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IJAIM
28,1
96
Received 18 September 2018
Revised 26 January 2019
9 February 2019
Accepted 21 February 2019
International Journal of
Accounting & Information
Management
Vol. 28 No. 1, 2020
pp. 96-125
© Emerald Publishing Limited
1834-7649
DOI 10.1108/IJAIM-09-2018-0107
Audit committee ownership and
audit report lag: evidence
from Australia
Md. Borhan Uddin Bhuiyan and Mabel D’Costa
School of Accountancy, Massey University, Auckland, New Zealand
Abstract
Purpose – This paper aims to examine whether audit committee ownership affects audit report lag.
Independent audit committees are responsible for overseeing the financial reporting process, to ensure that
financial statements are both credible and released to external stakeholders in a timely manner. To date,
however, the extent to which audit committee ownership strengthens or compromises member independence,
and hence, influences audit report lag, has remained unexplored.
Design/methodology/approach – This paper hypothesizes that audit committee ownership is
associated with audit report lag. Further, the author hypothesize that both the financial reporting quality and
the going concern opinions of a firm mediate the effect of audit committee ownership on audit report lag.
Findings – Using data from Australian listed companies, the author find that audit committee ownership
increases audit report lag. The author further document that financial reporting quality and modified audit
opinions rendered by external auditors mediate this positive relationship. The results are robust to
endogeneity concerns emanating from firms’ deliberate decisions to grant shares to the audit committee
members.
Originality/value – The study contributes to both the audit report timeliness and the corporate
governance literatures, by documenting an adverse effect of audit committee ownership.
Keywords Australia, Financial reporting quality, Audit report lag, Audit opinion,
Audit committee ownership
Paper type Research paper
1. Introduction
This research examines the impact of audit committee ownership on audit report lag in
Australia, and whether financial reporting quality and modified audit opinions rendered by
external auditors mediate this association. Audit report lag is defined as the period between
a company’s fiscal year-end and the audit report date and is one of the few externally
observable audit output variables available for estimating audit efficiency (Bamber et al.,
1993). As the audit report contains the auditor’s opinion regarding the credibility of the
financial statements, investors prefer that the audit report be released within a short period
following the end of the fiscal year. Audit delays may lead to delayed earnings
announcements, reduce earnings informativeness and generate a lower market response to
earnings (Whittred and Zimmer, 1980). A substantial body of academic research has
investigated the likely determinants of audit report lag, including firm-level
corporate governance mechanisms, for example, board characteristics, CEO duality,
audit committee existence and independence (Abernathy et al., 2017). However, the effect of
audit committee ownership on audit report timeliness remain unexplored. This is surprising,
given the role audit committees play in strengthening the corporate governance mosaic, and
the growing debate on compensating audit committee members with company shares
(Archambeault et al., 2008; Bedard and Johnstone, 2010; Bolton, 2014).
 Corporate governance best practice codes require or encourage companies to form audit Audit
committees, comprising independent members with financial expertise, to satisfy public committee
expectations of improved financial reporting quality (Bedard et al., 2004; Dewally and Peck,
2009; Hunton and Rose, 2008; Karamanou and Vafeas, 2005; Mustafa and Meier, 2006;
ownership
Pucheta-Martínez and De Fuentes, 2007) and improved audit quality (Abbott et al., 2003a,
2003b; Boo and Sharma, 2008; Chen and Zhou, 2007; Lee et al., 2004; Lennox and Park, 2007).
Bronson et al. (2009) evidence that to ensure audit committee effectiveness the members must
be completely independent. However, there is debate as to whether audit committee
97
ownership threatens audit committee member independence. Both regulators and the Press
have expressed serious concerns, arguing that equity-based compensation compromises
audit committee independence, because stocks and options tie members’ wealth to firms’
short-term and long-term financial performance (Barrier, 2002; Higgs, 2003; Millstein, 2002;
New York Times, 2007; Financial Reporting Council, 2003). On the other hand, however, the
corporate governance literature suggests that equity ownership by outside directors aligns
the incentives of directors with those of the shareholders. Jensen (1989) suggests that
shareholdings by non-executive directors can strengthen monitoring oversights and,
consequently, company performance (Bolton, 2014). If share ownership compromises
independence, then audit committee members may be less inclined to challenge management
regarding questionable accounting practices. This will affect financial reporting quality
adversely, requiring auditors to spend additional time and effort in detecting financial
misstatements, thus increasing audit report lag. Financial misstatements may eventually
lead auditors to express a qualified audit opinion: an action that prior research has
convincingly documented as increasing the audit report lag (Abernathy et al., 2017).
Conversely, if audit committee ownership provides additional motivation for members to
exercise effective oversight, then we should expect a shorter audit report lag. We test these
competing arguments by using audit report lag as an observable proxy.
Our sample consists of the top 1,500 Australian listed firms for which the data required
to calculate audit committee ownership is available from the Securities Industry Research
Centre of Asia-Pacific (SIRCA)[1] for the period 2001 to 2015. We began in 2001 because the
data coverage for periods prior to 2001 was not comprehensive. The first Corporate
Governance code in Australia was released in March 2003 and comprises ten principles, two
of which were related to the audit committee (Principle 4 and 7), and one to timely disclosure
of financial information and documents (Principle 5). In 2007, the code was modified, and
then again in 2014. The principles were developed from the first version to the current
amended version, on a “comply or explain” basis.
With respect to the existence of audit committees, Recommendation 4.1 of the Code
stipulates that a listed entity should have an audit committee but also notes:
The boards of some listed entities may decide that they are able to oversee the corporate reporting
process efficiently and effectively without establishing a separate audit committee. If they do, the
entity should disclose [. . .] [. . .] that it does not have an audit committee and explain the processes
it employs that independently verify and safeguard the integrity of its corporate reporting [. . .]
[. . .].
(p. 22). The code did not mandate the appointment of audit committee members with
financial expertise but notes that: “[. . .] [. . .] its members between them should have
accounting and financial expertise and a sufficient understanding of the industry in which
the entity operates [. . .] [. . .]” (p. 22). However, the Australian Stock Exchange (ASX) listing
rules require that companies included in the ASX All Ordinaries index (which consists of top
500 market capitalized companies) must have an audit committee. As will be detailed in
IJAIM Section 3, about 29 per cent of our initial firm-year observations did not have an audit
28,1 committee.
With respect to the compensation structure of the non-executive directors,
Recommendation 8.2 of the “Corporate Governance Best Practice Code” suggests:
[. . .] [. . .] it is generally acceptable for non-executive directors to receive securities as part of their
remuneration [. . .] [. . .] However, non-executive directors generally should not receive options
98 with performance hurdles attached or performance rights as part of their remuneration as it may
compromise their objectivity (p. 33).
We measure audit committee ownership as the proportion of audit committee members’
total shareholdings over total outstanding shares of a company in a particular year. After
controlling for a number of firm-specific determinants of audit report lag, we find that audit
committee ownership increases audit report lag. We further document that poor financial
reporting quality and modified audit opinions (the so-called mediating channels) drive this
adverse effect. We also document that ownership by non-financial–expert audit committee
members increases audit report lag, but ownership by audit committee members with
financial expertise is unrelated to audit report lag. Our findings are robust to controlling for
self-selection emanating from firms’ non-random decisions to grant equity ownership to
audit committee members.
Bamber et al. (1993) suggest that research on the determinants of audit report lag is
important because:

audit report lag affects the timeliness of both audit and earnings information; and

a better understanding of the determinants of audit report lag is likely to provide
more insights into audit efficiency.

We contribute to the audit committee effectiveness literature by contextualizing the research

in a country with a less litigious and lighter corporate governance environment than is
found elsewhere (Sultana et al., 2015). A prevalent view holds that compensating audit
committee members with company shares compromises their independence. Prior evidence
in the USA, which has a much stronger litigation environment, especially after the
enactment of the SOX, confirms this proposition. The low-level litigation environment of
Australia, coupled with its still-voluntary audit committee formation, make Australia a
more interesting and, at the same time, an important market for governance regulators. If
the incentive alignment view holds, then granting shares to audit committee members may
compensate for the lack of litigation threat, by motivating audit committee members to be
more vigilant in overseeing the financial reporting process. On the other hand, the same lack
of litigation threat may also provide natural incentives for audit committee members to
maximize their short-term interests, thus threatening their independence and weakening
investor protection. Our study, therefore, should be of interest to regulators in formulating
regulation regarding the compensation structure of audit committee members in countries
with weak litigation environments.
The remainder of the paper proceeds as follows. Section 2 reviews the related literature
and develops hypotheses. Section 3 explains research design issues. The following section
provides our sample selection procedure and descriptive statistics. Section 5 explains the
regression results and sensitivity tests. Section 6 concludes the paper.

