Audit Firms’ Mergers and Audit Report Lag: Examining Contradictory Arguments

IntroductionThe emergence of audit firms’ mergers in Iran and the positive perception of Iranian regulators about the mergers, unlike other countries (Torkani et al., 2022), motivate us to examine the consequences of the mergers. In addition, disclosing audited financial statements in a timely manner to maintain the information’s usefulness (Almosa and Alabbas, 2008) is an important issue as well. Therefore, the present study examines the effect of Iranian audit firms’ mergers on audit report lag (ARL).  Research question or hypothesisBased on the extant theories about audit firms’ mergers and by taking to account the Iranian audit market attributes (Greenwood et al.,1993) as well as the emergence of symbolic audit firms` mergers in Iran (Torkani et al.2022), two scenarios are developed based on “symbol over substance” view and two contradictory theories are employed in accordance with the scenarios. The first theory is economics of scale, which is consistent with the substantive merger scenario (desired by the regulators). According to this theory, audit firms achieve synergy through merging (Kim and Singal, 1993) and consequently reduce ARL (Lai, 2019). The second theory is commercialism, which is consistent with the symbolic merger scenario. According to this theory, audit firms only seek to increase their market share and do not pay attention to improving their performance (e.g., efficiency); as a result, there is no decrease in ARL (Gendron and Spira, 2010; Ciconte et al., 2019). Thus, with regards to the competing scenarios and theories, we predict that audit firms’ mergers are associated with ARL.  MethodsData on audit firms’ mergers, ARL and the characteristics of client firms were collected manually from the annual reports of firms listed on the TSE between 2011 and 2020 (946 firm-years observations). Electronic copies of annual reports are available on the website of CODAL[1]. Then, using the in-sample Propensity Score Matching (PSM) approach, we have matched the observations of merged and non-merged firms and reached the final sample for model estimation. In the model of this research, based on previous research and the prevailing attributes of the Iranian auditing market, the variables affecting ARL were controlled. Finally, the research hypothesis is tested based on the nature of the merger process using the Difference-in-Difference (DID) method, which considers the merger method incidentally and as an external shock to the client firms.  ResultsThe results of the descriptive statistics in accordance with previous studies indicates long delay in issuing audit reports in Iran, which has not changed significantly after audit firms merging period. The results of the model estimation using the main sample and different sub-samples indicate that audit firms’ mergers do not affect ARL. This result is robust for several sensitivity tests.  Discussion and conclusionThis study shows that mergers between Iranian local audit firms (where international audit firms are not allowed to operate), follow the symbolic mergers and are attributable to the commercialism. Hence, the mergers do not improve audit efficiency and only lead to the classification of merged firms into the first-class group of trusted audit firms and take  advantage of the merged audit firms. The inconsistence between the results of this study and previous studies shows the differences between the consequences of mergers between Big and Non-big audit firms. This research is a rich avenue for future studies in the area of audit firms’ mergers differences and consequences for the case of non-big audit firms with different environmental attributes. The findings of this study also draw legislators’ attention to the real consequences of mergers and help them to provide appropriate privileges and incentives for mergers to improve the efficiency and effectiveness of merged audit firms.