Audit concentration, auditor choice and management ownership in underdeveloped s ecurities markets: The case of Bangladesh 1.

Introduction and Motivation

Financial reporting quality is critically dependent on, among other things, audi t quality. Audit quality can be viewed as a composite phenomenon comprising audi tor competence, correct application of international standards on auditing (ISA) , application of high moral and ethical standards by the auditor, auditor indepe ndence, auditor reputation and application of professional judgement by the audi tor. In the less developed countries financial reporting quality as well as audi t quality are issues of major concern for both domestic and international financ ial community. Such concerns often lead to various initiatives taken by major Br etton Woods Institutions (BWIs) such as the World Bank, IMF, UNDP, and UNCTAD an d regional development agencies such as the Asian Development Bank (ADB). As glo balization of world economies gains momentum, international financial architectu re cannot function as a coherent and integrated system if a significant number o f global trading partners of major capital market economies are unable to produc e a credible and comparable set of financial statements. Never before were the a doption of International Financial Reporting Standards (IFRSs) and International Standards on Auditing (ISA) been stressed more by the IASB, IFAC and IOSCO. A c omprehensive reform of financial reporting is envisaged in most of the least dev eloped countries (LDCs) in order to improve the overall corporate governance qua lity among these countries. Institutional reforms of LDC stock markets, their pr ofessional accounting bodies and financial markets oversight bodies and legislat ive reforms of existing regulatory frameworks are being insisted upon in pursuit of a high quality, globally compatible, accounting and auditing practice across the whole world. As a developing country, Bangladesh is traditionally dependent on foreign assist ance, mainly from the World Bank and the ADB. In the recent past the country und erwent systematic reforms in the fields of accounting and auditing in its bid to strengthen its financial markets. Over the past decade the country has set up a Securities and Exchange Commission (SEC) in 1993, enacted a new companies act i n 1994 replacing the age old Companies Act of 1913, made compliance to IASs and ISA mandatory for listed companies in 1997, reinforced this decision by further amending the relevant law (Securities and Exchange Rules of 1987) in 2000, autom ated the two stock exchanges in 1998, created a central depository of securities in 2003, made auditor rotation mandatory for banks initially but later for all listed companies, revised listing requirements of stock exchanges and promulgate d numerous rules and regulations (e.g., insider trading rules, IPO issue rules) etc.) aimed at strengthening the capital market via improving the quality of fin ancial reporting in the country. Most recently, in February 2006, the SEC annou nced that one-third of all directors in listed company boards must be independen t and all such companies must have audit committees. Despite all its efforts, a recent World Bank report on observance of standards and codes (ROSC 2003, publi shed in 2005) has identified a number of weaknesses, many of which are serious i n nature, in its financial reporting. Enforcement of existing laws and standards remains a serious issue as non-compliance to mandatory disclosure and measureme nt requirements is still high (ROSC, 2003; Karim and Ahmed, 2005). In 2006, the country has decided to establish a Financial Reporting Council (FRC) with mandat es similar to the FRC in the UK, in line with the recommendations of the ROSC 20 03. As the existing accounting and auditing infrastructure in the country still show s signs of weaknesses, technology transfer from international professional accou nting bodies could be useful in narrowing the knowledge gap between developed co untries and Bangladesh. The country has recently sought international twinning p artners to work with its professional accounting body the ICAB to strengthen the Institutes capacity in implementing the adoption of IASs and ISA. A corollary to

such twinning arrangements between professional accounting bodies has been tech nology transfer through affiliation with international Big 4 or non-big 4 firms. This is a common practice for big and reputed local firms to seek affiliation w ith international firms in countries where the international Big 4 are not allow ed to operate in their own names (e.g., Bangladesh) or without having a local pa rtner (e.g., Indonesia, Korea, the Philippines, Thailand etc.). International B ig 4 firms are viewed by financial market participants as a proxy of audit quali ty (Fan and Wong, 2005). Big 4 audit firms or big 4 affiliated firms are genera lly found to have a dominant market share in most audit markets. Depending on th e measure of market share used, big 4 concentration range from 50 percent to 98 percent in most markets for audit services. In Bangladesh, the big 4 affiliated firms command only 17 percent of listed audit clients and account for only 34 pe rcent of client assets and 45 percent of client revenue. None of the companies i n many industry sectors hire an affiliated firm while 54 percent of banks and 90 percent of insurance companies tend to hire a non-big 4 affiliated auditor. Thi s pattern contrasts those in most developed market economies and many LDCs. It i s interesting to enquire how auditors are chosen and why the ones are chosen are chosen. Is auditor size (or international affiliation) not considered a reasona ble proxy of audit quality? Is it culture (relationship based) or economics (inc entive based) that explains auditor choice? Does industry specialization play a role in auditor choice? Is it the fee premia charged by the affiliated firms tha t explain their smaller market share? Or are audit services not quality differen tiated in Bangladesh? Given all these unanswered questions, it is interesting to study the mechanism of auditor choice, measure audit concentration, and identif y possible determinants of auditor choice in some detail. 2. The Present Study and its Rationale

The aim of this paper is to present the results of a systematic enquiry of the a udit services market of an emerging market economy, namely, Bangladesh. It cover s three major aspects of auditing in the country - (i) audit concentration; (ii) big four premium; and (ii) auditor choice. Using both conventional and innovati ve measures of audit concentration, it shows that unlike the market structures c ommonly found in most developed and many developing country settings, the big-fo ur affiliated audit firms (equivalent to the big-four in countries where big-fou r firms operate in their own names) do not enjoy significant market power in Ban gladesh. They are responsible for auditing only 16.4 percent of listed companies . Their market share ranges from 17.6 percent to 56.1 percent depending on the measure of market share used. This lack of dominant market power might inhibit t heir ability to charge fee premia which in turn may adversely affect their abili ty to attract high-calibre graduates to the profession. The second issue analyze d in this paper is whether the big-four affiliated firms in Bangladesh charge an y fee premia from their audit clients. Interestingly, although the big-four affi liated firms appear to receive higher average audit fees per client, an in-depth look at their audit fee levels reveals that they actually receive lower average audit fees per unit of client sales or client assets. However, when audit fees are standardized for natural logs of client sales and assets, big-four audit fee s are found to be marginally higher than those charged by their non-big counterp arts. Finally, the paper attempts to develop a model for auditor choice. A study of this kind is interesting for a number of reasons. At least three reas ons can be identified from the supply side of the audit services market: First, auditor size has long been viewed as a surrogate for audit quality. The big 4 af filiated firms are seen as providers of higher quality audit work than their una ffiliated peers in Bangladesh (Karim and Moizer, 1996; Ahmed and Hossain; 2000; Ahmed and Goyal, 2005). The market shares enjoyed by these internationally affil iated firms have direct links with their audit fee incomes and possibility of ea rning fee premia. Audit firms revenues affect their ability to devote the resourc es (e.g., partner hours and time devoted by other members of the audit team, siz e of the audit sample, etc.) necessary to carry out the audit without compromisi

