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JAEE
2,1
The market for audit services
in Bangladesh
AKM Waresul Karim
Saint Marys College of California, Moraga, California, USA, and
50
Tanweer Hasan
Roosevelt University, Chicago, Illinois, USA
Abstract
Purpose The purpose of this paper is to provide a comprehensive analysis of the audit services
market in Bangladesh. It explores the trend in audit fees over a period of 14 years and shows that in
real terms audit fees have actually been declining although in nominal terms it appears otherwise. The
study aims to expand the domain of audit fee literature by determining audit concentration in
the market and thereby showing how the market is not dominated by the so-called Big Four firms. The
paper also examines the degree of inside ownership as a possible determinant of audit fees.
Design/methodology/approach The paper employs a multivariate analysis of estimating audit
fees against mainly client-specific attributes. It computes Helfindahl Index to measure audit
concentration in the market.
Findings Results from the multivariate analysis show that the degree of inside ownership inversely
affects audit fees. Client size and their multinational affiliation have a significant positive effect on
audit fees. Firms in the financial sector also tend to pay significantly higher audit fees in Bangladesh.
The reported inverse relationship between the audit fee and proportion of inside-ownership in the
auditee firm indicates, per agency theory prediction, that firms with more diverse ownership in
Bangladesh pay more in audit fees. However, contrary to the findings in prior empirical studies, audit
fee was reported to be significantly negatively related to audit complexity. As the audit complexity
measure is revised, the variable ceases to be a significant driver of audit fees. This could be
attributable to a methodological flaw in the traditional method of measuring audit fees as the ratio of
inventory and receivables to total assets or to increased efficiency achieved by auditors via scale
economies while auditing companies owned essentially by the same group of people.
Research limitations/implications The main limitation of the paper is that the closing period of
the data is 2003, although there is no evidence to believe that the general determinants of audit fees
have changed in Bangladesh since 2003.
Practical implications A decline in real audit fees is a matter of concern for the quality of audit
services because it may impede audit firms to invest in talent and other forms of audit technology
essential to delivering a high quality audit. It may also have wider implications on the quality of
financial reporting in the country.
Social implications If the audit fees do not increase keeping pace with general power, the profession
would struggle to recruit talented individuals to the auditing profession. This may have longer-term
social implications as it may drive away potential graduates with little or no parental resources to
support them to develop an accounting career with substantial dependence on family funds.
Originality/value The current study is the first to introduce ownership structure based
perspective, in a multivariate format, to explain what drives audit fees in a developing country setting.
It also is the first to compute audit concentration in a developing country context. This is the first
paper to present audit fee trend in real terms, i.e. inflation adjusted, client size adjusted, and so on.
Keywords Bangladesh, Developing countries, Auditing, Fees, Audit pricing, Audit concentration,
Audit services market, Ownership structure, Premium
Paper type Research paper
Journal of Accounting in Emerging
Economies
Vol. 2 No. 1, 2012
pp. 50-66 1. Introduction
r Emerald Group Publishing Limited
2042-1168
The empirical literature on audit pricing, concentration, drivers of audit fees and Big-4
DOI 10.1108/20421161211196120 premium is in mature phase. Besides the USA (Simunic, 1980), similar studies were
undertaken in various developed (and relatively developed) countries Audit services
(markets) that include Australia (Crasswell and Francis, 1999), Belgium (Caneghem, in Bangladesh
2010), Canada (Anderson and Zighal, 1994), Denmark (Thinggaard and Kiertzner,
2008), Hong Kong (Rose, 1999), Ireland (Haskins and Williams, 1988), Italy (Cameran,
2005), Japan (Taylor, 1997), the Netherlands (Langendjik, 1997), New Zealand (Firth,
1985), Norway (Firth, 1997), Singapore (Low et al., 1990) the UK (Ezzamel et al., 2002),
etc. However, studies on countries in developing setting have been emerging only in 51
the recent past and these include Bahrain ( Joshi and AL-Bastaki, 2000),
Bangladesh (Ahmed and Goyal, 2005; Imam et al., 2001; Karim and Moizer, 1996),
China (Ji-hong, 1997), India (Simon et al., 1986), Jordan (Naser et al., 2007), Kuwait
(Al-Harshani, 2008), Malaysia (Rose, 1999), Pakistan (Simon and Taylor, 1997), South
Korea (Taylor et al., 1999), South Africa (Simon, 1995), etc[1]. Several studies have
examined whether the BigN audit firms command a fee premium compared to other
auditors (Watts and Zimmerman, 1986; Dye, 1993; Al-Harshani, 2008). The two more
popular explanations for this fee premium, in the literature, are first, BigN firms
charge higher fees to reflect the higher quality of their audit services and second,
BigN firms have deeper pocket than other firms, face higher potential risk of
litigation and consequently, charge more. On the other hand the explanations for
lack of a fee premium are efficiency and economies of scale. BigN firms have large
well-trained staff and can offer specialization which may lead to the observed lack of
fee premium.
There are three published studies on audit pricing and determinants of audit fees
in Bangladesh (Ahmed and Goyal, 2005; Imam et al., 2001; Karim and Moizer, 1996).
Karim and Moizer (1996) conduct an analysis of the determinants of audit fees
using 1990 data of Dhaka Stock Exchange (DSE)-listed firms. The results reported
in the study indicate that the size of the auditee, size of the audit firm, financial
sector firms, and multinational affiliates have most significant impact on audit fees.
Ahmed and Goyal (2005) include Bangladesh in a multicountry setting with India
and Pakistan in the analysis of audit fees. Results reported, using 1997 data of
DSE-listed firms, indicate that the size of the auditee is the main driver of audit fees in
Bangladesh. Multinational affiliation and the size of the audit firm also have significant
impact on audit fees. Both of these studies focus solely on the empirical issue of
determinants of audit fees using 1990 and 1997 data, respectively, and lack adequate
discussion on the operating environment of the audit services market in Bangladesh
in terms of structure, composition, trends. The economy of Bangladesh has undergone
tremendous changes since 1990/1997 and grew at an average rate of 5.5 percent
over the period 1996-2004[2]. The Securities and Exchange Rules of 1987, which
