Accounting in Asia

Corporate Governance and Audit Report Timeliness: Evidence from Malaysia

Sherliza Puat Nelson, Siti Norwahida Shukeri
Article information:
To cite this document: Sherliza Puat Nelson, Siti Norwahida Shukeri. "Corporate
Governance and Audit Report Timeliness: Evidence from Malaysia" In Accounting in
Asia. Published online: 10 Mar 2015; 109-127.
Permanent link to this document:
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

http://dx.doi.org/10.1108/S1479-3563(2011)0000011010
Downloaded on: 30 January 2016, At: 22:23 (PT)
References: this document contains references to 33 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 694 times since NaN*
Users who downloaded this article also downloaded:
Zachary Sheaffer, Abraham Carmeli, Michal Steiner-Revivo, Shaul
Zionit, (2009),"Downsizing strategies and organizational performance: a
longitudinal study", Management Decision, Vol. 47 Iss 6 pp. 950-974 http://
dx.doi.org/10.1108/00251740910966677
Caroline Closon, Christophe Leys, Catherine Hellemans, (2015),"Perceptions of
corporate social responsibility, organizational commitment and job satisfaction",
Management Research: Journal of the Iberoamerican Academy of Management, Vol.
13 Iss 1 pp. 31-54 http://dx.doi.org/10.1108/MRJIAM-09-2014-0565
H.A.E. Afify, (2009),"Determinants of audit report lag: Does implementing
corporate governance have any impact? Empirical evidence from Egypt",
Journal of Applied Accounting Research, Vol. 10 Iss 1 pp. 56-86 http://
dx.doi.org/10.1108/09675420910963397

Access to this document was granted through an Emerald subscription provided by

emerald-srm:375684 []
For Authors
If you would like to write for this, or any other Emerald publication, then please
use our Emerald for Authors service information about how to choose which
publication to write for and submission guidelines are available for all. Please visit
www.emeraldinsight.com/authors for more information.
 About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society.
The company manages a portfolio of more than 290 journals and over 2,350 books
and book series volumes, as well as providing an extensive range of online products
and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner
of the Committee on Publication Ethics (COPE) and also works with Portico and the
LOCKSS initiative for digital archive preservation.

*Related content and download information correct at

time of download.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)
 CORPORATE GOVERNANCE AND
AUDIT REPORT TIMELINESS:
EVIDENCE FROM MALAYSIA
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

Sherliza Puat Nelson and Siti Norwahida Shukeri

ABSTRACT

Purpose – The purpose of this study is to examine the impact of corporate

governance characteristics on audit report timeliness in Malaysia. The
corporate governance characteristics examined are board independence,
audit committee size, audit committee meetings and audit committee
members’ qualifications.
Design/Methodology/Approach – The sample comprises of 703
Malaysian listed companies from Bursa Malaysia, for the year 2009. It
excludes companies from the finance-related sector as they operate under
a highly regulated regime under supervision by the Central Bank of
Malaysia. Further, regression analysis was performed to examine the
audit report timeliness determinants.
Findings – Results show that audit report timeliness is influenced by audit
committee size, auditor type, audit opinion and firm profitability.
However, no association was found between board independence, audit
committee meetings, audit committee members’ qualifications and audit
report timeliness.

Accounting in Asia
Research in Accounting in Emerging Economies, Volume 11, 109–127
Copyright r 2011 by Emerald Group Publishing Limited
All rights of reproduction in any form reserved
ISSN: 1479-3563/doi:10.1108/S1479-3563(2011)0000011010
109
 110 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

Research limitations/Implications – It is a cross-sectional study of the

year 2009. Practical implications for policy makers are consideration of
the minimum submission period for audit reports Regulators’ support for
firms to have larger audit committee sizes is also discussed.
Originality/Value – The study investigates the impact of corporate
governance on audit timeliness in light of the recent amendments to the
Malaysian Code of Corporate Governance made in 2007.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

Keywords: Audit reports; timeliness; corporate governance; audit

committees; Malaysia

INTRODUCTION

Audit report timeliness is commonly measured as the number of days from

the year end to the date of the audit report, and is also known as audit
report lag. The audit report timeliness is found to have a great impact on
financial reporting timeliness and it has become a main concern for
regulators and policy makers to investigate the possible factors that may
influence audit report timeliness. Strong corporate governance mechanisms
may improve financial reporting quality such as the strength of the board of
directors and audit committees (AC). Whereby, the audit committee is
documented to be significantly associated with the quality of the financial
reports as it potentially affects the auditor’s risk assessments (Abbott,
Parker, & Peter, 2004). Furthermore, premised on agency theory, Fama and
Jensen (1983) posit that a firm’s internal governance plays an important role
in shaping and effectively enhancing the operations of its internal control
system.
Corporate governance is an important entity-level factor that sets the tone
for the overall control environment that has significant implications for
auditors’ risk judgments. The impact of strong corporate governance
mechanisms will reduce client-related risks and subsequently reduce the
timing and extent of substantive testing. Hence, auditors will perceive stronger
corporate governance, and less substantive testing would be performed. This
leads to better audit timeliness on the issuance of audited annual report by the
independent external auditor to its client. Subsequently, this affects the
issuance of corporate annual report by the organisation to their stakeholders.
 Corporate Governance and Audit Report Timeliness 111