ng the quality. Second, the less audit fees are charged the more audit firms wil l be forced to do one or more of the following: (i) compromise audit quality; (i i) compromise independence with high fee paying clients because losing high-fee paying clients would mean more of a loss; (iii) pay less to its audit team inclu ding articled students; (iv) invest less on modern technology; (v) spend less on training its employees; (vi) explore non-audit jobs to supplement lost fee inco me; (vii) solicit potential clients to gain more clients (i.e., lobby clients); (viii) compete aggressively that would potentially reduce audit fees further. Th ird, if there is no fee premia for big-4 affiliation, then big audit firms would find it harder to compete with audit forms not having such affiliation as they (the non-affiliated ones) don t have to pay anyone for affiliation. From a demand perspective, it is even more interesting to study auditor choice o f a market showing unusual client behaviour. First, the study is expected to unrav el the incentives that Bangladeshi listed companies have in hiring a big or a no n-big auditor. It would reveal possible causes of the unusually low audit concen tration of the affiliated audit firms. It would be of interest to both auditors and clients to know what drives clients auditor choice. Are affiliated firms char ging any premium for their services, are unaffiliated firms providing a better v alue for money, or is it the management who are making an opportunistic choice. Second, it is important to know why more than fifty-percent of the banks and nin ety-percent of insurance companies hire unaffiliated audit firms. Traditionally, banks have been significant institutions in Bangladesh financial system. It is surprising for so many banks not opting for a big audit firm. Third, it will rev eal whether corporate governance or some other client-specific factor is driving auditor choice. The present study involves developing two regression models to explain auditor c hoice in two samples. The first sample comprises 208 DSE listed companies while the second sample concentrates on 159 listed non-financial companies only. Put d ifferently, the second sample is a sub-sample of the first sample of companies. The rest of the paper is organised as follows. A description of the nature of t he audit services market in Bangladesh is provided in the next section. Section 4 presents the analysis and develops models for auditor choice while Section 5 c oncludes the discussions. 3. Audit Services Market in Bangladesh

The regulatory framework governing audit function in Bangladesh is fairly robust . There exist a number of legislative provisions requiring companies to have sta tutory audits by a chartered accountant or a firm of chartered accountants. The se legislations provisions principally emanate from the Companies Act 1994, the Securities and Exchange Rules 1987 along with its amendments in 2000, the Bankin g Companies Act 1991, the Insurance Act 1938, the Income Tax Act 1922, the Incom e Tax Ordinance 1984, and the Nationalisation Orders of 1972 and 1973. Hence, a ll joint stock companies registered in Bangladesh are required to have a statuto ry audit once every year by a chartered accountant. Relevant provisions of thes e Acts and Ordinances solely empower the members of one professional body, the I nstitute of Chartered Accountants of Bangladesh (ICAB), to carry out statutory a udits. To perform this audit function, there are 171 audit firms in the country as on 3 0 June 2005. Among them, 110 firms are sole traderships while 61 are partnership s. The majority of the partnerships (47) are two-partner firms while the highest number of partners that can be found in a firm is 7. Table 1 shows the distribu tion of firms in terms of the number of partners: Table 1 Distribution of audit firms by no. of partners No. of partners No. of firms

1 2 3 4 5 6 7 Total

110 47 6 2 1 4 1 171

Most Bangladeshi audit firms operate from a single office, predominantly located in Dhaka. However, some firms have multiple offices. The number of audit firms operating from a single office is 147 while 23 firms have two offices (e.g., in Dhaka and Chittagong or in Dhaka and London) and only 1 has three offices. A tot al of 266 members of the Institute are in practice while 494 members are not in practice. Most of those members that are not in practice are found to work in in fluential positions in business, commerce, and government. As on the same date 1 27 members are working abroad. At present, none of the international Big Four audit firms directly operate thro ugh a named branch office in Bangladesh although they do in other South Asian co untries, e.g., in India, Pakistan, and Sri Lanka. However, some Bangladeshi aud it firms have official affiliations with international Big Four and non-Big Four audit firms and these links are shown in Table 2. Table 2 International Affiliations of Audit Firms Name of the firm International firm with which linked No. of partners No. of staff Rahman Rahman Huq KPMG 6 135 Hoda Vasi Chowdhury Deloitte 7 150 S F Ahmed Ernst and Young 3 55 Howlader Yunus BDO 6 42 A Quasem PriceWaterhouseCoopers 6 83 M J Abedin Moore Stephen 4 58 Until 1961, all audit work used to be carried out by foreign audit firms as ther e were no local audit firms in Pakistan. The Institute of Chartered Accountants of Pakistan (ICAP) was created by the Chartered Accountants Ordinance of 1961 a nd all chartered accountants in the then East Pakistan were automatically made m embers of the ICAP. After the liberation of Bangladesh, a similar ordinance, th e Chartered Accountants Ordinance of 1973 was promulgated making way for Banglad eshi chartered accountants to establish their own institute. The demand for audit work in Bangladesh is fairly large as the countrys economy i s growing at an average growth rate of 5.5 percent (GOB, 1996 2004). The major demand for audit services emerge from the rapidly expanding private sector. It may be worth mentioning that although Bangladesh inherited a predominantly priva te enterprise economy at its independence, the first post-independence governmen t generally followed a socialist economic path thereby nationalizing all medium to large enterprises by promulgating a series of Presidential Orders (POs) durin g 1972 73. However, the governments of the late Seventies and the Eighties sough t to reverse the trend by embracing a more market-oriented economic philosophy. By the late Eighties and throughout Nineties, the successive governments pursued a policy of denationalizing state-owned enterprises. As more and more enterpris es are denationalised, they enter the audit services market as a separate compan y while during their nationalised period, all the units under one corporation (a n umbrella holding company) used to be audited by one audit firm. For example, u p to 1984, there were only two insurance companies and six commercial banks in B angladesh, all of them in the public sector whereas, by the end of April 2005, t here were thirty-nine insurance companies, forty-nine commercial banks and twelv e leasing companies operating in the country. In the mean time, there was no in

