Jurnal Dyer & Mchugh 1975

Accounting Research Center, Booth School of Business, University of Chicago

The Timeliness of the Australian Annual Report Author(s): James C. Dyer IV and Arthur J. McHugh Source: Journal of Accounting Research, Vol. 13, No. 2 (Autumn, 1975), pp. 204-219 Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago Stable URL: http://www.jstor.org/stable/2490361 . Accessed: 01/04/2011 02:32 Your use of the JSTOR archive indicates your acceptance of JSTOR's Terms and Conditions of Use, available at . http://www.jstor.org/page/info/about/policies/terms.jsp. JSTOR's Terms and Conditions of Use provides, in part, that unless you have obtained prior permission, you may not download an entire issue of a journal or multiple copies of articles, and you may use content in the JSTOR archive only for your personal, non-commercial use. Please contact the publisher regarding any further use of this work. Publisher contact information may be obtained at . http://www.jstor.org/action/showPublisher?publisherCode=black. . Each copy of any part of a JSTOR transmission must contain the same copyright notice that appears on the screen or printed page of such transmission. JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact [email protected].

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The Timelinessof theAustralian AnnualReport JAMES C. DYER IV AND ARTHUR J. McHUGH*

Many accountants, managersand financial analystsbelievethattimeoffinancial linessis an important characteristic statements. The American in 1954observedthat,"Timeliness Association ofreporting Accounting is an essentialelement ofadequatedisclosure."' In morerecenttimesGrady,2 the Accounting PrinciplesBoard of the AmericanInstituteof Certified PublicAccountants,3 Hendriksen,4 and othershave acknowledged therole * Lecturerin Commerce,Universityof Newcastle, and Senior Lecturerin Accounting,MacquarieUniversity.We wishto expressour gratitudeto Miss J. Coffey, SydneyStock ExchangeLibrary,forher graciousassistance. The membersof the accountingworkshopat the Universityof Queenslandprovidedconstructivecriticisms, particularlyProfessorRay Ball. We are most appreciativeof the generous timeProfessorPhilipBrownexpendedin reviewingan earlydraftand in comparing our timelags withthosehe used in "Those Half-YearlyReports," BulletinNo. 13 (Melbourne:AustralianSocietyofAccountants),June,1972.Some differences could in selectioncriteriaor in systematic not be reconciledand maybe due to differences differences betweenthe Melbourneand Sydneycompanies(or some combinationof both). 1 Committeeon Conceptsand StandardsUnderlyingCorporateFinancial Statements,"Standards of Disclosure forPublishedFinancial Reports," Supplementary StatementNo. 8, 1954.Reprintedin Accountingand ReportingStandardsfor CorporateFinancial Statements and PrecedingStatements and Supplements(Evanston, Illinois: AmericanAccountingAssociation),p. 46. 2 Paul Grady,"Inventoryof GenerallyAcceptedAccounting PrinciplesforBusiness Enterprises,"Accounting ResearchStudyNo. 7 (New York: AmericanInstitute of CertifiedPublic Accountants,1965),p. 41. AccountingPrinciplesBoard, AmericanInstituteof CertifiedPublic Accountants, "Basic Conceptsand AccountingPrinciplesUnderlyingFinancial Statements Number4 (New York: 1970),p. 37. of BusinessEnterprises,"Statement 4 Eldon S. Hendriksen, Accounting Theory,AmericanInstituteof CertifiedPublic Accountants,revised edition (iomewood, Illinois: Richard D. Irwin,Inc., 1970),

p. 111.

204

TIMELINESS

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AUSTRALIAN

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205

of timelinessin accountingtheorywhileKenley goes so faras to say "that the value of a financialstatementvaries inverselywiththe time taken to prepare it."' Since this study commenced,many companies have been suspendedfromtradingby the AustralianStock Exchangeson the grounds of noncompliancewith the particulartimelinessrequirementof the exchanges,so it is obviouslyviewed as an importantmatter.6Yet therehas been littleempiricalresearchon the timelinessof financialstatements.In this paper, certain time lags for Australianannual financialreportsare describedin an attempt to discover reasons for the lengthof delay for Australianfirms.However,the principalobjectiveofthispaper is to establish the impact of selected corporateattributeson reportingdelays. The attributesexaminedare companysize, year-endclosingdate, and relative profitability.

