AUDIT DELAY FOR FIRMS CORRECTING QUARTERLY EARNINGS

This study extends prior work by relating audit delay to correction of previously reported interim earnings. Correction of previously report ed earnings may be the result of client factors such as poor internal controls or intentional violation of the securities acts by client man agement. Presence of these factors is expected to lead to increased ye ar-end audit work and auditor/client negotiations about the best discl osure action. Also, increased audit delay for these firms may be induc ed by the auditor's concern about continued existence of the client wh ich leads to an increased search for possible misstatements. Data were collected on 85 firms making year-end announcements of corrections of previously reported interim earnings. These were matched by industry to the firms closet in size having the same sign of earnings change. A nalyses of audit delay differences between the correcting and matched firms show significant increases in audit delay overall for firms corr ecting misstatements in previously reported interim earnings. The incr ease is due primarily to those firms with overstatements of previously reported interim earnings whose earnings are also declining. A multiv ariate cross sectional regression that relates delay to correction mag nitudes as well as sign shows that the intercept for audit delay is si gnificantly positive for firms with interim overstatements and declini ng earnings, and that audit delay increases with the size of the overs tatement of interim earnings.