crease in the number of state-owned insurance companies or banks while three com mercial banks were denationalised. Moreover, the decision to allow the creation of industries in the private sector by post-1975 governments has given rise to the formation of thousands of private companies in the manufacturing and the ser vices sectors. One example is the large increase in companies in the ready made garments industry. This sector was virtually non-existent before 1975. At pre sent, there are more than ten thousand garments industries in Bangladesh and all of them require an annual audit, at least for tax and loan purposes. Additiona l demand has also been created by the rapid growth in the pharmaceuticals, texti le, sea food, and leather sectors. Although not required by any Act of the country, there is a demand for audit ser vices from Non-Government Organisations (NGOs) operating in the country. In the last three decades, there was an influx of foreign aid in the aftermath of the devastating floods of 1987, 1988, and 1998 and the cyclone of 1991. Most of the donors now prefer to channel their aid through NGOs like BRAC, PROSHIKA, ASA, R DRS, and through their own aid agencies including USAID, CARE, SIDA, CIDA, OXFAM , Action Aid, and MCC owing to reports of misuse and inappropriate use of aid by government agencies. This has caused an enormous increase in the number of NGO s and turned the existing NGOs into important catalysts in the economic fabric o f the nation. The sheer size and scope of activities of many NGOs have made it inevitable both from the government s and from the donors point of view that th eir accounts are audited by professional accountants. As a matter of fact, Bangl adesh is now the home of the worlds largest NGO Bangladesh Rural Advancement Comm ittee (BRAC). Another NGO, the Grameen Bank has grown so much that its turnover and asset size exceeded those of many state-owned commercial banks. In the recen t years, several cellular phone companies have also emerged as significant playe rs in the market for audit services. The largest cellular phone company, Grameen Phone, reported revenues that are higher than that of the largest stock exchang e listed company (BATBC) in the country. Hence, the market for audit services is no longer limited to the joint stock companies and companies in the state secto r. The subsidiaries of multinationals are usually audited by one or more of the firms having links with the international Big Four. In cases where two audit f irms are appointed by a multinational, the joint auditor may not have links with the Big Four. In most cases, the parent company recommends an audit firm that has links with the parent s auditor. For instance, British American Tobacco (BA TBC) is audited by Rahman Rahman Haq on the grounds that it has links with BATs i nternational auditor KPMG. Similarly, GEC (Bangladesh) Ltd. uses the audit firm of Hoda Vasi Chowdhury and Co., which has links with Deloitte. If none of the local firms have any link with the parent s auditor, the local subsidiary is usu ally instructed to appoint an audit firm with international links. Audit fees in Bangladesh are low. The companies included in the current study a re the largest ones and pay the highest amounts of audit fees. The average audi t fee paid by the sample companies is Tk. 78,027.13 (650) with a standard deviati on of Tk. 86,702 (677). The minimum audit fee paid in the sample is Tk. 7000 (55) and the maximum audit fee is Tk. 559,000 (4,367). The vast majority of small an d medium sized companies pay in the range of Tk. 30,000 (234) and Tk.100,000 (781) . Now that foreign investors have started investing in the securities of some B angladeshi companies, the need to employ auditors with international repute and credibility is considerable. International joint venture concerns also demand a udit work of higher standards in their Bangladeshi subsidiaries. For example, t he consortium partners of Karnafuli Fertiliser Company (KAFCO), one of the bigge st fertiliser factories in Asia, were reported to have insisted on the appointme nt of auditors having an affiliation with an international Big Four firm. Hence , the audit fees earned by the existing audit firms could be higher if higher qu ality audit work could be offered. 4. Study Design

The present study is based on all DSE listed companies whose 2003 annual reports were available by December 2005. Annual reports of 208 such companies were publ ished by the given date and all of them were included in this study. Overall, th e study covers 83 percent of the population. As shown in Table 3 below, it cover s all companies in 3 industry sectors while for two other sectors it covers over 90 percent. The combined market capitalization of the companies included in thi s study represents approximately 98 percent of the total market capitalization o f the DSE. Table 3 Industry-wise distribution of the sample and their auditor size No. of Companies Listed on DSE present sample Percentage of Coverage affiliated auditor Banks 28 26 93 12 Investment 4 3 75 Engineering 22 18 82 Food and Allied 41 30 73 Energy 5 4 80 2 Jute 5 4 80 Textiles 44 37 84 Pharmaceuticals & Chemicals 28 Paper and Printing 9 6 Services and Real Estate 5 3 60 1 Cement 8 8 100 3 IT Sector 6 5 83 Tannery Industries 10 6 Ceramic Industries 4 4 Insurance 20 20 100 Miscellaneous 12 8 67 Total 251 208 83 34 on 31 Dec. 2003 No. of companies in the (%) No. of companies hiring a big 4 2 3 3

26 67

93

60 100 2 1

As mentioned earlier, this paper presents the analysis of several aspects of the audit services market in Bangladesh. Those aspects include: (i) audit concentra tion; (ii) big-4 premium; and (iii) factors determining auditor choice. The firs t two aspects, viz., audit concentration and big-4 premium are analysed in the f ollowing two subsections. The third aspect, i.e., determinants of auditor choice , is analysed more in-depth in subsection 4.1. The analysis of the first three a spects is carried out primarily by means of two-way tables while the analysis of auditor choice is carried out using both univariate and multivariate analytical tools. 4.1 Audit Concentration

There is no universally accepted measure of audit concentration in auditing rese arch. Moizer and Turley 1987) recommend client sales and square root of sales as providing upper and lower bands of actual audit fee concentration. They view th e number of audits as a poor measure of concentration as this measure assumes th at all audit clients are of the same size. In the present study, in addition to the concentration measures recommended by Moizer and Turley (1987), we use a nu mber of measures to test the robustness of the observed concentration. Addition al measures used include natural log of sales, client assets, square root of cli ent assets, natural log of client assets, client market capitalization along wit h its square root and natural log. In this study, a total of 60 audit firms were engaged in auditing the 208 listed companies included in this study. Therefore, more than 100 audit firms are already excluded at the outset. Among the 60 firm s represented in this study, the 4 affiliates of international Big 4 firms accou nt for 34 clients, the two affiliates of international non-big 4 firms account f

or a further 37 clients while the remaining 54 audit firms account for the remai ning 137 clients. A total of 60 audit firms are involved in auditing the 208 listed companies in t he study. Among them, M J Abedin & Co (local affiliate of Moore Stephen) audits the largest number of companies (20). Howlader Yunus & Co (local affiliate of BD O Binder) audits 17, Hoda Vasi Chowdhury & Co (local affiliate of Deloitte) audi ts 16, Rahman Rahman Huq (KPMGs local affiliate) audits 9, A Quasem & Co (PWCs loc al affiliate) audits 6 and S F Ahmed & Co (Ernst & Youngs local affiliate) audits only 3 companies in the sample. The 4 local affiliates of the international Big 4 together audit 34 companies in the sample while the 2 local affiliates of int ernational non-big 4 firms together audit 37 companies. Taken together these 6 i nternationally linked firms audit 71 companies (34.13 percent) in the sample. A few unaffiliated audit firms also account for large concentration of customers. They include M A Malek Siddiqui Wali (12), Shaha Mazumder & Co (9), Haque Shahal am Mansur (8), K M Alam Khaleque & Co (7), A Wahab & Co (7), Khan Wahab Shafique Rahman & Co (6) and Aziz Halim Anwar & Co (6). Together with the 6 internationa lly linked firms, they audit a total of 126 companies in this sample. That means these 13 audit firms are responsible for auditing 60.6 percent clients in this sample. If we include audit firms who audit 5, 4, or 3 companies in this sample, we find that 23 audit firms audit 152 companies while the remaining 37 audit fi rms are audit only 56 companies. This translates into the fact that 38.33 percen t audit firms audit 73.1 percent of the clients in this sample. These statistics by themselves may not suggest the existence of concentration as each client is considered as equal clients. However, if client size or audit fees are considere d, then we will find that the 6 internationally linked firms earn 49 percent of total audit fees and audit 62.4 percent of assets, 64.8 percent of turnover, and 73 percent of market capitalization of the whole sample. Therefore, the equatio n changes now as only 3 percent of audit firms audit 65 percent of client turnov er. Considering all 171 audit firms operating in the country, it could be said t hat the 6 internationally linked audit firms actually constitute only 3.5 percen t of all firms yet auditing nearly two-third of total value audited. Table 4 Audit Concentration Ratios (all measures in %)