provides (among other things) a framework financial reporting and control, has been
amended a number of times since its promulgation. However, the 1997 and 2000
amendments are regarded as the most extensive and these amendments included
provisions mandating the use of International Accounting Standards (IASs) and
International Standards on Auditing for listed companies[3]. Bangladesh automated
its two stock exchanges in 1998, created a central depository of securities in 2003,
made auditor rotation mandatory for all exchange-listed companies (starting with the
banking sector only at the beginning), revised listing requirements of stock
exchanges and promulgated numerous rules and regulations (e.g. insider trading
rules, IPO issue rules, etc.) aimed at strengthening the capital market via improving the
quality of financial reporting in the country[4]. Bangladesh has also undergone
tremendous change with the private sector flourishing by leaps and bound, e.g. there
JAEE were only two insurance companies and six commercial banks in Bangladesh
2,1 in 1984 (and all of them in the public sector) but there were 39 insurance companies,
49 commercial banks and 12 leasing companies operating in the country by the
end of April 2005. The largest growth is witnessed in the apparel industry along with
rapid growth in pharmaceuticals, textile and seafood sectors. Also, as various foreign
donor agencies now prefer disbursing funds through Non-Governmental
52 Organizations (NGOs), instead of going through government, the number of NGOs
in Bangladesh grew at a record rate over the years making the NGOs an important
player in the Bangladesh economy. Against this backdrop, the present study attempts
to provide a comprehensive analysis of the market for audit services in Bangladesh
using both time series (1990-2003) and cross-sectional (2003) data of DSE-listed
companies. This is the first study in this strand of literature to introduce ownership
structure-based perspective, in a multivariate format, to explain what drives audit
fees in a developing country setting[5]. Results reported in the study indicate that
nominal audit fees in Bangladesh have increased steadily over the decade and a
half. They also show that the local affiliates of international accounting firms
(Big-4 and -2 international) command fee premia against their non-Big, domestic
competitors. However, when the nominal audit fee is adjusted for client size, inflation
and exchange rate, both trends reverse. Furthermore, results from multivariate
analysis show that the size and multinational affiliation of the auditee have significant
positive effect on audit fees. Firms in the financial sector also tend to pay high in
audit fees in Bangladesh. The proportion of inside ownership in the auditee
firm is significantly inversely related to the audit fee paid. This inverse
relationship indicates that firms with more diverse ownership in Bangladesh pay
more in audit fees. However, contrary to the findings in prior empirical studies,
audit fee was reported to be significantly negatively related to audit complexity.
There could be three possible explanations for this finding. First, measuring audit
complexity as the sum of inventory and receivables as a proportion of total
assets, as is done in the present study, may not be the most sound way to capture
the phenomenon because it could be argued that auditing receivables may not
actually take as much audit effort as it appears, rather auditing non-current
assets could pose more challenge due to introduction of revaluation and impairment
regimes under IAS 16 and IAS 36, respectively. Second, various large groups
of companies, owned essentially by the same group of people, in Bangladesh tend to
employ the same accounting firm to audit all their operations across industries[6].
This, in turn, could indicate that in order to get business from several units,
auditors may ask for less fees and thereby, concede to strong bargaining power
of the group managers. Due to the presence of a very small number of group
companies in our sample any meaningful statistical comparison cannot be made
between the group and non-group of companies. Finally, it may also indicate
that the audit firms got more efficient over the time using modern information
technology resulting in the observed negative relationship between audit fee and
audit complexity.
The remainder of the paper is organized as follows: Section 2 provides an overview
of the audit market in Bangladesh, Section 3 describes the data and sample used in the
present study, Section 4 describes the trends in audit fees and audit concentration
along with a discussion on Big-4/International-link premium and market share,
Section 5 presents an analysis of determinants of audit fees in Bangladesh, and Section
6 contains concluding remarks.
2. Overview of the audit market in Bangladesh Audit services
The auditing profession in Bangladesh is self-regulated. The Chartered Accountants in Bangladesh
Ordinance of 1973 paved the way for Bangladeshi accountants to establish their
own institute, the Institute of Chartered Accountants of Bangladesh (ICAB). ICAB is a
member, among others, of International Accounting Standards Board, International
Federation of Accountants, and South Asian Federation of Accountants. ICAB had
760 members, which includes 171 audit firms, as of 2003. About one-third (266) of 53
ICAB members are in practice while the remaining 494 members are not. Most
of the members who are not in practice generally occupy influential positions in
business, commerce, and government. Furthermore, as of 2003, 127 members of ICAB
were working abroad. All joint-stock companies registered in Bangladesh are required
to have a statutory audit once a year by a chartered accountant.
Of the 171 audit firms 110 are sole proprietorships and 61 are partnerships. While
the majority (47 out of 61) of these partnerships consists of two partners the highest
number of partners that can be found in audit firm is seven. Table I shows the
distribution of audit firms by number of partners. Most audit firms operate from a
single office and are predominantly located in the capital city 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 and only one has three offices. Firms with two
offices have their second location in the port city of Chittagong (in addition to Dhaka).
One firm has office in an overseas location, London (UK), in addition to Dhaka and
Chittagong.
The Big-4 accounting firms, as in some other south Asian countries, do not operate
directly (under the brand name) in Bangladesh. Instead they operate through local
affiliates. There are two other international firms operating in Bangladesh through
local affiliates in addition to the Big-4, Moore Stephen and Binder, Dijker, Otte & Co.
The names of the local firms with Big-4 and international affiliations along with
the number of partners and staff in each are listed in Table II. Thus, altogether, only
six out of the total 171 audit firms in Bangladesh have some international link that
includes Big-4.

