Audit Committee Effectiveness and Its Relation to Audit Report Lag

Transcription

1 Audit Committee Effectiveness and Its Relation to Audit Report Lag Shafira Firdausi Nugroho, Yan Rahadian 1. Departemen Akuntansi, Fakultas Ekonomi Universitas Indonesia 2. Departemen Akuntansi, Fakultas Ekonomi Universitas Indonesia Abstract This study examines the effect of audit committee effectiveness on audit report lag in Indonesia setting with company size, audit type, profitability, and leverage as controlling variable. This study is conducted using panel data of 173 public companies listed in IDX within three years period. We refer to Junaidda and Rashidah (2011) and measure the audit committee effectiveness using Hermawan s scorecard of audit committee effectiveness (2009). Audit committee effectiveness is divided into three parts: activities, size, and competence. The result shows that audit committee activities has significant impact on audit report lag while the other two do not. Keywords: audit committee effectiveness; audit report lag; corporate governance; financial report; timeliness Pengaruh Efektivitas Komite Audit Terhadap Audit Report Lag Abstrak Penelitian ini menguji pengaruh efektivitas komite audit terhadap audit report lag di Indonesia dengan variabel company size, audit type, profitability, dan leverage sebagai variabel pengendali. Penelitian ini menggunakan data panel dengan 173 perusahaan yang terdaftar pada Indonesia Stock Exchange selama Dalam melakukan penelitian, peneliti mengacu pada Junaidda dan Rashidah (2011) dan melakukan pengembangan dengan menggunakan scorecard of audit committee effectiveness (Hermawan, 2009). Efektivitas komite audit dibagi menjadi tiga variabel dependen: activities, size, and competence. Hasil regresi menunjukkan hanya variabel activities yang memiliki dampak signifikan terhadap audit report lag. 1. Introduction Globalization transforms the way companies finance their selves, from traditionally using owners fund to debt and issuance of shares. The consequence brought up from this is the separation between owner role and manager role within company. Jensen and Meckling (1976) explain the situation as agency theory, as a contract under which one or more persons (the principals) engage another person (the agent) to perform some service on their behalf,

2 which involves delegating some decision-making authority to the agent. Further, Jensen and Meckling (1976) suggest that the agent will not always act in principals interest. Agent or manager might overstate the value of business to attract investor, or worse not disclose any material information that may lead to asymmetric information. To reduce asymmetric information, full disclosure is necessary. Financial report is an important media for investors to assess companies viability and its life expectancy. It is very important since most of the times financial report is the only opportunity for investor to assess company s value. The quality of financial report has been an important issue for management since the credibility of information provided by management influences investors judgments (Jennings, 1987; Mercer, 2004) To support the reliability of financial report, audit process is required to give assurance of its contents. On the other hand, audit process costs some time to finish and causes delay in releasing the report. IASC (1998 p ) suggested that an undue delay in reporting of information might lose the relevance of its contents. Thus, timeliness is one important quality of financial report. Especially in developing country like Indonesia, The provision of timely financial report is in higher importance since the other non-financial report sources such as media releases, news, conferences, and financial analyst are not well developed and the regulatory bodies are not as effective as in the West (Wallace, 1993). Timely financial report in Indonesia gets more important with Bapepam-LK Rule number X.K.2, 2003 that sets companies to submit their audited financial report within 90 days. Past studies have examined the determinants of timeliness of financial report with focus on company s specific variables such as company size (Al-Ajmi, 2008), profitability (Ahmad and Kamarudin, 2003), and leverage (Owusu-Ansah and Leventis, 2006). Others studied corporate governance as determinant of timeliness of financial report (Afify, 2009; Tauringana, 2008). This study stands as a new insight related the role of corporate governance, especially audit committee to audi report lag. It is arguably that audit committee can increase the quality of financial report, especially its timeliness. Dechow, et al., (1996) suggest that firms involved in fraudulent financial reporting are less likely to have an audit committee or audit committees that are active and have financial expertise (Farber, 2005). 2. Literature Review 2.1 Agency Problems, Asymmetric Information, and Financial Report