Audit Firm No. of ales Log of Sales Market Capital ization Hoda Vasi Chowdhury 9.1 33.2 Rahman Rahman Huq 5.4 14.8 Howlader Yunus 8.2 10.6 M J Abedin 9.6 6.2 A Quasem 2.9 3.4 S F Ahmed 1.4 4.7 Big 4 total 56.1 16.4

Audits Audit Fees Net Sales Total Assets Square Root of Assets 7.7 4.3 8.2 7.9 3.9 2.5 32.9 15.3 11.2 11.2 8.7 3.9 19.0 44.9 9.8 12.2 10.1 10.9 4.3 6.0 29.1 9.6 9.2 8.6 10.9 3.7 2.3 20.2 49.0 8.1 6.1 24.5 4.3 4.9 7.1 33.7 64.8

Square Root of S Log of Assets 16.7 5.0 14.6 8.7 4.4 4.4 29.5 50.1 14.0 6.7 9.1 10.3 3.4 2.0 19.9 39.7

Big 6 total (big 4 + 2 non-big linked) 34.1 62.5 52.8 39.3 72.9

Top 16 firms (with 2% or more audit fees) 65.2 91.4 78.6 65.8 85.5 Herfindahl Index 0.045 0.158 0.040 0.062 0.089

61.5 0.054

77.6 0.044

82.4 0.118

72.6 0.066

Big 4s share of the audit market in terms of the number of exchange-listed client s has always been around 20 percent mark. The following table shows the year-wis e trend of Big 4 and non-Big 4 firms market shares. Table 5 Big 4s share of the market 1999 to 2003 Year Big 4 share total share N 1990 21 17 1991 20 17 1992 19 17 1993 20 17 1994 19 18 1995 17 17 1996 16 19 1997 14 16 1998 14 16 1999 13 18 2000 14 17 2001 14 18 2002 14 18 2003 16 18 Total 18 17 2 medium tier int. linked firms share Affiliated firms 38 37 36 38 37 34 34 30 30 30 31 32 32 34 35 89 94 100 104 116 132 145 162 160 193 183 187 190 208 2063

4.1.1 Audit concentration by industry There appears a serious lack of interest for big four auditors among several maj or industry sectors. None of the companies in the textile, jute, paper and print ing, IT, and ceramic sectors hired a big-four auditor. The share of the big-four among food and allied, pharmaceuticals and the insurance sectors is also neglig ible, being 10 percent or less. Banking sector appears to be the main employer o f big four auditors. A good number of banks employ the non-big four but internat ionally linked firms. This is the only sector that employs fewer unaffiliated au dit firms than the affiliated ones. Nevertheless, given the size and significanc e of banks, it is interesting to see that 7 of the 26 banks in the study still e mploy an unaffiliated audit firm. This is particularly important to note as some of these 7 banks are among the largest in the country. Table 6 Sector-wise distribution of big 4 and non-big 4 auditors Big, medium and small firms N Big Four Linked Banks 26 12 7 7 Investment 3 2 Engineering 18 3 3 Food and Allied 30 3 7 Energy 4 2 2 Jute 4 1 3 Textiles 37 9 Pharmaceuticals & Chemicals 26 Paper and Printing 6 Non Big Other Cases 1 12 20 28 4

5 6

17

Services and Real Estate Cement 8 3 IT Sector 5 Tannery Industries 6 Ceramic Industries 4 Insurance 20 2 Miscellaneous 8 1 Total 208 34 37

3 5 1 1 2 137

1 4 1 18 5

1 5 3

Table 7 Firm size and auditor choice Small (below median) Big Four 8 26 Other Cases 96 78 Big or Non Big Linked 21 Other Cases 83 54 Big (above median) 50

When companies are divided between small and big based on median asset size, we find that the bigger companies generally hire big audit firms. The same pattern follows if we look at the two medium sized audit firms (who are affiliated with international non-big four firms). 4.1.2 Sponsor Shareholding and auditor choice It is interesting to see that companies with less than 50 percent sponsor shareh olding have a smaller proportion of big 4 auditor. However, they have a relative ly bigger share of big 6 auditors. Table 8 Sponsor shareholding and auditor choice Shareholding less than 50% Big Four 9 25 Other Cases 73 101 Total 82 126 Big or Non Big Linked 32 39 Other Cases 50 87 Total 82 126 Shareholding 50% and above

4.1.3 Industrial conglomerates and auditor choice One phenomenon that might be of interest in this connection is whether auditor c hoice is driven by auditor-client relationship rather than economics of the mark et. It is found that influential business houses diversify their investments in enterprises across a number of different industries and maintain ownership contr ol using cross-directorships. Sixteen such groupings can be identified among the companies in the sample. Interestingly, we find that 10 of the 16 groups have t he same audit firm audit all their enterprises. For example, Beximco group has 1 1 sister companies listed on DSE and CSE. All 11 of them are audited by the same audit firm MJ Abedin & Co (affiliate of Moore Stephen). Another major group is Square group who has 2 listed companies both of which have Chowdhury Bhattacharj ee & Co. as their auditor. Anisur Rahman & Co is the auditor of all 3 listed com panies of Tallu group. Similarly, A. Quasem & Co (affiliated with PWC) audits al l 3 companies within Islam group. There are only a few exceptions where one or t wo companies within the group might have a different auditor. In Monno group for example, A. Wahab audits 3 of their 4 companies and M J Abedin being the other

auditor. Apex group is the only real exception who employs 4 different audit fir ms to audit its 5 listed companies. This is interesting because typically these companies owned by the same group are spread across different industry sectors. Clearly, auditors industry specialization is not playing any role as one audit fi rm can hardly be specialised in pharmaceuticals, leather, textile, cement, real estate, and IT (as the case of M J Abedin and Beximco). Another phenomenon is that MNCs tend to always go for big 4 auditors. All the 7 MNC subsidiaries have big 4 affiliated firms as their auditors. 4.2 Determinants of Auditor Choice

