Jurnal Dyer & Mchugh 1975

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

The Timeliness of the Australian Annual ReportAuthor(s): James C. Dyer IV and Arthur J. McHughSource: Journal of Accounting Research, Vol. 13, No. 2 (Autumn, 1975), pp. 204-219Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business,University of ChicagoStable URL: http://www.jstor.org/stable/2490361 .Accessed: 01/04/2011 02:32

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The Timeliness of the Australian Annual Report

JAMES C. DYER IV AND ARTHUR J. McHUGH*

Many accountants, managers and financial analysts believe that timeliness is an important characteristic of financial statements. The American Accounting Association in 1954 observed that, "Timeliness of reporting is an essential element of adequate disclosure."' In more recent times Grady,2 the Accounting Principles Board of the American Institute of Certified Public Accountants,3 Hendriksen,4 and others have acknowledged the role

* Lecturer in Commerce, University of Newcastle, and Senior Lecturer in Ac- counting, Macquarie University. We wish to express our gratitude to Miss J. Coffey, Sydney Stock Exchange Library, for her gracious assistance. The members of the accounting workshop at the University of Queensland provided constructive criti- cisms, particularly Professor Ray Ball. We are most appreciative of the generous time Professor Philip Brown expended in reviewing an early draft and in comparing our time lags with those he used in "Those Half-Yearly Reports," Bulletin No. 13 (Melbourne: Australian Society of Accountants), June, 1972. Some differences could not be reconciled and may be due to differences in selection criteria or in systematic differences between the Melbourne and Sydney companies (or some combination of both).

1 Committee on Concepts and Standards Underlying Corporate Financial State- ments, "Standards of Disclosure for Published Financial Reports," Supplementary Statement No. 8, 1954. Reprinted in Accounting and Reporting Standards for Cor- porate Financial Statements and Preceding Statements and Supplements (Evanston, Illinois: American Accounting Association), p. 46.

2 Paul Grady, "Inventory of Generally Accepted Accounting Principles for Busi- ness Enterprises," Accounting Research Study No. 7 (New York: American Institute of Certified Public Accountants, 1965), p. 41.

Accounting Principles Board, American Institute of Certified Public Account- ants, "Basic Concepts and Accounting Principles Underlying Financial Statements of Business Enterprises," Statement Number 4 (New York: 1970), p. 37.

4 Eldon S. Hendriksen, Accounting Theory, American Institute of Certified Public Accountants, revised edition (iomewood, Illinois: Richard D. Irwin, Inc., 1970), p. 111.

204

TIMELINESS OF THE AUSTRALIAN ANNUAL REPORT 205

of timeliness in accounting theory while Kenley goes so far as to say "that the value of a financial statement varies inversely with the time taken to prepare it."' Since this study commenced, many companies have been suspended from trading by the Australian Stock Exchanges on the grounds of noncompliance with the particular timeliness requirement of the exchanges, so it is obviously viewed as an important matter.6 Yet there has been little empirical research on the timeliness of financial statements. In this paper, certain time lags for Australian annual financial reports are described in an attempt to discover reasons for the length of delay for Australian firms. However, the principal objective of this paper is to estab- lish the impact of selected corporate attributes on reporting delays. The attributes examined are company size, year-end closing date, and relative profitability.

The Data

In order to specify time-lag distributions, an unrestricted random sample of 120 companies was taken from the industrial and commercial companies listed on the Sydney Stock Exchange on June, 1971. The period of analysis from which data were taken was 1965 through 1971. Only one sample set was drawn and all results generated in terms of that set. A bias toward surviving companies was, thus, introduced into the computed statistics.

The time-lag data were taken from the files maintained by the Sydney Stock Exchange Library, which has a policy of stamping all documents with the date and hour received. Individual time lags for each sampled company were computed from these stamped dates. For the preliminary final statements, the earliest date stamped on the company's letter, tele- gram, or telex which contained the stipulated information was selected as the receipt date. In all cases the beginning date for the period was the financial year-end of the company. In computing the time lags neither the year-end nor the stamped date of receipt was included. It was not always possible to obtain the full set of observations over time for all of the variables of interest. The most common cause of a failure to include data was the absence of documents from the library records. On a few occasions documents had not been stamped.