3 Agency problems arise when principle hire agents to act on behalf of them. Corporation is a real example of agency problem where investors hire managers to manage fund through business daily operation. Agency problem arises because investors who invest in a business usually do not intend to play an active role in its management. Consequently, the self-interested managers have incentive to make decisions that expropriate investors funds (Healy and Palepu, 2001). Moreover, agency problems may cause asymmetric information. While both investors and managers would like to do business with each other, matching both parties is not an easy thing to do. Managers typically have better knowledge about the value of business investment than investors do, and they have incentives to overstate the value or not to disclose any material information that will affect investors decision to fund the business (Healy and Palepu, 2001). While agency theory states that managers tend to give little information about the firm, the market seems to show the reason why managers should not. Greater disclosure enhances stock market liquidity thereby reducing cost of equity capital either through reduced transaction cost or increased demand for a firm s securities (Amihud and Mendelson, 1986). Accordingly, Diamond and Verrecchia (1991) suggest that greater disclosure reduces the amount of information revealed by a large trade thereby reducing the adverse price impact associated with such trades. As a result, investors are willing to take larger positions in a particular firm s stock than they otherwise would. This increases demand for the firm s securities and raises the current price of the firm s stock, thus, reducing the cost of equity capital. For instances above, it is for company s interest to give full disclosure through adequate financial report. Shafira Firdausi Nug, 7/24/13 10:23 AM Comment [1]: Amihud, Y., and H, Mendelson Asset pricing and the bid- ask spread. Journal of Financial Economics 17: With its important role as the bridge between investor and managers, financial report needs to have certain characteristics in order to be useful. Standards and regulations should be addressed to specify the scope and element of disclosure. Globally, IASB with conceptual framework defines elements of financial report that help financial report reach its objective. In Indonesia, Ikatan Akuntan Indonesia comes with Pernyataan Standar Akuntansi Keuangan as a guiding principle on disclosure. 2.2 Accuracy of Financial Report The objective of general purpose external financial reporting is to provide information that is useful to present and potential investors and creditors and others in making investment,

4 credit, and similar resource allocation decisions (FASB, Financial Reporting Framework, 2006). Assuming reliability of financial information is governed by accounting principles and regulations; timeliness of corporate financial reporting is an important quality which requires that financial information should be made available to users as rapidly as possible in order to make financial statement information relevant and useful to users for decision making (Ahmed, 2003). Timely financial statement information helps in efficient allocation of resources by reducing dissemination of asymmetric information (Statement of Financial Accounting Concepts No.2, 1980), by improving pricing of securities (Chambers and Penman, 1984), and by mitigating insider trading, leaks, and rumors in the market (Owusu- Ansah, 2000). In emerging economies like Indonesia, the demand for timely financial report is higher than in developed since other non-financial information sources such as media releases, news conferences, and financial analysts are not well developed and regulatory bodies are not really effective (Wallace, 1993). Within this context, the timing of financial report is at least as important as its content for users. Moreover, share prices of listed companies are presumably based on such disclosed information. The disclosure of financial results is an influential factor of firm value (Dogan, et al., 2007). Prior research noted that timing of financial report is important in preventing insider trading activities (Owusu-Ansah, 2000) while Leventis and Weetman (2004) suggested that timing of financial report should be designed to minimize such activities which damage the efficacy of the capital market. Leventis et al., (2005) argued that the time lag in publishing the audit report is a critical factor in emerging and newly developed capital markets where audited financial statements in the annual report are the only reliable source of information to investors. With high demand of timely financial report, auditors are expected to perform assurance services without delays, within the constraints imposed by professional codes and ethics (Carcello, Hermanson, and McGrat, 1992; DeAngelo, 1981). One of measurement of financial report timeliness is audit report lag. Leventis, Weetman, and Caramanis (2005) suggest that audit report lag refers to the time from the end of the company s financial year to the date of the audit report. Managers are expected to prefer a minimal audit report lag (Johnson, 1998) to reach its usefulness and relevance to users. Since the timeliness of financial report is one essential characteristic, standard setter and regulatory bodies put a lot of concern to ensure that publicly traded companies issue the report in a timely manner.

