This paper examines the relationship between accounting outsourcing and audit lag. Accounting outsourcing may reduce misstatement risk, reducing the amount of audit effort necessary and thereby decrease audit lag. Alternatively, outsourcing may increase the amount of coordination necessary between the auditor, client management and the outside accounting service provider and thereby increase audit lag.
The accounting outsourcing/audit lag relationship is examined among closed-end mutual funds. These funds often outsource their accounting functions and disclose the names and services provided by any company providing services to the fund. These disclosures permit a consistent measurement of whether the fund outsources their accounting functions or performs them in-house.
This paper finds a positive relationship between accounting outsourcing and audit lag; outsourcing funds have audit lags that are two to three days longer than those not outsourcing their accounting. The results are robust to different specifications, controls for the distinctive characteristics of closed-end funds and consideration of endogeneity.
Closed-end funds could consider the increased time necessary to complete the audit when deciding whether to outsource their accounting functions.
By identifying a unique setting in which outsourcing data can be consistently obtained and analyzed (i.e. closed-end funds), this is the first study to empirically evaluate the relationship between accounting outsourcing and audit lag.
The authors gratefully acknowledge helpful comments received from participants at the AAA Auditing section mid-year meeting and the AAA annual meeting, especially John Abernathy, the discussant.
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