In order to identify the factors affecting auditor choice, a multivariate test o f association between auditor choice and auditor and client-specific variables i s carried out. Auditor choice is examined against a number of explanatory variab les. The explanatory variables used are: client size, degree of sponsor ownershi p, whether the client firm is categorised as a Z-category company by the DSE and the market value of equity-to-book value of equity ratio of client firms. Detai led description on each of these variables is provided in the next section. Hypothesis The expected association between auditor choice and selected client characterist ics is examined by testing the following hypothesis: Ho: There is no significant association between a number of corporate attributes and auditor choice in Bangladesh. The analysis is carried out at two levels. At the first level, all the companie s in the sample are considered in order to develop a model representing both fin ancial and non-financial companies. At the second level, only the non-financial companies are considered. The multiple linear regression technique is used to te st the above hypothesis. In both cases, the dependent variable was a dichotomou s variable representing auditor choice. Model for Auditor Choice The dependent and explanatory variables used in the present study are described below: Dependent variable: Auditor Reputation: The choice of auditor (Big 4 affiliated firm versus an unaffiliated local firm) by the sample companies is used as the dependent variable in both the models. Ty pically a dummy variable is used to capture the auditor size in auditor choice s tudies. Segregation is usually made between Big 4 (formerly Big 8, Big 6, or Bi g 5 in earlier studies) and non-Big 4 firms. Generally audit fee studies are in terested in auditor size as a potential explanatory variable explaining variatio ns in auditor size. Simunic (1980) found no evidence of significantly higher aud it fees charged by the Big Eight firms in the US except Price Waterhouse, regard less of the auditee size. Firth (1985) also reported no significant influence o f auditor size in New Zealand. But other studies including Taffler and Ramaling gam (1982), Francis (1984), Palmrose (1986), Francis and Stokes (1986) and Franc is and Simon (1987) found the existence of a Big Eight premium. In the present study, it was difficult to partition the audit firms in the absence of internati onally recognised Big and non-Big firms category. However, from the available i

nformation, it was possible to identify the international link of the audit firm s, mostly with the Big Four. Four local firms affiliated with the international Big 4 and two affiliated with two non-big four firms were classified as large. Both Big 4 and Big 6 affiliations were studied. This produced six audit firms wh ich could be recognised as large firms in the context of Bangladesh. Four of th ese firms are affiliated with the international big 4 firms while the other two are affiliated with two international non-big firms. The variable is labelled AF S. Explanatory variables: Auditee size: There are a number of reasons why a large client would want to emp loy a more reputed auditor. A large client has a bigger volume of transactions u nder audit, has more and wider range of stakeholders, is likely to have greater agency tension and have more to lose should anything go wrong. Large companies a lso typically have more dispersed ownership and diversified operations that may tend to make its auditing more complex and potentially risky. Therefore, client size should have a positive link with demand for auditor reputation. Copley and Douthett (2002) provide argument in line with the above contention. Large firms can also afford to pay higher audit fees and typically they appear to pay higher fees. Auditee size is the most commonly used explanatory variable in audit fee studies and is consistently found to be the most significant variable in determi ning audit fees (Hay et al, 2005). In the present study, both total assets and sales were transformed into natural logs and the log of total assets is used in the model because of its higher correlation with the dependent variable. The va riable was labelled LOGASSET. Auditee profitability: A more profitable company is likely to go for higher qua lity audit as it may wish to signal the quality of its earnings. Client profitab ility as measured by net profit to sales ratio or return on shareholders equity has been used to explain the link between profitability and auditor choice. Re lative measures of profitability are usually preferred to absolute measures beca use absolute profit may be highly correlated with company size. In the present study, the net profit to sales ratio is considered for use in the auditor choice model but was dropped to avoid possible multicollinearity with the market categ ory variable. Leverage: Agency literature (Jensen and Meckling, 1976) suggests increased agenc y tension as leverage increases. Debt-holders have incentives to engage in costl y monitoring to prevent potential wealth transfers from debtholders to equity ho lders or to managers. They also have incentives to ensure that the financial inf ormation produced by the borrower is of acceptable quality. The borrower also ha s incentives to employ higher quality auditor (even voluntarily) to signal quali ty of its earnings and asset values. Leverage has been used in a number of audit fee studies as well, although the findings of these studies are mixed (Hay et a l 2006). The debt-equity ratio is used as the measure of leverage. Some other l everage measures were also computed such as debt to total assets, total debt, an d capital gearing ratio. The debt-equity ratio was selected for analysis because it showed the highest correlation with the dependent variable. A few problems a rise in the computation of the ratio. One such problem stems from the lack of a uniform definition of debt that could consistently apply to both banks and non-b ank financial institutions (such as insurance and leasing companies) as well as to non-financial companies. Computing the ratio for non-financial companies was rather straight-forward. However, for banks and other financial institutions tha t was not the case. While customer deposits are liabilities for banks, it cannot be conveniently called a debt. A second problem is caused by the existence of n egative equity companies in the sample. In the present study, the first problem was resolved by defining debt to include borrowing from other banks and from the central bank (if applicable) and other borrowings (if any). Similar procedure w

as employed for non-bank financial institutions. The second problem was averted by replacing book value of equity by market value of equity for negative equity firms. The variable demonstrates significant positive correlation with the selec ted size variable logasset. Therefore, in the final model the variable is droppe d. Market category: Recently DSE listed companies have been categorized into 3 cate gories-A, B, and Z based o their regularity of holding AGMs and/or payment of di vidend. It is expected that companies in the Z category are likely to have finan cial and/or other difficulties and have no incentives to demand reputation by pa ying higher audit fees and also risking potential revelation of further weakness es with the firm. The phenomenon is captured with a dummy variable with the val ue of 1 if it is in the Z category and 0 otherwise. The variable is labelled MKT CAT1. A negative sign is expected for this variable, as companies in the Z categ ory are likely to engage non-big audit firms. Audit risk: Some measure of audit risk was considered in the present study. The measures of audit risk used include: leverage ratio, and existence of accumulate d loss. In this study, leverage and the existence of loss in clients accounts we re used as the measures of audit risk. The RISK variable was given the value of one if the company had an accumulated loss and zero otherwise. However, the var iable is found to be highly correlated with market category variable and was dro pped to avoid multicollinearity. Multinationality: Subsidiaries of multinational companies observe higher account ing standards and disclose more information than their domestic counterparts. T his may require higher quality audit work which arguably could only be provided by more reputed auditors. In the current sample, all the MNC subsidiaries are c lients of big audit firms and pay higher than average audit fees. A dichotomous variable called MNCSUB was used with the value of one if the company was a subs idiary of a multi-national parent and zero otherwise. The variable shows signifi cant positive correlations with the client size (LOGASSET) and was, therefore dr opped from the analysis. Management shareholding: External audit is commonly viewed as a corporate govern ance mechanism to resolve agency conflict between managers and absentee owners ( Fan and Wong, 2004). Unless statutorily required, in the absence of separation o f management from ownership, an entity has no incentive to have an audit for ass urance purpose alone. While it is almost impossible to find a modern corporation without any separation of management from ownership, it is not uncommon to find companies with high proportion of management shareholding. Under an agency fram ework, the relationship between management (or board) shareholding and demand fo r high quality audit work may be drawn to be inverse. In companies with high man agement shareholding, less information asymmetry could be expected and hence the reliance on auditor to resolve agency conflict is consequently less. Therefore, companies with high proportion of management (or board or sponsor) shareholding are expected to opt for high quality audit work and vice-versa. In the present study, management and directors shareholdings are used to mean the same as in Ban gladesh, except in the financial services sector, most directors act as inside d irectors. The variable is labelled MGTSHARE. Market-to-Book Ratio: Market value of equity to book value of equity shows a com panys growth opportunities and investment in intangible assets. Companies with hi gh ratio of market-to-book ratios are likely to demand higher quality audit as t hey wish to signal higher quality of accounting numbers. The variable is used as an explanatory variable and is labelled MVEBVE. Regression Models: Four auditor choice models are developed, two based on the combined sample and t

