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Reviewing the Literature on Audit Report Lag and Corporate Governance

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DOI: 10.2139/ssrn.2207811

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REVIEWING THE LITERATURE ON AUDIT REPORT LAG
AND CORPORATE GOVERNANCE

Ummi Junaidda Binti Hashim

Department of Accounting
Faculty of Business Management and Accountancy
Universiti Sultan Zainal Abidin
Campus Gong Badak
21300 Kuala Terengganu, Terengganu, Malaysia
Email: junaidda@unisza.edu.my
Tel: +609-6653750
Fax:+ 609-6669220

Rashidah Binti Abdul Rahman

Deputy Director
Accounting Research Institute
Universiti Teknologi MARA
40450 Shah Alam, Selangor, Malaysia
Email: shidah@salam.uitm.edu.my
Tel: +603 55444745
Fax: +603 55444921

Electronic copy available at: http://ssrn.com/abstract=2207811

 REVIEWING THE LITERATURE ON AUDIT REPORT LAG AND
CORPORATE GOVERNANCE
Abstract - This paper examines the literature on audit report lag (ARL) and corporate
governance mechanisms over the years. It zooms the pioneer study in this field till the current
year (2011), which is year the paper is written. It visualizes the determinants of audit report lag
and also how effective of those charge with governance in assuring the timeliness. By presenting
the overview of past literature on audit report lag, it would motivate the researchers to conduct
more research in this field. It recommends that a few variables that had been tested in previous
studies can be re-examined in the future studies of audit report lag. Also, future study can
examine on how ownership structure will influence the audit report lag. Besides that, potential
study also may include other factors such as government policy or political issue that also might
affect audit report lag.

Keywords: audit report lag, corporate governance, timeliness

INTRODUCTION

With regards to quality annual reporting, efficiency is an important feature. Efficiency

is often refers to timeliness that enhances the qualitative characteristics. This is provided in the
Exposure Draft of an improved Conceptual Framework for Financial Reporting, (May 2008)
issued by International Accounting Standard Board (IASB). Usefulness of information disclosed
in a company’s annual report reduces when time lag increases. This is consistent with Abdulla
(1996) that note ‘‘the longer the period between year end and publication of the annual report,
the higher the chances that the information would be leaked to some interested investors’’
(FASB, 2000).
Timeliness of financial reporting is crucial to all users of financial reports. This is
because most users particularly the shareholders and potential investors rely on the audited
financial reports before deciding whether to retain as shareholders or to become investors of a
company. Reliability of the reports would increase when it is audited by external auditor. In
Exposure Draft of an Improved Conceptual Framework for Financial Reporting (2008) which is
issued by International Accounting Standard Board, also includes that reliability as an essential
qualitative characteristic of decision-useful financial reporting information. Users will feel affirm
on the reports verified by the auditors and would able to make decision wisely (FASB, Concepts
Statement 2).
Malaysian companies are frequently unable to provide the audited financial statement
timely to the users. The reporting delay from the company’s accounting year end to the date of
the audit report completed is a situation of audit delay or audit report lag (Ashton et al. 1987).
Audit report lag would lead the shareholders and potential shareholders to postpone their
transaction on shares (Ng and Tai, 1994). This in turn, would provide negative effect to the
company. Owusu-Ansah (2000) provides that audit timeliness is one the factor that will influence
on the timeliness of financial statements. It is therefore, imperative for the management of the
companies to ensure such problem do not occur.
Bursa Malaysia views the delay of issuing audited financial reports as a serious issue.
Steps have been taken by Bursa Malaysia in cautioning the directors of companies to submit

