ajmi, 2008; Fagbem&Uadiale, 2011; Iyoha,
2012;Dibia&Onwuchekwa, 2013; and Vuko&Cular, 2014).In summary, the firm attributes
that were used to understand audit delay in this study are: firm size, firm profitability, firm
age, firm accrual and firm complexity.
Firm size is an important variable that impact on audit delay, it is argued that the bigger the
size of the firm, the timely release of audited financial report and the reliable the internal
control system of the firm (Ibadin, Izedonmi&Ibadin, 2012). This is possibly due to the
ability of larger firms to engage large auditing firms and to pressure auditors to complete the
audit work in a timely manner. In addition, larger companies may have their audit reports
completed earlier than smaller once because larger firms may have stronger internal controls,
which give the auditor access to required data from the internal controls and reduce the extent
of substantive tests (Almosa&Alabbas, 2008). Contrary, large firms publish their financial
statements later than the small ones since the financial transactions in large firms are more
complex. In other words, there may be a positive relationship between firm size and audit
delay (Turel, 2010).From the foregoing, firm size is expected to have a negative relationship
with audit delay.
Firm profitability as an important variable that impact on audit delay, prior researchers
argued that firms reporting a profit for the period are expected to have a shorter audit delay
compared to ones reporting a loss. Firms with a profit are expected to invite the auditor to
complete the audit engagement as quickly as possible so as to be able to release the good
news of their profitability to their stakeholders as soon as possible(Almosa&Alabbas, 2008;
Ibadin, et al. 2012 and Saqer, 2015). Contrary, based on signaling theory, by delaying bad
news, the management is giving its shareholders a silent signal and opportunity to divest from
the firm‟s shares before the information reaches the market and since reporting is a regulatory
requirement by all companies, bad news or good news cannot impact on audit delay
(Mahajan&Chander, 2008 and Merdekawati& Regina, 2011). Therefore, in line with majority
augments a negative relationship is expected between audit delay and firm profitability.
Another important variable that impact on audit delay is the firmage. Saqer (2015) argued
that promptness in financial reporting by a company is influenced by its existence over time.
As a company continues in operations and financial reporting, its accountants learn more, the
‘teething problems’ which would cause unusual delays are minimized. As a result, an older,
well-established company is likely to be more proficient in gathering, processing and
releasing information when needed because of learning experience gained over many years of
existence. In short, older firms might have improved their financial reporting practices over
time. However, a few other studies (Al Jabr, 2006; Mahajan&Chander, 2008) found no
association between age of company and audit delay in annual financial reports. But despite
some evidence that company age did not influence audit delay, the present study however
argues that the contrary is true, based on the theoretical arguments posed above. Hence, a
negative relationship is expected between company age and audit delay.
Firm accrual is used as an indicator of audit delay; accruals have a higher risk of error and
require more audit effort. It is arguedthat audits of high accrual companies pose more
uncertainty than audits of low accrual companies because of the potential of estimation
errorand a greater chance that high accrual companies have undetected asset realization and
going concern problems related to a higher level of accruals (Vuko&Cular, 2014). Since
higher levels of accounting accruals increase the risk of information reliability because they
are inherently subjective, linked to future realizations and prone to opportunistic earnings
management (Hooy& Lee, 2010,). Contrary, firm accruals are mostly associated with large
and older companies; as such total accrual will impact negatively on delay of publishing the
financial statement of such companies with high accruals (Saqer, 2015). Based on the above
argument, a positive relationship between audit delay and total accruals is expected.
Furthermore, firm complexity was employed;Vuko and Cular (2014) argued that business
complexity impact on audit delay positively because it has to do with account receivable and
inventories which take most of the audit effort. Gajevsky (2015) argues that the more
complex a business operation is the more time taken in auditing the firm and consequently
delays in the publication. Thus, it is expected that business complexity will have a positive
relationship with audit delay.
Audit delay has become subject to an increasing amount of attention from accounting
researchers and regulatory bodies (Leventis, Weetman&Caramanis, 2005). It is evidence that
companies in transition economies issue their financial statements for later than do companies
in the more developed market economies. Hence, such delay may adversely affect the level of
confidence reposed on the financial statements(McGee,2007). In Nigeria, by the provisions of
CAMA (2004) as amended the maximum time within which companies are expected to
complete and make public their financial report is three (3) months. However, most
companies present their reports much later than this date (Dibia&Onwuchekwa, 2013).
Therefore, a study on the current level of audit delay in Nigeria firms is in the right
direction.The study focused specifically on listed manufacturing firms as it domain. The
sector is chosen because of its vital role in the industrialization process and economic
development of the country.
1.2 Statement of the Problem
Timeliness in financial reporting is a significant characteristic of accounting information.