The issue of timely reporting will also affect regulators and policy makers
since they need to play a role in ensuring efficient financial reporting.
Given the importance of financial reporting timeliness, identifying the
determinants of financial reporting delay is considered an important step to
improve the financial reporting quality. Therefore, this study aims to
investigate the impact of corporate governance mechanisms on audit report
timeliness. We predict that strong corporate governance will reduce client-
related risks and hence reduce the timing and extent of substantive testing.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

Further, we examine the board of directors and audit committee attributes

(such as size, frequency of meetings and qualification) as explanatory
independent variables. Whereby, they act as effective monitoring mechan-
isms that will enhance the internal controls and reduce the audit business
risk, and eventually give shorter audit report timeline. The study extends
current literature with evidence that shows an association between audit
report timeliness and the strength of a client’s corporate governance and,
subsequently, this substantiates the role of corporate governance in financial
reporting and the auditing process.
This study is organised as follows: in the second section, a review of audit
report timeliness literature is discussed, followed by the third section on the
development of hypotheses. The fourth section explains the research design,
followed by a discussion on analysis of findings. The sixth section offers the
conclusion.

LITERATURE REVIEW

Timeliness has long been recognised as one of the qualitative attributes of

general-purpose financial reports. Timeliness of financial reporting is
influenced by two specific categories: company’s or client’s attributes and
auditor’s attributes. Company’s attributes comprises company size, profit-
ability, leverage, audit risk, audit complexity and company’s age. Prior
studies found that financial reporting timeliness is mostly influenced by
company’s size (Ashton, Graul, & Newton, 1989; Payne & Jensen, 2002),
auditor type (Knechel & Payne, 2001), audit risk (Sharma, Boo, & Sharma,
2007) and profitability (Ismail & Chandler, 2004). Prior literatures also
documented an association between financial reporting timeliness with the
auditor’s attributes such as audit technology (Ashton et al., 1989), provision
of non-audit services (Walker & Hay, 2007), audit qualification (Soltani,
2002), auditor size (Davies & Whittred, 1980; Jaggi & Tsui, 1999) and
auditor opinion (Leventis, Weetman, & Caramanis, 2005; Soltani, 2002).
 112 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

Whereby, in Ashton et al. (1989), the audit report timeliness is found to be

better in a company where the auditor used a high audit technology and
system and was able to complete the audit procedures and test on time.
Hence, audit timeliness is one of the factors that affects financial reporting
timeliness since the financial report can only be publicly announced after the
independent auditor has signed and issued the audited financial report.
Further, prior literature also examined audit timeliness in relation to
information intended to be released by the company. For example, Givoly
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

and Palmon (1982) document that companies with bad news tend to delay
their financial reports announcement, hence suggesting that company with
bad news will tend to take more time to report than companies with good
news. Part of this was because companies were hesitant to report bad news
to the public and took more time to massage the numbers or resort to
creative accounting techniques when they had to report bad news. This fact
was supported by Ashton et al. (1989) when they examined the relationship
between audit delays and timeliness of corporate reporting of 465 companies
listed on Toronto Stock Exchange (TSE), and found longer audit delay was
significantly associated with auditor’s size, industry, extraordinary items and
net income. Subsequently, Soltani (2002) documents companies that
received qualified audit opinions, tend to delay in releasing their financial
report, supplements prior studies that show company with bad news will
tend to take more time to report than companies with good news.
Prior literature examines audit timeliness in relation to company’s and
auditor’s attributes or characteristics with audit timeliness. Recent studies,
such as Al-Ajmi (2008) and Afify (2009), extended current literature in
association with company’s characteristics and corporate governance
characteristics. Al-Ajmi (2008) documents that company’s size, profitability,
industry and leverage significantly affect audit lag period, consistent with
Ashton et al. (1989); Ismail and Chandler (2004); Lee, Mande and Son
(2008); and Afify (2009). Consequently, Afify (2009) when examining the
impact of corporate governance characteristics on audit report lag, found
that corporate governance characteristics (board independence, duality of
CEO and existence of audit committee) are significantly related to audit
report lag. In addition, a more recent study on corporate governance
characteristics shows that firms with large number of audit committee
members have more frequent audit committee meetings and are more likely
to produce audit reports in a timely manner (Mohd Naimi, Shafie, & Wan
Nordin, 2010).
We can see that the audit timeliness literature has expanded from
examining financial reporting timeliness with audit attributes (Ashton et al.,
 Corporate Governance and Audit Report Timeliness 113