2. Literature review and hypotheses development

Early research on the determinants of audit report lag investigates a common set of firm
characteristics, including firm size, fiscal year-end, loss occurrence, presence of
extraordinary items, client complexity, auditor size, audit opinion and earnings quality Audit
(Courtis, 1976; Davies and Whittred, 1980; Gilling, 1977; Givoly and Palmon, 1982). Ashton committee
et al. (1987) provide a comprehensive assessment of the determinants of audit report lag by
ownership
including 14 variables in their regression estimation. Research on the determinants of audit
report lag beyond the US setting includes Australia (Davies and Whittred, 1980; Dyer and
McHugh, 1975; Whittred and Zimmer, 1980, 1984); Canada (Ashton et al., 1989; Ashton and
Newton, 1989); China (Habib, 2015); Egypt (Afify, 2009; Khlif and Samaha, 2014); France 99
(Soltani, 2002); Greece (Leventis et al., 2005); Hong Kong (Jaggi and Tsui, 1999; Ng and Tai,
1994); Malaysia (Wan-Hussin and Bamahros, 2013); and New Zealand (Carslaw and Kaplan,
1991; Courtis, 1976; Gilling, 1977; Habib and Bhuiyan, 2011).
With the growing popularity of corporate governance research, it is not surprising to see
a surge in research on the association between different attributes of corporate governance
and audit report lag. For example, Knechel and Payne (2001) find that auditor-provided non-
audit services (NAS) reduce audit report lag, and thus, support the knowledge-spillover
benefits of NAS. Lee et al. (2009) document that longer audit tenure is associated with a
shorter audit report lag. Afify (2009) finds that board independence, CEO duality, and the
existence of an audit committee are associated with audit report lag. The SOX requirement
for equipping the audit committees with at least one member having financial expertise
provides further impetus for corporate governance and audit report lag research (Abernathy
et al., 2014).
Boards of directors are at the helm of corporate governance and work through sub-
committees (Adams et al., 2010; Hermalin and Weisbach, 1998, 2003). Delegating different
board functions to distinct committees represents a separation of tasks and functions, and
has been strongly recommended as a suitable mechanism for improving corporate
governance (Kesner, 1988; Spira and Bender, 2004). An important sub-committee found in
modern organizations is the audit committee, with delegated authority to oversee the
auditing and financial reporting-related matters of the firm. Extant auditing literature reveals
that corporate governance affects audit quality (Waresul Karim et al., 2013; Chong, 2015).
Habib and Muhammadi (2018) investigate the impact of political connections on audit report
lag in Indonesia and evidence that the audit report lag is relatively short for politically
connected firms, but that it increases when such firms conduct both operating and loan-type
related party transactions.
Whether audit committee members should be compensated with company stocks and/or
options is debatable (Barrier, 2002; Higgs, 2003; Millstein, 2002). Existing literature provides
mixed evidence on the governance role of audit committee ownership. Evidence in support
of “incentive-alignment” effects includes greater responsiveness to risk (MacGregor, 2012),
enhanced earnings quality (Sharma and Kuang, 2014; Vafeas, 2005), reduced financial
statement fraud (Beasley et al., 2000) and better firm performance (Bolton, 2014). Sharma
and Kuang (2014), for example, find that greater stock ownership by non-executive and
executive directors on the audit committee increases the risk of aggressive earnings
management in New Zealand.
On the other hand, evidence supporting the “impairment of independence” view, includes
increases in earnings management, financial restatements and reporting of internal control
weaknesses (Archambeault et al., 2008; Cullinan et al., 2010; Magilke et al., 2009; Yang and
Krishnan, 2005). Cullinan et al. (2010) find that firms compensating their audit committee
members with stock options are more likely to report an internal control weakness than are
firms without such policies. These findings are consistent with the Blue Ribbon Committee
(1999) Report, which noted:
IJAIM [. . .] independence is critical to ensuring that the board fulfills its objective oversight role and
holds management accountable to shareholders [. . .]. In addition, rational thinking dictates that a
28,1 director without any financial, family or other material personal ties to management is more likely
to be able to evaluate objectively the propriety of management’s accounting, internal control and
reporting practices (p. 22)[2].
Our theoretical arguments for audit committee ownership affecting audit report lag are
100 premised on the causal relation that equity-based compensation compromises audit
committee independence, which leads to oversight failures. One manifestation of such
oversight failure may show up in poor earnings quality and, as is documented in extant
research, financial reporting quality is one of the determinants of audit report lag (Asthana,
2014). Equity ownership by audit committee members may bias them towards accepting
questionable accounting practices. In the extreme, audit committees may dismiss incumbent
auditors (Carcello and Neal, 2003), so that the bad news is not disclosed to the market, and
the short-term stock price is not adversely affected. Audit report lag increases in the event of
auditor changes, as new auditors need time to become familiar with firms’ accounting and
internal control systems (Craswell, 1988; Schwartz and Soo, 1996; Tanyi et al., 2010). This
“impairment of independence” perspective hypothesizes a positive association between
audit committee ownership and audit report lag.
On the other hand, one of the essential tasks for audit committee members is to support
external auditors in negotiating with management over questionable accounting
transactions. Audit committees often support auditors’ preference for acceptable accounting
treatments in the event of disagreements with management. Negotiation with management
prolongs audit report lag. Audit committee ownership may further strengthen such an
oversight role. Effective oversight by audit committees improves financial reporting quality,
thus shortening the time required for external auditors to perform the audit. This view
suggests a negative association between audit committee ownership and audit report lag.
Given the competing arguments, we develop the following hypothesis:

H1. There is no association between audit committee ownership and audit report lag.
The above hypothesis does not inform us as to what variable(s) may mediate the
relationship, if any, between audit committee ownership and audit report lag. We consider
financial reporting quality and modified audit opinions as two such mediating variables. If
audit committee ownership compromises independence, then oversight failure may
dominate, and biased financial statements may mislead investors. Prior research provides
support for this proposition. Firms with higher audit committee shareholding make less
frequent interim disclosures (Mangena and Pike, 2005), are likely to report more internal
control weaknesses (Cullinan et al., 2010) and exhibit more earnings management (Bedard
et al., 2004; Yang and Krishnan, 2005). Ineffective internal control increases business risks
and exacerbates the agency problem, leading to poor quality financial statements
(Ashbaugh-Skaife et al., 2008). Poor quality financial statements are one of the primary
catalysts for auditor-provided modified audit opinions, which increase audit report lag.
Following the arguments above, oversight failure reduces reporting quality and increases
the probability of receiving a modified audit opinion and, consequently, audit report lag.
Therefore, we hypothesize as follows:

H2A. The effect of audit committee ownership on audit report lag is independent of
financial reporting quality.
 H2B. The effect of audit committee ownership on audit report lag is independent of Audit
going concern opinion. committee
ownership
3. Data, variable definitions and descriptive statistics
3.1 Sample selection
We retrieve data on audit committee ownership and other corporate governance variables
from the SIRCA “Corporate Governance Database”. This database covers corporate 101
governance data for the top 1,500 listed Australian firms. We estimate our regression
models over the period 2001 to 2015. We chose 2001 as the initial sample year because the
data coverage by SIRCA is entirely inadequate prior to 2001. Our initial sample was 13,461
firm-year observations. We then:

removed 823 observations pertaining to financial institutions (GICS code 40);

deleted 3,631 firm-year observations with no audit committee;

deleted 298 firm-year observations with missing audit committee ownership data,
and finally; and

deleted a further 1,665 firm-year observations without required financial statement
data.

Our final sample, therefore, consists of 7,044 firm-year observations. Panel A in

Table I explains the sample selection procedure. Panel B reports the industry
distribution. About 26 per cent of the firm-year observations come from the
Materials industry (GICS code 15) followed by 19 per cent from Industrials (GICS
code 20).

Explanation Observations

Panel A: sample selection procedure

Initial sample for the period 2001 to 2015 retrieved from SIRCA 13,461
Less: observations pertaining to financial institutions (GICS Code==40) ( 823)
Less: firm-year observations with no audit committee ( 3,631)
Less: missing audit committee ownership data ( 298)
Less: missing financial statements data ( 1,665)
Final sample 7,044

Panel B: industry distribution

Sectors Name N % distribution
10 Energy 718 10.19
15 Materials 1,847 26.22
20 Industries 1,336 18.97
25 Consumer Discretionary 1,037 14.72
30 Consumer staples 423 6.01
35 Health Care 669 9.50
45 Information technology 717 10.18
50 Telecommunication Services 148 2.10
55 Utilities 149 2.12 Table I.
Total 7,044 100.00 Sample selection
IJAIM 3.2 Empirical model
28,1 To test the hypotheses we estimate the following regression model:

ARL ¼ g 0 þ g 1 AC_HOLD% þ g 2 BIG4 þ g 3 SPEC_CITY þ g 4 AOPIN

þ g 5 LN_AF þ g 6 LN_NAF þ g 7 FYE þ g 8 AC_SIZE þ g 9 AC_EXP

102 þ g 10 BSIZE þ g 11 INDPEN þ g 12 CEO_DUAL þ g 13 SIZE
þ g 14 M&A þ g 15 LEV þ g 16 LOSS þ g 17 INV_REC þ g 18 SPI þ « (1)

where the dependent variable ARL is the number of days from the fiscal year-end to the
audit report date (ARL_DAY). We also use the natural log of audit report lag (LN_ARL) as
an alternative measure, to normalize the dependent variable of the regression. AC_HOLD
per cent is the audit committee members’ equity holdings measured as total number of
shareholdings by the audit committee members, divided by the total number of outstanding
shares. We also use the natural logarithm of total audit committee ownership as an
alternative equity holdings proxy and denote it as LN_HOLD. We then include a series of
corporate governance variables, which previous research has found to have predictive
ability for audit report lag. BIG 4 is a categorical variable coded 1 if the firm-year
observations are audited by a Big 4 audit firm, and 0 otherwise. SPEC_CITY is a dummy
variable coded 1 if the auditor is a city-level specialist, and 0 otherwise. An auditor is defined
as a city industry leader if, in a particular year, the auditor has the largest market share in a
two-digit industry sector, and if its market share is at least ten percentage points greater
than the second largest industry leader in a city audit market. We expect negative and
significant coefficients on these variables. AOPIN is a dummy variable coded 1 if the firm-
year observations had a qualified audit opinion, including a going concern (GC) opinion, and
0 otherwise. We expect a positive coefficient on AOPIN. LN_AF is the natural log of total
audit fees. LN_NAF is the natural log of total non-audit fees. A negative coefficient is
expected for LN_AF, as auditees may be willing to pay higher fees for quicker completion of
the audit procedures. The higher fees are also justified because a quicker completion of audit
requires concentrated audit resources, additional staff and overtime work. Provision of NAS
generates knowledge-spillover benefits, which may allow the incumbent auditors to
complete the audit early. FYE is a dummy variable coded 1 if firm fiscal year-end is June 30,
and 0 otherwise, and is expected to increase audit report lag (Knechel and Payne, 2001;
Knechel and Sharma, 2012; Lee et al., 2008). AC_EXP is the total number of AC members
with financial expertise, defined as:

professional qualifications and/or experience as a public accountant, auditor,
principal or chief financial officer, controller, principal or chief accounting officer;
and

experience as a CEO or president of a for-profit firm.

We expect a negative coefficient on AC_EXP, as firms with a greater number of financial

experts on their audit committees report fewer material internal control weaknesses, and
exhibit increased audit committee effectiveness and monitoring ability (Beasley and
Salterio, 2001). ACSIZE is the total number of AC members. Habib et al. (2019) posits that
some of the corporate governance characteristics such as board size (BSIZE), independence
of board (INDPEN) and CEO dominance (CEO_DUAL), influence ARL. We measure, BSIZE
is the total number of board members. INDPEN is the ratio of independent outside directors
to the total number of directors. CEO_DUAL is a dummy variable coded 1 if the CEO is also Audit
the chairman of the board, and 0 otherwise. committee
We then control for a number of firm-specific determinants of audit report lag. SIZE is
the natural log of total assets. M&A is a dummy variable that equals 1 if the firm had a
ownership
merger or acquisition, and 0 otherwise. LEV is the sum of short-term and long-term debt
over total assets. LOSS is a dummy variable that equals 1 if the firm’s net income before
extraordinary items is negative, and 0 otherwise. INVREC is a proxy for firm complexity,
measured as the sum of the firm’s receivables and inventory divided by its total assets. 103
SPI_D is a dummy variable that equals 1 if the firm reports special items in its income
statement, and 0 otherwise. We expect positive and significant coefficients on all but SIZE.
Incentives for reducing audit delay by larger firms stem from the fact that larger firms tend
to have stronger internal controls, and these reduce financial statement errors and allow
auditors to perform more interim work (Carslaw and Kaplan, 1991).

3.3 Descriptive statistics, univariate analysis and correlation

Panel A of Table II presents descriptive statistics. The mean ARL_DAY is 75 days with a
standard deviation of about 26 days, suggesting a wide variation among companies with
respect to the timeliness of audit reporting. Audit committee ownership as a proportion of
total outstanding shares (AC_HOLD per cent) is about 9 per cent, although the median is
only 1 per cent, suggesting the presence of some extreme values as is also evident from the
large standard deviation (0.17). Our findings are, overall, consistent with Cullinan et al.
(2010), who report that audit committee members have an average of 5 per cent stock
options in UK companies. Audit committees in our sample firms are composed of both
independent and executive audit committee members, although the former group
constitutes more than three-quarters of the sample (77 per cent). Average AC_HOLD per
cent of the former group is about 6 per cent. The Big 4 audit firms audit sixty percent of the
firm-year observations, while 18 per cent of the firm-year observations had industry
specialist auditors. In total, 44 per cent of the firm-year observations report negative
earnings, with an average ROA of 10 per cent. The average size of the AC is 3.4, with an
average of one member with financial expertise. The average board size is seven with 71 per
cent of the board members being independent. Only 10 per cent of the firm-year
observations have CEOs who are also Chairmen of their boards. Sample companies are
larger, active in the Merger and Acquisition transactions, and low-leveraged. In total, 44 per
cent of the firm-year observations report special items on their income statements. The
average of the earnings quality measure, proxied by jDACj, is 15 per cent of lagged total
assets.
Panel B provides a time-series distribution of the key-dependent and independent
variables. We see a gradual decline in the mean ARL_DAY from a high of 80 days in 2001, to
a low of 69 days in 2014 and 2015. Mean AC_HOLD per cent, too, declined from a high of
12.4 per cent in 2001, to 6.57 per cent in 2015.
Panel C provides a univariate test of difference in the regression variables for firms with
high versus low audit committee ownership. We split the sample into a high, versus a low,
group based on the median ownership. The mean ARL_DAY for the “high” group is
significantly higher than that of the “low” group (mean ARL_DAY of 79, versus 71, days).
The difference is significant at p < 0.001. The high-ownership firms are smaller, less active
in M&A and incur more losses, but are less-highly leveraged. Firms with high audit
committee ownership suffer from a weak corporate governance environment, as is evident
from their lower percentage of Big 4 and industry specialist auditors; a greater number of
modified audit opinions; lower audit and non-audit fees; smaller board and audit committee
IJAIM
Variable N Mean SD 0.25 Median 0.75
28,1
Panel A: descriptive statistics
ARL_DAY 7,044 75.01 25.58 57.00 76.00 90.00
LN_ARL 7,044 4.27 0.29 4.04 4.33 4.50
AC_HOLD% 7,044 0.09 0.17 0.00 0.0141 0.09
LN_HOLD 7,044 14.07 3.54 12.56 14.56 16.3
104 BIG4 7,044 0.66 0.47 0.00 1.00 1.00
SPEC_CITY 7,044 0.18 0.38 0.00 0.00 0.00
AOPIN 7,044 0.11 0.31 0.00 0.00 0.00
LN_AF 7,039 11.97 1.35 11.05 11.81 12.71
LN_NAF 7,044 10.48 3.92 10.18 11.5 12.61
FYE 7,044 0.81 0.40 1.00 1.00 1.00
ACSIZE 7,044 3.40 1.34 3.00 3.00 4.00
AC_EXP 7,044 1.03 0.90 0.00 1.00 2.00
BSIZE 7,044 6.59 2.58 5.00 6.00 8.00
INDPEN 7,044 0.71 0.16 0.6 0.75 0.83
DUAL 7,044 0.10 0.29 0.00 0.00 0.00
SIZE 7,044 3.88 2.62 1.56 4.02 5.81
M&A 7,044 0.34 0.47 0.00 0.00 1.00
LEV 7,044 0.17 0.26 0.00 0.11 0.27
LOSS 7,044 0.44 0.50 0.00 0.00 1.00
ROA_W 7,044 0.10 0.37 0.13 0.02 0.07
INVREC 7,044 0.21 0.20 0.05 0.15 0.34
SPI 7,044 0.44 0.50 0.00 0.00 1.00
jDACj 6,239 0.15 0.14 0.05 0.11 0.20

Panel B: Time-series distribution of audit committee ownership and ARL

YEAR Mean ARL Mean LN_ARL AC_HOLD%
2001 80.28 4.35 0.1092
2002 82.37 4.36 0.0982
2003 75.94 4.29 0.0874
2004 74.41 4.27 0.0869
2005 77.26 4.31 0.0826
2006 78.10 4.31 0.0713
2007 76.11 4.28 0.0734
2008 76.16 4.29 0.0787
2009 74.64 4.26 0.0765
2010 71.64 4.24 0.0824
2011 71.41 4.23 0.0703
2012 70.78 4.22 0.0787
2013 70.61 4.22 0.0611
2014 69.37 4.19 0.0664
2015 68.94 4.18 0.0590

Panel C: Univariate analysis

Variables [AC_HOLD%> = median] [AC_HOLD%<median] t-test for difference in means
ARL_DAY 78.55 71.44 11.76
LN_ARL 4.33 4.22 15.73***
BIG4 0.54 0.78 21.87***
SPEC_CITY 0.11 0.24 14.67***
AOPIN 0.14 0.08 8.48***
Table II. LN_AF 11.48 12.45 32.61***
Descriptive statistics (continued)
LN_NAF 9.77 11.20 15.61***
Audit
FYE 0.86 0.75 12.57*** committee
ACSIZE 3.36 3.44 2.52** ownership
AC_EXP 0.87 1.18 14.41***
BSIZE 5.88 7.31 24.36***
INDPEN 4.04 5.41 27.07***
DUAL 0.12 0.07 8.04***
SIZE 2.97 4.80 31.32*** 105
M&A 0.30 0.37 6.73***
LEV 0.15 0.20 7.39***
LOSS 0.51 0.36 12.92***
INVREC 0.21 0.22 1.54
SPI 0.38 0.50 9.97***
jDACj 0.15 0.14 1.45

Notes: ***, ** and * represent statistical significance at the 1, 5, and 10% levels respectively (two-tailed
test); variable definitions are in the Appendix Table II.

