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. ARL is defined as the period between a company’s fiscal year end and the audit report date, and it is one of the few externally observable audit output variables that allow outsiders to gauge audit efficiency (Bamber et al., 1993). Because the audit report contains the auditor’s opinion regarding the credibility of the financial statements, investors generally prefer shorter reporting lags because the earlier they receive the audit opinion, the more rapidly they can adjust their investment preferences. Since the ARL is expected to vary cross-sectionally because of firm and audit-specific characteristics, an understanding of the possible determinants of the ARL will Downloaded by RMIT University Library At 06:04 08 February 2018 (PT) 2 be likely to provide insights into audit efficiency. Prior research has generally examined audit and auditor-attributes as well as certain firm-specific factors as the potential determinants of the ARL (Ashton et al., 1987, Bamber et al., 1993, among many others). However, the impact of a broader institutional environment on ARL remains unexplored.