The Data an unrestricted In orderto specifytime-lagdistributions, randomsample of 120 companieswas taken fromthe industrialand commercialcompanies listedon the SydneyStock Exchange on June,1971. The periodof analysis fromwhichdata were taken was 1965 through1971. Only one sample set was drawn and all resultsgeneratedin termsof that set. A bias toward survivingcompanieswas, thus,introducedinto the computedstatistics. The time-lagdata were taken fromthe filesmaintainedby the Sydney Stock Exchange Library,which has a policy of stampingall documents with the date and hour received. Individual time lags for each sampled companywere computedfromthese stamped dates. For the preliminary finalstatements,the earliestdate stamped on the company'sletter,telewas selectedas gram,or telex whichcontainedthe stipulatedinformation the receiptdate. In all cases the beginningdate for the period was the financialyear-endof the company.In computingthe timelags neitherthe year-endnor the stampeddate of receiptwas included.It was not always possibleto obtain the fullset of observationsover timeforall of the variables of interest.The most commoncause of a failureto includedata was the absence of documentsfromthe libraryrecords.On a few occasions documentshad not been stamped. In addition to the time-lagdata, data on rates of returnon ordinary capital were collected from the Sydney Stock Exchange's Investment Serviceforthe period 1966 through1971. Rate of returnwas definedas earningsless preferencedividendsdivided by the sum of dollar value of ordinarycapital and sharepremiumreserve. 6 W. J. Kenley and G. J. Staubus, "Objectives and Conceptsof Financial Statements," AccountingResearchStudyNo. 3 (Melbourne,Victoria: AccountancyResearch Foundation,1972),p. 9. 6 For example,the AustralianFinancial Review of Jan.3, 1974,reportedthat 38 companieshad been suspendedfromtradingbecause of failureto supply the exchangeswithannual accountsfortheprecedingfinancialyearendingJune30, 1973.

206

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RESEARCH,

AUTUMN,

1975

viewofthe timelags,118 To obtaina moreexactand comprehensive of thosefirmswhich to the comptroller weredistributed questionnaires The recompanies.7 the sampleofindustrialand commercial comprised 53 companies.In spiteofthissmall sponserate was 45%, representing to as we willbe referred questionnaire theresultsofthecompany number, responsesto checkand cross-reference proceed.Becauseofthesuccessful are believedto be representative. questions,the resultspresented to the auditingfirmsof these was distributed A similarquestionnaire and commercial companiesselectedfromtherandomsampleofindustrial weremailed(somefirmswerereprequestionnaires firms.Seventy-eight only 15 firmsreplied (19 %). sented more than once), but, unfortunately,

lag We thus feltunableto assess the auditors'viewson the reporting situation. ofthisstudy,threeprimary lags willbe retheremainder Throughout to. Theyareheredefined as: ferred lag-the openintervalofthenumberof daysfromthe (i) Preliminary by theSydney finalstatement year-endto thereceiptofthepreliminary StockExchange. lag-the openintervalof the numberof days (ii) Auditors'signature datein the as theopinionsignature to thedaterecorded fromtheyear-end auditors'report. -(iii)Total lag-the openintervalofthenumberofdaysfromtheyearend to the receiptof the publishedannualreportby the SydneyStock Exchange.

andDistributions Statistics noneof the lags describedabove can be negative,and By definition, long,in practicethestockextheycouldbe arbitrarily while,in theory, andothercommercial effectively considerations requirements changelisting ofa fewvery providean upperbound.However,becauseoftheexistence positiveskewnesswouldbe expected.It was,therefore, delayedreports, followed bythedata. Kolmogorovthedistributions ofinterest to examine wereusedto testthenullhypothestatistics Smirnov(K-S) andchi-square sis ofnormality. thedistributions oftheabovetestswas that,in general, The conclusion lagsand thetotallagswere ofthepreliminary lags,theauditors'signature of theleptoThe fat-tails skewedand leptokurtic. positively nonnormal, thattherewere werebiasedto therightside,meaning kurticdistributions too manylags of longdurationrelativeto the meanthan expectedfor werequiteasymlags.Sincethedistributions normally distributed strictly ofkurtosiswerehighlyassociatedwiththe coeffimetric,the coefficients were 7Two of thefirmswereeliminatedfromthe total 120since theirhomeoffices in foreigncountries.

TIMELINESS

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ANNUA L REPORT

1

QuartileDistribution of TotalLags Percentoffirms

25 50 75

1965

76 99 119

1966

86 103 118

1967

83 100 118

Fiscal years 1968

88 102 128

1969

89 104 127

1970

1971

86 106 128

96 111 139

119.0 111.0 103.1

125.9 117.8 109.6

limits 95% Confidence

Upper limit Mean Lowerlimit

108.1 101.5 94.9

115.2 107.8 100.5

112.1 104.9 97.7

111.9 105.8 99.6

116.1 109.3 102.4

cientsof skewness,whichleads to problemsin measuringdeparturesfrom mesokurtosis.8

The Total Lag Quartile distributionsof the total lag for companiesin the sample set are givenin table 1. The meansand 95 % upperand lowerconfidencelimits forthe means are listedforeach year. Skewnessis positivein all yearsand is significantly greaterthan zero forall distributionsof total lags in all of the sample years except 1965 and 1968 (at 2 standard deviations). The ratio of the centralrange of total lags to the base range is significantly smallerthan the ratio fora normal distributionin 1966, 1967, 1970 and 1971 (i.e.,leptokurtic).Chi-squarevalues indicatethat onlythe 1965 total lags reasonablyconformto the Gaussian probabilitydistribution(at the 5 % level). Cumulativerelativefrequencies(hereafterabbreviatedc.r.f.)were generated foreach of the years 1965 through1971 to determineif the total fromany time-lagdistributionforany one year was statisticallydifferent otheryear in this time span. Using K-S two-sample,two-tailedtests,the hypothesisof 1965 c.r.f. 1971 c.r.f.; 1966 c.r.f. = 1971 c.r.f.;and 1967 c.r.f. = 1971 c.r.f.could all be rejectedat the 10 % level. When the confidence level was raised to 95 %, only the lattertwo could be rejected,the This does 1971 values beingstochasticallylargerin all cases ofsignificance. not necessarilymeanthatthe total timelags increased,sinceovera number of samplesone would expectthe occasionalindicationof inequalityin the sampleswhen,in fact,therewas no inequalityin the populations.It is also possible that 1971 was an exceptionallypoor year and not typical of the 8 The coefficients to in thetextare -yi= m3/m28/2 ofskewnessand kurtosisreferred and y2= (m4/m22)-3. m,is thejth centralmoment.The respectivestandarddeviawith a sample size of N. For a tions forthesemeasuresare (6/N)1'2and (24/N)112

normal distribution, aY1= 0, -Y

=

0.