size; fewer independent board directors; and fewer audit committee members with financial
expertise.
Larger audit committee ownership in poorly governed firms can be explained by the fact
that such firms require more monitoring than do firms with good governance.
Compensating audit committee members with shares may incentivize the members to be
vigilant monitors. Efficient monitoring, in turn, constrains reporting opportunism and, thus
reduces the audit report lag. Engel et al. (2010) find that compensating audit committee
members with equity compensation, increases when the demand for monitoring, as proxied
by audit fees and a post-SOX regime, becomes greater. On the other hand, higher ownership
could actually compromise audit committee independence, encouraging members to collude
with managers to engage in opportunistic reporting to boost the stock price. Auditors,
therefore, are likely to exert more auditing effort to detect misreporting, thus increasing
ARL. Furthermore, auditor dismissal is more likely in such firms, and auditor changes
would result in an increased audit report lag.
Table III presents the Pearson pair-wise correlation of selected variables used in the
regression models. AC_HOLDper cent is correlated with ARL_DAY positively (correlation
0.10, p < 0.01). As was revealed in the univariate analysis, the correlation between
AC_HOLD per cent and many of the good governance proxies is negative and significant (for
example, 0.20 with BIG4; 0.10 with AC_EXP; 0.20 with LN_AF; 0.14 with INDPEN
and 0.08 with CEO_DUAL). On the other hand, ARL_DAY is relatively short for large firms,
firms audited by the Big 4 and industry specialist auditors, and firms with large boards; but
ARL_DAY is relatively long for firms receiving modified audit opinions and for loss-making
firms, among others. Taken together, correlation analysis supports the hypothesis that the
audit report lag is longer for firms with more audit committee ownership.

4. Regression results
4.1 Audit committee ownership and audit report lag: baseline regression results
Table IV, Panel A, presents the regression results for the effect of audit committee
ownership on audit report lag. We estimate the regression models using ordinary least
squares (OLS) regressions with standard errors adjusted for heteroscedasticity and within-
firm clustering. In Table IV, across all models, the dependent variable is ARL_DAY as well
 28,1

106
IJAIM

Table III.
Correlation analysis
Variables (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20)

ARL_DAY (1) –
AC_HOLD% (2) 0.10 –
LN_HOLD (3) 0.09 0.49 –
BIG4 (4) 0.14 0.20 0.18 –
SPEC_CITY (5) 0.08 0.10 0.11 0.16 –
AOPIN (6) 0.19 0.09 0.09 0.15 0.06 –
LN_AF (7) 0.22 0.20 0.20 0.43 0.36 0.17 –
LN_NAF (8) 0.08 0.12 0.13 0.29 0.19 0.17 0.41 –
FYE (9) 0.06 0.08 0.15 0.17 0.05 0.02 0.20 0.12 –
AC_SIZE (10) 0.12 0.05 0.04 0.19 0.12 0.07 0.32 0.16 0.10 –
AC_EXP (11) 0.12 0.10 0.08 0.13 0.08 0.07 0.29 0.11 0.04 0.31 –
BSIZE (12) 0.12 0.19 0.18 0.27 0.24 0.12 0.49 0.27 0.16 0.52 0.26 –
INDPEN (13) 0.12 0.14 0.11 0.17 0.09 0.04 0.19 0.11 0.13 0.17 0.13 0.11 –
DUAL (14) 0.07 0.08 0.07 0.04 0.07 0.10 0.10 0.05 0.02 0.08 0.07 0.13 0.15 –
SIZE (15) 0.26 0.18 0.24 0.36 0.32 0.28 0.78 0.41 0.19 0.30 0.30 0.45 0.18 0.12 –
M&A (16) 0.06 0.06 0.02 0.11 0.11 0.11 0.34 0.20 0.03 0.09 0.11 0.20 0.02 0.06 0.38 –
LEV (17) 0.03 0.03 0.03 0.03 0.10 0.19 0.17 0.07 0.04 0.04 0.03 0.06 0.04 0.07 0.18 0.08 –
LOSS (18) 0.21 0.07 0.15 0.16 0.15 0.32 0.38 0.22 0.08 0.12 0.17 0.15 0.07 0.07 0.60 0.25 0.05 –
INVREC (19) 0.05 0.07 0.07 0.09 0.04 0.04 0.23 0.14 0.05 0.07 0.08 0.04 0.01 0.01 0.42 0.17 0.10 0.31 –
SPI (20) 0.03 0.09 0.06 0.08 0.06 0.03 0.23 0.04 0.06 0.05 0.08 0.08 0.10 0.01 0.18 0.08 0.08 0.01 0.06 

Note: Italicized correlations are significant at p < 0.001. Variable definitions are in the Appendix
 ARL ¼ g 0 þ g 1 HOLD% þ g 2 BIG4 þ g 3 SPEC_CITY þ g 4 AOPIN þ g 5 LN_AF þ g 6 LN_NAF þ g 7 FYEþ g 8 AC_SIZE þ g 9 AC_EXP þ g 10 BSIZE
þ g 11 INDPEN þ g 12 CEO_DUAL þ g 13 S IZE þ g 14 M&A þ g 15 LEVþ g 16 LOSS þ g 17 BTM þ g 18 INV_REC þ g 19 SPI þ« (1)
(1) (2) (3) (4) (5) (6) (7) (8)
OLS OLS OLS OLS FFE FFE Fama/Macbeth Fama/Macbeth
Variables ARL_DAY LN_ARL ARL_DAY LN_ARL ARL_DAY LN_ARL ARL_DAY ARL_DAY

Panel A: Audit committee ownership and audit report lag: baseline regression results
AC_HOLD% 5.678*** [2.73] 0.073*** [3.58] –  4.410* [1.76] 0.054** [2.16] 5.507* [2.03]
LN_HOLD  – 0.670*** [3.23] 0.011*** [3.75]  – 0.688*** [6.78]
BIG4 2.433*** [3.78] 0.039*** [5.46] 2.250** [2.30] 0.035*** [2.69] 0.659 [0.58] 0.007 [0.60] 2.385*** [3.80] 2.172*** [3.43]
SPEC_CITY 0.620 [0.68] 0.003 [0.30] 0.950 [0.73] 0.007 [0.44] 0.244 [0.24] 0.002 [0.22] 0.362 [0.44] 0.640 [0.73]
AOPIN 9.060*** [8.39] 0.108*** [10.32] 9.024*** [7.21] 0.106*** [7.70] 4.832*** [4.17] 0.062*** [5.38] 9.611*** [6.82] 9.107*** [6.10]
LN_AF 0.651 [1.60] 0.011** [2.46] 0.780 [1.35] 0.012 [1.55] 0.535 [1.01] 0.001 [0.12] 0.365 [0.59] 0.506 [0.86]
LN_NAF 0.048 [0.57] 0.000 [0.17] 0.040 [0.35] 0.000 [0.07] 0.038 [0.37] 0.000 [0.27] 0.002 [0.02] 0.022 [0.25]
FYE 0.936 [1.00] 0.031*** [3.43] 1.406 [1.00] 0.033* [1.80] 3.324* [1.75] 0.053*** [2.80] 0.240 [0.25] 0.576 [0.67]
AC_SIZE 0.830*** [2.99] 0.009*** [2.97] 0.859** [2.37] 0.010** [2.25] 0.647** [2.18] 0.006** [2.08] 0.858*** [3.58] 0.844** [2.90]
AC_EXP 0.612* [1.72] 0.012*** [3.07] 0.609 [1.16] 0.012 [1.61] 0.339 [0.72] 0.004 [0.76] 0.517 [1.31] 0.534 [1.44]
BSIZE 0.342* [1.85] 0.002 [1.16] 0.323 [1.35] 0.002 [0.88] 0.430** [2.35] 0.004** [2.35] 0.221 [1.64] 0.251* [2.01]
INDPEN 6.935*** [3.36] 0.097*** [4.66] 6.432** [2.37] 0.090*** [2.65] 0.914 [0.39] 0.001 [0.06] 7.326*** [3.60] 6.597*** [3.34]
CEO_DUAL 1.595* [1.74] 0.028*** [2.69] 1.815 [1.20] 0.029 [1.45] 1.560 [1.16] 0.013 [0.94] 1.648** [2.56] 1.703** [2.75]
SIZE 2.142*** [8.55] 0.031*** [11.34] 2.067*** [5.31] 0.029*** [5.78] 0.026 [0.05] 0.003 [0.65] 1.765*** [5.69] 1.834*** [6.18]
M&A 1.678** [2.49] 0.022*** [3.02] 1.451* [1.72] 0.019* [1.83] 1.220* [1.69] 0.014** [1.99] 1.311 [1.70] 1.013 [1.49]
LEV 3.545*** [3.24] 0.041*** [3.48] 3.450** [2.44] 0.041** [2.34] 1.957 [1.34] 0.020 [1.41] 0.586 [0.31] 4.188*** [4.20]
LOSS 3.155*** [3.98] 0.041*** [4.84] 2.391** [2.32] 0.033*** [2.67] 4.783*** [4.57] 0.049*** [4.70] 3.074*** [3.27] 2.140** [2.19]
INVREC 6.397*** [3.13] 0.073*** [3.56] 6.686** [2.26] 0.075* [1.92] 0.874 [0.29] 0.009 [0.29] 4.557* [2.09] 5.133** [2.55]
SPI 1.750*** [2.75] 0.025*** [3.57] 1.800** [2.37] 0.025** [2.56] 0.716 [1.05] 0.007 [1.01] 1.595** [2.31] 1.477* [1.95]
Constant 82.267*** [18.86] 4.362*** [89.95] 70.984*** [10.09] 4.198*** [44.92] 81.848*** [13.85] 4.300*** [73.20] 80.272*** [12.56] 67.671*** [10.88]
Industry Yes Yes Yes Yes No No No No
Year Yes Yes Yes Yes Yes Yes Yes Yes
Firm No No No No Yes Yes
Observations 7,044 7,044 6800 6800 7,044 7,044 7044 6800
Adj. R2 0.13 0.19 0.12 0.19 0.04 0.07 0.10 0.10
(continued)