In addition to the time-lag data, data on rates of return on ordinary capital were collected from the Sydney Stock Exchange's Investment Service for the period 1966 through 1971. Rate of return was defined as earnings less preference dividends divided by the sum of dollar value of ordinary capital and share premium reserve.

6 W. J. Kenley and G. J. Staubus, "Objectives and Concepts of Financial State- ments," Accounting Research Study No. 3 (Melbourne, Victoria: Accountancy Re- search Foundation, 1972), p. 9.

6 For example, the Australian Financial Review of Jan. 3, 1974, reported that 38 companies had been suspended from trading because of failure to supply the exchanges with annual accounts for the preceding financial year ending June 30, 1973.

206 JOURNAL OF ACCOUNTING RESEARCH, AUTUMN, 1975

To obtain a more exact and comprehensive view of the time lags, 118 questionnaires were distributed to the comptroller of those firms which comprised the sample of industrial and commercial companies.7 The response rate was 45 %, representing 53 companies. In spite of this small number, the results of the company questionnaire will be referred to as we proceed. Because of the successful responses to check and cross-reference questions, the results presented are believed to be representative.

A similar questionnaire was distributed to the auditing firms of these companies selected from the random sample of industrial and commercial firms. Seventy-eight questionnaires were mailed (some firms were represented more than once), but, unfortunately, only 15 firms replied (19 %). We thus felt unable to assess the auditors' views on the reporting lag situation.

Throughout the remainder of this study, three primary lags will be referred to. They are here defined as:

(i) Preliminary lag-the open interval of the number of days from the year-end to the receipt of the preliminary final statement by the Sydney Stock Exchange.

(ii) Auditors' signature lag-the open interval of the number of days from the year-end to the date recorded as the opinion signature date in the auditors' report.

-(iii) Total lag-the open interval of the number of days from the year- end to the receipt of the published annual report by the Sydney Stock Exchange.

Statistics and Distributions By definition, none of the lags described above can be negative, and

while, in theory, they could be arbitrarily long, in practice the stock exchange listing requirements and other commercial considerations effectively provide an upper bound. However, because of the existence of a few very delayed reports, positive skewness would be expected. It was, therefore, of interest to examine the distributions followed by the data. Kolmogorov- Smirnov (K-S) and chi-square statistics were used to test the null hypothesis of normality.

The conclusion of the above tests was that, in general, the distributions of the preliminary lags, the auditors' signature lags and the total lags were nonnormal, positively skewed and leptokurtic. The fat-tails of the leptokurtic distributions were biased to the right side, meaning that there were too many lags of long duration relative to the mean than expected for strictly normally distributed lags. Since the distributions were quite asym- metric, the coefficients of kurtosis were highly associated with the coeffi-

7Two of the firms were eliminated from the total 120 since their home offices were in foreign countries.

TIMELINESS OF THE AUSTRALIAN ANNUA L REPORT 207

TABLE 1 Quartile Distribution of Total Lags

Fiscal years Percent of firms -

years 1965 1966 1967 1968 1969 1970 1971

25 76 86 83 88 89 86 96 50 99 103 100 102 104 106 111 75 119 118 118 128 127 128 139

95% Confidence limits

Upper limit 108.1 115.2 112.1 111.9 116.1 119.0 125.9 Mean 101.5 107.8 104.9 105.8 109.3 111.0 117.8 Lower limit 94.9 100.5 97.7 99.6 102.4 103.1 109.6

cients of skewness, which leads to problems in measuring departures from mesokurtosis.8

The Total Lag

Quartile distributions of the total lag for companies in the sample set are given in table 1. The means and 95 % upper and lower confidence limits for the means are listed for each year. Skewness is positive in all years and is significantly greater than zero for all distributions of total lags in all of the sample years except 1965 and 1968 (at 2 standard deviations). The ratio of the central range of total lags to the base range is significantly smaller than the ratio for a normal distribution in 1966, 1967, 1970 and 1971 (i.e., leptokurtic). Chi-square values indicate that only the 1965 total lags reasonably conform to the Gaussian probability distribution (at the 5 % level).

