The Effect of Audit Firm Mergers on Audit Delay

Abstract

The audit profession has undergone significant changes in the last decade. Specifically, the Big Eight was reduced to the Big Six by the merger of Deloitte, Haskins and Sells with Touche Ross to form Deloitte & Touche, and the merger of Ernst & Whinney with Arthur Young to form Ernst & Young. In addition, Peat Marwick & Mitchell merged with KMG Main Hurdman in 1987 to form KPMG Peat Marwick. These mergers, as well as additional merger discussions among the remaining Big Six accounting firms, have been attributed primarily to the cost of increased regulation, litigation, and competitive survival (Berkovitch and Narayanan, 1993). The impact of these audit firm mergers on their output, the audit report, should be examined. This study explores the impact of these audit firm mergers on one aspect of the audit report: audit delay, which can be defined as the length of time between the fiscal year-end of a company and the date of the auditor's report. To be useful in business decision making, accounting information must be reliable, relevant, and timely. The major factor determining the perception of timeliness by users of financial statements is the lag between the end of the fiscal year and the issuance of the earnings announcement. Audits of financial statements delay the release of this information to the public and other consumers of accounting information. According to Givoly and Palmon, the length of the audit is the single most important determinant of the timeliness of the earnings announcement (1982: 491). This timeliness is a function of the number of hours of audit time required and is also affected by such factors as the amount of interim audit work performed, the number of audit personnel assigned to the engagement, and the number of overtime hours worked. Specifically, the purpose of this study is to provide a pre-/post-merger analysis of audit delay between the years 1986 and 1991. This extends prior research in important ways. First, the time period of this study is more recent than that used in prior audit delay research; previous audit delay studies focus on periods prior to the audit firm mergers. Also, studies to date of the impact of the audit firm mergers do not examine audit delay. Second, while prior studies consider client/auditor traits as explanatory variables for audit delay, this study holds these traits constant allowing the effect of audit firm mergers to be examined. PRIOR RESEARCH Audit Delay Several audit studies focus on audit delay or audit efficiency proxied by audit delay. Newton and Ashton (1989), Bamber et al. (1993), Carslaw and Kaplan (1901) and Williams and Dirsmith (1988) focus on the relationship between audit delay and other firm characteristics such as audit technology (structure) or firm size. Audit technology here is defined as the classification of the firm's audit approach as highly structured, intermediate, or unstructured. The extant audit structure metric is a tri-level classification developed by Kinney (1986). Williams and Dirsmith (1988) report an inverse relationship between a firm's audit technology (as defined by Kinney (1986) and Gushing and Loebbecke (1986)) and audit delay. Newton and Ashton (1989) extend audit delay studies to Canadian Big Eight firms with the opposite results. They find structure tends to increase audit delay. Bamber et al. (1993) recently attempted to reconcile these inconsistent results in prior research by evaluating the incentives to report on a timely basis along with audit complexity and audit technology. Their findings also suggest a positive correlation between audit technology and audit delay. The results of this study might provide insight into why the inconsistency exists in the results of the earlier studies. Firm Mergers Organizational theory offers synergy as one motivation for corporate mergers. Synergy is defined as the ability to maximize the complementary strengths of the uniting organizations to achieve certain objectives. …

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