208

JAMES C. DYER

IV AND ARTHUR

J. MCHUGH

sincethe wouldseemto suggestotherwise, however, trend.The evidence, from101daysin 1965to 117daysin 1971. meansincreased ofseveralcomponent The totaltimelag can be viewedas an aggregate but in detailall thelagsthatareinvolved, lags.It is notpossibleto specify make-up of the concept the basic evidenceto formulate thereis sufficient 1) ofthetotallag for1971 diagram(figure ofthetotallag. A composition of the sub-lags. examination following the is presented lags were finalstatement Lag. Data on thepreliminary (i) Preliminary oftheprelimicollectedand analyzedbecausethedate ofannouncement whichtherewasnopublic signaledtheendoftheperiodduring naryfigures is As thepreliminary statement on theresultsofoperations. information it is conceivablethatreporting behavior announcement, the firstofficial in the timedelay to the preliminary may be moreaccuratelyreflected StockExthanin thetotallag. Moreover, theAustralian announcement to thepreliminary attention lag becausethe changesarepayingincreased theperiodduringwhichinsidertradingis poslongerthelag,thegreater sible. to reject forthe c.r.f.'sare insufficient K-S differences The maximum of identicaldistribution overtime(10% level). This the nullhypothesis withthebelief is consistent ofthepreliminary lag distribution stationarity to announcethepreliminary on management thatthe externalpressures overthe resultswithina fixedtimeintervaldid not altersignificantly studiedperiod. oftheauditors'signature Lags. An examination Signature (ii) Auditors' in thebeliefthatthedate oftheauditors'signature lags was undertaken audit thepointat whichthe year-end signified to the opinionstatement may complete.Whilethe audit examination periodwas mostdefinitely at somepointpriorto the signature date,it was have,in fact,finalized to thesigtookplacesubsequent auditprocedures thatscheduled unlikely datesis in then,ofthe auditors'signature naturedate.The significance, theportionofthetotaldelayduringwhichtheauditorswere determining responinvolved,and,indeed,forwhichtheymayhave been primarily TABLE

2

Lags QuartileDistributionof Preliminary Percentoffirms 25 50 75

Fiscal years 1965 53 70 90

1966 52 68 92

1967 53 65 89

1968 51 68 94

1969 55 71 93

1970

1971

49 69 91

59 71 92

86.0 77.0 68.1

87.4 80.5 73.5

limits 95% Confidence Upper limit Mean Lower limit

79.8 73.5 67.1

82.2 75.1 68.1

81.7 74.6 67.4

81.5 74.8 68.0

86.1 78.7 71.3

AUSTRALIAN

OF THE

TIMELINESS

ANNUAL

209

REPORT

TABLE 3 ofAuditors'SignatureLags QuartileDistribution Percentoffirms

Fiscal years 1965

1966

1967

1968

1969

1970

1971

25 50

60 78

61 82

58 76

58 78

62 79

62 84

69 85

75

103

108

102

102

105

112

111

99.9 91.8 83.8

97.7 91.1 84.5

limits 95% Confidence

Upper limit Mean Lower limit

93.1 85.0 77.0

94.2 87.0 79.9

89.2 82.5 75.8

90.2 83.3 76.4

91.5 85.1 78.7

of the auditors'signature sible. Table 3 presentsthe quartiledistributions thus implyinga stationarypopulags. All K-S statisticsare insignificant, lation over time (at 10% level). Lag. To betterestimatethe actual year-endaudit (iii) 90% Availability the sampledcompanieswereasked to specifythe time examinationperiod, the from year-endclosingto the date the auditorshad been able interval to commencethe investigationof 90 % of the balance sheetaccounts.The respondentsindicated an average delay of 34 days for 1971. This period representedan estimationof the time duringwhich the auditors were unable to activelycommencetheirfinalexaminationdue to management delays. Submission Lag. As noted,the auditors'signaturedate (iv) AuditReport representsa point certainwith respect to the durationof the year-end audit examination.At the same time,the audit examinationperiodwas in many cases, no doubt, somewhatshorter,even afteradjustmentsforthe 90 % availabilitylag, than that computedforthe auditors'signaturelags. To moreclearlyevaluate the year-endexaminationperiod,and to estimate the timeperiodfollowingthe audit examinationperiodforwhichthe company directorswere primarilyresponsible,the sampled companieswere asked to indicatethe total time period fromthe financialyear-endto the date the signedaudit reportwas submittedby the auditorsto the company directors.For 1971, the respondentsindicatedthe average period was 78 days. Lag.The finalsub-lagof the total lag forwhichinformation (v) Printing was obtained was printingtime. The sampled companieswere asked to indicatethe timetaken (in days) by the printersto completethe year-end financialreport.The arithmeticmean delay for1971 was 23 days.