he other two on non-financial sub-sample. The first of the two models based on t he combined sample uses Big 4 versus non-Big 4 dichotomy in the dependent variab le while the second model uses Big 6 versus non-Big 6 dichotomy. The Big 6 firms comprise the local affiliates of the international Big 4 plus two local firms w ho are affiliated with two no-Big 4 international firms, namely Moore Stephen (M J Abedin and Co.) and BDO Spicer (Howlader Yunus and Co.). The description and expected signs of the explanatory variables are stated in Table 9. Dependent variable: AFS = Audit firm size Table 9 Description of Variables Variable Label Variable Expected sign MKTCAT1 Market category, i.e., A, B or Z category shares LOGASSET Natural log of total assets (in million Tk) MGTSHARE Percentage of management shareholding MVEBVE Market value of equity to book value of equity + The equation for Model 1 (combined sample) was: AFS = (KTCAT01) + LOGASSET) + MGTSHARE) + MVEBVE) ........... + e.

Descriptive statistics of all relevant variables are provided below: Table 9(a) Descriptive Statistics (Combined sample) N MKTCAT01 SAFIRM 208 LOGASSET MGTSHARE MVEBVE Minimum 208 0 208 208 Maximum 0 1 .90 0 Mean 1 .34 4.91 1 Std. Deviation .27 .447 .475 2.7481 .79740 .61 .490

Table 9(b) Descriptive Statistics (non-financial sub-sample) N MKTCAT01 SAFIRM 159 LOGASSET MGTSHARE MVEBVE Minimum 159 0 159 159 Maximum 0 1 .90 0 Mean 1 .30 4.19 1 Std. Deviation .32 .468 .461 2.5251 .61792 .56 .498

The first step towards the development of the proposed models was the constructi on of correlation matrices of all the variables likely to be used as explanatory variables and the dependent variable. Table provides the correlation matrix wh ich is used to select the variables for the proposed models. An OLS regression procedure was followed to examine the models. The results of the regression procedures are summarised in the following tables: Table 10 Summary of the regression output Model All companies Dependent Variable Beta Sig Non-financial companies Big 4 Big 6 Big 4 Big 6 Beta Sig Beta Sig

Beta

Sig

mktcat01 -1.664 logasset 1.093 mgtshare .027 mvebve 1.095 .000 Constant -7.326 Cox & Snell R Square Nagelkerke R Square N 203

.143 .000 .099 .549 .000 .242 .421 203

-.917 .936 .001 .011 -3.689

.066 .000 .911 1.617 .000 .202 .282 157

-16.784 1.842 .042 .000 -11.155

.997 .004 .116 .626 .000 .309 .606 157

-.455 1.207 .004 .018 -4.568

.414 .002 .805 .001 .197 .280

Discussion: The results of the four models show that client size and market-tobook ratio are significant in all four models. This clearly indicates that large r companies show greater demand for reputation and that companies that are favou rably valued in the market, i.e., market values higher than book values, show gr eater demand for auditor reputation. The most surprising finding is that sponsor shareholding is not significant in any of the models, except for being weakly s ignificant in the first model based on the combined sample. Similarly, market ca tegory does not appear to be significant in three of the four models. It is cons istently showing the expected negative signs but is weakly significant only in t he Big 6 model based on the combined sample. The Cox & Snell R Squares and Nagelkerke R Squares are reasonable as they range from approximately 20 percent to over 60 percent. 5. Summary and Conclusion

The audit concentration measures presented in the study show that the big audit firms share of the market is significantly small in Bangladesh. We need to unde rstand why. Moreover, at the moment we have no knowledge as to the share of majo r audit firms in the unlisted company market. We have identified individual audi t firm market share as well the market share of the big 4, big 6, or big 16 as w ell the non-big 4 etc. in terms of audit fees earned, value audited, and fee per million Tk of assets or sales. It is interesting to observe that the big audit firms are actually charging less audit fees per, say, million Taka sales or asse ts. That indicates that they are either more efficient or are providing a better value for money audit. However, the multivariate analysis shows that there is a big-4 premium in Bangladesh. Findings of the present study also show that audit fees have systematically been dropping. Comparing the fee data with the ICAB recommended fees it appears that there are big fee cuts for almost all the audit clients. Leaving fee cut aside, the actual audit fees appear to have decreased over the years once they are adj usted for purchasing power loss, i.e., inflation. The situation is even serious if you adjust fee data for both inflation and the weakening Bangladesh currency against almost all major currencies. Two aspects of Bangladesh audit services ma rket are worth noticing. First, except for multinational clients, big-4 affiliat ed firms do not appear to have any sector that they are currently dominating and second, banking sector being one of the more complex and sophisticated sectors, appear to have a tendency to hire non-affiliated firms. Is this because they ha ve something to hide? What might explain their incentives to prefer unaffiliated local firms ignoring those with big 4 affiliations? How can a small, unknown au dit firm earn itself the job of auditing one of the largest nationalised commerc ial banks? The auditor choice models formulated here are intended to identify the client ch aracteristics that determine auditor choices made by companies in Bangladesh. F our models were developed using the data from the combined and non-financial com panies. The results generally suggest that client size and market performance ( reflected in MVEBVE ratio) consistently explain auditor choice. Market category and sponsor shareholding only have weak explanatory powers in explaining auditor