1989; Soltani, 2002), to auditors’ control environment risk (Cohen,

Krishnamoorthy, & Wright, 2002; Sharma et al., 2007), dissemination of
good news (Givoly & Palmon, 1982), audit lag period (Al-Ajmi, 2008) and
recently on corporate governance characteristics (Afify, 2009; Mohd Naimi
et al., 2010). Even though recent studies on corporate governance had been
tested, and documented audit committee size and meetings are significantly
associated with audit report timeliness (see Mohd Naimi et al., 2010), little
can be found on other board and audit committees’ characteristics, such as
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

audit committee’s qualification. Furthermore, the former study did not

consider the recent MCCG changes made in October 2007; especially the
changes made to board of directors and audit committees.1
The recent changes made in MCCG stressed on strengthening the board
of directors and audit committees, and ensuring that the board of directors
and audit committees discharge their roles and responsibilities effectively. In
Malaysia, Bursa Malaysia views the delay of issuing audited annual reports as
a serious offence and warns company’s directors about their responsibility to
maintain appropriate standards of corporate responsibility and account-
ability. In addition, the Bursa also requires a timely financial reporting
according to the provision in Chapter 9 of the Listing Requirements.2 The
Bursa had also recently issued new rules, the Bursa Malaysia Corporate
Governance Guide (2009), that require the audit committee meetings to
be held at least four times a year.
In light of these recent changes, there is still avenue for areas of research
where corporate governance characteristics can be expanded on board’s
characteristics, especially the audit committees. As such, there is still a
growing need to expand current literature and provide recent empirical
evidence on other corporate governance characteristics that are still not
widely researched in the past. Consequently, the objective of the study is to
investigate the association of corporate governance characteristics such as
board independence, audit committee independence and qualification, in
association with audit report timeliness among Malaysian listed companies.

HYPOTHESES DEVELOPMENT

Prior literature suggests that the presence of corporate governance

mechanisms will increase the monitoring of management and reduce the
incidence of mismanagement or misreporting and delays in the financial
reporting processes. Thus, effective corporate governance should improve
internal control and reduce business risk, hence having an effect on shorter
 114 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

audit delay (Afify, 2009). The agency relationship between the managers and
shareholders may cause the agency conflicts to occur. An efficient corporate
governance mechanism is an important element to the company, especially
the group of big companies, in order to ensure the credibility of internal
control and monitoring of the financial reporting system (Wan Abdullah,
Ismail, & Jamaluddin, 2008).
According to Safieddine (2009), for good governance to take place there
should be active participation of all parties, including the board of directors,
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

audit committee, top management team, internal auditors, external auditors

and governing bodies, in fostering continuous improvements. Lack of
strong corporate governance may jeopardise the performance and internal
control of the organisation since all business functions are interrelated to
each other ranging from issues of internal control, audits, organisational
structures, board directorship and management including top management
and employees.
Agency theory is relevant to this study because it explains the board of
directors, directors’ ownership and audit committee, each of which functions
as a monitoring mechanism to reduce agency problems. Monitoring
mechanisms refer to the corporate governance practices and ensure the
proper management performance and financial reporting processes. The
financial statement can be announced to the public in a timely manner if
the organisation has less business risk, as less business risk means less audit
risk, thus reducing the time taken by the auditor to complete the annual audit
and subsequently, shorter audit report lag. Therefore, reducing reporting lag
is also considered as another component of good corporate governance
practices since it reduces the information asymmetric issues by releasing the
financial information on time to public (Al-Ajmi, 2008).
There is a close association between timely corporate reporting and
corporate governance mechanisms since the components of corporate
governance have an important role in the corporate reporting process.
Agency conflicts within the organisation lead to information asymmetry
between managers and shareholders. Thus, audits serve to reduce this
asymmetric information risk by attesting the reliability of published financial
information among the shareholders.
The presence of corporate governance mechanisms such as board
independence, executives’ and nonexecutives’ portion of ownership and audit
committee ensure the credibility of financial information that is announced to
the public. Thus, corporate governance mechanisms were used in this study to
examine their effects on audit delay, whereby, it is assumed that the shorter
 Corporate Governance and Audit Report Timeliness 115

the audit delay, the shorter the time taken by the organisation to publish its
corporate report and thus bring more updated information to shareholders.
Boards conduct monitoring activities (agency view) and ensure that the
managerial performance of the boards will reduce the agency problems that
arise in the company.
It is expected that client companies with stronger corporate governance
are assessed as having lower business risk and this will increase auditors’
reliance on the client’s internal controls and reduce the extent of substantive
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

tests (Sharma et al., 2007). Therefore, the corporate governance mechanisms

especially relating to the board are expected to reduce the audit report lag
through the ability of the board to control the company’s business risk.
Thus, the hypotheses of this study were developed based on the corporate
governance characteristics which include board independence, audit com-
mittee size, audit committee qualification and frequency of audit committee
meetings. While examining the impact of corporate governance character-
istics on audit report lag, it is important to control for possible auditor
attributes that are likely to affect timeliness such as auditor type and audit
opinion.

Board Independence

Fama and Jensen (1983) explained that outside board of directors could
strengthen the firm value by lending experienced and monitoring services
and are supposed to be guardians of the shareholders’ interests via
monitoring and control. Past study (O’Sullivan, 2000; Salleh, Steward, &
Manson, 2006) found that the proportion of board independence had a
significant positive impact on audit quality. The larger the proportion of
independent directors on the board, the more effective it will be in
monitoring management behaviour, and thus reduce the nature of inherent
risk which at the end reduce the period of audit lag (Afify, 2009). Cohen
et al. (2002) argued that in the case where a client’s governance structure has
effectively implemented a strong monitoring as well as strong strategic
perspective, there is the potential for both a more efficient audit work which
leads to less extent of tests of details and a greater assurance of the integrity
of the financial statements. This could then affect the assessed level of
inherent and control risks, thereby affecting the nature, timing and extent of
audit work. Whereby, higher number of board independence may lead to
lower ARL, as it is expected that higher independent board will give better
 116 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

monitoring control. Hence, less audit field work and eventually reduce the
ARL. The first hypothesis will be as follows:
H1. There is a negative relationship between ARL and board indepen-
dence.

