This study aims to address a longstanding puzzle in the financial reporting literature concerning why the traditionally negative signal conveyed by a non-clean audit opinion does not consistently result in delayed financial disclosure. Specifically, the authors examine how a firm’s underlying earnings quality (EQ) influences its strategic disclosure timing decisions in response to such adverse audit signals.
Using a panel data set of 130 Egyptian non-financial firms over the 2014–2022 period, comprising 1,059 firm-year observations, the authors use a fixed-effects (FE) panel regression model. The robustness of the findings is further validated through subsample analyses and alternative econometric specifications, including the system generalized method of moments (GMM) estimator, to mitigate potential endogeneity concerns.
Although the direct effect of a non-clean audit opinion is not statistically significant, the significant negative interaction effect indicates the presence of two contrasting strategic disclosure responses. Specifically, firms with low-EQ significantly delay financial reporting following the receipt of a non-clean audit opinion, whereas high-EQ firms accelerate their disclosure announcements, consistent with a credible signaling strategy aimed at proactively demonstrating financial resilience. Furthermore, this interaction effect is conditional on the severity of the audit modification and is particularly pronounced among firms characterized by lower external audit quality and larger organizational size.
A delayed announcement of a non-clean audit opinion constitutes a dual negative signal, reflecting not only the presence of an adverse audit outcome but also deficiencies in the firm’s underlying information quality. In contrast, the timely disclosure of unfavorable audit news may function as a credible signal of organizational resilience, transparency and confidence in the firm’s underlying financial reporting quality.
To the best of the authors’ knowledge, this study is among the first to document the significant moderating role of EQ in shaping the relationship between audit opinion modifications and earnings announcement delays. In doing so, it offers a theoretically grounded explanation for a longstanding puzzle in the disclosure literature by demonstrating the interactive role of EQ through an extension of dynamic capabilities theory. The findings further suggest that high earnings quality functions as a critical operational buffer, enabling firms to adopt a credible and timely disclosure strategy even when confronted with adverse audit outcomes.