Cumulative relative frequencies (hereafter abbreviated c.r.f.) were generated for each of the years 1965 through 1971 to determine if the total time-lag distribution for any one year was statistically different from any other year in this time span. Using K-S two-sample, two-tailed tests, the hypothesis of 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 rejected at the 10 % level. When the confidence level was raised to 95 %, only the latter two could be rejected, the 1971 values being stochastically larger in all cases of significance. This does not necessarily mean that the total time lags increased, since over a number of samples one would expect the occasional indication of inequality in the samples when, in fact, there was no inequality in the populations. It is also possible that 1971 was an exceptionally poor year and not typical of the

8 The coefficients of skewness and kurtosis referred to in the text are -yi = m3/m28/2 and y2 = (m4/m22) -3. m, is the jth central moment. The respective standard deviations for these measures are (6/N)1'2 and (24/N)112 with a sample size of N. For a normal distribution, aY1 = 0, -Y = 0.

208 JAMES C. DYER IV AND ARTHUR J. MCHUGH

trend. The evidence, however, would seem to suggest otherwise, since the means increased from 101 days in 1965 to 117 days in 1971.

The total time lag can be viewed as an aggregate of several component lags. It is not possible to specify in detail all the lags that are involved, but there is sufficient evidence to formulate the basic concept of the make-up of the total lag. A composition diagram (figure 1) of the total lag for 1971 is presented following the examination of the sub-lags.

(i) Preliminary Lag. Data on the preliminary final statement lags were collected and analyzed because the date of announcement of the preliminary figures signaled the end of the period during which there was no public information on the results of operations. As the preliminary statement is the first official announcement, it is conceivable that reporting behavior may be more accurately reflected in the time delay to the preliminary announcement than in the total lag. Moreover, the Australian Stock Ex- changes are paying increased attention to the preliminary lag because the longer the lag, the greater the period during which insider trading is possible.

The maximum K-S differences for the c.r.f.'s are insufficient to reject the null hypothesis of identical distribution over time (10% level). This stationarity of the preliminary lag distribution is consistent with the belief that the external pressures on management to announce the preliminary results within a fixed time interval did not alter significantly over the studied period.

(ii) Auditors' Signature Lags. An examination of the auditors' signature lags was undertaken in the belief that the date of the auditors' signature to the opinion statement signified the point at which the year-end audit period was most definitely complete. While the audit examination may have, in fact, finalized at some point prior to the signature date, it was unlikely that scheduled audit procedures took place subsequent to the signature date. The significance, then, of the auditors' signature dates is in determining the portion of the total delay during which the auditors were involved, and, indeed, for which they may have been primarily respon-

TABLE 2

Quartile Distribution of Preliminary Lags

Fiscal years Percent of firms

1965 1966 1967 1968 1969 1970 1971

25 53 52 53 51 55 49 59 50 70 68 65 68 71 69 71 75 90 92 89 94 93 91 92




TABLE 3 Quartile Distribution of Auditors' Signature Lags

Fiscal years Percent of firms

1965 1966 1967 1968 1969 1970 1971

25 60 61 58 58 62 62 69 50 78 82 76 78 79 84 85 75 103 108 102 102 105 112 111



sible. Table 3 presents the quartile distributions of the auditors' signature lags. All K-S statistics are insignificant, thus implying a stationary popu- lation over time (at 10% level).

(iii) 90% Availability Lag. To better estimate the actual year-end audit examination period, the sampled companies were asked to specify the time interval from the year-end closing to the date the auditors had been able to commence the investigation of 90 % of the balance sheet accounts. The respondents indicated an average delay of 34 days for 1971. This period represented an estimation of the time during which the auditors were unable to actively commence their final examination due to management delays.

(iv) Audit Report Submission Lag. As noted, the auditors' signature date represents a point certain with respect to the duration of the year-end audit examination. At the same time, the audit examination period was in many cases, no doubt, somewhat shorter, even after adjustments for the 90 % availability lag, than that computed for the auditors' signature lags. To more clearly evaluate the year-end examination period, and to estimate the time period following the audit examination period for which the company directors were primarily responsible, the sampled companies were asked to indicate the total time period from the financial year-end to the date the signed audit report was submitted by the auditors to the company directors. For 1971, the respondents indicated the average period was 78 days.

(v) Printing Lag. The final sub-lag of the total lag for which information was obtained was printing time. The sampled companies were asked to indicate the time taken (in days) by the printers to complete the year-end financial report. The arithmetic mean delay for 1971 was 23 days.