Audit Committee
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

The effectiveness of an audit committee increases when the size of the

committee increases because it has sufficient resources to address the issues
faced by the company (Rahmat, Iskandar, & Saleh, 2009). In a recent work
by Bédard and Gendron (2010), they indicate that the audit committee size,
independence, competency and meetings have greatest impact on financial
reporting quality. This is supported by Mohd Naimi et al. (2010), who
document that firms with more members in the audit committee and more
frequent audit committee meetings are more likely to produce audit reports
in a timely manner. In addition, Abbott et al. (2004) noted that with
frequent meetings, audit committee will remain informed and knowledge-
able about accounting or auditing issues and can direct internal and external
audit resources to address the matter in a timely fashion. Thus, strong
audit committee in terms of its size, higher meeting frequency and more
qualified members will ensure the internal control and procedures of the
company is reduced. Therefore, it will reduce the auditor working hours and
subsequently reduce the ARL. Hence, the following hypotheses are
conjectured:

H2. There is a negative relationship between ARL and audit committee size.
H3. There is a negative relationship between ARL and frequency of audit
committee meeting.
H4. There is a negative relationship between ARL and audit committee
qualification.

Auditor’s Type

Afify (2009) shows that larger audit firms have a stronger motivation to
complete their audit work on time in order to maintain their reputation and
 Corporate Governance and Audit Report Timeliness 117

name. The large audit firms normally have more efficient audit teams as they
have more resources to conduct trainings for their staff and are also able to
employ more powerful audit technologies which reduce the time of audit
work (Owusu-Ansah & Leventis, 2006). Giroux and McLelland (2000)
found that Big Four firms completed their audit work faster than the non-
Big Four firms. Thus, it is expected that large audit firms (Big Four firms)
will perform faster audit work as compared to the small audit firms (non-Big
Four firms) as Big Four firms have more resources compared to non-Big
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

Four firms. Given with more resources, the auditors in Big Four firms are
able to complete the audit work on time and consequently reduce the ARL.
Hence, the hypothesis will be as follows:

H5. There is a negative relationship between ARL and auditor type.

Audit Opinion

The company that received unqualified audit opinion is said to have proper
management and internal control system, thus reducing the time of audit
process and procedures (Soltani, 2002). Bamber, Bamber, and Schoderbek
(1993) argued that the qualified opinions are not likely to be issued until the
auditor has spent considerable time and effort in performing additional
audit procedures. Moreover, companies always view audit qualified opinion
as ‘bad news’ and might not respond to the auditor’s request promptly. It is
a symptom of auditor–management conflict that would also increase audit
delay (Che-Ahmad & Abidin, 2008). For the company that received
qualified audit opinion, the auditor may need additional time to complete
the audit work and thus increase the ARL. Thus, the expected relationship
for audit opinion is as follows:

H6. There is a negative relationship between ARL and audit opinion.

Firms’ Performance

Prior research has found that firms that experience losses for the period
would result in longer audit report lag (Ashton et al., 1989; Givoly &
Palmon, 1982; Ismail & Chandler, 2004). Prior studies also reported that
firms experiencing losses for the periods are expected to have a longer audit
 118 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

delay as compared to the ones reporting a profit. There are some underlying
reasons to the expectation of firm performance with audit report lag. Firms
that have bad news – the ones which have made losses – tend to delay their
financial statement release because they want to avoid reporting the bad
news to their shareholders and investors, and hence avoid jeopardising their
firm’s reputation and performance. However, for firms that experience profit,
the management wants the auditor to complete their annual report in a short
time because they want to report the good news to their shareholders.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

Moreover, the auditor may take a longer period to audit firms that incurred
losses because of the associated business risk (Afify, 2009) and consequently
increase the ARL. Hence, the expected relationship between firm’s
performance and audit report lag is as follows:
H7. There is a negative relationship between ARL and firm performance.

RESEARCH DESIGN

Sample

This study utilised secondary data as the main source of information.

The information relating to the proportion of board independence,
composition of audit committee size, meetings and qualification, auditor
type, audit opinion and firms’ profitability was collected from company
annual reports for the year 2009. There were 719 companies listed in the
Bursa Malaysia, but only 703 companies had available information.
The sample excluded finance-related companies, companies from Initial
Public Offerings (IPO), close-end funds sectors, exchange-traded funds and
Real Estate Investment Trust (REITs). Finance-related companies are
excluded from the sample because these companies have significantly
different requirements, rules and regulations with respect to financial
reporting.3 The sample also excluded companies under PN44 conditions
since the companies are categorised as being unable to maintain the listing
condition of the Bursa Malaysia (Rahmat et al., 2009) and do not comply
with any of the specified conditions by the Bursa Malaysia.
The sample selection covers the audited annual report for the year 2009
which is considered as the latest issue of annual reports and latest available
information at time of this study and it is the information after the CG
revised code was implemented in 2007. In addition, the sample selection
of annual report of 2009 is to complement the earlier study by Mohd Naimi
 Corporate Governance and Audit Report Timeliness 119

et al. (2010). Almost all corporate annual reports were downloaded from the
Bursa Malaysia’s website and a few were hand collected.