Electronic copy available at: http://ssrn.com/abstract=2207811

their audited financial reports on time. Bursa Malaysia listing requirement under chapter 9.23 (a)
provides that a public listed companies must submit it annual report to Bursa Malaysia within six
months after the company’s year end. To prevent companies from late submission of their
audited financial reports, Bursa Malaysia in consultation with Securities Commission has
imposed penalty to public listed companies for failure to disclose the material facts such as the
annual report within the time frame. However, despite the penalty being imposed, there are
companies that could not meet the submission deadline. Bursa Malaysia reported that there are
few companies had been imposed penalty due to breach of listing requirements; 9.23(a) such as
Energreen Corporation Berhad, formerly known as Welli Multi Berhad, Talam Corporation
Berhad and LFE Corporation Berhad. The reports was disclosed in Bursa Malaysia Website
2010.
Bursa Malaysia has expressed concern with regards to directors’ and audit committee
role in corporate governance. Bursa Malaysia has also highlighted the role of directors’ play and
audit committee in maintaining appropriate standards of corporate responsibility and
accountability by having timely of reporting.
Malaysian Government has recommended Malaysian Code on Corporate Governance
(MCCG, 2000, revised 2007). MCCG provides the role of the directors in a company which
includes reviewing and developing company’s strategic plan, overseeing and evaluating the
management operationalisation, identifying and preventing risk and reviewing the internal
control system in order to ensure compliance with the laws, rules, guidelines and regulations.
The code also provides the role of the audit committee which includes discussion with
external auditors on the audit nature and scope before audit commences. The audit committee
also has the responsibility to monitor the performance of the company which includes reviewing
the quarterly and year-end financial statements. The audit committee is also responsible in
selecting external auditors, overseeing audit and assuring the credibility of the financial reporting
(Menon and Williams, 1994).
Objective of this paper is to review the literature on audit report lag. The first part of
the paper reviews on the determinants of audit report lag and the second part reviews on audit
report lag in relation to corporate governance. The first section provides the discussion on quality
of financial reporting and timeliness, regulations on timely reporting, corporate governance in
Malaysia and on agency theory and timeliness. Next, it provides the review of previous studies
on audit report lag and the last section is on conclusion part which includes future research
avenues.

QUALITY OF FINANCIAL REPORTING AND TIMELINESS

Timeliness has been recognised in the past few decades as one of the qualitative
characteristics of financial reports (AICPA, 1973; APB, 1970; FASB, 1979). The Financial
Accounting Standard Board (FASB) has pointed out the quality of accounting information from
the viewpoint of users’ decision usefulness. According to the FASB’s conceptual framework
(SFAC) No. 2, there are four criteria that a financial report can be useful for users’ decision-
making. The four criteria include relevance, verifiability, free from bias and quantifiable. For
annual report to be relevance, the provision of information must have predictive or feedback
value and that information should be provided in timely manner.

3
 Timeliness refers to the provision of financial reports within the time frame imposed by
regulators. The purpose of timeliness is to enable the recognition of all related information that
would enable users of the financial report to predict and analyse in making investment decisions.
Timely corporate financial reporting is essential for a well-functioning market since a delay in
releasing financial statements would increase uncertainty associated with investment decisions
and eventually affects the market (Ashton et al. 1987).
In terms of audit, users of annual reports often consider timeliness as one of the
determinants of audit quality (Al-Ajmi, 2008). Leventis and Caramanis (2005) provides similar
argument where timeliness is a measure of audit quality since quality of audit would increase if
a financial report is submitted on time. Users often feel more confidence and would rely more
on corporate reports that submitted within the timeframe. In addition, users normally perceived
that the longer it takes for a company to make the announcement, the lower would be the quality
of reports and vice versa. This is because users may find out information related to the company
from other sources which sometimes reveal unpleasant news related to the company.
Previous studies found that the level of timely reporting is indifferent for each country.
Ashton et al., (1987) examined on sample of 488 companies in United States of America (USA).
They found that audit delay will be greater during the busy season and as overall, the mean audit
delay for the sample was reported at 62.5 days in US. Ahmed (2003) carried out a study of the
timeliness of corporate annual reporting in three countries, Bangladesh, India, and Pakistan for
year 1998. The reported mean of audit delay of his study for that sample of companies in these
three developing countries were 162, 92, and 145 days respectively.
Ahmad and Kamaruddin (2003) had employed model from Ashton, et al. (1989) and
Carslaw and Kaplan, (1991). They examined Malaysian public companies that listed for the year
1996 to 2000. Their study found that the maximum of delay between five years periods are
between 220 days to 341 days. Che-Ahmad and Abidin (2008), used sample on all public
companies, which were listed on both the Main Board and the Second Board of the Bursa
Malaysia, as at 31 December 1993. The longest delay has been reported at that time was 442
days. Tauringana et al., (2008) investigated the association between corporate governance
mechanisms and timeliness of annual reports of companies listed on the Nairobi Stock Exchange
(NSE) in Kenya on 2005 and 2006. The result showed that the average time taken to publish the
report on 2005 was 74.50 days and was 76.47 days in 2006. Afify (2009) examined the impact of
CG characteristics audit report lag of Egyptian listed companies. He found that the maximum
and mean score number of days to complete and submit the annual report was 115 days and 67
days respectively.
Mohamad Naimi et al., (2010) examined audit delay of 628 Malaysian companies that
listed on the main and second boards in 2002. They found that the minimum audit report lag was
19 days and the maximum was 332 days. Hashim and Abdul Rahman, (2011) examined the link
between corporate governance mechanisms and audit report lag among 288 companies listed on
Bursa Malaysia for a three-year period from 2007 to 2009. The results showed that audit report
lag for the listed companies in Malaysia ranges from 36 days to 184 days for the three year
period. This illustrated that the audit delay in Malaysia at the moment is shorter than what have
been found by Mohamad Naimi et al., (2010). Overall, the different on level of reporting among
countries is due to the different requirements set up by their regulators.