Table IV.
ownership
committee
Audit

impact of audit
committee ownership
examining the
107

Multivariate
regression for
 28,1

108
IJAIM

Table IV.
Panel B: Equity holdings by audit committee members with financial expertise and ARL
ARL_DAY LN_ARL ARL_DAY LN_ARL
ACEXP_HOLD% 5.805 [0.96] 0.093 [1.14]  
ACOTH_HOLD% 5.681** [2.11] 0.072** [2.32]  
LN_EXP_HOLD   0.028 [0.38] 0.001 [1.06]
LN_OTH_HOLD   0.210** [2.04] 0.0035** [2.58]
Other control variables Yes Yes Yes Yes
Industry Yes Yes Yes Yes
Year Yes Yes Yes Yes
Observations 7,039 7,039 6,725 6,725
Adjusted R2 0.12 0.19 0.13 0.18

Notes: Robust t-statistics in brackets. ***, ** and * represent statistical significance at the 1, 5, and 10% levels respectively (two-tailed test). Variable definitions
are in the Appendix
as LN_ARL, and the test variable is audit committee ownership (both AC_HOLD per cent Audit
and LN_HOLD). Regression models include firm-level controls, with dummies to control for committee
industry and year fixed effects.
Columns (1) to (4) of Table IV report odinary least square regression results. Across all
ownership
four columns, the coefficients on audit committee ownership are positive and significant.
The coefficient on AC_HOLD per cent is 5.68 (t-stat 2.73, p < 0.01) in Column (1), suggesting
that audit report lag is about 6 days longer for firms with greater audit committee
ownership. For the LN_HOLD measure, too, the coefficient is positive and significant in 109
Column (3) (coefficient 0.67, p < 0.01). Our inference remains the same when we use
LN_ARL as an alternative ARL proxy. Reported evidence, therefore, suggests that audit
committee ownership has a detrimental effect on audit reporting timeliness. The regression
results in Table IV show that the coefficients for most of the control variables have the
predicted signs and statistical significance. For example, the coefficient on BIG4 is negative
(2.43, p < 0.01), while that on AOPIN is positive (9.06, p < 0.001). Audit report lag is
shorter for firms with larger ACSIZE (0.83, p < 0.01) and for firms with more AC_EXP
(0.61, p < 0.10). Audit report lag is shorter for larger firms, but longer for firms with more
M&A transactions, highly leveraged-firms, firms incurring losses, firms with more inherent
risk, and firms reporting any special items on their income statements.
One may argue that firm fixed effects estimates are critical to control for unobserved
time-invariant firm heterogeneity. Therefore, in Columns (5) and (6), we present firm fixed
effect regression results for two variants of ARL measures. We continue to find positive and
significant coefficients on our ARL proxies (coefficients are 4.41 (p < 0.1) and 0.05 (p < 0.05)
for the ARL_DAY and LN_ARL measures, respectively). Results are qualitatively similar
when we use LN_HOLD as the independent variable (untabulated).
In the preceding analysis, we have considered total audit committee ownership,
irrespective of the members’ characteristics. Regulations encourage and, in some cases,
require audit committees to have at least one member with financial expertise. Empirical
research documents that firms with audit committee financial experts report fewer internal
control weaknesses. Financial experts ensure higher independence, minimize or mediate
disagreements between external auditors and management more efficiently, and thus,
reduce audit report lag (Baatwah et al., 2015; Rochmah Ika and Mohd Ghazali, 2012; Sultana
et al., 2015). However, if audit committee ownership compromises independence, then
members with financial expertise are equally likely to succumb to management pressures
and permit questionable accounting practices. However, Krishnan and Visvanathan (2008)
argue that considering the importance of experience and expertise, audit committee expert
members are more exposed to litigation risk than any other members. Cost and Miller (2005)
report that the courts regard an expert director as more responsible and accountable than
non-expert directors. This suggests that equity ownership by audit committee members
with financial expertise may reduce audit report lag. To test this proposition, we decompose
AC_HOLD per cent into ACEXP_HOLD per cent and ACOTH_HOLD per cent and rerun
equation (1). Panel B reports the results. We find that the ownership of non-financial expert
members drives the positive association between audit committee ownership and audit
report lag. The coefficients on ACOTH_HOLD per cent are 5.68 (p < 0.05) and 0.07 (p <
0.05) for the ARL_DAY and LN_ARL measures, respectively. The corresponding
coefficients for ACEXP_HOLD per cent are positive but insignificant. This finding suggests
that, although audit committee ownership increases audit report lag, ownership by audit
committee financial experts may not necessarily be sub-optimal.
Considering the higher correlation between firm size (SIZE) and audit fees (LN_AF)
(correlation = 0.78), we assume a certain degree of multicollinearity could exist within the
IJAIM regression model. Therefore, an effective means of testing multicollinearity is to compute the
28,1 variance inflation factor (VIF). The largest VIF factor observed for the full model was 2.47
(SIZE) and the VIFs of all other independent variables were below 2.0 (results are
untabulated for the sake of brevity). Also, we re-run the regression model without including
the firm size (SIZE) and audit fees (LN_AF) but the results are consistent with the main
findings. Thus, these results further support the lack of presence of multicollinearity in our
110 research model. The results of the ordinary least square regression analysis can, therefore,
be interpreted with a high degree of confidence.

4.2 Audit committee ownership and audit report lag: endogeneity tests
4.2.1 Heckman (1979) error correction method. The decision to compensate audit
committee members with company stocks is non-random. An endogeneity problem arises if
the unobservable factors that affect this decision may also be associated with firm-level
audit report lag. Selection bias, which is one form of the endogeneity problem, can lead to
inappropriate inferences about treatment effects (Tucker, 2010). “Selection bias due to
observables”, arises from a failure to control for differences researchers can observe, e.g.
size, growth, complexity, profitability. “Selection bias due to unobservables” arises because
researchers use a small set of observations. In the extant literature, the Heckman two-stage
error correction method has been the most popular and widely used approach for controlling
the latter source of bias, whereas the “Propensity score matching” (PSM) method has been
used to control for bias due to observable factors.
To perform the Heckman (1979) test, we proceed as follows. First, we model firms’
decisions to grant shares to audit committee members using some observable firm
characteristics based on prior research (Engel et al., 2010). Lennox et al. (2011) argue that it is
essential to impose exclusion restrictions in implementing the Heckman two-stage
regression, even though the Inverse Mills Ratio (IMR) can be identified by its nonlinear
arguments. We include ACIND_HOLD per cent (industry-year mean audit committee equity
holdings) as the exclusion variable. This should be related positively to the dependent
variable, ACHOLD_Dum (a dummy variable, coded 1 for firms with non-zero equity
ownership, and 0 otherwise). However, we have no a priori reason to believe that
ACIND_HOLD per cent has a direct impact on ARL through channels other than firm-level
audit committee ownership. Column (1) of Table V reports the logistic regression results
whereby we regress ACHOLD_Dum on the likely determinants of equity ownership and on
the exclusion variable (ACIND_HOLD per cent). The coefficient on the latter is significantly
positive (coefficient 6.45, t-stat 3.80, p < 0.01), and thus, supports the choice of this exclusion
variable. We calculate IMR from the first stage probit model and include it as an additional
independent variable in the second stage regression model. Columns (2) to (5) report the
results. In agreement with the baseline results, we find the coefficients on AC_HOLD per
cent and LN_HOLD are positive and significant for both the ARL variable proxies, e.g. the
coefficient on AC_HOLD per cent is 5.83 (p < 0.01) and that on LN_HOLD is 0.66 (p < 0.01).
4.2.2 Propensity score matching technique. Propensity score matching (PSM) is used to
mitigate the selection problem arising from observables. Matching on firm characteristics
(covariates) is ideal when the number of characteristics over which the treated and control
groups differ is limited. Rosenbaum and Rubin (1983) propose matching, by a function of
covariates, the probability of an individual selection into the treatment group. We use the
nearest neighbor (NN), and average treatment effects (ATE) to perform the PSM model.
Proper implementation of PSM requires both the treatment and the control group to be
similar across a number of firm characteristics, excluding the main variable on which they
are expected to differ: in our case, ARL. Therefore, we first document the covariates
 1st stage logit DV = ACHOLD_Dum ARL_DAY LN_ARL ARL _DAY LN_ARL
Variables (1) (2) (3) (4) (5)