5 Indonesian standard setters have increased the urgency of having lower audit report lag through BAPEPAM-LK regulation and Indonesia Stock Exchange regulation. Regulation of BAPEPAM-LK number X.K.2, 2003 mentions the latest submission of audited financial report is by the end of third month after end of period (article 2 point a). Furthermore, Indonesia Stock Exchange trough SK Kep-306/BEJ/ explains the punishment for any violation. There are four layers of penalty for any late submission: days after due date. Indonesia Stock Exchange will give first warning for company in this layer (Article II.6.1.) days after due date. Indonesia Stock Exchange will give second warning and violating company will be fined IDR 50,000,000 (Article II.6.2.) days after due date. Indonesia Stock Exchange will give final warning and violating company will be fined IDR 150,000,000 (Article II.6.3.). 4. More than 90 days after due date. Indonesia Stock Exchange will suspend stock of violating company out of market. 2.3 Audit Committee Indonesia s Code of Good Corporate Governance defines the organs of a company consisting of the General Meeting of Shareholders, the Board of Commissioners, and the Board of Directors. All organs shall carry out their respective functions in implementing good corporate governance accordingly. Moreover, the code explains oversight board which role is to supervise and advice named Board of Commissioner. In carrying out its duty, the Board may form committees including Audit Committee. The role of audit committee can be classified into four: 1. To ensure that financial reports are presented appropriately in accordance with the generally accepted accounting principles. 2. To ensure that internal control structure is adequate and effective. 3. To ensure that internal and external audits are conducted in accordance with applicable audit standards 4. To ensure that audit findings are followed up by the management Furthermore, The Code explains that audit committee shall review the candidates for external auditors and give recommendation to board of commissioner. An independent commissioner shall chair the audit committee and the members may consist of Commissioners and or professionals from outside the company with minimum one person should have an accounting and or finance background.

6 Rezaee (2004) suggests that audit committee should have financial expert in the team in order to fulfill the role of audit committee. Beyond requirement, audit committee members should be independent from managers in order to achieve its credibility in performing their duty (Carcello and Neal, 2000). Rezaee et al. (2003) suggested that the evolution of audit committees shows many companies voluntarily establishing audit committees in the mid-twentieth century to provide more effective communication between the board of directors and external auditors. Prior research suggests that firms that engage in fraudulent financial statement are more likely to have no audit committee or ineffective audit committees that meet infrequently (Beasley, 1996; Dechow et al., 1996; McMullen, 1996). 3. Research Methodology 3.1 Sampling Method This research uses secondary data, annual report of listed companies in Indonesia Stock Exchange taken from companies website, Indonesia Stock Exchange website, and Reuters Knowledge. We use purposive sampling with following criteria: 1. Listed in Indonesia Stock Exchange during Excluding financial sector. 3. Ones with end of fiscal year on December 31 st. 4. Ones with complete annual report within period of , specifically audit committee disclosure on annual report. 5. Do not have negative equity. From above criteria, we have come to 173 companies within 3 years period. Thus, we have 519 observations examined in this research. 3.2 Variable Operationalization Audit Report Lag There are several measurement of reporting lag depending on research design and context. Dyer and McHugh (1975), Courtis (1976), and Whittred (1980), the type of reporting lags can be classified as three: 1. Audit lag interval days between the balance sheet closing date and the signed date of the auditor s report stated in the corporate annual report.

7 2. Preliminary lag interval between the balance sheet closing date and the date of the date companies are required to submit their audited financial report to Stock Exchange. 3. Total lag interval of days between the balance sheet closing date and the date audited financial report distributed to shareholders in General Meeting of Shareholders. Considering today s technology that leads to immense stream of information, once financial report is submitted to stock exchange, public can access it instantly. Thus, ideally, we measure the lag as the date between balance sheet closing date and submission to stock exchange. However, this study focuses on audit committee role, and the responsibility of audit committee ends in the end of financial reporting process that is audit process. For said reasons, we measure the lag as interval between financial end of year and signed date of audit report Audit Committee Effectiveness Three of independent variables used in this research are based on audit committee effectiveness checklist (Hermawan, 2009). The three variables are activities, size, and expertise and competence. Most researcher put independence as variable measuring audit committee effectiveness (Junaidda and Rashidah, 2011; Mohamad-Nor, et al., 2010; Rainsbury, et al., 2009). However, independence variable is not relevant with Indonesia condition where audit committee is assumed independent with Indonesian Stock Exchange and Bapepam-LK Rule IX.I.5, 2004 require companies to have at least two independent persons in the committee. Instead, we try to emphasize more on the characteristics of audit committee that contributes to the achievement of its objective. All data of independent variable are gathered from each company s annual report from Indonesian stock exchange website and company s website Controlling Variable a. SIZE This research uses the company size as controlling variable. Company size measured by the natural logarithm of year-end total assets. This variable is examined in several studies (Dogan et al., 2007; Almosa and Alabbas, 2007; Owusu-Ansah, 2000) with all of them suggesting that company size has significant impact on audit report lag. Large companies are usually owned and monitored by external parties, so the management will have incentive to