Composition Diagram A composition diagram for 1971 is presented in figure 1. Diagrams for

the other years for which data were collected were generally similar to


A 34 B =44 1C- D =23 total lag 1 13 118 days

l_3 I I - I I I - 1 . I - I I I I I 0 10 20 30 40 50 60 70 80 90 100 110 120

days * Release of preliminary final statement.

Sub-lags Mean 95%0/ Confidence MjrCmoet (days) Limits (days) Major Components

(iii) 90% availability lag 34 -t4 (A) (iv) Audit report submission lag 78 +7 (A + B) (i) Preliminary lag 81 i7 (ii) Auditors' signature lag 91 46 (A + B + C) (v) Printing lag 114 49 (A + B + C + D) Total lag 118 A8

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

1971. The total time lag can be broken down into four major components which are lettered "A," "B," "C," and "D." Period "A" represents that lag during which the auditors were unable to carry out their final examination of 90% of the balance sheet accounts. Period "B" represents an estimate of the actual year-end audit examination time. That is, period "B" is the time from when the auditors were able to assess 90 % of the accounts to the date the auditors submitted their report to the directors. The next major period is "C," which is the time lapse from the receipt of the auditors' report by the directors to the date the auditors signed the report. Period "C" represents an estimation of the time taken by the directors to consider the auditors' report and for the auditors and directors to make any final adjustments. Note that on the average the preliminary statements (*) were released by the directors three days after the receipt of the auditors' reports. The final major period, "D," is the printing time. It was assumed that the annual financial report was sent to the printer on the day of the auditors' signature. The difference of four days between the total lag to the date the printed report was received by the companies and the average 118 days total duration is assumed to be in-mail time.

How Corporate Comptrollers View the Time Lags

The questionnaire distributed to the sampled comptrollers asked them to indicate the respective corporate opinion of the maximum acceptable total time lag from the year-end to the presentation of the published final


TABLE 4

Difficulty in Complying with Alternative Total Lag Maximum Periods

Total time (in days) No difficulty Some difficulty Very difficult Impossible

150 100.0%* 120 96.1* 3.9% 100 76.5* 23.5 90 51.0* 35.3 11.8% 1.9% 75 23.5 29.4 33.4* 13.7 60 7.8 17.6 33.4 41.2 45 7.8 23.5 68.7* 30 5.9 94.1*

* Largest per row.

report to the stock exchanges. The average of the responses was a duration of 93 days.9 This was 25 days shorter than the actual lags for 1971 (which was significant at 5 %). However, even if one assumes management endorses the timeliness principle it does not necessarily follow that the observed total lag and the "maximum acceptable total lag" will be identical. There is a tradeoff between the benefits of more timely statements and the costs to the firm in obtaining these benefits. In management's view, the equilibrium position for shareholders may occur for a delay in excess of what management could achieve were it not for the costs.

Further indication of management's view of the time lags was procured from a question which indirectly introduced the issue of the cost of more timely reporting. The respondents were required to specify the level of difficulty their company would experience in meeting a certain maximum lag period if it were necessary to do so because of some regulation. The results of this question are outlined in table 4.10 It is noteworthy that while in 1971 only 68 % of the sample set released their statements to the public within 4 months from year-end, 100 % of the respondents said they would have at the most only some difficulty in doing so. When it came to the question of shareholders and timely reporting, the questionnaire respondents were split nearly evenly over whether shareholders do indeed desire less delay in reporting (49% affirmative). The average response to the maximum acceptable lag question of those who believe shareholders value timely reporting was 98 days, whereas those who responded negatively stated 103 days on the average. It would appear that, on the average, very little additional effort was expended by the former group in implementing their philosophy of timeliness.

9 A 95% confidence interval for the responses yielded upper and lower limits of 100 and 86 days.

10 A direct comparison of responses to the maximum interval question and the lowest "no difficulty" lag of this question yielded a Spearman rank correlation coefficient of .64. The respondents were thus somewhat fickle in their answers.


Some Reasons for the Four-Month Average Total Lag One possible explanation why annual reports might take an average of

just under 4 months to reach the public is because there is little or no planning and scheduling of the activities which take place subsequent to the year-end closing. The company questionnaire sought a surrogate for the degree of year-end planning by inquiring as to how often auditors indicated an estimated completion date for their year-end work, prior to com- mencing the final audit examination. Sixty-six percent stated this was always the case, and 85 % indicated it was always or usually the case. The companies were then asked how often the auditors completed the final audit by the originally estimated completion date. Somewhat unexpectedly, 86 % said that such was always or usually the case.