4
REGULATIONS ON TIMELY REPORTING
The Securities and Exchange Commissions (SEC) in the U.S.A has also highlight the
importance of annual reports to be timely to the investors as delaying the submission of annual
reports to the public would indicate that the information contained in the annual reports to be less
valuable to the investors (SEC, 2002). In order to increase the information efficiency in the
markets, SEC has issued rules requiring reductions in filing deadlines on year 2007 from 90 days
after the financial year-end to 60 days for large accelerated filers (SEC, 2005). That reduction
illustrates that timeliness is a key characteristic of financial reporting.
Similarly in the Malaysian market, Bursa Malaysia Listing Requirements (2009)
imposes that the annual report has to be submitted to the exchange within a period not exceeding
six months from the year end of the company. Failure to comply with the listing requirements of
the Bursa Malaysia which is within six months may result in a number of sanctions including a
reprimand or a fine of up to RM 1 million or both.
Listing Requirements of Bursa Malaysia Securities Berhad as at 3rd August 2009, for
Chapter 2 (2.03-2) highlights that:

“Investors and the public shall be kept fully informed by the listed issuers of all facts or
information that might affect their interests and in particular, full, accurate and timely disclosure
shall be made of any information which may reasonably be expected to have a material effect on
the price, value or market activity in the securities of listed issuers.”

The highlights provides above indicate that timely reporting is important. On the other
chapter of that listing requirement which relate to continuing disclosure, Bursa Malaysia has
emphasised the importance of timely disclosure on Chapter 9 (9.01-3):

“Continuing disclosure is the timely and accurate disclosure of all material information
by a listed issuer to the public”.

The other requirement under this chapter is on 9.23 which provides reminder to the
companies on submission of annual audited accounts and annual reports. Requirement on 9.23
(a) is as follow:

“The annual report shall be issued to the listed issuer’s shareholders and given to the Exchange
within a period not exceeding 6 months from the close of the financial year of the listed issuer.”

Under provision Section 169 of Companies Act 1965, this section requires a company
to table its audited accounts at the Annual General Meeting (AGM) not later than six months
after the company’s financial year end. The financial statement needs to be tabled in the AGM
for the shareholders to seek clarification from the board of directors on any issues pertaining to
the audited accounts.
In summary, having relevant information could enhance its capacity to influence
decisions. A lack of timeliness could hamper the usefulness of the information. This is
consistent with the Exposure Draft of an improved Conceptual Framework for Financial

5
Reporting (May 2008) issued by the International Accounting Standard Board (IASB) that
concluded reporting information in a timely manner could enhance both relevance and faithful
representation of that information.