3. Data and sample


The relevant legislations in Bangladesh require all companies, exchange-listed or not,
to furnish their audited annual accounts within nine months of expiry of their
respective accounting years. However, audit delay and delay in publishing annual
reports in Bangladesh during the 1980s, 1990s, and early parts the 2000s have been
documented in various studies (Parry and Groves, 1990; Imam et al., 2001)[7]. On the

No. of partners No. of firms

1 110
2 47
3 6
4 2
5 1
6 4 Table I.
7 1 Distribution of audit firms
Total 171 by number of partners
JAEE other hand, DSE Library and the Securities Exchange Commission of Bangladesh
2,1 Library do keep copies of the company annual reports but, when requested, may not be
able to provide reports of all the listed companies for even recent years let alone
providing with complete sets of archival data. A visit to the DSE Library was made in
2006 and all the available annual reports during the period 1990-2003 were collected.
The number annual reports that were available for each year, over the period
54 1990-2003, can be found in Table III. The sample used in the present study covers 66-92
percent of the total number of DSE-listed companies each year, depending on the year.
For analysis of audit fees and trend longitudinal data over this 14-year period is used.
However, the analysis of audit concentration, premium for local affiliates of Big-4
(or lack thereof), and determinants of audit fees is conducted using information
contained in the 2003 annual reports only. A total of 208 firms, representing 84 percent
of the DSE-listed firms with about 98 percent of the market capitalization in 2003, were
included for the cross-sectional analysis.