choice. The study reveals the absence of any domination by the international Big Four, a lthough there is some influence of larger Bangladeshi firms with international l inks. However, there seems to be an insignificant impact of sponsor shareholding and market category. Market category being a composite variable combining effec ts of profitability, leverage, and audit risk. One reason behind low levels of d emand for auditor reputation might be the very low level of audit fees paid by a udit clients, indicating that the type of auditing being carried out in Banglade sh is different in character from that in developed countries. REFERENCE [1] Ahmed, K. and Des Nicholls (1994) "The Impact of Non-financial Company Chara cteristics on Mandatory Disclosure Compliance in Developing Countries: The Case of Bangladesh", The International Journal of Accounting Education and Research, 29, pp. 62-77. [2] Ahmed, K. and M. Hossain (2000) The Effects of Investment Opportunities and M anagerial Ownership on Audit Fees: Evidence from an Emerging Market, Internationa l Journal of Business Studies, 8(1): 37-53. [3] Ahmed, K. and M. K. Goyal (2005) A Comparative Study of Pricing of Audit Serv ices in Emerging Economies, International Journal of Auditing, 9(2):103-116. [4] Chan, P., Mahmoud Ezzamel, and David Gwilliam (1993) "Determinants of Audit Fees for Quoted UK Companies", Journal of Business finance and Accounting, 20 (6 ) November, pp. 765-786. [5] Chung D. Y. and W. D. Lindsay (1988) "The Pricing of Audit Services: The Can adian Perspective", Contemporary Accounting Research, 4 Fall, pp. 19-46. [6] Copley, P. A. and E. B. Douthett, Jr. (2002) The Association Between Auditor Choice, Ownership Retained, and Earnings Disclosure by Firms Making Initial Publ ic Offerings, Contemporary Accounting Research, 19 (1), 49-75. [7] Davis L. R., David N. Ricchiute and Greg Trompeter (1993) "Audit Effort, Aud it Fees, and the Provision of Nonaudit Services to Audit Clients", The Accountin g Review, 68 (1) January, pp. 135-150. [8] DeAngelo L. E. (1981b) "Auditor Size and Audit Quality", Journal of Accounti ng and Economics, 3, pp. 183-199. [9] Dopuch N. and D. Simunic (1982) "Competition in Auditing: An Assessment", I n Fourth Symposium on Auditing Research, Urbana: Office of Accounting Research, pp. 401-450. [10] Fan, J. P. H. and T. J. Wong (2004) Do External Auditors Perform a Corporate Governance Role in Emerging Markets? Evidence from East Asia, Journal of Account ing Research, 43 (1), 35-72. [11] Francis J. R. (1984) "The Effect of Audit Firm Size on Audit Prices: A Stud y of the Australian Market", Journal of Accounting and Economics, 6, pp. 133-151 . [12] Firth M. (1985) "An Analysis of Audit Fees and Their Determinants in New Ze aland", Auditing: A Journal of Practice and Theory, 4(2) Spring, pp. 23-37. [13] Francis J. (1984) "The Effect of Audit Firm Size on Audit Prices", Journal

of accounting and Economics, 6 August, pp. 133-151. [14] Francis J. R. and D. J. Stokes (1986) "Audit Prices, Product Differentiatio n, and Scale Economies: Further Evidence from the Australian Market", Journal of Accounting Research, 24(2) Autumn, pp. 383-393. [15] Francis J. R. and Daniel T. Simon (1987) "A Test of Audit Pricing in the Sm all Client Segment of the U. S. Audit Market", The Accounting Review, 62 (1) Jan uary, pp. 145-157. [16] Government of Bangladesh (1987) The Securities and Exchange Rules 1987, The Bangladesh Gazette, Ministry of Finance, Government of the Peoples Republic of Bangladesh. [17] Government of Bangladesh (1993) Securities and Exchange Commission Act 1993 , The Bangladesh Gazette, Ministry of Finance, Government of the Peoples Republi c of Bangladesh. [18] Haskins M. E. and David D. Williams (1988) "The Association Between Client Factors and Audit Fees: A Comparison by Country and by Firm", Accounting and Bus iness Research, 18 (70) Spring, pp. 183-190. [19] Hay, D., W. R. Knechel and N. Wong (2006) Audit Fees: A Meta-Analysis of the Effect of Supply and Demand Attributes, Contemporary Accounting Research, 23 (1) 141[20] Jensen, M. C. and W. H. Meckling (1976) Theory of the Firm: Managerial Behav iour, Agency Costs and Ownership Structure, Journal of Financial Economics, Octob er, 305-360. [21] Karim, A. K. M. W. and J. U. Ahmed (2005) Determinants of IAS Disclosure Com pliance in Emerging Economies: Evidence from Exchange-Listed Companies in Bangla desh, Working Paper No. 21, Centre for Accounting, Governance and Taxation Resear ch, Victoria University of Wellington, New Zealand. [22] Karim, A. K. M. W. and P. Moizer (1996) The Determinants of Audit Fees in Ba ngladesh, The International Journal of Accounting, 31(4): 498-512. [23] Low L. C., P. Tan and H. C. Koh (1990) "The Determination of Audit Fees: An Analysis in the Singapore Context", Journal of Business Finance and Accounting, 17(2) Spring, pp. 285-295. [24] Maher M. W., A. J. Broman, R. Colson and P. Tiessen (1985) Pricing of Audit Services: Additional Evidence, Unpublished Manuscript, University of Michigan: Ann Arbor, Michigan. [25] Palmrose Z.V. (1986a) "Audit Fees and Auditor Size: Further Evidence" Journ al of Accounting Research, 24 (1) Spring, pp. 97-110. [26] Palmrose Z.V. (1986b) " The Effect of Nonaudit Services on the Pricing of A udit Services: Further Evidence", Journal of Accounting Research, 24 (2) Autumn, pp. 405-411. [27] Palmrose Z. V. (1989) "The Relation of Audit Contract Type to Audit Fees an d Hours", The Accounting Review, 63 July, pp. 488-499. [28] Pong C. K. M. and G. Whittington (1994) "The Determination of Audit Fees: S ome Empirical Models", Journal of Business Finance and Accounting, December. [29] Ramzy W. A. M. (1988) The Determinants of Audit Fees: An Analytical Study,