CORPORATE GOVERNANCE IN MALAYSIA

Corporate governance in Malaysia is governed by MICG. MICG was established in
March 1998 after approval by the High Level Finance Committee. MICG was formed due to the
need of standards in corporate governance and the best practice framework in Malaysia. During
the formation of MICG, the members appointed comprised of individuals in almost all sectors of
the business and regulatory communities. The committee had two working groups, known as the
working group on best practice in corporate governance and on law reform issues in corporate
governance. The committee had successfully published a report in 1999 which is known as the
“Green Book Report”. In the Green Book Report, the committee defines corporate governance
as:

“. . . the process and structure used to direct and manage the business and affairs of
the company towards enhancing business prosperity and corporate accountability with the
ultimate objective of realizing long term shareholder value, whist taking into account the
interests of other stakeholders.(Green Book, p. 52)”

The Green Book Report also covers three other areas namely, the establishment of the
MCCG, the reform of laws, regulations and rules relating to corporate governance and training
and education for directors. The MCCG grounded that good corporate governance is strongly
dependent on the board of directors while the shareholders and auditors play secondary roles.
MCCG highlights that the board of directors plays major role in monitoring the company.
After seven years of establishment, MCCG was revised in year 2007. Several parts of
the code have been amended including the appointments of directors, the role of nomination
committee, criteria for appointment as an audit committee member, the composition of audit
committees and also requirements for public listed companies to have internal audit function.
The revised code also recommends that members in the board of directors should have skills,
knowledge, expertise, experience, professionalism and integrity. With regards to audit
committee, the code proposes that the board of directors is responsible to strengthen the role of
audit committees which requires the member of that committee to comprise fully of non-
executive directors, be able to read, analyse and interpret financial statements. This is to ensure
that they would be able to effectively discharge their functions.
Other than MCCG, there is another regulatory body that regulates requirements for the
board of directors and audit committee. The regulatory body, Bursa Malaysia provides listing
requirements on board of directors and audit committee. Similar to MCCG, Bursa Malaysia
Listing Requirements has also been revised to strengthen the rules in order to become more
effective. Bursa Malaysia listing requirement was last amended in August 2009. Corporate
governance is also covered in Chapter 15. With regards to board composition in a company,
Chapter 15 specifies that one third of the members in the board must be independent directors.
This chapter also provides restriction on directorships where members could not hold more than

6
25 directorships at one time. Out of the 25 directorships, 10 positions should be within public
listed companies and 15 positions in non-listed companies.
In terms of audit committee, Bursa Malaysia Listing requirement provides that the
members of audit committee must not be less than 3 persons. All members of the audit
committee must be non-executive directors, with a majority of them being independent directors
and at least one member is a member of the Malaysia Institute of Accountants (MIA). If the
member of the audit committee is not a member of MIA, the member must have at least three
years of working experience.
Between MCCG and Bursa Malaysia, Bursa Malaysia Listing Requirements prevails
than MCCG. This is because in order to be continuously listed at the board, a company must
comply on the rules provides by Bursa Malaysia. The requirement is aimed towards regulating
companies to become more transparent and accountable in their actions in order to gain
investors’ confidence. Indirectly, it also envisaged that these efforts would in turn boost the
country’s economic growth as well as encouraging inflow of foreign direct investments.

AGENCY THEORY AND TIMELINESS

The importance of corporate governance can be justified by agency theory. Jensen and
Meckling (1976 p.5.) provide a meaningful definition to the agency relationship as “a contract
under which one or more principals engage another person, (the agent) to perform some services
on his/their behalf involving delegation of some decision-making authority to the agent”.
Shareholders as the principals, having little knowledge of the business, will transfer the decision
in relation to the operationalisation of the company to the agents, and often represented by the
managers. The role of the managers is to enhance shareholders’ value and will be monitored by
the directors. Monitoring of them is vital since managers may act in their own best interests at
the expense of the shareholders. Within the corporate governance mechanisms, board of directors
and audit committee play important role in the monitoring process. Therefore, corporate
governance (include BOD & AC) serves as a control mechanism in safeguarding against
inappropriate management behavior (Baker and Owsen, 2002) by reconciling the interests of
shareholders and managers (Fama and Jensen, 1983). Corporate governance not only provides as
monitoring tool in companies, but also on monitoring the overall performance of the company
which include assuring quality of the financial reports as well as timely of audited financial
statements.
Bursa Malaysia has outlined the appointment requirements for members being
appointed in the board of directors and audit committee. Such requirements would ensure
monitoring targets are achievable since expert members would be able to clarify matters related
to the company. Consequently, these members would reduce auditors’ task complexity and
increase the timeliness of reporting. Therefore, arguably, board of directors and audit committee
would be able to reduce audit report lag. This is because the appointment of the directors and
audit committee are in line with the agency theory where agents act on behalf of principles in
ensuring the company is performing well and provides quality annual reporting.