8 minimize audit report lag. Hence, it is arguably that SIZE has negative relationship with audit report lag. b. AUDIT TYPE This variable represents the type of audit firm. It is a dummy variable where company get 1 if it is audited by Big4 and 0 otherwise. This variable is used in Almos and Alabbas (2007) and Leventis, Weetman, and Caramanis (2005). Both agree that audit type has significant impact on audit report lag. Companies that are audited by international accounting firms are expected to have shorter audit report lag because these firms have highly experienced auditors and advanced audit technologies (Naimi, Shafie, and Wan-Hussin, 2010). c. PROFITABILITY Return on Asset shows company s profitability. Return on asset is measured by net income divided with average total asset. This variable is used in studies conducted by Dogan et al. (2007) and Owusu-Ansah (2000). Both suggested that profitability has significant impact on audit report lag. Geiger and Rama (2003) show that financially distressed companies require auditors to exercise a significant amount of professional judgment, which may lag the issuing of the audit report. d. LEVERAGE This variable is examined by Al-Ajmi (2008) as a determinant of audit report lag. This variable is measured by total liabilities divided by total assets. Higher leverage gives higher risk of bankruptcy thus, auditors might need more time to finish substantive tests (Al- Ghanem and Hegazy, 2011). Abdulla (1996) and Conover et al. (2007) found a negative relationship between leverage and reporting lag in four countries out of twenty-two observations. 3.3 Hypothesis Development Audit Committee Activities At the first place, audit committee is established to help board of commissioner in ensuring financial reporting runs well. As a part of internal governance mechanism, audit committee must perform several tasks in order to achieve its objective. With all activities it should hold, audit committee can strengthen the quality of financial reporting. Prior studies suggest that firms involved in fraudulent financial reporting are less likely to have an audit committee (Dechow et al., 1996; McMullen, 1996) or audit committees that are active and have financial expertise (Farber, 2005). Firms with audit committees that are independent and active are also less likely to experience other accounting

9 irregularities (Dechow at al., 1996; McMullen and Raghunandan, 1996; Abbott and Parker, 2000; Peasnell et al., 2001). Prior researches suggest that audit committee activities, meeting for instance have negative relationship with audit report lag. Since audit committee meeting is where all company s compliance matters discussed, it is presumably that higher number of audit committee meeting increase the quality of financial reporting. Various researches held in the past seconded this argument (Menon and Williams, 1994; Beasley et al., 2000; Anderson et al., 2003; Xie et al., 2003; Zhou and Chen, 2004). Furthermore, audit committee that holds at least four meeting in a year has negative relationship with financial report restatement (Abbott et al., 2004). It can be concluded that audit committee activities can increase its reviewing role and increase efficiency of financial reporting that will lead to lower audit report lag. Overall, audit committee can increase timeliness of financial report in a way that it controls the whole financial reporting processes. Audit committee is responsible for reviewing financial statement, control by internal audit, and hiring independent auditor. Once all duties are in place, effectiveness of financial reporting should be increase thus shorten the audit report lag. H! : There is a negative relationship between audit committee activities and audit report lag Audit Committee Size Audit committee member could help investor to force manager to provide necessary information available publicly. Audit committee member is responsible to control the whole financial reporting so that it can achieve its objective. The amount of audit committee member becomes important since more audit committee member means better control over financial reporting, considering the amount of workload one member can hold. More audit committee member also means more opinion and solution regarding financial reporting issues. More people meaning more ideas and thus the solution for any financial reporting issues will be found quickly and any unnecessary delay of financial reporting can be avoided. H! : There is a negative relationship between audit committee size and audit report lag Audit Committee Competence With its role of reviewing financial report, it is required that audit committee should have the background of financial reporting. Audit committees are responsible for numerous

10 duties that require a high degree of accounting sophistication such as understanding auditing issues and risks and the audit procedures proposed to address them, comprehending audit judgments and understanding the substance of disagreement between the management and external auditor, and evaluating judgmental accounting areas ((Naimi, Shafie, and Wan- Hussin, 2010). There should be at least one expert with accounting background to really understand how assurance is given along financial reporting process (Dhaliwal et.al., 2007). McMullen and Raghunandan (1996) show that fraudulent financial reporting companies have few members that have expertise in accounting. In addition, audit committee members with previous experience and knowledge in financial reporting and audit are more likely to make expert judgments than those without (DeZoort and Salterio, 2001). This implies that the presence of at least one member with financial expertise, specifically accounting, can increase the performance of monitoring of financial reporting thus increase the quality of financial report including the timeliness. H! : There is a negative relationship between audit committee expertise and competence and audit report lag 3.4 Research Model To answer the research question, we use regression model adapted from Junaidda and Rashidah (2011), which examined the relationship between audit committee effectiveness and audit report lag. Junaidda and Rashidah (2011) suggested that audit committee plays an important role in the monitoring process as well as its reporting role in companies. The responsibility of audit committee is to oversee and monitor the integrity, quality, and reliability of the financial reporting process without stepping into the managerial functions and decisions relating to the preparation of financial staements (Rezaee, 2004). Once audit committee works effectively, assessed by the audit committee effectiveness scorecard (Hermawan, 2009), it is expected that the audit report lag is low. We use one model in this research, written as follow: ARL =!! +!!!"# +!!!"#$%& +!!!"#$ +!!!"#$ +!!!"#$ +!!!"# +!!!"# +!!" Notes: ACT = score of audit committee activities ACSIZE = score of audit committee size COMP = score of audit committee experience and competence