Operationalisation of Variables

The study used multiple regression analysis by modelling ARL as a function

Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

of explanatory variables. Corporate governance characteristics are modelled

as independent variables that are consistent with prior studies. Specifically,
the ARL model used in this study is consistent from prior studies (Afify,
2009; Che-Ahmad & Abidin, 2008; Mohd Naimi et al., 2010).
The ARL model for this study is as follows:
ARL ¼ b0 þ b1ðBINDÞ þ b2ðACSIZEÞ þ b3ðACMEETÞ þ b4ðACQUALÞ
þ b5ðAUDTYPEÞ þ b6ðAUDOPINÞ þ b7ðPERFÞ þ 

Table 1 shows the operational measures of each variable.

Table 1. Summary of Operationalisation of Variables.

Variables Operational Measures

Dependent variable
Audit Report Lag (ARL) Number of days from the interval period of
financial year end date to the date of annual
audit report
Independent variables
Board Independence (BIND) The proportion of non-executive directors to the
total number of directors
Audit Committee Size (ACSIZE) Total number of audit committee members
Audit Committee Meetings (ACMEET) The number of audit committee meetings held
during the financial year
Audit Committee Qualifications The proportion of audit committee members
(ACQUAL) possessing professional accounting qualifications
(ACCA etc.) or members of any professional
accounting bodies (MIA, CPA etc.) to the total
number of audit committee members
Auditor Type (AUDTYPE) Assigned as 1 for Big Four firm and 0 otherwise
Audit Opinion (AUDOPIN) Assigned as 1 for company received unqualified
audit opinion and 0 otherwise
Firm Performance (PERF) Assigned as 1 for company that incurs profit and 0
for company that incurs loss
 120 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

ANALYSIS OF RESULTS AND DISCUSSIONS

Descriptive Analysis

Table 2 reports the descriptive statistics of all variables investigated in this

study. The table shows the descriptive of mean, standard deviation,
minimum and maximum. Using data from 703 observations of annual
reports from the KLSE for a year period of 2009, it was found that the
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

average audit report lag was 101 days with a standard deviation of 22.32
days. The analysis of the sample study also shows that only two companies
were found to have audit report lag of more than 180 days and violated the
Bursa Malaysia requirements on the minimum submission period of six
months. However, majority of the companies in the sample complied with
the reporting requirements on audit report as shown in Table 3. Hence,

Table 2. Descriptive Statistics.

Variables (N ¼ 703) Minimum Maximum Mean SD

ARL 34 239 101.09 22.32

BIND 0.17 0.83 0.44 0.12
ACSIZE 2 6 3.26 0.54
ACMEET 0 16 4.93 1.25
ACQUAL 0.00 1.00 .33 0.16

Note: ARL, number of days from the interval period of financial year end date to the date of
annual audit report; BIND, the proportion of non-executive directors to the total number of
directors; ACSIZE, number of AC members; ACMEET, the number of audit committee
meetings held during the financial year; ACQUAL, the proportion of audit committee members
possessing professional accounting qualifications (ACCA etc.) or members of any professional
accounting bodies (MIA, CPA etc.) to the total number of audit committee members.

Table 3. Descriptive Statistics.

Variables (N ¼ 703) Category Frequency Percentage (%)

AUDTYPE Big Four 304 43.2

Non-Big Four 399 56.8
AUDOPIN Qualified audit opinion 67 9.5
Unqualified audit Opinion 636 90.5
PERF Loss 175 24.9
Profit 528 75.1

Note: AUDTYPE, assigned as 1 for Big Four firm and 0 otherwise; AUDOPIN, assigned as 1
for company received unqualified audit opinion and 0 otherwise; PERF, assigned as 1 for
company that incurs profit and 0 for company that incurs loss.
 Corporate Governance and Audit Report Timeliness 121

suggesting that firms actually adhered to the listing requirements to submit

the annual audit report within the stipulated time period.

Correlation Analysis

The objective of the test is to see if there is any multi-collinearity problems

among the variables and association among variables as shown in Table 4.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

The problem exists if independent variables are highly correlated at each

other with correlation values exceeding 0.9 according to Tabachnick and
Fidell (2007). However, none of the variables found to be more than 0.5.
The highest correlation is between the two control variables which are audit
opinion and firm performance (profitability) that is 0.306 which suggest that
multi-collinearity is not a serious problem that would jeopardise the
regression results (Tabachnick & Fidell, 2007). Results show that ARL are
negatively and significantly correlated with audit committee size, auditor’s
type, audit opinion and firms’ performance suggesting that as ACSIZE
increases, it reduces the ARL.

Table 4. Pearson’s Correlation.