7
REVIEW OF PREVIOUS STUDIES ON CORPORATE GOVERNANCE
AND AUDIT REPORT LAG
A number of studies have examined the determinants of audit report lag. Some were
conducted in developed countries such as in the UK, U.S, Australia, Canada and New Zealand
and some other studies were conducted in the developing countries such as in Bangladesh, Hong
Kong, China, Egypt, Russia, Pakistan, India and Malaysia.
At the early stage of the study on audit report lag, it focus on firm specific variables
such as company size, (Dyer and McHugh, 1975; Davies and Whittred, 1980; Atiase et al., 1988;
Ahmed, 2003; Owusu-Ansah and Leventis, 2006; Al-Ajmi, 2008), profitability (Ashton et al.,
1987; Bamber et al. 1993; Annaert et al., 2002; Ahmed, 2003; Ahmad and Kamarudin, 2003),
year end (Ashton et al. 1987; Davies and Whittred, 1980; Carslaw and Kaplan, 1991; Ahmed,
2003); leverage (Jaggi and Tsui, 1999; Owusu-Ansah and Leventis, 2006), industry type (Ashton
et al., 1987; Ng and Tai,1994; Jaggi and Tsui, 1999), audit opinion (Ng and Tai, 1994), type of
auditor (Ahmed, 2003; Leventis and Caramanis 2005; Afify, 2009), extraordinary items (Ng and
Tai, 1994), number of subsidiaries (Ng and Tai, 1994; Jaggi and Tsui, 1999) and types of news
of either bad or good news of the company (Jaggi and Tsui, 1999; Al-Ajmi, 2008).
Currently, there have been widely investigated the issue of corporate governance in
association with companies’ performance (Mohd Ghazali, 2010; Che Haat et al., 2008), financial
reporting quality (Ismail et al., 2008; He et al., 2009), corporate failure (Hsu and Wu, 2010),
audit quality (Wan Abdullah et al., 2008), environmental reporting (Said et al. 2009; Buniamin et
al., 2008), earnings management (Abdul Rahman and Mohamed Ali, 2006; Xie et al., 2003). In
the field of audit report lag, there are also some studies that have been examined extensively on
corporate governance in relation to audit report lag (Tauringana et al. 2008, Afify, 2009,
Mohamad Naimi et al., 2010, Hashim and Abdul Rahman, 2010 and Hashim and Abdul Rahman,
2011).

a) DETERMINANTS OF AUDIT REPORT LAG ON FIRM SPECIFIC VARIABLES

The pioneer study in this field has been done as early on 1975, by Dyer and Mchugh on
120 of Australian Annual Report between years of 1967 to 1971. Objective of this study is to
find relation between corporate attributes and audit delay. Only three variables tested in that
study which are size of the company, company’s year end and profitability. They did not find
any meaningful relationship between audit report lag with company’s year end and profitability
except for size of company. More bigger the company, there are more resources to control the
company such as pay high fees and appoint good auditor in order to complete the report timely.
Davies and Whittred (1980) suggested that the only variable should be considered in
determinants of audit lag is the size of the company. The research conducted among 100 listed
companies in Australia and the variables tested are same as Dyer and Mchugh (1975). The
company may reduce uncertainty about performance of the share price, when larger firms tend to
complete their audit work as soon as possible (with the resources it has) in order to release their
annual reports.
Ashton et al., (1987) examined on sample of 488 companies in United States of
America (USA). In that study, 14 variables are using (some of which are not publicly available),
they found that the length of audit delay is significantly longer for companies that are
categorized as nonfinancial, have received qualified audit opinion, have a fiscal year-end in