11 SIZE BIG4 ROA LEV = natural log of total assets (in billions of Indonesia Rupiah) = dummy variable; 1 if audited by Big-4, 0 if otherwise = net income divided with average total asset. = total liabilities divided by total asset 4. Result and Analysis 4.1. Audit Report Lag in Indonesia Timely reporting is important device to mitigate insider training, leaks and rumors in emerging markets (Owusu-Ansah, 2000). We have gathered audit report lag of 173 publicly listed in Indonesia in three years period. The summary of audit report lag is presented below: Table 4.1 Summary of Audit Report Lag Lag Overall Shafira Firdausi Nug, 7/24/13 10:31 AM Comment [2]: Owusu-Ansah, S. (2000). Timeliness of corporate financial reporting in emerging capital markets: Empirical evidence from the Zimbabwe Stock Exchange. Accounting and Business Research, 30, days % % % % days % % % % days % % % % >90 days % % % % TOTAL % % % % AVERAGE The compliance of financial report date in Indonesia is good. Around 90% of companies release the audited financial report within due date of 90 days. The trend from shows increasing days needed to prepare audited financial statements. This may be affected by the growing business indicated by growing total assets. The increasing total asset will take more time to finish the audit processes thus increase the audit report lag. The longer lag might also be affected by IFRS convergence. Companies need to adjust accounting principles used in preparing financial report thus takes longer time than it usually does to prepare the report. The shifting in accounting principle gets even higher urgency with the revised Bapepam-LK Rule VIII.G.7, 2000 to ensure that convergence of IFRS and PSAK are obeyed by public companies. BAPEPAM-LK has made it very clear that companies should release their audited financial report in 90 days the latest. However, several companies are unable to perform so.

12 Around 10% of the companies each year publish their audited financial report in more than 90 days. The number is increasing each year showing that some companies are not improving in providing timely financial report. The longest lag of all is 202 achieved by PT Sorini Agro Asia Corporindo Tbk (SOBI). The company suffered from supply shortage of raw material in first five months of 2011, which give double impact of high price of raw material and low production thus lower revenue in The company was audited by Ernst and Young with unqualified opinion despite of the issue and long duration of audit process. Interesting fact from non-complying companies is that some fail to release audited financial report before due date in more than one year. Table 4.3 shows that some companies even have longer audit report lag in the next year. The shortest lag of all is achieved by PT Wahana Phonix Mandiri (WAPO) in It took only 13 days for them to release the audited financial report. The company was audited by non-big4, KAP Supoyo, Sutjahjo, Subyantara, and Partner with unqualified opinion. It has successfully managed through challenges of shortage supply of commodity due to El Nino hurricane and extreme rain. Despite of its timely value of financial report, it somewhat raises question of the quality of audit process especially with the fact that it is audited by non-big4. The average audit lag is ranging from 77 79, which is relatively shorter than the average lag in Greece, which is 98 days (Leventis, et al., 2005). The number is also lower than average lag in Malaysia, which is around 102 days. This might be affected by regulation in each country. For instance, the deadline for public companies in Malaysia is 120 days whereas regulation in Indonesia sets 90 days as the limit for publishing audited financial report Audit Committee Effectiveness in Indonesia Based on the scorecard, there are 11 questions to assess the effectiveness of audit committee with each question scored in a range of 1 to 3. The scorecard is divided into three parts that are individually assessed in this research, which is Activities, Size, and Competence. The result of each question is presented in Table 4.2. Table 4.2 Summary of Audit Committee Effectiveness Score Year 2009 Category Number of Questions Min Max Mean Median Activity Size Competence Standard Deviation