Unpublished Doctoral Dissertation, Harriott-Watt University. [30] Shockley R. A. and R. N. Holt (1983) "A Behavioural Investigation of Suppli er Differentiation in the Market for Audit Services", Journal of Accounting Rese arch, Autumn, pp. 545-564. [31] Simon D. T. (1985) "The Audit Services Market: Additional Empirical Evidenc e", Auditing: A Journal of Practice and Theory, 5(1) Fall, pp. 71-78. [32] Simon D. T. and Jere R. Francis (1988) "The Effects of Auditor Change on Au dit Fees: Tests of Price Cutting and Price Recovery", The Accounting Review, 63 (2) April, pp. 255-269. [33] Simunic D. A. (1980) "The Pricing of Audit Services: Theory and Evidence", Journal of Accounting Research, 18 (1) Spring, pp. 161-190. [34] Taffler R. J. and K. S. Ramalinggam (1982) "The Determinants of Audit Fees in the UK: An Exploratory Study", City University Business School Working Paper No. 37, London. [35] Taylor, M. E. and Robert L. Baker (1981) "An Analysis of the External Audit Fee", Accounting and Business Research, Winter, pp. 55-60. [36] Thornton D. B. and Giora Moore (1993) "Auditor Choice and audit Fee Determi nants", Journal of Business Finance and Accounting, 20 (3) April, pp. 333-349. [37] Wallace W. (1984) A Time Series Analysis of the Effects of Internal Audit A ctivities on External Audit Fees, The Institute of Internal Auditors Research Fo undation, Florida. [38] Whittington G. (1992) The Determinants of Audit Fees: Some Empirical Models , University of Cambridge working paper. [39] Yardley, J. A., N. L. Kauffman, T. D. Cairney, and W. D. Albrecht (1992) Sup plier Behaviour in the US Audit Market, Journal of Accounting Literature, 11(1), pp. 151-185. Appendix 1 (a) Correlation Matrix (Combined Sample) nptosale logasset mncsub Institdum25 Lvgmodi Big four Big six nptosale 1.000 roe .057 1.000 roa .521** -.506** mktcat01 -.409** complex -.056 .021 loginvar .075 logasset .190** mncsub .032 .035 fin .287** .051 spnshare .124 .075 1.000 spondum .121 .081 .677** 1.000 instit -.041 .004 -.359** -.243** 1.000 roe roa mktcat01 complex loginvar fin spnshare Spondum Instit Instit dum20 mvebve

1.000 .023 -.078 -.017 -.111 .093 .181** .031 .075 -.060

-.331** -.036 .044 .188** -.123 -.189** .033 -.100 -.059

1.000 1.000 -.193** -.264** .019 .062 -.027 -.109 .023

.666** .365** .108 .380** -.032 -.046 .093

1.000 .903** .125 .491** -.014 .002 .070

1.000 1.000 -.111 .044 .161* .011

1.000 .296** .170* -.082

institdum20 -.105 -.266** institdum25 -.140* -.267** lvgmodi -.405** .034 -.022 mvebve .216** .155* .133 Big four .245** .196** Big six .196** .067 -.083

-.067 -.210** -.091 -.181** .026 -.099 -.281** .048 .158* .117 .013 -.038

-.077 .819** .057 .841** -.378** -.075 .430** .083 .046 .047 .114 -.066

-.011 1.000 -.106 .773** .296** -.098 -.381** .008 .114 .015 -.283** -.106

-.042 .038 1.000 -.015 1.000 -.012 -.176* -.242** -.054 .233** -.099

-.049 -.067

-.005 -.015

.016 -.029 -.064

.074 .023 -.107

-.168* -.132 .109 1.000 .136 -.069 .367** .287** .173* .299** .400** .374** .614**

.491** .084 .333** .452** 1.000 .278** .150* 1.000

** Correlation is significant at the 0.01 level 2-tailed. * Correlation is significant at the 0.05 level 2-tailed. Appendix 1 (b) Correlation Matrix (Non-financial companies sub-sample) nptosale ROE ROA Mktcat01 complex loginvar Logasset mncsubsi FIN spnshare Spondum Instit Institdu m20 Institum25 Lvgmodi mvebve Big four Big six nptosale 1 ROE .025 1 ROA .463** -.610** 1 Mktcat01 -.392** .042 -.329** 1 complex .041 .035 .011 -.128 1 loginvar .144 -.039 .135 -.353** .559** 1 logasset .187* -.194* .289** -.399** .159* .863** 1 mncsubsi .070 .041 .125 -.158* .032 .225** .266** 1 FIN .a .a .a .a .a .a a a 1 spnshare .120 .039 .044 -.088 -.121 -.114 -.018 .358** .a 1 Spondum .064 .080 .031 -.096 -.145 -.128 -.080 .204** .a .704** 1 Instit .002 .016 -.014 -.106 .045 .214** .198* .002 .a -.358** -.202* 1 Institdum20 -.039 -.075 .021 -.079 .010 .143 .163* .069 .a -.280** -.201* .833** 1 Institdum25 -.053 .075 -.077 -.008 -.070 .086 .079 .008 .a -.293** -.156* .865** .763** 1 Lvgmodi -.403** .036 -.384** .290** -.053 -.279** -.181* -.078 .a .053 .013 -.133 -.092 -.133 1 mvebve .226** -.316** .503** -.376** -.004 .166* .268** .535** .a .239** .152 .052 .103 .011 -.175* 1 Big four .116 .048 .166* -.246** .110 .304** .323** .644** .a .302** .157* .064 .073 -.019 -.088 .488** 1 Big six .210** .010 .185* -.276** .166* .349** .357** .350** .a .102 -.107 -.023 -.025 -.092 -.125 .310** .543** 1 ** Correlation is significant at the 0.01 level 2-tailed. * Correlation is significant at the 0.05 level 2-tailed. a Cannot be computed because at least one of the variables is constant. Appendix 2 Audit Concentration Ratios (all measures in %)

Audit Firm No. of Audits Audit Fees Log of Audit Fees Net Sales Square Total Assets Square Root of Assets Log of Square Root of Market Capitalization Log of Big 4 total 16.4 32.9 23.8 17.6 29.5 19.9 56.1 32.8 20.9 Big 6 total (big 4 + 2 non-big linked) 34.1 50.1 39.7 62.5 52.8 39.3 72.9 Top 16 firms (with 2% or more audit fees) 82.4 72.6 65.2 91.4 78.6 65.8 Herfindahl Index 0.040 0.062 0.047 0.118 0.066 0.045 0.158 0.065 0.046 Appendix 3 Big 4 Premium

Square Root of Audit Fees Root of Sales Log of Sales Assets Market Capitalization Market Capitalization 44.9 29.1 20.2 33.7 49.0 53.1 61.5 85.5 0.041 41.6 40.5 77.6 76.1 0.089 35.6 69.7 67.7 0.054 64.8 63.1 0.044

ADTCODE FEES Audit fees per million Tk of sales Audit fees per million T k of assets Audit fees per million Tk of market capitalization Audit fe es per square root of sales Audit fees per square root of assets Audit fe es per square root of market capitalization Audit fees per log sales Audit fees per log assets Audit fees per log market capitalization Average 64,266 713 239 1,001 4,491 2,772 5,769 27,762 22,526 31,699 Big 4 average 119,110 246 117 414 3,740 2,852 4,583 37,529 35,531 41,309 Big 6 average 123,497 316 119 338 3,987 2,795 4,652 39,534 35,992 42,775 All but big 4 average 60,349 746 248 1,045 4,545 2,766 5,857 27,064 21,597 30,987 All but big 6 average 57,685 757 252 1,078 4,547 2,770 5,898 26,454 21,029 30,421