In view of these responses it would appear that a certain element of planning does take place. At the same time, note that the total lags have not decreased over the period 1965-1971. This, in itself, calls for further consideration of the significance of the planning. In addition, there is the matter of reconciling the substantial occurrence of planning with the average audit period of 44 days (1971) beyond the virtual ending of the post- balance date work, a reconciliation that might prove difficult in the context of the Australian ongoing, year-round audit. As to the relevance of the high proportion of audits completed by the originally estimated completion date, this too must be interpreted with a touch of skepticism. There is the distinct possibility that the estimated completion dates are self- fulfilling, in that if the audit of one company is proceeding ahead of schedule, auditing staff are shifted to another audit which has fallen behind the schedule.

The duration of the year-end audit work is, of course, a major element in the total lag. Figure 1 revealed that, on the average (1971), 66 % of the total lag was taken up by the audit report submission date (to the directors). In order to gain a clearer picture of the causes of this delay, the questionnaire had the respondents rank six alternative reasons for failing to complete a year-end audit examination by the originally estimated completion date.11 While the question pertained only to audit examinations not completed by a scheduled date, there is no compelling reason to believe that the rankings are not as relevant to audits which are completed "on time." The results of the question are presented in table 5.

The nature of the two alternatives ranked first and second indicates that it is the recurring, normal problems of accounting and auditing, as opposed to the extraordinary issues, which consume the greatest amount of time. The first ranked alternative partially explains the 34 days (1971) during which less than 90 % of the balance sheet accounts were accessible to the auditors. Likewise, the second ranked factor, at least in part, ex-

11 One of the alternatives was a dummy check variable and was eliminated prior to the computation of the statistics.


TABLE 5 Causes of Failure to Complete Audits by Originally Estimated Completion Date*

Rank Alternative

1 Delays in posting the final months' operations and completing preaudit year-end adjustments of the accounts;

2 Delays in producing documents for the auditors, taking of inventories, etc.; 3 Auditing procedural delays such as slow returns of confirmations, verifica-

tions of subsidiary ledgers, etc.; 4 Disagreements with the auditors over the valuation of accounts, other than

as in (5); 5 Disagreements with the auditors over the reporting of some extraordinary

and/or nonrecurring events.

* Rankings determined by the mode for each alternative, e.g., alternative 1 ranked first more often than any other rank.

plains the 44-day duration marked in figure 1 as the difference between the audit report submission lag and the 90 % availability lag.'2

A moment's reflection reveals that each of the above-mentioned reasons for delay affects the time lag up to the preliminary statement release or, at the latest, the auditors' signature date. For example, any lengthening of reporting delay induced by delays in posting the final month's transactions would be fully absorbed in the preliminary statement lag. Previously we argued that the distributions of preliminary and auditors' signature lags were stationary over the studied period, and we suggested that this situation is consistent with the hypothesis that the externalities on management (e.g., from shareholders, stock exchanges, etc.) constraining their reporting-lag behavior did not alter significantly during that period. The external pressures apparently did not cause management, in the aggregate, to adjust their reporting-lag behavior. This simply says the noted causes have been invariant to time. It does not necessarily imply that they were, or are, inconsequential.

The Association of Time Lags and Selected Corporate Attributes

The time-lag distributions have been described, and certain factors which may partially account for an average four-month total lag have been proposed. The possible association between time lags and selected corporate attributes is now examined. Unlike the previous factors discussed which directly cause deviations in time lags, the attributes considered have

12 Despite our previous caveat, it is interesting to note that those auditing firms that did respond to the questionnaire agreed with management as to the two principal causes for not completing the year-end examination by the originally estimated completion date. The figures were 73% for alternative (i) as rank 1, and 60% for alternative (ii) as rank 2. Alternatives (iii) and (iv) reversed rankings in the auditors' questionnaire; i.e., ranked 4 and 3, respectively.


no causal property per se, but are each surrogates for variables which do induce changes in reporting delay. For example, substantially improved profitability does not itself bring about an earlier or later than usual preliminary final statement announcement. Rather, it is the actions instigated by management, such as working overtime to prepare trial balances, or it is the increased audit duration resulting from additional time spent by the auditors in accounting for any abnormal profits which bring about any change in the time lags. Nonetheless, the surrogates, namely corporate size, year-end closing and relative profitability, are of importance.