8
December, are non-listed companies, have poor internal controls, rely on less complex data-
processing technology, and have a greater relative amount of audit work performed after year-
end. Audit delay will be greater during the busy season. While, Atiase et al., (1988) have carried
out a study in USA and covered sample from year 1975 to 1984. They found that the firm size
and types of news would influence the timeliness of annual earnings announcements. However,
study done by Annaert et al., (2002) found that there are no significant association between audit
report lag and either good or bad news and profit or loss. This is because the investors already
have the earnings warnings via semi-annual earning of the company. So, it would not have any
relation on delay of the report with the earnings for the year.
Ahmed (2003) carried out a study of the timeliness of corporate annual reporting in
three countries, Bangladesh, India, and Pakistan. The study utilized 558 annual reports for the
year 1998. The variables interested to test are company size, sign of earnings, company financial
condition, audit firm size and company year end. It again revealed that profitability and corporate
size are significant determinants of audit report lag, but only in Pakistan while the audit firm size
significant determinants in India and Pakistan, but not in Bangladesh. The result shows
differently in different country.
Owusu-Ansah and Leventis (2006) carried out investigation for the factors that affect
timely annual financial reporting practices of 95 non-financial companies listed on the Athens
Stocks Exchange. The variables inspected are size of the company, extraordinary items, number
of remarks in annual report, and type of auditor. The result show that size of company and
audited by big-5 audit firm will have shorter audit report lag. As discussed before, the same
reason for the size of the company and ability to reduce audit report lag. Dyer & McHugh (1975)
stated that larger companies have more motivation to reduce audit delay since it being monitor
by the investors and regulatory bodies.
Prabandari and Rustiana (2007) examined the factors on differences of audit delay in
the financing firms that listed at Jakarta Stock Exchange (JSE). Five factors have been
investigated are total revenue, debt to assets ratio, gains or losses, audit opinion, and
characteristic’s of accounting firms. The samples are among 111 the financial companies listed at
JSE in year ended 2002 until 2004. The result show that the differences of audit delay in total
revenue and profit or loss announcement but, no differences of audit delay in audit opinion and
characteristic’s accounting firms. The result is consistent as what have been found by Afify
(2009).
Ahmad and Kamaruddin (2003) had employed model from Ashton, Graul and Newton
(1989) and Carslaw and Kaplan, (1991). Malaysian public companies that listed for the year
1996 to 2000 have been examined in the above study. The variables employed are total asset,
industry, sign of income, extraordinary items, audit opinion, type of auditor, year end and debt
proportion on audit report lag. Out of eight, six of the variables are significant includes of
industry, sign of income, audit opinion, type of auditor, year end and debt.
Che-Ahmad and Abidin (2008) have included another three variables that do not test by
Ahmad and Kamaruddin (2003) which include number of subsidiaries, change of auditor, and
ratio of inventory. The sample covered on that study are consists of all publicly held Malaysian
companies, which were listed on both the Main Board and the Second Board of the Bursa
Malaysia, as at 31 December 1993. The longest delay has been reported at that time was 442
days. This show much higher on the number of delays as compared to developed countries such
as U.S.A, Canada and New Zealand. However the results on significant variables in this study
are consistent with the study in Western countries.

9
 Both of the study done by Hossain & Taylor, (1998) in Bangladesh and Ahmad &
Kamaruddin, (2003) in Malaysia, found that type of auditor may reduce audit report lag because
The larger audit firm is expected to do audit work more efficiently, effectively and timely since
have more resources such as good and experience staffs. Conversely, Affify (2009), found that
type of audit firm did not reduce audit report lag in Egypt, but the author did not give specific
reason why this different with previous studies
The above studies have been extensively discusses on the determinants of audit report
lag based on firm specific variables. The next stage study on audit report lag are extensively
examine it relation on corporate governance.