4. Trend in audit fees and audit concentration


4.1 Audit fee trend
The average audit fee for DSE-listed companies over the years 1990-2003 is reported in
Table IV. A look at the nominal fee amount it may appear that the average audit fee has

Name of the local affiliates of Name of the international No. of No. of


international audit firms audit firm partners staff

Local affiliates of Big-4


Rahman Rahman Huq KPMG 6 135
Hoda Vasi Chowdhury Deloitte 7 150
S F Ahmed Ernst and Young 3 55
A Quasem PriceWaterhouseCoopers 6 83
Table II. Local affiliates of other foreign firms
International affiliations Howlader Yunus BDO 6 42
of audit firms M J Abedin Moore Stephen 4 58

Number of listed companies Total number of Percentage covered


Year in the sample listed companies (rounded up)

1990 89 134 66.42


1991 94 138 68.12
1992 100 145 68.97
1993 104 153 67.97
1994 116 170 68.42
1995 132 183 72.13
1996 145 186 77.96
1997 162 202 80.20
1998 160 208 76.92
1999 193 211 91.47
Table III. 2000 183 221 82.81
Number of listed 2001 187 230 81.30
companies included 2002 190 239 79.50
in the sample 2003 208 247 84.21
Average audit Average total Average audit Average total
Average Average fees (inflation assets (inflation Exchange Average fees (inflation assets (inflation
audit fees total assets adjusted adjusted rates (Tk. audit fees adjusted and adjusted and
Year (000 Tk.) (million Tk.) N 000 Tk.) million Tk.) for US$1) (US$) in US$) in million US$)

1990 37.09 303.10 87 37.09 303 36 1,030 1,030 8.42


1991 38.72 297.86 94 36.87 284 38 1,019 970 7.47
1992 36.42 299.89 100 33.04 272 40 911 826 6.80
1993 42.22 317.83 103 36.47 275 42 1,005 868 6.54
1994 35.06 367.72 115 28.85 303 44 797 656 6.88
1995 38.29 448.87 132 30.00 352 46 832 652 7.65
1996 40.05 516.23 144 29.88 385 47 852 636 8.20
1997 41.20 564.30 162 29.28 401 48 858 610 8.35
1998 44.98 599.26 160 30.44 406 50 900 609 8.11
1999 60.87 603.93 193 39.24 389 52 1,171 755 7.49
2000 63.48 661.00 183 38.97 406 54 1,176 722 7.51
2001 65.65 715.77 187 38.38 419 56 1,172 685 7.47
2002 71.41 776.67 190 39.76 432 58 1,231 686 7.46
2003 78.03 873.15 208 41.38 463 60 1,300 690 7.72
in Bangladesh
Audit services

1990-2003
Average audit fees of
Table IV.

