Competing Size Theories and Audit Lag: Evidence from Mutual Fund Audits

The existing audit lag literature identifies three theories for why client size may affect audit fees: (1) that larger clients have shorter audit lags because they can prepare their financial statements more quickly (the client preparation theory), (2) that larger clients have shorter lags because auditors are more willing to complete the audit quickly to retain larger clients (the client service theory), and (3) that larger clients have more transactions to audit, resulting in longer audit delays (the transactions theory). Mutual funds are required to prepare financial statements daily, eliminating any delay caused by the client's financial statement preparation time. There are also measures of fund transactions that are separate from traditional measure of client size, allowing for an discrete examination of the client service and transactions theory. Results of this study provide mixed support for the client service theory in finding that fund assets was negatively related to audit lag, while other measures of the potential incentives for client service were not significantly related to audit lags. Results of the study also provide mixed support the transactions theory.