CompositionDiagram A compositiondiagramfor 1971 is presentedin figure1. Diagrams for the other years for which data were collected were generallysimilarto

210

JAMES C. DYER

34

A

I

l_3

0

10 *

IV AND ARTHUR

J. MCHUGH

1C1 13

B =44

I

20

- I

30

I

40

I

50

-

1

60

.

I -

70

I

80

I

90

finalstatement. Release of preliminary Sub-lags

(iii) 90% availabilitylag (iv) Audit reportsubmissionlag lag (i) Preliminary (ii) Auditors'signaturelag (v) Printinglag Total lag

Confidence Mean (days) 95%0/ Limits(days)

34 78 81 91 114 118

totallag 118days

D =23

-t4 +7 i7 46 49 A8

I

100

I

110

I

120 days

MjrCmoet Major Components

(A) (A + B) (A + B + C) (A + B + C + D)

FIG. 1.-Composition diagram:1971total lag.

1971. The total timelag can be brokendown into fourmajor components which are lettered"A," "B," "C," and "D." Period "A" representsthat lag duringwhichthe auditorswere unable to carryout theirfinalexamination of 90% of the balance sheet accounts. Period "B" representsan estimateof the actual year-endaudit examinationtime. That is, period "B" is the time fromwhen the auditorswere able to assess 90 % of the accounts to the date the auditorssubmittedtheirreportto the directors. The next major periodis "C," whichis the timelapse fromthe receiptof the auditors'reportby the directorsto the date the auditorssignedthe report.Period "C" representsan estimationof the time taken by the directorsto considerthe auditors'reportand forthe auditorsand directors to make any finaladjustments.Note that on the average the preliminary statements(*) were releasedby the directorsthreedays afterthe receipt of the auditors'reports.The finalmajor period,"D," is theprintingtime. It was assumedthat the annual financialreportwas sent to the printeron of fourdays betweenthe the day ofthe auditors'signature.The difference total lag to the date the printedreportwas receivedby the companiesand the average 118 days total durationis assumedto be in-mailtime.

View theTime Lags How CorporateComptrollers The questionnairedistributedto the sampled comptrollersasked them to indicate the respectivecorporateopinion of the maximumacceptable totaltimelag fromthe year-endto the presentationof the publishedfinal

TIMELINESS

OF THE

AUSTRALIAN

TABLE

ANNUAL

REPORT

211

4

in Complying TotalLag MaximumPeriods withAlternative Difficulty Total time(in days)

No difficulty

150 120 100 90 75 60 45 30

100.0%* 96.1* 76.5* 51.0* 23.5 7.8

Somedifficulty

3.9% 23.5 35.3 29.4 17.6 7.8

Verydifficult

11.8% 33.4* 33.4 23.5 5.9

Impossible

1.9% 13.7 41.2 68.7* 94.1*

* Largest per row.

was a duration The averageoftheresponses reportto thestockexchanges. thantheactuallagsfor1971(which of93 days.9Thiswas 25 daysshorter endorses evenifoneassumesmanagement at 5 %). However, wassignificant followthatthe observed principleit does not necessarily the timeliness acceptabletotallag" willbe identical.There totallag and the"maximum and thecosts ofmoretimelystatements betweenthebenefits is a tradeoff In management's view,the equithesebenefits. to the firmin obtaining mayoccurfora delayin excessofwhat libriumpositionforshareholders couldachievewereit notforthecosts. management viewofthetimelagswas procured ofmanagement's Furtherindication theissueofthecostofmore introduced froma questionwhichindirectly wererequiredto specifythe level of The respondents timelyreporting. in meetinga certainmaximum theircompanywouldexperience difficulty The lag periodif it werenecessaryto do so becauseof someregulation. in table4.10It is noteworthy thatwhile resultsofthisquestionareoutlined to thepublic in 1971only68% ofthesamplesetreleasedtheirstatements 100% oftherespondents said theywould within4 monthsfromyear-end, in doingso. Whenit cameto the have at the mostonlysomedifficulty thequestionnaire and timelyreporting, respondquestionofshareholders shareholders do indeeddesire entsweresplitnearlyevenlyoverwhether The averageresponseto the (49% affirmative). less delayin reporting of those who believeshareholders value acceptablelag question maximum who those whereas was 98 negatively responded days, timelyreporting stated103daysontheaverage.It wouldappearthat,on theaverage,very was expendedby theformer groupin implementing littleadditionaleffort oftimeliness. theirphilosophy 9 A 95% confidence intervalforthe responsesyieldedupper and lowerlimitsof 100 and 86 days. 10A directcomparisonof responsesto the maximumintervalquestion and the lowest "no difficulty" lag of this questionyieldeda Spearmanrankcorrelationcoof .64. The respondentswerethussomewhatficklein theiranswers. efficient

