SYNOPSIS: The Securities and Exchange Commission introduced accelerated filing requirements for corporate 10-K and 10-Q filings in 2003. The major accounting firms and some companies expressed concerns about the acceleration, arguing that other changes in financial reporting and disclosure requirements, corporate governance, and auditing standards would make it difficult to meet the shorter deadlines while maintaining good quality reporting.
Using longitudinal samples of companies for the period 2001–2006, we examine two lags in the corporate reporting process: the audit report lag (the number of days between the fiscal year-end and the audit report date), and the earnings announcement lag (the number of days between the fiscal year-end and the earnings announcement date). Our results indicate that both lags increased significantly in the two-year period 2001–2002 prior to the introduction of the accelerated filing requirements and in the period 2003–2006 when the new filing requirements were in effect. Furthermore, when we examine the sample of companies for which both the audit lag and earnings announcement lags are available, we find that the likelihood that companies announced earnings prior to the audit report date increased considerably over the period 2001–2006, but particularly during 2004–2006 when Section 404 of the Sarbanes-Oxley Act of 2002 (SOX) was in effect. Thus it appears that an unintended consequence of recent policy changes is that companies are less likely to wait for completion of their audits to announce earnings.
We also examine the quality of reporting (measured by absolute discretionary accruals and quality of accruals) for the sample period. We find that long audit report lags (or 10-K filings lags) were not associated with lower quality of earnings or accruals (except for a mild effect in 2004), providing no support for the concern that companies that have to rush to meet the deadlines may suffer a loss of reporting quality. However, when we examine potential reporting quality effects of early earnings announcements, we find some mild evidence that for those companies that made earnings announcements several days in advance of completion of their audits, the quality of earnings/accruals was lower in some years during the period 2003–2006.