DSE-listed companies:
55
JAEE increased over the years the average audit fee in 2003 was Tk. 78,030 compared to
2,1 Tk. 37,090 in 1990.
However, this inference does not hold up if exchange rate fluctuations (local
currency Tk. against US$), inflation, and the size of the client company are considered
over these years. When the data are converted to US$ and adjusted for inflation
it can be seen that the average audit fee actually declined over this period from
56 US$1,030 in 1990 to US$690 in 2003. Similar pattern of declining average audit
fee is observed when the audit fees are standardized by the value audited (clients
assets). As Table IV indicates, the average audit fee per million Taka of client assets
was Tk. 122 in 1990 while in 2003, the average stood at Tk. 90 only. The pattern
remains the same if both audit fees and volume of client assets are adjusted
for inflation. The main professional body of accountants in the country The
ICAB publishes a formula of recommended fees. Applying the standard formula
on 2003 client assets, the average audit fee recommended by ICAB stands at Tk.
534,057 while average audit fees for the same year for the same sample was only Tk.
78,027. This shows a significant amount of (approximately 85 percent) fee discount
prevailing in the market. Leventis et al. (2011) emphasize the need to address audit
fee trend in general. Karim (1995) and Karim and Moizer (1996) both document
historically low levels of audit fees paid in Bangladesh. Ahmed (2006) reinforces
Karims (1995 and 2007) evidence of extremely low audit fee levels in Bangladesh.
Comparing audit fee levels in neighboring India, Pakistan, and Sri Lanka, Ahmed
(2006) shows the poverty in audit fee levels in Bangladesh even by developing
country standards. He reveals that the audit fees paid by Central Banks of
Pakistan and India are, respectively, 16 and 31 times higher than that paid by
the Central Bank of Bangladesh[8]. The observed declining trend in adjusted audit
fee in Bangladesh is a matter of concern specifically at a time when its private sector
and economy is growing at an accelerated rate for a number of reasons: first,
audit fee levels have direct implications on audit firms total revenue
that in turn affects their ability to devote the resources (e.g. partner hours and
time devoted by other members of the audit team, size of the audit sample, etc.)
necessary to carry out the audit without compromising the quality. Second, as
audit fees decline, albeit in real terms, audit firms would be forced to compromise
audit quality or independence for fear of losing high-fee paying clients, pay less
to its audit personnel including articled students, invest less on modern technology
and training, explore non-audit jobs to supplement lost fee income, compete
aggressively that would potentially reduce audit fees further. Third, the
longer-term effects could be even more harmful for the profession as the profession
would miss out on recruiting many bright students because audit firms would
not be able to pay them a competitive allowance. In the backdrop of this
somewhat grim picture, it should also be emphasized that audit fees have
actually risen in nominal terms, as Table IV suggests, and the base audit fee, i.e. the
constant term in the multivariate results, is positive, suggesting a reasonable,
minimum fixed audit fee of Tk. 14,354 (antilog of 4.157 as reported in Table IX).
The reported decline can be observed only when they are adjusted for inflation,
value audited, i.e. client size and exchange rates. Moreover, the decline in audit
fees is very modest as a trend over time, i.e. on a time series basis, not on a cross-
sectional one. In other words, our results suggest that in a given year, bigger
clients still pay higher audit fees although over time, audit fees have decreased in
real terms.
4.2 Audit concentration Audit services
A total of 60 audit firms, out of total 171, were engaged in auditing the 208 sample in Bangladesh
companies in 2003. Various proxies of audit concentration, used in the extant
literature, are estimated, using 2003 data only, to make sure the concentration
results reported the present study is robust and are reported in Table V. These
include number of audits, audit fees, client sales, square root of client sales, natural
logarithm of client sales, client assets, square root of client assets, natural logarithm 57
of client assets, and client market capitalization. The four local Big-4 affiliates
together audited 34 sample companies whereas the two other local affiliates of
international accounting firms together audited 37 sample companies in 2003.
Taken together these six internationally linked local firms audited about 34 percent
of the sample. The remaining 137 sample companies were audited by the other
54 local accounting firms. Seven of these 54 firms had a relatively higher volume
of business in 2003. These seven local accounting firms together with the local
affiliates of six international firms audited a total of 126 companies in this sample.
That means these 13 audit firms are responsible for auditing about 61 percent
of the clients in this sample. If we further include local firms who audited at least
three companies in this sample, we find that 23 firms audited 152 companies while
the remaining 37 firms accounted for only 56 companies. That means 38 percent of
audit firms audit 73 percent of the clients in this sample. These statistics, by
themselves, may not suggest the existence of concentration as each client is considered
as being equal. However, when client size or audit fees were considered we found
that the six internationally linked firms earned 49 percent of total audit fees, audited
62.4 percent of assets, 64.8 percent of turnover, and 73 percent of market capitalization
of the whole sample.
Table VI provides audit concentration by industry groups in 2003. There seems to
be a lack of interest in Big-4 affiliated local auditors among several major industry
sectors. None of the companies in the textile, jute, paper and printing, IT, and ceramic
sectors hired a Big-4 affiliated local auditors. The share of the local affiliates of Big-4
among food and allied, pharmaceuticals, and the insurance sectors is also negligible,
being 10 percent or less. The banking sector appears to be the main employer of the
local affiliates of Big-4 and the Big-2 internationally linked firms 19 out of 26, banks
used their services.