The objective in evaluating the time lags in this manner is to seek further evidence regarding the factors influencing the reporting delays for Australian annual financial statements. No doubt some of this evidence could be useful to regulative agencies. A strong association, for example, between corporate financial year-ending date and long total lag would suggest, ceteris paribus, that the stock exchanges should require new regis- trants, where possible, to adopt a year-end other than the common choice of June 30. A relationship between profitability and reporting lag may be expected. If so then the duration of the reporting lag could be a prime source of information (about the results of operations) which the market uses in determining the equilibrium price of shares. This has a number of implications. Deregistration as a result of excess delay, for example, may onlv serve to increase uncertainty regarding profitability. Furthermore, in order to protect the market from any conscious manipulation of the reporting lag (to imply a false profit) or from an involuntary delay unrelated to abnormal results, the stock exchanges might consider a rule which required companies to state the reasons for reporting delays which are expected to surpass a standard period. That there should be some relationship between corporate size and time delay in reporting annual results is consistent with the belief that management's sensitivity to timely reporting is a function of the firm's capital value. The growth of an enterprise and the degree of scrutiny over its financial affairs by regulative agencies, unions, investors, etc., are invariably associated. Increasing outside interest will be met, within limits, with decreasing total reporting delay because management will be willing to direct additional funds to obtain less lag so as to more quickly eliminate the uncertainty of outsiders regarding operating results. One reason why management will be willing to purchase less reporting lag is that the alternative may be increased regulative control over their reporting activities. Another reason is that the larger the firm, the greater the outside interest and, consequently, the greater the potential political pressure to bring about such control.

Corporate Size and Total Lag If timely reporting is an integral part of the managerial function, one

would generally expect managers to direct some portion of every marginal


TABLE 6 RIank Correlations of Asset Size and Total Lag

Fiscal year 1966 1967 1968 1969 1970 1971

Spearman rank co- -.308 -.232 -.181 -.176 -.159 -.180 efficient

Computed t-value -3.13* -2.26* -1.80** -1.71** -1.56 -1.78**

Significant at a = .05. * Significant at a = .10.

TABLE 7 Total Lag Comparisons of Extreme Asset Size Intervals (000s8)

Fiscal Year 1966 1969 1971

Assets (000's) $5,000 $50,000 $5,000 $50,000 $5,000 $50,000

Number of firms 46 11 48 12 42 17 Lags < 90 days .283& .636 .271 .500 .214 .235 Lags > 90 days .717 .364 .729 .500 .786 .765

Lags < 122 days .674 1.000 .604 1.000 .619 .941 Lags > 122 days .326 .396 .381 .059

a Percent of firms with total lags less than or equal to 90 days.

dollar of revenue to the purchase of less delay, up to the point where the marginal benefit to shareholders, creditors, etc. from the next incremental reduction of delay was less than the cost of such.'8 Since large companies have substantial resources, both absolutely and relatively, it might be hypothesized that significant covariability would exist between time lags and firm size. The alternative case is that large companies do not desire or are unable to reduce delay because they have equal or greater demands on their resources compared to smaller firms.

Spearman rank correlations were computed for the total lags and total assets of each company to measure the extent of covariability.14 The results, as in table 6, indicate that there was significant correspondence in five of the six years tested, although the relationship was never strong.

Further refinement of the correlation analysis was undertaken by computing Mann-Whitney U statistics for comparisons of the total lags of

13 By purchasing less delay we mean hiring more accounting personnel, paying greater audit fees for less time-in audit, installing e.d.p. systems, etc.

14 The only alternative measure of corporate size is sales. Standish reported that a significant percent of his sampled Australian industrial and commercial enterprises did not report sales figures. For this reason sales data were not collected. See: Peter E. M. Standish, "Australian Financial Reporting," Accounting Research Study No. 2 (Melbourne, Victoria: Accountancy Research Foundation, 1972), p. 195. Share- holders' equity was not considered since it is partially a function of the financing mix for each enterprise.