212

JAMES C. DYER

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J. MCHUGH

Some ReasonsfortheFour-MonthAverageTotal Lag One possibleexplanation whyannualreportsmighttakean averageof justunder4 months to reachthepublicis becausethereis littleorno planningand scheduling ofthe activitieswhichtakeplace subsequent to the year-endclosing.The companyquestionnaire soughta surrogate forthe degreeof year-end planningby inquiring as to howoftenauditorsindicatedan estimated completion datefortheiryear-end work,priorto commencingthe finalaudit examination. Sixty-sixpercentstatedthis was alwaysthecase,and85% indicatedit was alwaysorusuallythecase.The companieswerethenasked how oftenthe auditorscompletedthe final auditbytheoriginally estimated completion date.Somewhat unexpectedly, 86% saidthatsuchwasalwaysorusuallythecase. In view of theseresponses it wouldappearthat a certainelementof planningdoestakeplace.At thesametime,notethatthetotallags have not decreasedovertheperiod1965-1971.This,in itself,callsforfurther ofthesignificance In addition,thereis the consideration oftheplanning. matterofreconciling withtheaverofplanning thesubstantial occurrence age auditperiodof44 days (1971)beyondthevirtualendingofthepostinthecontext balancedatework,a reconciliation thatmightprovedifficult of the Australianongoing, year-round audit.As to the relevanceof the of auditscompleted highproportion by the originally estimatedcompletiondate,thistoo mustbe interpreted witha touchofskepticism. There is the distinctpossibility that the estimatedcompletion dates are selfin thatiftheauditofonecompany aheadofschedis proceeding fulfilling, areshifted to anotherauditwhichhas fallenbehindthe ule,auditingstaff schedule. The durationoftheyear-end auditworkis, ofcourse,a majorelement in thetotallag. Figure1 revealedthat,on theaverage(1971),66% ofthe date(tothedirectors). totallagwastakenup bytheauditreport submission In orderto gaina clearerpictureofthecausesofthisdelay,thequestionnairehad therespondents ranksix alternative reasonsforfailingto comauditexamination estimated pletea year-end by theoriginally completion notcomdate.11 Whilethequestionpertained onlyto auditexaminations reasonto believethat pletedby a scheduleddate,thereis no compelling "on time." arenotas relevant to auditswhichare completed therankings in The resultsofthequestionarepresented table5. rankedfirstand secondindicates The natureof the two alternatives and auditing,as it normal that is therecurring, problemsof accounting the to the consume which opposed extraordinary issues, greatestamount the oftime.The firstrankedalternative partiallyexplains 34 days(1971) of sheetaccountswereaccessible than % the balance which less 90 during to the auditors.Likewise,the secondrankedfactor,at leastin part,ex11 One of the alternativeswas a dummycheckvariable and was eliminatedprior to the computationof the statistics.

TIMELINESS

OF THE AUSTRALIAN ANNUAL REPORT TABLE

213

5

Date* EstimatedCompletion AuditsbyOriginally Causes ofFailure toComplete Rank

Alternative

1

Delays in postingthe finalmonths'operationsand completingpreaudit year-endadjustmentsof the accounts; etc.; Delays in producingdocumentsfortheauditors,takingofinventories, verificaAuditingproceduraldelayssuch as slow returnsofconfirmations, tionsof subsidiaryledgers,etc.; Disagreementswiththeauditorsoverthevaluationofaccounts,otherthan as in (5); ofsome extraordinary Disagreementswiththe auditorsover the reporting events. and/ornonrecurring

2 3 4 5

* Rankingsdetermined bythemodeforeach alternative,e.g., alternative1 ranked firstmoreoftenthan any otherrank.

between plains the 44-day durationmarked in figure1 as the difference the audit reportsubmissionlag and the 90 % availabilitylag.'2 reasons reveals that each of the above-mentioned A moment'sreflection fordelay affectsthe time lag up to the preliminarystatementrelease or, of at the latest,the auditors'signaturedate. For example,any lengthening reportingdelay inducedby delays in postingthe finalmonth'stransactions would be fullyabsorbed in the preliminarystatementlag. Previouslywe argued that the distributionsof preliminaryand auditors' signaturelags were stationaryover the studiedperiod,and we suggestedthat this situaon management tionis consistentwiththe hypothesisthat the externalities (e.g., fromshareholders,stock exchanges,etc.) constrainingtheirreportduringthat period.The external ing-lagbehaviordid not altersignificantly in the aggregate,to adjust did not cause management, pressuresapparently the noted causes have been This behavior. simply says theirreporting-lag that not It to does they were, or are, imply time. necessarily invariant inconsequential.

