Audit report lags in Maltese companies : an analysis

Abstract

This study identifies and measures the significance of the determinants of Audit Report Lags (ARL) for a sample of 372 active companies for the 3 years between 2017-2019. Moreover, this study also determines the average ARL in Maltese companies and whether lengthy report lags are an early warning signal to financial distress and/or bankruptcy. The latter is conducted by analysing the financial statements of the latest 3 years in operation of 209 struck-off companies. Lastly, the study’s purpose is also to analyse the current and prospective effect of technology in audit and audit data analytics (ADA) on ARL. Design: A mixed methodology approach was implemented, integrating both quantitative and qualitative methods to achieve the research objectives of this study. A series of statistical tests and a GLM regression model have been applied to examine the association and significance between 10 variables and ARL. These 10 variables and other 3 variables were also analysed qualitatively. A series of semi-structured interviews with 10 auditors have been conducted to develop a deeper analysis of the objectives of this study. Findings: This study reports that the key factors driving the ARL in Maltese companies are industry type, bankruptcy risk, auditor type, auditor opinion, profitability and company size. Findings show that a long ARL is an indicator to the company’s stakeholders that the company may be facing financial distress or has a high probability of bankruptcy. Audit delays occur when auditors increase audit sampling to examine in further detail the company’s financial condition or when management attempts to delay the publication of financial statements to protect the company’s reputation and/or to postpone stakeholders’ negative actions. The study also found that ADA is changing the audit process but not at the expected pace. Findings indicate that ADA and the application of technology during the audit process, lead to better quality and quicker information from the client, whilst reducing the need for audit sampling. However, accounting and auditing standards may need to be revised to take into consideration this digitalisation of the audit process. Conclusions: This study concludes that a number of factors have a significant effect on ARL with the industry type (i.e. being a financial company or not) having the highest impact. Moreover, struck off companies that have a much higher level of bankruptcy risk experienced longer ARL compared to active companies. It was found that ARL can indicate to stakeholders the presence of financial problems in the company. ADA accelerates and simplifies the processing of a large amount of data input during the audit process which helps to reduce the ARL. However, the costs and time of implementation are the main blocking points for its implementation and use. Value: This study is a contributor in determining the leading causes of ARL in Malta, thus being beneficial for the future in trying to reduce audit delays. This study is also fruitful in analysing the benefits of ADA and technology in the audit process and how it aims to reduce ARL.