Indirect effects of regulatory change: Evidence from the acceleration of the 10-K filing deadline

Abstract

This study examines the indirect effects of regulatory change by studying the audit office effects of changes in client time pressure caused by the first acceleration of the 10-K filing deadline. The extant literature provides evidence that increased client time pressure adversely affects the timing and quality of individual engagements. We argue that because audit offices possess finite resources and production capacity in the short run, client-level pressure can have office-level effects. We document within-office differences related to changes in audit timeliness. In the same audit office, clients with no pressure (with pressure) experience an increase (a decrease) in audit report lag post-acceleration. This evidence suggests that auditors alter the timing of concurrent engagements in response to client pressure, and clients of the same office are affected differently by changes in time pressure. We also document across-office differences in audit/filing timeliness and audit quality. Clients of audit offices with more time pressure across the entire client portfolio experience a greater negative impact on audit timeliness, are more likely to file late, and experience lower audit quality. Taken as a whole, our results are consistent with client time pressure producing office effects as a result of the auditors' response to increased resource constraints. Further, we show that the time pressure documented during the first acceleration is transitory in nature. These results should be informative to regulators and practitioners because they suggest there are indirect costs associated with regulatory compliance, and such costs are not limited to directly affected clients.