13 Overall Activity Size Competence Activity Size Competence Activity Size Competence Overall, the minimum and the maximum value are the least and most score in each category. This shows that there are some observations with all Good scores and some with all Poor scores. We can conclude that our sample can capture discrepancy of audit committee effectiveness among public companies in Indonesia thus, we can conclude that our sample can represent the population quite well. Table 4.3 Summary of Activities Activities Mean Median Review internal control Propose external auditor Review financial report Review law compliance Audit committee report The least held activity by audit committee is proposing external auditor. This is because a lot of companies are using the same external auditor in years. Ideally, audit committee has to evaluate performance of external auditor even though it has been working in years with the companies. Audit committee has to give proposal based on the evaluation to board of directors so that board of directors has the knowledge of external auditor performance before deciding to re-engage. Other thing being assessed in activity section is number of meeting and presence in each meeting. In average, audit committees hold 6 meeting each year. However, most companies tend to hold only 4 meetings. The average number of meeting suggests that audit committees meet once every two months. This number is relatively good, considering that the number of meeting is not governed by any regulation. One question to address is whether the meeting is done only because it is obliged or is it really a media to tackle financial reporting issues.

14 Table 4.4 Summary of Audit Committee Meeting Observation Mean Std. Deviation Median Meeting Presence From table 4.5, we can see that size category has mean of 3.1 and median of 3. The mean and median values imply that in general, companies only get Fair score with three members of audit committee as required by BAPEPAM-LK Rule IX.I.5, However, there are companies with no audit committee: PT Dayaindo Resources International Tbk (KARK) and PT Nusantara Inti Corpora Tbk (UNIT). Company with most audit committee member is PT Telekomunikasi Indonesia (Persero) Tbk (TLKM) with 7 members of audit committee. Table 4.5 Summary of Audit Committee Size Observation Mean Std. Deviation Median Min Max # of member The competence section quantifies the expertise and experience of audit committee. Table 4.5 suggests that most companies have 1 member with accounting background. Companies with most audit committee member with accounting background are PT Aneka Tambang (Persero) Tbk (ANTM), PT Sentul City Tbk (BKSL), and PT Bumi Serpong Damai Tbk (BSDE) with four audit committee members from accounting background. From Table 4.5, we can conclude that in average, audit committee members in Indonesia are 30 years old with most age of 37. However, this information does not reflect real condition for most audit committees do not disclose their age on annual report. The oldest member aged 84. Despites of accounted for more experience, audit committee members with age of more than 60 are questioned about their health condition in performing their work. The youngest audit committee member is 23 years old. The management s decision to hire a person that age as audit committee member is questionable since he or she is still lacking of experience. He was possibly hired only to fill the position, since he was discharged in 2011 and replaced by more experienced person. Table 4.6 Summary of Audit Committee Competence

15 Observation Mean Std. Deviation Median Min Max Accounting Background Age Regression Result There are three independent variables being tested here: ACT, NUMB_MEMBER, and COMP. Even though the three variables are expected to have negative relationship, each of them shows different result. Variable Expected Sign Table 4.7 Regression Result Coefficient Std. Error P> z C * ACT (-) * AC_SIZE (-) COMP (-) BIG4 (-) ROA (-) * SIZE (-) LEV (-) Prob>chi Wald chi2 (7) ACT = Score of audit committee activities AC_SIZE = score of audit committee size COMP = score of audit committee competence BIG4 = dummy variable, 1 if company is audited by Big4, 0 otherwise ROA = Return on asset, net income divided by average total asset SIZE = natural logarithm of total asset LEV = total liabilities divided by total assets *significant at 1% The Relationship Between Audit Committee Activities and Audit Report Lag

16 Audit committee activities (ACT) is significant at confidence interval of 1% with P> z Thus, we can accept H1 and it can be concluded that audit committee activities have significant negative impact on ARL. The coefficient of this variable is This implies that when the audit committee activities is increased by 1 point, the ARL will be decreased by point. This support prior studies that suggest active audit committee can increase the quality of financial report (Farber, 2005). The Relationship Between Audit Committee Size and Audit Report Lag Audit committee size (AC_SIZE) does not show significant impact on ARL with P> z value of This implies that the competence of audit committee does not play significant role in determining ARL. This is in accordance with Ahmad-Zaluki and Wan-Hussin (2010) that provided weak evidence that audit committee size is positively associated with the quality of financial information. Taking a closer look to Indonesian companies, most of companies obey the rule of having three members of audit committee. The Relationship Between Audit Committee Competence and Audit Report Lag The competence of audit committee (COMP) has P> z value of This means that audit committee competence do not have significant impact on ARL. The coefficient of COMP is -1.04, which shows the expected result of negative correlation between audit committee competence and audit report lag. However, the negative impact of audit committee competence to audit report lag would be very low and considered insignificant. This is in accordance with Mohamad-Nor, Shafie, and Wan-Hussin (2010) that suggest no significant relationship between audit committee expertise and ARL. The Relationship Between Audit Type and Audit Report Lag Audit type (BIG4) gives no significant impact on ARL with P> z of This is similar to Junaidda and Rashidah (2011) that suggest audit type is not a strong determinant of ARL. This is possible due to auditing process standard. Regardless of the Big4 or non-big4, all audit firms should conduct standardized process following SPAP. Thus, it is arguably that both Big4 and non-big4 firm will have low variance of audit process quality since all processes are guided by Standard Professional Akuntan Publik. Other thing that might affect the insignificancy of this variable is repetitive pattern of the value. The Relationship Between Company Size and Audit Report Lag