Panel A: Heckman (1979) self-selection tests

AC_HOLD%  5.829*** [2.79] 0.075*** [3.71]  
LN_HOLD    0.657*** [3.17] 0.003*** [3.03]
BIG4 0.471*** [3.80] 1.242 [1.34] 0.020** [2.07] 1.268 [1.01] 0.023** [2.36]
SPEC_CITY 0.217 [1.57] 1.370 [1.41] 0.015 [1.39] 1.570 [1.12] 0.015 [1.35]
AOPIN  9.069*** [8.41] 0.109*** [10.35] 9.038*** [7.25] 0.109*** [10.35]
LN_AF 0.167** [2.13] 1.161** [2.33] 0.019*** [3.63] 1.204* [1.78] 0.018*** [3.43]
LN_NAF 0.022 [1.59] 0.012 [0.13] 0.001 [0.83] 0.010 [0.08] 0.001 [0.68]
FYE  0.878 [0.94] 0.030*** [3.32] 1.363 [0.97] 0.028*** [3.09]
AC_SIZE 0.448*** [9.98] 2.058*** [3.07] 0.028*** [3.96] 1.872** [2.44] 0.026*** [3.71]
AC_EXP 0.216*** [3.28] 0.009 [0.02] 0.002 [0.40] 0.093 [0.15] 0.003 [0.64]
BSIZE 0.212*** [7.67] 0.968*** [2.66] 0.012*** [3.18] 0.840** [1.99] 0.011*** [2.92]
INDPEN 1.177*** [3.94] 3.924 [1.60] 0.049* [1.90] 3.953 [1.20] 0.057** [2.19]
CEO_DUAL 0.259 [1.25] 0.911 [0.89] 0.017 [1.51] 1.250 [0.78] 0.018* [1.65]
SIZE 0.235*** [5.70] 1.428*** [3.15] 0.020*** [4.08] 1.477** [2.57] 0.020*** [4.28]
M&A  1.638** [2.42] 0.022*** [2.93] 1.417* [1.67] 0.020*** [2.67]
LEV 0.319 [1.37] 4.502*** [3.65] 0.056*** [4.28] 4.249*** [2.71] 0.057*** [4.32]
LOSS 0.144 [1.41] 3.654*** [4.37] 0.049*** [5.51] 2.807*** [2.68] 0.048*** [5.35]
INVREC 0.870** [2.54] 3.767 [1.44] 0.031 [1.22] 4.503 [1.29] 0.039 [1.54]
SPI  1.765*** [2.78] 0.025*** [3.61] 1.809** [2.38] 0.025*** [3.59]
IND_HOLD% 6.452*** [3.80]    
IMR  7.654* [1.88] 0.122*** [2.85] 6.375 [1.29] 0.112*** [2.62]
Constant 3.939*** [4.76] 75.514*** [13.24] 4.254*** [70.10] 65.595*** [7.92] 4.234*** [67.62]
Industry Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes
Observations 7,044 7,044 7,044 6,800 7,044
Pseudo R2/Adj. R2 0.19 0.13 0.19 0.13 0.19
(continued)

Table V.
ownership
committee
Audit

Endogeneity tests
111
 28,1

112
IJAIM

Table V.
Panel B: PSM analysis Covariates matching
Variable Treated Controls Difference t-statistic
BIG4 0.54 0.52 0.02 1.21
SPEC_CITY 0.11 0.11 0.00 0.04
AOPIN 0.14 0.14 0.00 0.02
LN_AF 11.48 11.42 0.06 1.35
LN_NAF 9.78 9.84 0.06 0.37
FYE 0.87 0.83 0.04 2.25**
AC_SIZE 3.36 3.24 0.13 2.05**
AC_EXP 0.87 0.88 0.01 0.15
BSIZE 5.88 5.86 0.02 0.20
INDPEN 0.68 0.68 0.01 0.96
CEO_DUAL 0.12 0.14 0.02 1.18
SIZE 2.97 2.89 0.08 0.78
M&A 0.30 0.25 0.05 2.48**
LEV 0.15 0.15 0.01 0.49
LOSS 0.51 0.52 0.01 0.44
INVREC 0.21 0.19 0.02 2.71***
SPI 0.38 0.39 0.01 0.37
(continued)
Panel C: Regression results
NN ATE NN ATE
Variables (1) (2) (3) (4) (5) (6) (7) (8)
ARL_ DAY LN_ARL ARL_ DAY LN_ARL ARL_ DAY LN_ARL ARL_ DAY LN_ARL
AC_HOLD% 7.390*** [3.26] 0.096*** [4.07] 5.330* [1.69] 0.083** [2.05] –   –
LN_HOLD     0.621*** [2.95] 0.004** [2.45] 0.375 [1.44] 0.003* [1.69]
BIG4 2.288*** [2.60] 0.037*** [3.77] 0.411 [0.34] 0.011 [0.79] 2.828*** [3.40] 0.038*** [3.91] 0.825 [0.70] 0.013 [0.92]
SPEC_CITY 1.109 [0.89] 0.009 [0.69] 4.088 [1.56] 0.031 [1.29] 1.564 [1.25] 0.010 [0.73] 4.585* [1.77] 0.032 [1.33]
AOPIN 7.520*** [5.87] 0.091*** [6.88] 6.781*** [4.21] 0.094*** [5.04] 7.869*** [6.24] 0.091*** [6.92] 7.032*** [4.27] 0.093*** [5.06]
LN_AF 2.451*** [3.73] 0.038*** [5.43] 0.099 [0.10] 0.008 [0.59] 2.703*** [4.61] 0.037*** [5.33] 0.192 [0.20] 0.009 [0.70]
LN_NAF 0.037 [0.35] 0.001 [0.49] 0.126 [0.87] 0.002 [0.92] 0.049 [0.51] 0.001 [0.66] 0.111 [0.86] 0.001 [0.85]
FYE 0.198 [0.13] 0.019 [1.43] 1.546 [1.00] 0.033** [2.03] 1.524 [1.19] 0.018 [1.31] 2.797** [2.05] 0.031* [1.93]
AC_SIZE 1.242*** [3.32] 0.011*** [2.89] 0.620 [1.14] 0.002 [0.42] 1.016*** [2.68] 0.010*** [2.70] 0.459 [0.88] 0.002 [0.37]
AC_EXP 0.222 [0.45] 0.001 [0.16] 0.623 [1.28] 0.011* [1.88] 0.352 [0.75] 0.002 [0.35] 0.312 [0.65] 0.012** [2.01]
BSIZE 0.455 [1.58] 0.001 [0.39] 0.001 [0.00] 0.006 [1.39] 0.109 [0.43] 0.000 [0.15] 0.300 [0.71] 0.006 [1.50]
INDPEN 6.391** [2.09] 0.080** [2.16] 13.118*** [3.57] 0.162*** [3.90] 7.283** [2.49] 0.086** [2.44] 14.99*** [4.23] 0.169*** [4.13]
CEO_DUAL 1.071 [1.04] 0.008 [0.61] 2.747* [1.76] 0.036* [1.74] 1.037 [1.01] 0.007 [0.51] 2.554 [1.59] 0.036* [1.70]
SIZE 2.821*** [7.95] 0.040*** [10.46] 2.559*** [5.44] 0.037*** [6.15] 3.050*** [9.37] 0.041*** [10.47] 2.622*** [5.82] 0.038*** [6.40]
M&A 1.784 [1.58] 0.022* [1.89] 2.177 [1.54] 0.032** [2.02] 1.839 [1.64] 0.021* [1.79] 2.512* [1.76] 0.030* [1.88]
LEV 4.142*** [3.03] 0.044*** [2.98] 4.572** [2.38] 0.049** [2.30] 3.653*** [2.70] 0.045*** [3.03] 3.404* [1.89] 0.048** [2.22]
LOSS 3.851*** [3.53] 0.047*** [4.05] 3.782*** [2.87] 0.049*** [3.09] 2.469** [2.28] 0.047*** [4.08] 3.423* [1.78] 0.049*** [3.07]
INVREC 5.665** [2.14] 0.076** [2.55] 7.159** [2.16] 0.109*** [2.75] 6.611*** [2.76] 0.084*** [2.93] 8.336*** [2.76] 0.117*** [3.06]
SPI 1.472* [1.78] 0.020** [2.18] 2.232* [1.78] 0.025* [1.85] 1.889** [2.31] 0.020** [2.16] 2.784** [2.26] 0.025* [1.91]
Constant 65.263*** [9.33] 4.106*** [52.03] 92.252*** [9.51] 4.459*** [34.67] 57.300*** [7.69] 4.077*** [49.31] 88.974*** [8.84] 4.415*** [35.00]
Industry Yes Yes Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes Yes Yes
Observations 4,979 4,979 2,929 2,929 4,979 4,979 2,929 2,929
Adj. R2 0.14 0.20 0.16 0.24 0.21 0.16 0.24

Notes: Robust t-statistics in brackets. ***, **, and * represent statistical significance at the 1, 5, and 10% levels respectively (two-tailed test). Variable definitions
are in the Appendix

Table V.
ownership
committee
Audit

113
IJAIM matching, based on the calculated propensity score (Armstrong et al., 2010). We report the
28,1 results in Panel B of Table V. Covariate balance is achieved if both the treatment and control
groups appear similar along their observable dimensions, except for their choice of auditors.
The reported t-statistics in the last column indicate that the matching algorithm was
relatively successful in achieving balance for most covariates. In particular, 13 of the 17
t-tests are not statistically significant.
114 Panel C, Table V shows the PSM regression results, using the NN technique in Columns
(1) to (4) and the ATE technique in Columns (5) to (8). We find results that are generally
consistent with the main results. For example, the coefficients on AC_HOLD per cent are
7.39 (p < 0.01) and 5.33 (p < 0.1) for the NN and ATE techniques, respectively. Overall, we
conclude that our primary results are robust to controls for endogeneity.