TABLE 8 U Tests of the Homogeneity of Total Lags for June 30 Ending and Non-June 30 Ending

Companies

Fiscal Year 1965 1966 1967 1968 1969 1970 1971

Two-tail probability .0052 .0012 .0008 .0005 .0136 .0524 .1616 associated with observed U

Class sizes 21:75 22:73 20:73 18:78 22:71 19:74 19:77

TABLE 9 Rank Correlation of Relative Profitability and Total Lag

Fiscal year 1966 1967 1968 1969 1970 1971

Spearman rank coeffi- -.203 -.190 .034 -.016 -.016 -.056 cient

Computed t-value -1. 827** -1.794** .325 -.150 -.989 -.509

** Significant at et = .10.

firms with greater than $50,000,000 total assets and firms with less than $5,000,000. The U statistics were significant except in 1971 (with a = .05). The importance of these results is perhaps better appreciated by referring to table 7. The pattern disclosed in table 7, by comparing the lags to two "benchmarks," is that "larger" firms have consistently been more timely reporters than "smaller" companies. They have, nevertheless, become relatively less timely (in terms of the 90-day standard)."5

Financial Year-End and Total Lag

Because a significant number of Australian industrial and commercial companies close their books on June 30, the opinion was formed that those companies would have reported later than companies with non-June 30 closings. Conceptually, the large number of June 30-end companies would have caused peak demands on the resources of auditing firms which, in turn, would have led to additional time in completing the year-end investigation and, ultimately, additional delay in reporting. As table 8 indicates, the total lags for June 30-ending companies were stochastically longer than those of non-June 30 companies in every year except the two most current (at the 5 % level). It would seem, therefore, that one means of reducing the average total lag would be for the stock exchanges to require new regis- trants to adopt a non-June 30 financial year. Generally, this should be a relatively costless adjustment for the firms.

15 The 90-day benchmark signifies the delay 86.3% of the questionnaire respondents stated could be met with only some or no difficulty. The 122-day benchmark is the current A.A.S.E. four-month requirement. See Australian Association Stock Ex- changes Listing Manual, Section 3, C(1) as of August 1972, Amendment.


TABLE 10 U Tests of the Homogeneity of Total Lags for Firms with Extreme Relative

Profitability Compared to Firms with Moderate Relative Profitability

Fiscal year 1966 1967 1968 1969 1970 1971

Two-tail probability asso- .0226 .9602 .7794 .7417 .7114 .8650 ciated with observed U

Class sizesa 17:78 21:72 21:76 26:67 26:70 31:64

a (X < 0.0%; X > 25.0%) and (0.0% <X < 25.0%) respectively.

Relative Profitability and Total Lag It appeared reasonable to expect relative profitability (i.e., rate of return

on ordinary capital) and total lags to vary inversely, higher relative profitability being related to shorter lags and vice versa. This opinion is a popu- larly accepted one as witnessed by the "National Times" when it claimed that, "Bad profit news not only takes longer to reach the public ear than good, but it sometimes never reaches it at all" (February 12-17, 1973). Measures of the relationship between relative profitability and total lag, however, left these expectations generally unsubstantiated, as shown by table 9. The correlation coefficients are indeed mostly negative, as expected, but generally not significant at the 10% level. In recent times there has been no trend for profitable companies to report quickly or for loss companies to report slowly.

Following the correlation analysis, the total-lag figures were stratified into three intervals according to each firm's respective relative profitability, such that:

let X = rate of return on ordinary capital interval (i) provided X < 0.0% interval (ii) provided 0.0% < X < 25.0% interval (iii) provided X> 25.0 %.

Intervals (i) and (iii) were then combined and compared to interval (ii) by the Mann-Whitney U test.'6 The purpose of these tests was to evaluate whether firms with extremely good or poor results would behave similarly to firms with moderate performance. The results, as presented in table 10, revealed that such was the case except in 1966. It appears that firms with exceptional profits (positive or negative) do not differ in their reporting lags from those with average profits.

Clearly, both management and the market form expectations of what a firm's earnings should be, and past earnings will be a major variable in arriving at these expectations. Moreover, if the previous year's profit is taken as the best predictor of this year's, then the change in relative profitability becomes a measure of the variation from "normal" profit. In this

16 The intervals were suggested by the distribution of the data and were selected so as to insure sufficient observations in each class.


TABLE 11 Rank Correlation of Change in Relative Profitability and Change in Total Lag

Fiscal year 1966-1967 1967-1968 1968-1969 1969-1970 1970-1971

Spearman rank coefficient -.259 -.043 .021 .245 -.095 Computed t-value -2.92* -.379 .179 -2.17* -.788

* Significant at a = .05.