17 Company size (SIZE) gives no significant impact on ARL with P> z of This is similar with findings of several prior researches (Dyer and McHugh, 1975; David and Whittred, 1980; Givoly and Palmon, 1982; Owusu-Ansah, 2000). It is suggested that superior financial resources are not sufficient to process information faster as the amount of information that they have to gather is vast and may come from numerous divisions, branches, and subsidiaries. The Relationship Between Company Profitability and Audit Report Lag Company s profitability (ROA) is significant with P> z value of Managers may announce bad news (in this case, poor performance of company indicated by negative ROA) later than good news. This may be due to managers natural desire to defer any repercussions from shareholders, and executives wish to continue and complete recent negotiations and contracts in the best possible light. (Givoly and Palmon, 1982). Stakeholder theory can explain it best. In the absence of an opportunity to hide bad information because of mandatory disclosure requirements, the management has the incentive to delay its release (Watts and Zimmerman, 1990). Bad news will be released only after being verified, justified, restated, and/or the mandated reported period has expired. This result is similar to Abdulla (1996) and Wang and Song (2006). On the other side, companies with good news (high profitability) would want to announce the news as soon as possible for it will give positive return to the companies. The Relationship Between Company Leverage and Audit Report Lag Company s leverage (LEV) is insignificant with P> z value of This is in contrary to what Al-Ajmi (2008) and Al-Ghanem and Hegazy (2011) suggested that company leverage has negative significant impact to ARL. The result is supported by theory saying that highly leveraged companies are expected to delay the release of audited financial report since highly-leveraged companies are associated with increasing probability Shafira Firdausi Nug, 7/24/13 10:46 AM Comment [3]: Watts, R. L., & Zimmerman, J. L. (1990). Positive accounting theory: A ten year perspective. Accounting Review, 65, Shafira Firdausi Nug, 7/24/13 10:46 AM Comment [4]: Abdulla, J. Y. A. (1996). The timeliness of Bahraini annual reports. Advances in International Accounting, 9, Shafira Firdausi Nug, 7/24/13 10:46 AM Comment [5]: Wang, J., & Song, L. (2006). Timeliness of annual reports of Chinese listed companies. Journal of Chinese Economic and Business Studies, 4, of default and bankruptcy, especially during economic downturn (Owusu-Ansah, 2000). Thus, companies might want to delay the announcement of this bad news to stakeholders. 5. Conclusion and Suggestion 5.1 Conclusion This study aims to find out determinant of Audit Report Lag. Focusing on corporate governance, we try to examine the relationship between audit committee

18 effectiveness and audit report lag. In the setting of Indonesian public companies during excluding financial sector, we have come to the conclusions below: Around 90% of public companies in Indonesia obey BAPEPAM-LK Rule X.K.2, 2003 by publishing audited financial report in 90 days. The rest 10% are somehow unable to achieve so. This is a good indicator that the regulation is effective in reducing asymmetric information by enabling timely financial report in Indonesia. Audit committee activities have a significant negative relationship with audit report lag. The higher level of activities held by audit committee, the lower it takes for companies to publish their audited financial report. There is no significant relationship between audit committee size and audit report lag % companies have three numbers of audit committee members. The implication from this is that audit committee size is not significantly affecting audit report lag since most companies with both long and short audit report lag comprise of three members. Audit committee competence shows a negative correlation with audit report lag with insignificant impact towards audit repot lag. Audit type does not have significant impact on audit report lag. This might be due to standardized audit processes in both Big4 and non-big4 firm. In Indonesia specifically, audit process are in guidance of Standard Professional Akuntan Publik. Company size has negative relationship with audit report lag. However, the impact of company size would be not significant to audit report lag. It is suggested that bigger resources will take longer time to process information, as the amount of information that they have to collect is enormous and come from numerous organizational part. Return on Asset as proxy of company profitability has negative significant impact on Audit Report lag. Companies with profit take shorter time to announce the good news through audited financial report than companies with less profit. 5.2 Limitation We realize that there are several limitations of this research: 1) We measured audit lag by the day differences between end of year to the date audit report signed, not to the date of submission to Bapepam-LK 2) Most information about audit committee activities on companies annual report tend to be normative. 3) We only used three years observation ( ) in this research due to time limitation in conducting this research.