4.3 Direct and indirect effects of audit committee ownership on audit report lag
Table IV suggests that audit committee ownership increases ARL, even after controlling
explicitly for known firm-specific variables, industry- and year-fixed effects. The extant
study suggests that audit committee ownership affects financial reporting quality
(Archambeault et al., 2008; Yang and Krishnan, 2005). A related issue is an extent to which
audit committee ownership affects ARL directly and indirectly: the so-called mediation
effect. We use a simultaneous equation model for defining and estimating such effects. In
our settings, direct effects are effects that AC_HOLD per cent and LN_HOLD exert on audit
report lag that are not mediated by any other variable in the model. Indirect effects are paths
from AC_HOLD per cent and LN_HOLD to audit report lag that travel through at least one
other variable. The sum of direct and indirect effects represents total effects.
We use financial reporting quality, proxied by absolute discretionary accruals (jDACj,
and modified audit opinion (AOPIN) as two such mediating channels. Asthana (2014) finds
that better quality earnings, as proxied by abnormal accruals, earnings persistence,
earnings timeliness and earnings predictability, reduce the audit report lag. The positive
association between modified audit opinion and audit report lag has been one of the more
consistent findings in the audit report lag-literature (Abernathy et al., 2017). We specify
the following empirical models to isolate the direct and indirect effect of audit committee
ownership on the ARL:

ARL ¼ b 0 þ b 1 MV þ b 2 AC_HOLD%=ð LN_HOLDÞ

X
m
þ b j CONTROLS þ IND_FE þ YEAR_FE (2)
j¼3

MV ¼ g 0 þ g 1 AC_HOLD%=ð LN_HOLDÞ
X
n
þ g j CONTROLS þ IND_FE þ YEAR_FE (3)
j¼3

The model consists of two equations. Equation (2) exhibits how the mediating variables,
(MV) (jDACj and AOPIN), influence audit report lag. The presence of AC_HOLDper cent or
LN_HOLD in equation (2) allows for the possibility that audit committee ownership may
have a direct effect on ARL. Equation (3) shows how AC_HOLDper cent or LN_HOLD
affect audit report lag through the mediating channels (indirect effect). The controls for
equation (2) are the same as reported in equation (1). In equation (3), we control for BIG4,
SPEC_CITY, LN_AF, LN_NAF, AC_SIZE, AC_EXP, BSIZE, BIND, CEO_DUAL, OCF, Audit
SIZE, LEV, LOSS, ROA, SPI, industry (IND) and year (YEAR) fixed effects, where OCF is committee
operating cash flows divided by total assets. Other variables are defined as before.
Table VI, Panel A tests mediating effects of jDACj on the relation between audit committee
ownership
ownership and audit report lag. Model (1) in Column (1) shows that the effect of AC_HOLD per
cent on jDACj is positive and significant (coefficient = 0.022, t-stat 1.99, significant at p < 0.05).
Model (2) in Column (1) shows that the effect of AC_HOLD per cent on ARL_DAY is positive
and significant (coefficient = 6.17, p < 0.01), implying that audit committee ownership 115
increases audit report lag through the direct path. Moreover, the effect of jDACj on ARL_DAY
is positive and significant (coefficient 10.02, p < 0.01), suggesting that poor earnings quality
increases audit delay (Asthana, 2014). The coefficient on the indirect effect is 0.22 (p < 0.05),
reported at the bottom of the table, but constitutes an insignificant fraction of the total effects
(0.22/6.39), suggesting that the direct effects of AC_HOLD per cent on ARL_DAY is the
dominant path. In Column (2), we repeat the regressions using LN_ARL as the dependent
variable and report qualitatively similar results (coefficient on indirect effect is 0.002, while that
on the direct effect is 0.075). Results using LN_HOLD as the audit committee ownership
measure are also consistent with the AC_HOLDper cent results.
In Panel B, we report the mediation test results for the AOPIN variable. Columns (1) to (4)
in the top Panel report results for Model (1), and provide strong evidence that AC_HOLD per
cent increases the propensity for receiving modified audit opinions (the coefficients are 0.048
and 0.007 for AC_HOLD per cent and LN_HOLD variables respectively). The bottom panel
reports results for Model (2) and finds consistent evidence that audit committee ownership
directly affects ARL_DAY, as well as indirectly affecting ARL_DAY through the mediating
channel of AOPIN. The coefficients on both the Direct and Indirect effects are positive and
significant, as reported in the bottom of the Table. Taken together, the results in Table VI
support H2A and H2B.

5. Additional analyses
5.1 Audit committee ownership and abnormal audit report lag
In line with previous research (Asthana, 2014; Chan et al., 2016), we also use abnormal audit
report lag (ABN_ARL) as a proxy for audit report lag. We estimate ABN_ARL as the difference
between ARL_DAY and expected ARL_DAY (estimated value from equation (1) excluding
AC_HOLD per cent from the equation). In the second stage, we regress the ABN_ARL on
AC_HOLD per cent and LN_HOLD. Columns (1) and (2) in Table VII reveal that the coefficient
on AC_HOLD per cent is 5.50 (p < 0.05) and that on LN_HOLD is 0.67 (p < 0.01).

5.2 Option compensations and audit report lag

Higgs (2003), in his recommendations on director compensation, suggests that director stock
compensation may enhance director effectiveness, while option compensation could
compromise director effectiveness. To determine whether the dollar amount of the option
grants affects audit report lag differentially, we searched the SIRCA database to find the fair
value of the option grants. We could find only 804 firm-year observations with non-zero
option fair values, out of our total sample of 7,044 observations. Therefore, we could not
perform this analysis, and hence, consider that to be a shortcoming of this study.

5.3 Independent versus executive AC members, audit committee ownership and audit report
lag
About 79 per cent of our sample-year observations constitute independent audit committee
members only: a finding that reflects regulatory prescriptions. The remaining observations
 28,1

116
IJAIM

Table VI.
Mediation test
(1) (2) (3) (4)
Dep. Var. ARL_DAY LN_ARL ARL_DAY LN_ARL
Model (1) (without the
mediator)

Panel A: Mediation test through financial reporting quality (FRQ) channel

AC_HOLD% 6.188** [2.26] 0.075** [2.39] – –
LN_HOLD – – 0.695*** [3.11] 0.010*** [3.45]
Other controls Yes Yes Yes Yes
Firm and Year FE Yes Yes Yes Yes
Observations 6,236 6,236 6,236 6,236
2
Adj. R 0.13 0.19 0.13 0.20

Model (2) (with the

mediator)
AC_HOLD% 6.409*** [3.21] 0.078*** [3.57] – –
LN_HOLD – – 0.723*** [4.85] 0.011*** [6.62]
jDACj 10.130*** [4.60] 0.087*** [3.61] 5.143** [2.27] 0.049* [1.92]
Other controls Yes Yes Yes Yes
Firm and Year FE Yes Yes Yes Yes
Observations 6,236 6,236 6,236 6,236
Adj. R2 0.14 0.19 0.13 0.19
Direct effect 6.409*** 0.078*** 0.723*** 0.011***
Indirect effect 0.15 0.001 0.0083 0.00
Total effect 6.559*** 0.079*** 0.715*** 0.011***
Sobel Z 3.22*** 3.57*** 4.79*** 6.57***
(p-value) of Sobel Z 0.001 0.001 0.001 0.001
(continued)
 (1) (2) (3) (4)
Dep. Var. ARL_DAY LN_ARL ARL_DAY LN_ARL
Model (1) (without the
mediator)

PANEL B: Mediation test through modified audit opinion (AOPIN) channel

Dep. Var. ARL_DAY LN_ARL ARL_DAY LN_ARL
Model (1) (without the
mediator)
AC_HOLD% 0.048** [2.22] 0.048** [2.22] – –
LN_HOLD – – 0.007*** [4.21] 0.007*** [4.21]
Other controls Yes Yes Yes Yes
Firm and Year FE Yes Yes Yes Yes
Observations 7,044 7,044 6,800 6,800
Adj. R2 0.18 0.18 0.18 0.18
Model (2) (with the
mediator)
AC_HOLD% 5.499*** [2.92] 0.071*** [3.41] – –
LN_HOLD – – 0.668*** [4.79] 0.01*** [6.75]
AOPIN 9.007*** [8.76] 0.108*** [9.53] 8.988*** [8.69] 0.11*** [9.20]
Other controls Yes Yes Yes Yes
Firm and Year FE Yes Yes Yes Yes
Observations 7,044 7,044 6,800 6,800
Adj. R2 0.13 0.19 0.13 0.20
Direct effect 5.50*** 0.071*** 0.668*** 0.01***
Indirect effect 0.43** 0.0055** 0.062*** 0.0073***
Total effect 5.93*** 0.077*** 0.729*** 0.011
Sobel Z 3.14*** 3.67*** 5.21*** 7.19
(p-value) of Sobel Z 0.002 0.001 0.001 0.001