TABLE 12 U Tests of the Homogeneity of Changes in Total Lags for Firms with Extreme Changes

in Relative Profitability Compared to Firms with Moderate Changes

Fiscal year 1966-1967 1967-1968 1968-1969 1969-1970 1970-1971

Two-tail probability asso- .3124 .1388 .0854 .3788 .3524 ciated with observed U

Class sizes$ 9:66 8:72 7:71 12:64 17:54

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

sense, a stronger association may be expected between the deviations in relative profitability for two consecutive years and changes in total time lags than was the observed relationship between static relative profitability and static total time lag. It is the variations from expectations which con- stitute information. Yet, as table 11 indicates, the rank correlations for changes in total lags and changes in rate of return on ordinary capital were significantly greater than zero in only two of the five periods.

This led us to follow the same reasoning as in the static total lag/static relative profitability case and separate the total-lag numbers in conformity with their change in relative performance such that:

let X = change in rate of return on ordinary capital interval (i) provided X < - 10.0 % interval (ii) provided -10.0 % < X < 10.0% interval (iii) provided X > 10.0 %.

As before, the "extreme" intervals were united to form a single class. Nonetheless, Mann-Whitney U statistics disclosed that the differences in these two classes were insufficient to warrant the conclusion that they were stochastically unequal (see table 12).

For the studied period it would appear that there was little relation between the results of operations and the total time taken by Australian management to report the results. While it may appear a reasonable argu- ment that "good" news would be reported quickly and "bad" news delayed, the data, surprisingly, did not validate such a belief."7 Most noteworthy is

17 Spearman rank correlation coefficients were also calculated for changes in rate of return of ordinary capital, changes in preliminary lags and changes in auditors' signature lags. The largest coefficient for the preliminaries is -.226 (1969-1970). This is significant in the statistical sense (at 5%), but of little meaning in the predictive sense. The largest coefficient for the changes in rate of return and changes in auditors' signature lags is - .199 (1966-1967).


the fact that the tests of the stratified data revealed no discrimination, yet such tests should have shown, according to our hypotheses, that the more inordinate the performance of the enterprise, the more timely was the annual report relaying such information.

Two qualifications to the profitability tests need explicit mention. First, the fact that a strong relationship between the results of operations and reporting lags could not be demonstrated does not necessarily imply that Australian managers are oblivious to the market's need and right to be currently informed. It may well be that there is insufficient flexibility in the total-lag structure to allow management to report more rapidly when cir- cumstances warrant. Recall that, as indicated by the Composition Diagram, the total audit time (A + B) constitutes 66 % of the average total delay and printing time a further 20%. Also, as stated previously, management may decide in the shareholders' interest that the costs of more timely reporting are not justified.

A further qualification relates to the methodology employed in the tests of profitability, particularly with respect to the definition of relative profitability. This study used an ex-post definition of relative profitability, and a comparatively simple one at that. It is not inconceivable that a more sophisticated model of profitability, perhaps in terms of the deviation from expected "normal" profit, would reveal an explanatory power in profitability over reporting delays.

Conclusion

The cumulative relative frequencies for the total lags, auditors' signature lags, and the preliminary lags were shownto bestable, withthesoleexception that the 1971 total lags may have increased. Sixty-six percent of the mean total lag (1971) was consumed in pre-audit delay and year-end audit examination. And the company questionnaires disclosed that, as an average measure, management holds the opinion that the maximum acceptable total lag should be at least three weeks less than it has been.

Planning of the year-end audit activities and scheduling an estimated completion date appear to be the common practice. But we suggested that such planning has not been influential in reducing the duration of the total lag.

Three corporate attributes were investigated in the belief that each would be a major explanatory factor of the reporting delay phenomenon. Corporate size was shown to account for some of the variation in total lags, though the relationship was not strong across all firms. Larger firms have taken less time to report, which is expected because they are more in the public eye. The vast majority of the sampled firms have June 30 financial year-ends and, accordingly, they were generally not as quick to report as the non-June 30 companies. Tests of the relation between relative profitability and total lag, as well as tests of the changes in these variables, surprisingly did not reveal any meaningful associations.

Jurnal Dyer & Mchugh 1975

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