19 4) We use audit committee effectiveness checklist by Hermawan (2010). In time, there might be checklist that can assess the audit committee effectiveness better. 5) We use audit report lag as measurement of timeliness of financial report. 6) We use total liabilities instead of total debt in Leverage variable. 5.3 Suggestion 1) For Board of Commissioner / Non-executive Board To produce timely financial report, Board of commissioner should ensure that audit committee could fully perform its duties by holding all activities needed to monitor and control financial reporting and ensure that they hire audit committee members with high competence. 2) For Regulators Considering the significance of the variable, BAPEPAM-LK and Indonesian Stock Exchange should regulate minimum activities audit committee should hold and the minimum competence audit committee members should hold. 3) For Investors It is arguably that investors desire timely financial report. This research helps them to understand determinant of audit report lag in Indonesia and to assess company s ability in providing timely financial report. 4) For future research: Conduct the research in longer period of time observation. Use more comprehensive checklist that can assess audit committee effectiveness more precisely. Use audit report lag variable measured by the lag between end of year to date of submission to Bapepam-LK References Afify, H.A.E., (2009), Determinants of audit report lag: Does implementing corporate governance have any impact? Empirical evidence form Egypt. Journal of Applied Accounting Research, 10(1), Ahmad, R.A.R. and Kamarudin, K.A., (2003), Audit delay and the timeliness of corporate reporting: Malaysian evidence. Working paper, MARA University of Technology, Shah Alam Ahmed, K., (2003) The timeliness of corporate reporting: a comparative study of South Asia. Advances in International Accounting, 16,

20 Al-Ajmi, J. (2008) Audit and reporting delays: Evidence from an emerging market. Advancesin Accounting, Incorporating Advances in International Accounting, 24, Amihud, Y., & Mendelson, H. (1986). Asset pricing and the bid-ask spread. Journal of Financial Economics, 17, Carcello, J., Hermanson, R., & McGrath, N. (1992). Audit quality attributes: The perceptions of audit partners, preparers, and financial statements users. Auditing: A Journal of Practice and Theory, 11(1), Chambers, A. E., & Penman, S. H. (1984). Timeliness of reporting and stock price reaction to earning announcements. Journal of Accounting Research, 22, De Angelo, L.E., (1981), Auditor Size and Audit Quality, Journal of Accounting and Economics, 3, Dechow, P.M., Sloan, R.G., Sweeney, A.P., Causes and consequences of earnings manipulation: an analysis of firms subject to enforcement actions by the SEC. Contemporary Accounting Research 13, Diamond, D. W., & Verrecchia, R. E. (1981). Information aggregation in a noisy rational expectations economy. Journal of Financial Economics, 9, Dogan, M.; Coskun, E. and Celik, O. (2007), Is Timing of Financial Reporting Relating to Firm Performance? An Examination on ISE Listed Companies, International Research Journal of Finance and Economics, 12: Dyer, J. C., & McHugh, A. J. (1975). The timeliness of the Australian annual report. Journal of Accounting Research, 13(3), Farber, D., Restoring trust after fraud: does corporate governance matter? The Accounting Review 80, Healy, P.M., Palepu, K.G., (2001), Information asymmetry, corporate disclosure, and the capital markets: a review of the empirical disclosure literature. Journal of Accounting and Economics 31, Hermawan, A. A. (2009). Pengaruh efektivitas dewan komisaris dan komite audit, kepemilikan oleh keluarga, dan peran monitoring bank terhadap kandungan informasi laba. Disertasi Universitas Indonesia. Junaidda, Ummi and Rashidah (2011). Audit report lag and the effectiveness of audit committee among Malaysian listed companies. International Bulletin of Business Administration Leventis, S., Weetman, P. and Caramanis, C. (2005), Determinants of Audit Report Lag: Some Evidence from the Athens Stock Exchange, International Journal of Auditing, 9(1): Owusu-Ansah, S., & Leventis, S. (2006). Timeliness of corporate annual financial reporting in Greece. European Accounting Review, 15,