RELATED-PARTY TRANSACTIONS AND AUDIT REPORT LAG: DO INDEPENDENT DIRECTORS MATTER?

Abstract

Related-party transactions (RPTs) have long been a topic of scrutiny due to their potential to generate conflicts of interest, reduce transparency, and negatively impact financial reporting quality. While the effect of RPTs on financial outcomes has been well-explored, less attention has been paid to how these transactions affect the audit report lag—the time it takes for auditors to issue an audit report after the fiscal year-end. This study examines the moderating role of independent directors in mitigating the impact of RPTs on audit report lag. Drawing on agency theory and resource orchestration theory, we hypothesize that independent directors enhance corporate governance mechanisms, which in turn help reduce audit delays associated with RPTs. We test this hypothesis using a sample of U.S. publicly listed firms from 2015 to 2020, employing a difference-in-differences (DiD) methodology to estimate the causal effect of RPTs on audit report lag, moderated by the proportion of independent directors on the board. Our findings reveal that RPTs are associated with longer audit report lags, but the presence of independent directors significantly mitigates this relationship, suggesting that independent directors play a crucial role in expediting the audit process. This study contributes to the literature on corporate governance, audit quality, and financial transparency, offering insights into how independent directors influence the timeliness of audit reports.

Keywords: Related-party transactions, audit report lag, independent directors, agency theory, corporate governance.