1. Introduction
This paper investigates the association between political connections and audit report lag (hereafter ARL) in Indonesia and whether related party transactions (hereafter RPTs) conducted by the connected firms moderate the association between the two. Political connections formed and maintained by corporations are pervasive (Faccio, 2006; 2010) because such connections allow firms preferential access to borrowings, among many other benefits (Faccio, 2006, Khwaja and Mian, 2005, among others). However, political connections are also viewed as harmful to the minority shareholders, as these connections can lead to high agency costs (Khan et al., 2016), corporate overinvestment (Su et al., 2013), rent-seeking activities (Frye and Shleifer, 1997), tunnelling (Qian et al., 2011), and earnings management (Chaney et al., 2011).1 Given the implications of political connections for financial reporting, it is useful to examine auditors’ response to firms’ political connections empirically. Whether auditors consider both the benefits and costs associated with political connections while conducting their audit work is important for the credibility of financial statements. Prior research has examined the effect of political connections on auditor choice (Guedhami et al., 2014) and audit fees (Gul, 2006). We consider another important aspect related to external auditing: the ARL.