No. Square Log Square Log


of Audit Net root of of Total root of of Market
Audit firm audits fees sales sales sales assets assets assets capitalization

Local affiliates of Big-4 16.3 32.9 44.9 29.1 20.2 33.7 29.5 19.9 56.1
Local affiliates of 2
international firms 17.8 16.1 19.9 21.0 19.5 28.8 23.3 19.4 16.8
All 6 local affiliates of
international firms 34.1 49.0 64.8 50.1 39.7 62.5 52.8 39.3 72.9
Herfindahl index 0.040 0.062 0.089 0.054 0.044 0.118 0.066 0.045 0.158
Note: All measures except for Herfindahl index are in percentage of corresponding totals of the audit Table V.
services market covered in the sample Audit concentration
JAEE Local affiliates Local affiliates Other local
2,1 Industry group of Big-4 of 2 international firms firms Total

Banks 12 7 7 26
Investment 2 0 1 3
Engineering 3 3 12 18
58 Food and allied 3 7 20 30
Energy 2 0 2 4
Jute 0 1 3 4
Textiles 0 9 28 37
Pharmaceuticals and chemicals 4 5 17 26
Paper and printing 0 0 6 6
Services and real estate 1 1 1 3
Cement 3 0 5 8
IT sector 0 1 4 5
Tannery industries 1 0 5 6
Ceramic industries 0 1 3 4
Table VI. Insurance 2 0 18 20
Choice of auditors Miscellaneous 1 2 5 8
by industry groups Total 34 37 137 208

4.3 Fee premium for the local affiliates of international accounting firms
It is well documented in the extant literature that audit pricing is quality differentiated
and consequently, Big-4 fee premium is observed in most markets. Table VII shows that
the local affiliates of Big-4, as a group, in Bangladesh also command premium in terms
of higher average audit fees per client (Tk. 156,877) compared to the rest of the firms
(Tk. 62,620). The same observation also holds up when the two international-linked local
affiliates are lumped together with the local affiliates of Big-4 (Tk. 112,054 vs Tk. 62,620).
The audit fees were then standardized to check the robustness of this finding of fee
premium for firms with international affiliation. Audit fees were adjusted for the variation
in client size by sales, assets, and market capitalization of client firms. Furthermore, as
audit fee is not a linear function of client size, square root transformations of these three
proxies for client size were also estimated and reported. A look at the adjusted fees,
however, show that the fee premium that seemed to exist between the local affiliates of
Big-4 and the rest or between the six local affiliates of international firms (Big-4 2) and
the rest does not hold up anymore after these adjustments are made.

5. Determinants of audit fees in Bangladesh


It is common to model audit fees by variables that proxy for client size, audit
complexity, risk profile of the auditee, auditor size, etc. In the present study, following
the extant literature, audit fees are regressed on a set of explanatory variables.
However, the present study is the first to introduce an ownership structure-based
perspective, in a multivariate format, to explain what drives audit fees. The regression
model used in the present study is as follows:

LOGFEE a b1 COMPLX b2 PRFT b3 SIZE b4 OWNERSHIP


b5 CRISK b6 SIZEAF b7 ARISK b8 MULTI
b9 CTZ b10 FIN b11 BUSY e
Audit fees per Audit fees per
Audit fees Audit fees million Tk. of Audit fees Audit fees per square root of
per million per million market per square square root market
Audit firms Audit fees Tk. of sales Tk. of assets capitalization root of sales of assets capitalization

Big-4 as a group 156,877 331 123 214 4,565 3,247 4,714


2 international-link affiliates as a group 70,865 463 135 603 3,783 2,233 4,828
Big-4 and -2 international-link affiliates as a group 112,054 400 129 423 4,157 2,718 4,775
Other firms 1 (all minus Big-4) 62,620 859 245 915 4,742 2,866 5,730
Other firms 2 (all minus 6 foreign affiliates) 60,393 967 275 1,000 5,004 3,037 5,975
in Bangladesh
Audit services

accounting firms (Big-4


affiliates international

and -2 international firms)


