Does managerial entrenchment affect audit report lag?

Abstract

We examine the association between audit report lag (ARL) and managerial entrenchment using data spanning 2008-2016. We use regression analysis and data obtained from publicly available sources to construct our sample consisting of 5,155 firm-year observations and 807 unique firms to investigate whether the behavior of entrenched managers influences the time it takes auditors to complete an audit. The length of the annual audit is the most critical determinant of the timeliness and relevance of the financial reports. Our proxy for managerial entrenchment is the entrenchment index (EINDEX) as constructed by Bebchuk, Cohen, and Farrell (2009). We find a negative relation between audit report lag and the entrenchment index. We stratify the entrenchment provisions in line with existing literature and find a negative association between the provisions that restrict shareholder rights and the provisions that discourage hostile takeovers. Overall, our findings suggest that management entrenchment curtails managerial opportunism and reduces the auditors’ efforts, and the time auditors spend to complete the audit.