Stale information is of little use to investors in their investment decision making processes.
Both prior analytical and empirical evidence provide strong support for this contention.
Almosa and Alabbas (2008) demonstrated analytically that timeliness of audited financial
reports are considered to be a critical and important factors affecting the usefulness of
information made available to external users. Empirical studies have also shown that timely
information affects the investment decision in the stock market (Fagbem&Uadiale, 2011;
Iyoha, 2012 andDibia&Onwuchekwa, 2013). In essence, timely corporate financial reporting
is an essential ingredient for a well-functioning capital market. Undue delay in releasing
financial statements increases uncertainty associated with investment decisions (Ibadin&
Elijah, 2015).
The problem of audit delay is pernicious in developing countries particularly Nigeria, where
regulatory norms for the timeliness of audited financial reports are not enforced properly and
where the general business culture is not attuned to observing punctuality and efficiency in
matters like financial reporting (Iyoha, 2012). Premises on the maximum time limit of 90days
required by CAMA (2004), for all companies registered in Nigeria to issue audited financial
statement, most registered companies in Nigeria found it difficult to report within the period
(Dibia&Onwuchekwa, 2013).Stale reporting in emerging markets is of particular importance
since information in these markets is relatively limited and has a longer time lag (Saqer
2015). Therefore, research into the delay reporting would be of much importance to
regulators of capital markets in formulating policies that will enhance the market efficiency,
decision making and reduce information asymmetry in these markets.
The empirical evidence on the impact of audit delay as a matter of fact been at extreme ends
and largely inconclusive in the literature, while some studies observed significant relationship
between variables employed to explain audit delay others observed no significant
relationship. The polarity in empirical findings interestingly is a common denominator for
both studies undertaken in developed economies and those undertaken for emerging markets
(Ibadin& Elijah, 2015).
Firm size which is an explanatory variable of audit delay in our study is used by studies like;
Iyoha (2012);Ibadin et al. (2012), they found that firm size has no significant impact on audit
report delay. Modugu, Erahbhe and Ikhatua (2012)and Dibia and Onwuchekwa (2013) in
their studies found firm size to be significant in explaining audit delay. However, these mixed
findings may be attributed to the measurement of audit delay, the researchers measured audit
delay in number of days from financial year end to auditors report date which did not capture
the delay from auditors report date to when the information get to the stakeholders, that is the
date of publishing the financial statement.
Firm profitability as an explanatory variable for audit delay has mixed finding in the literature
and that necessitate the inclusion of it in our study, studies of Oladipupo (2011) and
Moduguet al. (2012),both studies found that firm profitability has no significant impact on
audit delay. ContraryIbadinand Elijah (2015) andFagbem and Uadiale (2011) found
significant relationship between firm profitability and audit delay.
Another important variable that impact on audit delay chosen in this work is the firmage. It is
observed from the literature mixed finding, Saqer (2015) recorded a significant relationship
between firm age and audit delay in their studies, Ibadin and Elijah (2015) in their own
studies recorded insignificant relationship between audit delay and age of the firm, however,
this can be attributed to the measurement adopted by their studies on audit delay, they both
use number of days from the financial year end and the date the external auditor signed their
report.
Firm accrual and firm complexity are used to explain audit delay in quoted manufacturing
companies in Nigeria; this is premised on the fact that no any research to the best of our
knowledge has adopted these two variables to explain audit delay in Nigeria particularly in
quoted manufacturing sector. Work of Vuko and Cular (2014), Gajevsky (2015) found these
explanatory variables of audit delay to be significant in explaining audit delay.
Despite the unanimity in the literature that audit delay is not an attribute to be encouraged,
the findings with respect to the explanatory variables of audit delay have been at polarity and
this suggests to us that the issues surrounding the explanatory variables of audit delay are far
from been resolved, motivated more aside the measurement of audit delay, which is the total
lag, that is, the days different from financial yearend to the date of publishing the financial
report which the previous researchers reviewed adopted the auditors lag, that is days
difference from the financial year end to auditors report date, is the inclusion of firm accruals
and firm complexities as explanatory variables for audit delay, which no researcher has use to
the best of our knowledge in Nigeria, particularly in quoted manufacturing sector our main
domain.
1.3 Research Questions
Based on the background and problem of the study, the following questions are raised:
i. What is the impact of firm size on audit delay of listed manufacturing firms in
Nigeria?
ii. What is the influence of firm profitability on audit delayof listed manufacturing firms
in Nigeria?
iii. What is the impact of firm age on audit delay of listed manufacturing firms in
Nigeria?
iv. What is the influence of firm total accrual on audit delay of listed manufacturing
firms in Nigeria?
v. What is the impact offirm complexity on audit delay oflisted manufacturing firms in
Nigeria?