Attributes TheAssociationofTimeLags and SelectedCorporate The time-lag distributionshave been described,and certain factors total lag have which may partially account for an average four-month been proposed. The possible association between time lags and selected corporateattributesis now examined.Unlikethe previousfactorsdiscussed whichdirectlycause deviationsin timelags, the attributesconsideredhave our previouscaveat,it is interestingto note that those auditingfirms thatdidrespondto thequestionnaireagreedwithmanagementas to thetwoprincipal causes fornotcompletingtheyear-endexaminationby theoriginallyestimatedcompletiondate. The figureswere73% foralternative(i) as rank1, and 60% foralternative (ii) as rank2. Alternatives(iii) and (iv) reversedrankingsin the auditors'questionnaire;i.e., ranked4 and 3, respectively. 12 Despite

214

JAMES C. DYER

IV AND ARTHUR

J. MCHUGH

no causal propertyperse, but are each surrogatesforvariables whichdo induce changes in reportingdelay. For example, substantiallyimproved profitability does not itselfbringabout an earlieror later than usual preliminaryfinalstatementannouncement.Rather,it is the actionsinstigated by management,such as workingovertimeto preparetrialbalances, or it is the increasedaudit durationresultingfromadditionaltimespentby the auditors in accountingfor any abnormalprofitswhich bring about any change in the time lags. Nonetheless,the surrogates,namely corporate size, year-endclosingand relativeprofitability, are ofimportance. The objectivein evaluatingthe timelags in this manneris to seek further evidence regardingthe factorsinfluencingthe reportingdelays for Australian annual financialstatements.No doubt some of this evidence could be usefulto regulativeagencies. A strongassociation,forexample, between corporatefinancialyear-endingdate and long total lag would suggest,ceteris paribus, that the stock exchangesshouldrequirenew registrants,wherepossible,to adopt a year-endotherthan the commonchoice of June30. A relationshipbetweenprofitability and reportinglag may be expected. If so then the durationof the reportinglag could be a prime source of information(about the resultsof operations)whichthe market uses in determining the equilibriumprice of shares.This has a numberof implications.Deregistrationas a resultof excess delay, forexample,may onlv serve to increaseuncertaintyregardingprofitability. in Furthermore, orderto protectthe marketfromany consciousmanipulationofthe reporting lag (to implya falseprofit)or froman involuntarydelay unrelatedto abnormalresults,the stockexchangesmightconsidera rulewhichrequired companiesto state the reasonsforreportingdelays whichare expectedto surpassa standardperiod.That thereshouldbe somerelationshipbetween corporatesize and timedelay in reportingannual resultsis consistentwith the beliefthat management'ssensitivityto timelyreportingis a function of the firm'scapital value. The growthof an enterpriseand the degreeof scrutinyover its financialaffairsby regulativeagencies,unions,investors, etc., are invariably associated. Increasing outside interestwill be met, withinlimits,with decreasingtotal reportingdelay because management will be willingto directadditionalfundsto obtain less lag so as to more quicklyeliminatethe uncertaintyof outsidersregardingoperatingresults. One reasonwhymanagementwill be willingto purchaseless reportinglag is that the alternativemay be increased regulative control over their reportingactivities.Anotherreasonis that the largerthe firm,the greater the outsideinterestand, consequently,the greaterthe potentialpolitical pressureto bringabout such control.

CorporateSize and Total Lag If timelyreportingis an integralpart of the managerialfunction,one would generallyexpectmanagersto directsome portionof everymarginal

OF THE

TIMELINESS

AUSTRALIAN

ANNUAL

REPORT

215

TABLE 6 ofAssetSize and Total Lag RIankCorrelations Fiscal year

Spearman rank co-

efficient Computedt-value

at a Significant

=

1971

1970

1966

1967

1968

1969

-.308

-.232

-.181

-.176

-.159

-3.13*

-2.26*

-1.80**

-1.71**

-1.56

-.180

-1.78**

.05.

* Significant at a = .10.

TABLE 7 Total Lag Comparisonsof ExtremeAsset Size Intervals(000s8) Fiscal Year Assets(000's)

Numberof firms

46

$50,000

11

$5,000

48

42

$50,000

17

.729

.500

.235

.604 .396

1.000

.619 .381

.941 .059

Lags > 90 days

.717

.271

Lags < 122 days Lags > 122 days

.674 .326

1.000

a

12

$5,000

.214

.636

.364

$50,000

.500

.283&

Lags < 90 days

1971

1969

1966 $5,000

.786

.765

Percentoffirmswithtotal lags less thanor equal to 90 days.

dollarofrevenueto thepurchaseofless delay,up to thepointwherethe to shareholders, etc.fromthenextincremental benefit creditors, marginal ofdelaywas lessthanthe costofsuch.'8Sincelargecompanies reduction it mightbe both absolutelyand relatively, have substantialresources, thatsignificant wouldexistbetweentimelags covariability hypothesized do notdesireor caseis thatlargecompanies and firmsize.The alternative demandson areunableto reducedelaybecausetheyhaveequal orgreater to smallerfirms. compared theirresources werecomputedforthetotallags and total Spearmanrankcorrelations Theresults, to measuretheextentofcovariability.14 assetsofeachcompany in fiveof correspondence as in table6, indicatethattherewas significant was never the strong. thesixyearstested,although relationship ofthe correlation by comanalysiswas undertaken Furtherrefinement of total the for statistics lags of U comparisons putingMann-Whitney 13 By purchasing less delay we mean hiringmore accountingpersonnel,paying greaterauditfeesforless time-inaudit,installinge.d.p. systems,etc. 14 The onlyalternativemeasureof corporatesize is sales. Standishreportedthat a significantpercentof his sampled Australianindustrialand commercialenterprisesdid not reportsales figures.For thisreasonsales data werenot collected.See: ResearchStudy PeterE. M. Standish,"AustralianFinancialReporting,"Accounting No. 2 (Melbourne,Victoria:AccountancyResearchFoundation,1972),p. 195. Shareholders'equity was not consideredsince it is partiallya functionof the financing mix foreach enterprise.