Notes: This table reports the results from the simultaneous equations [i.e., Equations (2) and (3)], which describe both direct and indirect (through the jDACj and
the AOPIN) effect of audit committee ownership on audit report lag. Robust t-statistics in brackets. ***, ** and * represent statistical significance at the 1, 5 and
10% levels respectively (two-tailed test). Variable definitions are in the Appendix

Table VI.
ownership
committee
Audit

117
IJAIM (1) (2) (3) (4) (5) (6)
28,1 Alternative ARL Alternative ARL Independent AC Mixed AC Independent AC Mixed AC
Variables ABN_ARL ABN_ARL ARL_DAY ARL_DAY ARL_DAY ARL_DAY

AC_HOLD% 5.499** [2.16] – 5.414** [2.05] 6.845 [1.38] – –

LN_HOLD – 0.668*** [3.21] – – 0.452** [2.13] 0.546 [1.58]
Other controls Yes Yes Yes Yes Yes Yes
118 Industry Yes Yes Yes Yes Yes Yes
Year Yes Yes Yes Yes Yes Yes
Adjusted R2 0.0012 0.004 0.13 0.14 0.13 0.12
Observations 7,044 7,044 6,626 1,502 6626 1502

Notes: This table reports the results from additional robustness tests. ABN_ARL is abnormal ARL,
estimated as the difference between actual ARL and expected ARL (estimated value from equation (1)
Table VII. excluding the AC_HOLD% from the equation). Robust t-statistics in brackets. ***, ** and * represent
Additional test statistical significance at the 1, 5, and 10% levels respectively (two-tailed test). Variable definitions are in
results the Appendix

are made up of both independent and executive shareholdings. We create two continuous
variables, namely, ACIND_HOLD per cent (audit committee ownership of independent-only
members) and AC_MIXED (audit committees composed of a mix of both independent and
executive audit committee members). We report results in Columns (3) to (6) of Table VII.
The coefficients on ACIND_HOLD per cent are positive and significant for both audit
committee ownership variable [5.41, p < 0.05 for AC_HOLD per cent in Column (5) and 0.45,
p < 0.05 for LN_HOLD in Column (7)]. The coefficients for the audit committee ownership
variables are positive but insignificant for the AC_MIXED specification. This finding casts
doubt on the monitoring effectiveness of independent audit committee members with equity
ownership, at least from the audit report timeliness perspective.

6. Conclusion
This study examines the effects of audit committee ownership on audit report timeliness.
Competing arguments exist regarding the monitoring roles of audit committee members
when compensated with company shares. The incentive-alignment view suggests that
equity ownership strengthens audit committee members’ monitoring effectiveness. The
impairment of independence view, on the other hand, suggests that equity ownership
threatens independence and encourages members to engage in actions to boost short-term
stock price: actions that require additional audit efforts to detect the risks of financial
reporting restatements, thus increasing audit report lag. We find support for the latter view,
as our results suggest an increase in audit report lag for firms having high audit committee
ownership. This relation is also driven by ownership of non-financial expert members.
Our finding strengthens empirically the concerns raised by both regulators and the Press
that audit committee independence is compromised when members are compensated using
stocks and options; because such compensation ties members’ wealth to firms’ short-term
and long-term financial performance (Barrier, 2002; Higgs, 2003; Millstein, 2002; New York
Times, 2007; Financial Reporting Council, 2003). As pointed out by Bronson et al. (2009),
audit committee effectiveness depends on members’ independence. Thus, to ensure audit
committee members’ independence and timely submission of audit reports, management
should refrain from compensating audit committee members with equity-based
compensation. We further document that the audit committee ownership effects on audit
report lag are mediated by financial reporting quality and auditor-provided modified audit
opinions. This is because audit committee ownership compromises its independence, Audit
indicating ineffective internal control and oversight, which, in turn, results in lower reporting committee
quality and increased probability of receiving a modified audit opinion, and therefore, an ownership
increased audit report lag. This is in line with prior research documenting that firms with
higher audit committee shareholding make less frequent interim disclosures (Mangena and
Pike, 2005), are likely to report more internal control weaknesses (Cullinan et al., 2010), and
exhibit more earnings management (Bedard et al., 2004; Yang and Krishnan, 2005). 119
To date, the Corporate Governance Best Practice Code emphasises certain characteristics
of audit committees, such as size, independence and meeting frequency, as likely
determinants of audit outcomes, without paying much attention to the audit committee
ownership construct. Although regulators, professional auditors and the Press have
expressed serious concerns, arguing that equity-based compensation compromises audit
committee independence, academic evidence on this issue has not been conclusive. We
contribute to this debate by exploring the audit committee ownership effect on an important
outcome of the audit process: audit report timeliness.
Our research is not without limitations. Sample selection bias may be a concern in this
research. We use individual audit committee member-level data retrieved from SIRCA that
covers the top 1,500 Australian companies. Future research may include mid- or small-sized
firms to shade additional insights into an understanding of the association between audit
committee member ownership and audit report timeliness. Considering the conventional
argument that one-size may not fit all often used against the “Corporate Governance Best
Practice Code”, we offer a further extension of international research in the context of a
different corporate governance system: an extension that may prove useful in providing
further policy implications.

Notes
1. SIRCA has been an independent and leading provider of online financial data and analytical
services since 1997. For details see https://www.sirca.org.au/
2. Dhaliwal, Naiker, and Navissi (2010), however, find that accruals quality is related positively to
both high and low levels of equity holding by accounting experts on the audit committee. With
respect to the determinants of audit committee compensation structure Engel, Hayes and Wang
(2010) find that greater demand for the monitoring of financial reporting is the key factor behind
higher compensation payments.

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Corresponding author
Md. Borhan Uddin Bhuiyan can be contacted at: m.b.u.bhuiyan@massey.ac.nz
Appendix Audit
committee
Variables Explanation ownership
ARL_DAY Number of days from the fiscal year-end to the audit report data
LN_ARL Natural log of ARL
AC_HOLD% Total number of shareholdings of AC members in a firm divided by the total number of outstanding

ACEXP_HOLD%
shares
Total number of shareholdings of AC expert members in a firm divided by the total number of
125
outstanding shares
ACOTH_HOLD% Total number of shareholdings of AC other than expert members in a firm divided by the total
number of outstanding shares
LN_HOLD Natural logarithm of the total number of shareholdings by the AC members
BIG4 A categorical variable coded 1 if the firm-year observations are audited by a Big 4 audit firm, and 0
otherwise
SPEC_CIT City-level audit firm industry specialization. An auditor is defined as a city industry leader if in a
particular year, the auditor has the largest market share in a two-digit GSECTOR industry and if its
market share is at least ten percentage points greater than the second largest industry leader in a
national (city) audit market. Industry specialization is calculated for each industry for each year
AOPIN A dummy variable coded 1 if the firm-year observations had a qualified audit opinion including
going concern (GC) opinion, and 0 otherwise
LN_AF Natural log of total fees
LN_NAF Natural log of total non-audit fees
FYE A dummy variable coded 1 if firm fiscal year-end is June 30, and 0 otherwise
AC_EXP Total number of AC members with financial expertise
ACSIZE Total number of AC members
BSIZE Total number of board members
INDPEN The proportion of independent outside directors to the total number of directors
CEO_DUAL A dummy variable coded 1 if the CEO is also the chairman of the board, and 0 otherwise
SIZE Natural log of total assets
M&A A dummy variable that equals 1 if the firm had a merger or acquisition, and 0 otherwise
LEV Sum of short- and long-term debt over total assets
LOSS A dummy variable that equals 1 if the firm’s net income before extraordinary items is negative, and 0
otherwise
ROA Return-on-equity defined as net income divided by total shareholders’ equity
BTM Firm’s book-to-market ratio defined as its book value of equity divided by market value of equity
INVREC Some of the firm’s receivables and inventory divided by its total assets
SPI A dummy variable that equals 1 if the firm reports special items in its income statement, and 0
otherwise
jDACj We use the performance-matched discretionary accruals (DAC) model developed by Kothari et al.
(2005). To estimate DAC we use the cross-sectional modified Jones model, controlling for firm
performance (Dechow et al., 1995; Kothari et al., 2005). We estimate the following model for all firms
in the same industry (using the SIC two-digit industry code) with at least eight observations in an
industry in a particular year:
 
ACC t =TAt1 ¼ g 0 ð1=TAt1 Þ þ g 1 ðDSALESt  DRECEIVABLEt Þ=TA t1

þ g 2 ðPPE t =TA t1 Þ þ g 3 ð ROA t1 Þ þ « t (4)

where ACC is total accruals calculated as earnings before extraordinary items and
discontinued operations minus operating cash flows; TA is total assets in year t1;
DSALES is change in sales from year t1 to year t; DRECEIVABLE is change in
accounts receivable from year t1 to year t; PPE is gross property plant and equipment;
ROA is the prior year’s return-on-assets measured as earnings before extraordinary
items and discontinued operations divided by total assets for the previous year. The
coefficient estimates from equation (2) are used to estimate the non-discretionary
component of total accruals (NDAC) for our sample firms. The discretionary accruals is Table A1.
then the residual from equation (3), i.e. DAC = ACCNDAC Variable definitions