ARL BIND ACSIZE ACMEET ACQUAL AUDTYPE AUDOPIN PERF

ARL 1 0.010 0.159 0.070 0.014 0.265 0.214 0.194

BIND 1 0.083 0.077 0.012 0.080 0.090 0.093
ACSIZE 1 0.058 0.173 0.145 0.096 0.105
ACMEET 1 0.31 0.022 0.145 0.047
ACQUAL 1 0.019 0.077 0.029
AUDTYPE 1 0.088 0.181
AUDOPIN 1 0.306
PERF 1

Note: , , significant at 0.01 and 0.05 level (2-tailed). ARL, number of days from the interval
period of financial year end date to the date of annual audit report; BIND, the proportion of
non-executive directors to the total number of directors; ACSIZE, number of AC members;
ACMEET, the number of audit committee meetings held during the financial year; ACQUAL,
the proportion of audit committee members possessing professional accounting qualifications
(ACCA etc.) or members of any professional accounting bodies (MIA, CPA etc.) to the total
number of audit committee members; AUDTYPE, assigned as 1 for Big Four firm and 0
otherwise; AUDOPIN, assigned as 1 for company received unqualified audit opinion and 0
otherwise; PERF, assigned as 1 for company that incurs profit and 0 for company that incurs loss.
 122 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

Multivariate Analysis

Table 5 shows the multivariate analysis. Results show that ACSIZE is

negative and significantly associated with ARL. This was initially supported
earlier, where ACSIZE has a negative and significant relationship with ARL
and is consistent with Sharma et al. (2007). The findings support H2 (audit
committee size) and provide evidence that larger audit committee size tends
to ensure that the internal control of the company is strong. Consequently, it
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

generates positive influence on the auditor’s assessment of business and

audit risk, planned audit hours and the level of substantive testing and good
financial reporting. Therefore, reduce the audit report lag.
However, the findings find no support for H3 (audit committee meetings)
and H4 (audit committee qualification). These results might be addressed in

Table 5. Multiple Regression Analysis ARL ¼ b0 þ b1ðBINDÞ

þ b2ðACSIZEÞ þ b3ðACMEETÞ þ b4ðACQUALÞ
þ b5ðAUDTYPEÞ þ b6ðAUDOPINÞ þ b7ðPERFÞ þ :
Variable Expected Sign Coefficients t-Value p-Value

(Constant) 132.185 18.848 0.000

BIND – 0.026 0.713 0.476
ACSIZE – 0.101 2.743 0.006
ACMEET – 0.047 1.298 0.195
ACQUAL – 0.009 0.238 0.812
AUDTYPE – 0.22 6.051 0.000
AUDOPIN – 0.152 4.003 0.000
PERF – 0.098 2.584 0.010
N 703
F-value 14.73
p-value 0.000
Adjusted R2 0.12
R2 0.129

Note: ,, significant at 0.01 and 0.05 level. ARL, number of days from the interval period of
financial year end date to the date of annual audit report; BIND, the proportion of non-
executive directors to the total number of directors; ACSIZE, number of AC members;
ACMEET, the number of audit committee meetings held during the financial year; ACQUAL,
the proportion of audit committee members possessing professional accounting qualifications
(ACCA etc.) or members of any professional accounting bodies (MIA, CPA etc.) to the total
number of audit committee members; AUDTYPE, assigned as 1 for Big Four firm and 0
otherwise; AUDOPIN, assigned as 1 for company received unqualified audit opinion and 0
otherwise; PERF, assigned as 1 for company that incurs profit and 0 for company that incurs loss.
 Corporate Governance and Audit Report Timeliness 123

light of the strict adherence of listed companies on the enforcement of

MCCG (2007), which requires all listed companies to have at least three
members and at least one member being a financial expert. Furthermore,
H1 fails to be supported, where H1 assumes a negative association
between board independence and audit report lag, and finding is consistent
with Mohd Naimi et al. (2010) but contradicts with Wan Abdullah et al.
(2008).
The results support H5, H6 and H7, and provide evidences that auditor
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

type, audit opinion and profitability are significantly associated with audit
report lag. The results are consistent with prior studies such as Ashton et al.
(1989), Jaggi and Tsui (1999), Soltani (2002), Raja Ahmad and Kamarudin
(2003), Ismail and Chandler (2004), Al-Ajmi (2008), Che-Ahmad and
Abidin (2008) and Afify (2009). H5 (auditor type) has a significant negative
association with audit report lag and subsequently provides evidence that
companies audited by the Big Four firms have a shorter audit report lag,
thus report earlier to the public. Prior studies suggest that the possible
reason is that Big Four firms have more resources, powerful technology,
more experienced auditor which enables the audit process to be completed
within a shorter period of time. Furthermore, companies that received
qualified audit opinion are expected to report their financial statement early,
because the auditor believed these types of companies do not have much
problem which need extensive testing in providing their opinion.
H6 (audit opinion) is also supported and consistent with Soltani (2002)
and Raja Ahmad and Kamarudin (2003). The findings also support H7
(firm performance) indicating that profitability is significantly associated
with audit report timeliness, suggesting that companies with good news
(experience profit) report faster than companies with bad news (reporting
loss). The findings are consistent with Ashton et al. (1989), Afify (2009) and
Ismail and Chandler (2004) that documented bad news took longer time to
reach the public than good news. In addition to that, this result provides
evidence that companies with higher profitability may wish to complete the
audit of their accounts as early as possible in order to quickly release their
audited annual reports to the public.
From the above discussion, the findings suggest that the agency conflict
can be mitigated with the presence of corporate governance mechanisms.
Thus, the existing effective and strong corporate governance, concomitant
with proper monitoring control, leads to more efficient and effective audit
work, hence reducing audit report lag. Finally, it advances towards higher
financial disclosure quality.
 124 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