216

JAMES C. DYER

IV AND ARTHUR

J. MCHUGH

TABLE 8 ofTotalLags forJune30Endingand Non-June30 Ending U TestsoftheHomogeneity Companies Fiscal Year

Two-tailprobability associated withobserved U Class sizes

1965

1966

1967

1968

1969

1970

1971

.0052

.0012

.0008

.0005

.0136

.0524

.1616

21:75

22:73

20:73

18:78

22:71

19:74

19:77

TABLE 9 and Total Lag Rank Correlation of RelativeProfitability Fiscal year

1966

1967

-.190 Spearmanrank coeffi- -.203 cient -1. 827** -1.794** Computedt-value **

1968

1969

1970

1971

.034

-.016

-.016

-.056

.325

-.150

-.989

-.509

at et= .10. Significant

firmswith greaterthan $50,000,000total assets and firmswith less than exceptin 1971 (witha = .05). $5,000,000.The U statisticsweresignificant The importanceof these resultsis perhapsbetterappreciatedby referring to table 7. The patterndisclosedin table 7, by comparingthe lags to two "benchmarks,"is that "larger" firmshave consistentlybeen moretimely reportersthan "smaller" companies. They have, nevertheless,become relativelyless timely(in termsofthe 90-daystandard)."5

Financial Year-Endand Total Lag Because a significantnumberof Australianindustrialand commercial companiesclose theirbooks on June30, the opinionwas formedthat those companies would have reportedlater than companieswith non-June30 closings.Conceptually,the large numberof June30-endcompanieswould have caused peak demands on the resourcesof auditingfirmswhich,in turn,would have led to additionaltimein completingthe year-endinvestigationand, ultimately,additionaldelay in reporting.As table 8 indicates, the total lags forJune30-endingcompanieswerestochasticallylongerthan those of non-June30 companiesin everyyear exceptthe two most current that one meansofreducingthe (at the 5 % level). It would seem,therefore, average total lag would be forthe stock exchangesto requirenew registrantsto adopt a non-June30 financialyear. Generally,this should be a relativelycostlessadjustmentforthe firms. 15 The 90-daybenchmark thedelay86.3% ofthequestionnairerespondents signifies The 122-daybenchmarkis the stated could be met withonlysome or no difficulty. requirement.See Australian Association Stock ExcurrentA.A.S.E. four-month changesListingManual, Section3, C(1) as of August1972,Amendment.

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217

TABLE 10 U Tests of the Homogeneityof Total Lags for Firms with Extreme Relative Comparedto Firms with ModerateRelative Profitability Profitability Fiscal year

1966

1967

1968

1969

1970

1971

Two-tailprobabilityassociated withobservedU Class sizesa

.0226

.9602

.7794

.7417

.7114

.8650

17:78

21:72

21:76

26:67

26:70

31:64

a

(X < 0.0%; X> 25.0%) and (0.0%
and TotalLag Relative Profitability It appearedreasonable to expectrelativeprofitability (i.e.,rateofreturn to higher relativeprofitaonordinary capital)andtotallags varyinversely, versa. This opinion is a popuand vice related to shorter lags bilitybeing by the"NationalTimes"whenit claimed larlyacceptedoneas witnessed newsnotonlytakeslongerto reachthepublicear than that,"Bad profit neverreachesit at all" (February12-17,1973). good,but it sometimes and totallag, betweenrelativeprofitability Measuresofthe relationship as shownby generally unsubstantiated, however,lefttheseexpectations as expected, areindeedmostly coefficients table9. The correlation negative, not significant at the 10% level.In recenttimestherehas but generally to reportquicklyor forloss combeenno trendforprofitable companies paniesto reportslowly. werestratified analysis,the total-lagfigures Followingthe correlation relativeprofitabilaccording to eachfirm'srespective intothreeintervals ity,suchthat: on ordinary capital let X = rateofreturn interval(i) providedX < 0.0% interval(ii) provided0.0% < X < 25.0% interval(iii) providedX> 25.0%. Intervals(i) and (iii) werethencombinedand comparedto interval(ii) U test.'6The purposeofthesetestswasto evaluate bytheMann-Whitney firms withextremely goodor poorresultswouldbehavesimilarly whether in table10, to firms The results, as presented performance. withmoderate with revealedthatsuchwas thecase exceptin 1966.It appearsthatfirms in theirreporting exceptional profits(positiveor negative)do not differ lagsfromthosewithaverageprofits. ofwhata and themarketformexpectations Clearly,bothmanagement be a in will variable major should and earnings be, past firm'searnings at theseexpectations. Moreover,if the previousyear'sprofitis arriving ofthisyear's,thenthechangeinrelative profitatakenas thebestpredictor bilitybecomesa measureof the variationfrom"normal"profit.In this 16 The intervalsweresuggestedby the distribution of the data and wereselected so as to insuresufficient observationsin each class.

218

JAMES C. DYER

J. MCHUGH

IV AND ARTHUR

TABLE

11

and Changein TotalLag ofChangein RelativeProfitability Rank Correlation 1966-1967

Fiscal year

Spearman rank coefficient -.259 -2.92* Computedt-value

* Significantat a

=

1967-1968

-.043 -.379

1968-1969

.021

.179

1969-1970

.245

-2.17*

1970-1971

-.095 -.788

.05.