b) AUDIT REPORT LAG AND CORPORATE GOVERNANCE

A review of the literature also found a few studies that examined corporate governance
mechanisms in relation to audit report lag found mixed results. Tauringana et al., (2008)
investigated the association between corporate governance mechanisms and timeliness of annual
reports of companies listed on the Nairobi Stock Exchange (NSE) in Kenya. The corporate
governance variables that have been examined are proportion of finance experts on the audit
committee, frequency of board meetings and proportion of non-executive directors. The study
also includes other independent variable which is dual reporting. The study posits that dual
reporting will increase the time taken to produce the annual report. The control variables that are
included in the study are size of the company, long term debt to equity ratio, profitability and
industry type. Result shows that the finance expert on audit committee and frequency of board
meeting significantly affect the timely reporting where by when more experts on audit committee
and more frequent of board meeting will reduce on delay of reporting. This study show that
board independence is not an influencing factor in reducing audit report lag. The results indicate
that board independence does not necessarily assist timely corporate reporting. The key point is
that the board of directors needs to fulfill their role effectively and efficiently regardless whether
they are independent directors or non-independent directors.
Afify (2009) examined the impact of CG characteristics audit report lag of Egyptian
listed companies. The corporate governance variables that incorporate by Afify are board
independence, duality of chief executive officer (CEO), and existence of an audit committee. He
found that there is a negative significant between the board independence and audit report lag.
The independence of the board provides more independent monitoring and as a result increases
financial reporting quality that eventually lead to reduce audit work and audit report lag. Within
the audit committee variables, he limited his study to only examining the aggregate of the
existence of audit committee in a company. He found that the existence of audit committee
significantly reduce the audit report lag of the company. This indicates that the audit committee
plays a vital role in strengthening communication between management and external auditor,
influences auditors’ assessments on both of control risk and audit risk, plan audit hours and the
level of substantive testing, and good financial reporting; and hence reduce the ARL.
Awareness of the importance of corporate governance, such studies also has been
carried out in Malaysian setting. Mohamad Naimi et al., (2010) examined audit delay in
Malaysian public listed companies, upon the implementation of the Malaysian Code on
Corporate Governance in 2000. The variables inspected are audit committee size, audit
committee independent, audit committee meeting, audit committee expertise, board size, board
independence, CEO duality. The authors also incorporated variables of audit firm quality, busy

10
period, client complexity, client business risk and client size as control variables in the study. The
study provides that firms with more members in the audit committee and more frequent audit
committee meetings are more likely to produce audit reports timely whereas that board
characteristics do not contribute to reduce of reporting lag. The result of this study suggests that more
emphasis should be given to strengthening the independence and expertise of the audit committee
The most recent study, Hashim and Abdul Rahman, (2010) examined the link between
corporate governance mechanisms and audit report lag among 288 companies listed on Bursa
Malaysia for a three-year period from 2007 to 2009. Four characteristics of board of directors are
examined which are board independence, board diligence, board expertise and CEO duality on
their effectiveness in assuring the timeliness of audit reports. The results show that audit report
lag for the listed companies in Malaysia ranges from 36 days to 184 days for the three year
period. This show that the reporting among listed companies in Malaysia are relatively better as
compared to previous study done by Che-Ahmad and Abidin (2008) and Ahmad and Kamarudin
(2003) on the earlier year. There are significant negative relationships between board diligence
and audit report lag. This study found that the number of meetings held by the board of directors
in a company is able to reduce audit report lag, indicates the board is discharging their role
towards the company. This study, however, could not provide any evidence concerning the link
between board independence, board expertise and CEO duality on audit report lag.
Hashim and Abdul Rahman, (2011) extend the above study in order to examine
whether the existence of audit committee could assist in reducing audit report lag as what have
been done by Mohamad Naimi et al., (2010). The characteristics of audit committee that have
been examined including of audit committee independence, audit committee diligence and audit
committee expertise. The results of this study also show that audit committee independence and
audit committee expertise could assist in reducing audit report lag among companies in
Malaysia. Hashim and Abdul Rahman, (2011) find contradict result with Mohamad Naimi et al.,
(2010) due to different time frame of the study. This study however could not provide any
evidence on the link between audit committee diligence on audit report lag.

CONCLUSION
In summary, the paper shows that there are many factors or variables that could
influence the timeliness of the financial reporting. At the early stage of the study on audit report
lag, it focus on firm specific variables such as company size, profitability, year end, leverage,
industry type, audit opinion, type of auditor, extraordinary items, number of subsidiaries and
types of news of the company either bad or good. Some are significant to audit report lag and
some are not. Then, the second stage incorporates with corporate governance characteristics and
it relation on audit report lag. Businesses practices worldwide are necessary to include practices
of corporate governance in their operation. Thus, it is vital to examine how effective those
mechanisms towards the company and in this case on assuring of timely financial reporting.
Upon reviewing the literature, it recommends that a few variables that had been tested
in previous studies can be re-examined in the future studies of audit report lag. This is because
over the years, the trend and characteristics may change and will give different significant result
of the study. Other than that, future study can examine on how ownership structure will influence
the audit report lag. The audit report lag is expected to decline as the ownership of the client’s
shares becomes more concentrated (Afify, 2009). Besides that, potential study also may include
other factors such as government policy or political issue that also might affect audit report lag.

11
McGee (2007) noted that the influence of timeliness might be attributed by culture, political and
economic system of the country.

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