DISCUSSION AND CONCLUSION

This study provides recent empirical evidence relating to the audit report
timeliness of Malaysian listed companies in 2009. The mean audit delay is
101 days (which is still below the maximum periods of six months as
stipulated by the Bursa Malaysia at that time), and an improvement by one
day earlier from prior study (see Mohd Naimi et al., 2010). Nevertheless,
audit committee size, auditor type, audit opinion and profitability are found
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

to have significant relationships with audit delay. Whereby, audit delay was
significant and negatively associated with audit committee size, auditor type,
audit opinion and profitability of the companies.
The result suggests that larger audit committee size is associated with
lower audit report lag, hence improve audit report timeliness. Therefore, this
will provide more space to the external auditors to ample space for
discussion with audit committee members who are more diligent to provide
resources to the companies. Subsequently, they are able to give more time
and effort to ensure the accuracy of financial information that is going to
be disclosed to the public, and effectively improve the financial reporting
quality. It is vital to identify the timeliness issues, as it is found that there are
companies that exceeded the six-month period of audit report issuance. This
has implication for practice. Regulators should ensure that companies
comply with the minimum submission period, to avoid companies taking the
advantage of the current six-month reporting period, and giving rise to
issues of information asymmetry.
However, the study is not without some limitations. Since the study is
based on cross-sectional study, the trend of audit delay and long-term effects
of corporate governance on timeliness of audit report could not be
examined. Furthermore, the exclusion of companies from the finance sector
might have contributed some limitation to the study in terms of the reported
overall mean of the audit delays of financial companies. Due to the different
regulations for financial institutions, this research was unable to include
financial institutions in the sample size and future research might consider
examining the effects of corporate governance characteristics on audit
report timeliness in financial companies.
Therefore it is suggested that future studies may consider other
mechanisms of corporate governance such as board meetings, compensation
committee and proportion of board ownership and internal audit functions
in order to examine the overall influence of corporate governance on audit
report timeliness. The inclusion of more variables will amplify the research
and provides an in-depth explanation to examine other factors that might
 Corporate Governance and Audit Report Timeliness 125

influence audit timeliness. For example, the inclusion of internal audit

function may be considered since the study is likely to relate with
investigating the effect of client’s business risk on the auditor’s judgment.
Other than that, future research may also include companies from finance-
related sectors in order to examine different qualities of financial reporting
between financial and non-financial companies, and consider a longitudinal
study that would compare the timeliness of audit report in two or more
periods, to observe if the timeliness of audit report improves over time.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

In light of the corporate governance changes and improvements over the

years, the study provides prevalent implications to improve financial
reporting timeliness, as well as financial reporting quality.

NOTES
1. The revised Code strives to strengthen the role of audit committees by requiring
the committees to comprise fully of non-executive directors. In addition, all its
members should be able to read, analyse and interpret financial statements so that
they will be able to effectively discharge their functions (Securities Commission,
2007, p. 14).
2. Chapter 9, on continuing disclosure.
3. In Malaysia, financial institutions are under the supervision of the Central
Bank of Malaysia besides that of the KLSE.
4. Companies that do not comply with the Bursa Malaysia requirement and
experience financial difficulties.

REFERENCES
Abbott, L. J., Parker, S., & Peter, G. F. (2004). Committee characteristics and restatements.
Auditing: A Journal of Practice and Theory, 23(1), 69–87.
Afify, H. A. E. (2009). Determinants of audit report lag does implementing corporate
governance have any impact? Empirical evidence from Egypt. Journal of Applied
Accounting Research, 10(1), 56–86.
Al-Ajmi, J. (2008). Audit and reporting delays: Evidence from an emerging market. Advances in
Accounting, 24(1), 217–226.
Ashton, R. H., Graul, P. R., & Newton, J. D. (1989). Audit delay and the timeliness of
corporate reporting. Contemporary Accounting Research, 5(2), 657–673.
Bamber, E. M., Bamber, L. S., & Schoderbek, M. P. (1993). Audit structure and other
determinants of audit report lag: An empirical analysis. Auditing: A Journal of Practice
and Theory, 12(1), 1–23.
Bédard, J., & Gendron, Y. (2010). Strengthening the financial reporting systems: Can audit
committees deliver? International Journal of Auditing, 14(2), 1–37.
 126 SHERLIZA PUAT NELSON AND SITI NORWAHIDA SHUKERI