TABLE 12 ofChangesin Total Lags forFirmswithExtremeChanges U TestsoftheHomogeneity in RelativeProfitability Comparedto Firms withModerateChanges Fiscal year

Two-tailprobabilityassociated withobservedU Class sizes$ a (<

1966-1967

1967-1968

1968-1969

1969-1970

1970-1971

.3124

.1388

.0854

.3788

.3524

9:66

8:72

7:71

12:64

17:54

? -10.0%; X ? 10.0%) and (-10.0% < X < 10.0%).

associationmaybe expectedbetweenthe deviationsin sense,a stronger fortwoconsecutive yearsand changesin totaltime relativeprofitability betweenstaticrelativeprofitability relationship lagsthanwastheobserved whichconfromexpectations and statictotaltimelag. It is thevariations for Yet, as table 11 indicates,the rankcorrelations stituteinformation. on ordinary capitalwere changesintotallagsandchangesin rateofreturn thanzeroin onlytwoofthefiveperiods. greater significantly as in thestatictotallag/static Thisled us to followthesamereasoning in conformity caseand separatethetotal-lagnumbers relativeprofitability suchthat: withtheirchangeinrelativeperformance capital on ordinary letX = changeinrateofreturn interval(i) providedX < - 10.0% interval(ii) provided-10.0 % < X < 10.0% interval(iii) providedX > 10.0%. As before,the "extreme"intervalswereunitedto forma singleclass. in U statisticsdisclosedthatthedifferences Mann-Whitney Nonetheless, thattheywere theconclusion to warrant thesetwoclasseswereinsufficient unequal(seetable12). stochastically For the studiedperiodit wouldappearthat therewas littlerelation and thetotaltimetakenby Australian betweentheresultsofoperations Whileit mayappeara reasonable arguthe results. to report management news and "bad" be delayed, would news quickly reported mentthat"good" is Mostnoteworthy didnotvalidatesucha belief."7 thedata,surprisingly, 17 Spearmanrank correlation were also calculatedforchangesin rate coefficients lags and changesin auditors' of returnof ordinarycapital, changesin preliminary This is -.226 (1969-1970). forthe preliminaries signaturelags. The largestcoefficient in the statisticalsense (at 5%), but of littlemeaningin the predictive is significant forthechangesin rateofreturnand changesin auditors' sense.The largestcoefficient signaturelags is - .199 (1966-1967).

TIMELINESS

OF THE AUSTRALIAN ANNUAL REPORT

219

yet data revealedno discrimination, the factthat the testsof the stratified more that the hypotheses, to our according such tests should have shown, of the enterprise,the moretimelywas the aninordinatethe performance nual reportrelayingsuch information. testsneed explicitmention.First, Two qualificationsto the profitability the fact that a strongrelationshipbetweenthe resultsof operationsand reportinglags could not be demonstrateddoes not necessarilyimplythat Australianmanagersare oblivious to the market'sneed and rightto be in the flexibility It may wellbe thatthereis insufficient informed. currently total-lagstructureto allow managementto reportmorerapidlywhen circumstanceswarrant.Recall that,as indicatedby the CompositionDiagram, thetotal audit time(A + B) constitutes66 % oftheaveragetotal delayand printingtimea further20%. Also, as stated previously,managementmay decide in the shareholders'interestthat the costsof moretimelyreporting are not justified. A furtherqualificationrelatesto the methodologyemployedin the tests of relativeprofparticularlywithrespectto the definition of profitability, and ofrelativeprofitability, itability.This studyused an ex-postdefinition a comparativelysimple one at that. It is not inconceivablethat a more perhapsin termsofthe deviationfrom sophisticatedmodelofprofitability, expected"normal"profit,would reveal an explanatorypowerin profitability over reportingdelays.

Conclusion The cumulativerelativefrequenciesforthe total lags, auditors'signature lags wereshowntobestable,withthesoleexception lags,and the preliminary that the 1971 total lags may have increased.Sixty-sixpercentof the mean totallag (1971) was consumedin pre-auditdelay and year-endaudit examination.And the companyquestionnairesdisclosedthat,as an averagemeasure,managementholdsthe opinionthat the maximumacceptabletotal lag shouldbe at least threeweeksless thanit has been. Planning of the year-endaudit activitiesand schedulingan estimated completiondate appear to be the commonpractice.But we suggestedthat in reducingthe durationofthe total such planninghas not been influential lag. Three corporateattributeswere investigatedin the belief that each would be a major explanatoryfactorof the reportingdelay phenomenon. Corporatesize was shownto accountforsome ofthe variationin total lags, thoughthe relationshipwas not strongacross all firms.Largerfirmshave taken less time to report,whichis expectedbecause they are morein the public eye. The vast majorityof the sampledfirmshave June30 financial year-endsand, accordingly,they were generallynot as quick to reportas the non-June30 companies.Tests of the relationbetweenrelativeprofitabilityand total lag, as well as tests of the changesin thesevariables,surprisinglydid not revealany meaningfulassociations.