Event Study: Audit Report Announcements

Event study methodology is widely used in researches dedicated to the impact of audit opinion on investors’ decisions. This methodology requires specification of date of audit opinion announcement, date when the information about type of audit opinion becomes available to public. This date is event and days (allowed to capture pre- and post- effects) around the date are ‘event window’ (Campbell et al. 1997). See illustration of Time Line:

Source: Campbell, J.Y., Lo, A.W. and MacKinlay, A.C. (1997). The Econometrics of Financial Markets. Princeton, NJ: Princeton University Press, p. 157.

I wrote about this kind of studies in audit area in one of my posts (click link) on February. The issue here is difficulty to identify correct date of event as this would influence the whole research. There are number of researchers who emphasized this issue, e.g. Craswell (1985), Martinez et al. (2004), Soltani (2000). Especially this problem arises when it is necessary to compare studies in different countries, i.e. jurisdictions.

In following paragraphs I want to discuss briefly the features on event identification process in different countries.

Anglo-Saxon system

The countries with a case law system are suggested here: USA, UK, Canada, Australia. I would consider two key relevant characteristics:

·        Work of stock exchange commissions (let us name ‘SEC’ all similar authorities) with financial/annual reports, e.g. US companies are obliged to file 10-K (which contains audited FS) within 90 days after fiscal year end and after filing 10-Ks almost immediately become available to public via US SEC site (see sec.gov)

·        Transparency, e.g. it is more common for US companies to announce audit opinions before the annual general meeting or 10-K filing date.

Reasonable methodic in date selection was used by Menon and Williams (2010). They chose earlier of:

(1)   10-K filing date;

(2)   Date of press release of financial statement and audit opinion.

Continental European (Roman) Legal tradition

Following could be outlined as features in relation to opinion announcements (based on example of France and Spain):

·        SEC do not make audited financial statement available to public as soon as possible (see below some peculiarities in Spain) with deadline of 90 days after fiscal year end;

·        Audited financial statement must be provided (France and Spain) to shareholders at least 15 days (or any other number of days prescribed by law to notify shareholders about AGM) before annual general meeting (AGM). At the same time reports are to be send to SEC and only after this they are to be published by SEC ;

·        Listed companies are reluctant to announce publicly audit opinions (Soltani 2000).

To solve this issue for French market Soltani (2000) defined and calculated results for following three event dates:

(1)   Date of audit opinion signature;

(2)   15 days before the AGM date (most precise as was mentioned by Soltani);

(3)   Average date between the (1) and (2)

Martinez et al. (2004) identified that law requires listed companies to file audited financial statements (FS) within Spanish SEC (which has to publish them aftermath) before the date of AGM announcement. So Martinez used the earlier of:

(1)   Date when Spanish SEC makes FS and audit reports available to public;

(2)   15 days before the AGM date.

Russian jurisdiction

Russian modern corporate laws also belong to continental legislation system with specifics of emerging market economy and socialistic overregulated past.

Following matters to be considered:

·        All open joint stock companies have to file their audited FS to Tax authorities within 90 days after year end, but Tax authorities must not release them to public (Accounting Law, ФЗ 129);

·        Audited FS must be distributed to shareholders at least 20 days before AGM (Open Joint Stock Companies Law, ФЗ 208);

·        Audited FS must be also included in the quarterly report of issuer (ежеквартальный отчет эмитента) for the first quarter, which must be issued not later than 45 days after 1^st Quarter end, i.e. 15^th of May,

·        Announcement about the issue of quarterly reports and AGM must be placed by companies on the state authorized news wire available to public via internet (State Provision about Disclosure Information by Issuers, Приказ ФСФР N 06-117/пз-н).

 So in selection correct event date it would be reasonable to consider the earlier of:

(1)   Announcement of 1^st Quarter report issue on statutory news wire;

(2)   20 days before the AGM date.

Conclusion

I hope above summary and considerations about Russia would help researchers involved in accounting/reporting area to do event studies. I am going to use these ideas in my coming dissertation and I would like my readers to share with me information about report release legislation in their countries.

References

Campbell, J.Y., Lo, A.W. and MacKinlay, A.C. (1997). The Econometrics of Financial Markets. Princeton, NJ: Princeton University Press.

Craswell, A. T. (1985) Studies of the information content of qualified audit reports, Journal of Business Finance and Accounting. No 12(1), pp. 93–115

Martinez, M., Martinez, A. and Benau, M. (2004). Reactions of the Spanish capital market to qualified audit reports. European Accounting Review. Vol. 13, No. 4, pp. 689-711.

Menon, K. and Williams D.D. (2010). Investor Reaction to Going Concern Audit Reports. The Accounting Review. Vol. 85, No. 6, pp. 2075-2105.

Soltani, B. (2000) Some empirical evidence to support the relationship between audit reports and stock prices – the French case. International Journal of Auditing. No 4, pp. 269–291.