Bursa Malaysia. (2009). Bursa Malaysia Corporate Governance Guide 2009. Kuala Lumpur:
Bursa Malaysia.
Che-Ahmad, A., & Abidin, S. (2008). Audit delay of listed companies: A case of Malaysia.
International Business Research, 1(4), 32–39.
Cohen, J., Krishnamoorthy, G., & Wright, A. M. (2002). Corporate governance and the audit
process. Contemporary Accounting Research, 19(4), 573–594.
Davies, B., & Whittred, G.P. (1980). The association between selected corporate attributes and
timeliness in corporate reporting: Further analysis. Abacaus, pp. 48–60.
Fama, E. F., & Jensen, M. C. (1983). Separation of ownership and control. Journal of Law and
Economics, 26(2), 301–325.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

Giroux, G., & McLelland, A. J. (2000). An empirical analysis of auditor report timing by large
municipalities. Journal of Accounting and Public Policy, 19, 263–281.
Givoly, D., & Palmon, D. (1982). Timeliness of annual earnings announcements: Some
empirical evidence. The Accounting Review, 57(3), 485–508.
Ismail, K. N. I., & Chandler, R. (2004). The timeliness of quarterly financial reports of
companies in Malaysia. Asian Review of Accounting, 12(1), 1–18.
Jaggi, B., & Tsui, J. (1999). Determinants of audit report lag: Further evidence from Hong
Kong. Accounting and Business Research, 30(1), 17–28.
Knechel, W. R., & Payne, J. L. (2001). Additional evidence on audit report lag. Auditing: A
Journal of Practice and Theory, 20(1), 137–146.
Lee, H., Mande, V., & Son, M. (2008). A comparison of reporting lags of multinational and
domestic firms. Journal of International Financial Management and Accounting, 19(1),
28–56.
Leventis, S., Weetman, P., & Caramanis, C. (2005). Determinants of audit report lag: Some
evidence from the Athens Stock Exchange. International Journal of Auditing, 9, 45–58.
MCCG. (2007). Malaysian Code on Corporate Governance, Report on Corporate Governance,
Securities Commission, Kuala Lumpur.
Mohd Naimi, M. N., Shafie, R., & Wan Nordin, W. H. (2010). Corporate governance and audit
report lag in Malaysia. Asian Academy of Management Journal of Accounting and
Finance, 6(2), 57–84.
O’Sullivan, N. (2000). The impact of board composition and ownership on audit quality;
Evidence from large UK companies. The British Accounting Review, 32(4), 397–414.
Owusu-Ansah, S., & Leventis, S. (2006). Timeliness of corporate annual financial reporting in
Greece. European Accounting Review, 15(2), 273–287.
Payne, J. L., & Jensen, K. L. (2002). An examination of municipal audit delay. Journal of
Accounting and Public Policy, 21, 1–29.
Rahmat, M. M., Iskandar, T. M., & Saleh, N. M. (2009). Audit committee characteristics in
financially distressed and non-distressed companies. Managerial Auditing Journal, 24(7),
624–638.
Raja Ahmad, R. A., & Kamarudin, K. A. (2003). Audit delay and the timeliness of corporate
reporting: Malaysian evidence. Working Paper, MARA University of Technology, Shah
Alam.
Safieddine, A. (2009). Islamic financial institutions and corporate governance: New insights for
agency theory. Corporate Governance: An International Review, 17(2), 142–158.
Salleh, Z., Steward, J., & Manson, S. (2006). The impact of board composition and ethnicity on
audit quality: Evidence from Malaysian companies. Malaysian Acccounting Review, 5(2),
61–83.
 Corporate Governance and Audit Report Timeliness 127

Securities Commission. (2007). Malaysian Code of Corporate Governance (Revised 2007).

Kuala Lumpur.
Sharma, D. S., Boo, E., & Sharma, V.D. (2007). The impact of non-mandatory corporate
governance on auditors’ client acceptance, risk and planning judgments (2008).
Accounting & Business Research, 38(2), June 2008. Retrieved from SSRN: http://
ssrn.com/abstract¼1113194
Soltani, B. (2002). Timeliness of corporate and audit reports: Some empirical evidence in the
French context. The International Journal of Accounting, 37, 215–246.
Tabachnick, B. G., & Fidell, L. S. (2007). Using multivariate statistics (5th ed.). Pearson
Education.
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)

Walker, A., & Hay, D. (2007). An empirical investigation of the audit report lag: The effect of
non-audit services. Working paper presented at Australian National Centre for Audit
and Assurance Research Workshop. Australian National University. Retrieved from
http://www.unimaas.nl/ISAR2009/02_07_Walker_Hay.pdf. Accessed October 2010.
Wan Abdullah, W. Z., Ismail, S., & Jamaluddin, N. (2008). The impact of board composition,
ownership and CEO duality on audit quality: The Malaysian evidence. Malaysian
Accounting Review, 7(2), 17–32.
 This article has been cited by:

1. Sherliza Puat Nelson, Nurul Farha Mohamed-Rusdi. 2015. Ownership structures

influence on audit fee. Journal of Accounting in Emerging Economies 5:4, 457-478.
[Abstract] [Full Text] [PDF]
Downloaded by UNIVERSITY OF HONG KONG At 22:23 30 January 2016 (PT)