Fee premium for the local
Table VII.
59
JAEE where, LOGFEE is the audit quality, measured as log of audit fees, COMPLX the
2,1 complexity of the audit work; measured by the proportion of assets in the form of
inventory and receivables, PRFT the profitability of the auditee firm; measured by net
profit to sales ratio, SIZE the size of the auditee firm; measured by log of total assets,
OWNERSHIP the management and directors shareholdings in the auditee firm;
measured as a fraction of total, CRISK the client risk; measured by debt to equity ratio,
60 SIZEAF the size of the audit firm; measured as a dummy variable with the value of 1 if
the audit firm employs four or more chartered accountants (including partners)
and/or affiliated with international firms (Big-4 2 international affiliates), ARISK
the audit risk; a dummy variable with the value of 1 if the auditee reported loss in the
financial statement, 0 otherwise, MULTI the dummy variable with the value of 1 if the
auditee is a subsidiary of multinational company, 0 otherwise, CTZ the dummy
variable with the value of 1 if the auditee firm trade in the Z category of DSE,
0 otherwise, FIN the dummy variable with the value of 1 if the auditee company
belongs to the financial sector, 0 otherwise, BUSY the dummy variable with the value
of 1 if the fiscal year-end of the auditee is in June 30, 0 otherwise.
All the above variables have been used, in some combination, in prior empirical
studies in developing country settings except for OWNERSHIP. Natural log of audit
fees is used as the dependent variable to proxy for audit quality (AQ). The proportion
of assets in the form of inventory and receivables is used as the measure of audit
complexity (COMPLX) in the present study. As the process of attaching cost to the
inventory and verifications of accounts receivables demands additional resources
corporate complexity is likely to cost more in audit fees. Corporate profitability
(PRFT) is viewed as an indicator of management performance and efficiency in
allocating available resources. Some might argue that companies reporting high levels
of profits are likely to be subjected to a more rigorous audit process and consequently,
pay more in audit fees. The others may suggest that the underperforming companies
are more likely to control their overheads and this would result in less audit work.
Hence, the direction of relationship between audit fees and profitability can be either
positive or negative. Log of total assets is taken to proxy the size of the auditee
firm (SIZE). Auditors who deal with larger companies tend to spend more time on
transactional audits of clients more complex businesses. However, assuming most
large companies are likely to have advanced accounting and internal audit system
already in place, larger companies may pay less in audit fees. Agency theory suggests
that, in the absence of regulation, firms with more diverse ownership structure
are more likely to conduct higher quality audit over and above the minimum statutory
requirement compared to those with less diverse structure. The ownership structure
of the auditee firm is measured by taking the proportion of inside ownership
(management and directors) in the firm (OWNERSHIP). This variable is hypothesized
to be inversely related to audit fees. Client risk (CRISK) is measured by the debt to
equity ratio. For clients undertaking more financial risks, the auditor will take a
higher audit risk. This, in turn, imposes a more rigorous audit process resulting in
higher audit fees. The effect of auditor size on audit fee is the focus of attention in
researches of audit competition. Auditor size, as a variable, received significant
attention in the extant empirical literature when investigating whether there the fees
charged by the large audit firms (Big-4 vs non-Big-4 firms) are identifiably
different from the rest. In the present study, audit firms with four or more chartered
accountants (including partners) and the six local affiliates of international firms
(Big-4 2 international) are lumped together and treated as big firms (SIZEAF).
The dummy, SIZEAF, takes the value of 0 otherwise. These big firms are expected to Audit services
charge higher audit fees to cushion their reputational (and the consequent higher in Bangladesh
diligence which comes with a cost) and higher potential litigation costs. Audit risk
is viewed as an important factor that determines audit fees and high audit risk
(of liability for losses attributable to misrepresentations in the audited financial
statements) firms pay high audit fees. Audit risk (ARISK) is measured by a dummy
variable with the value of 1 if the company reported accumulated loss in the financial 61
statement, 0 otherwise. Subsidiaries of multinational companies (MULTI) generally
maintain high standards compared to their local counterparts due to higher accounting
and internal control system requirements of the parent organizations. Being dominant
players in the developing economies the multinational subsidiaries are also often
subjected to more stringent domestic accounting rules than their local counterparts
by the local regulators. The dummy, MULTI, is expected to be positively related with
audit fees. DSE-listed companies trade in three categories A, B, and Z. Category Z
(CTZ) is the most thinly traded group and a negative sign is expected for this variable,
as companies in the Z category are likely to pay lower audit fees because they are
categorized as such on grounds of not holding annual general meetings on a regular
basis or pay dividend. As they manifest these symptoms we expect them to be in poor
financial and/or operating condition and hence expect them to pay lower audit fees.
The financial dummy (FIN) is included to see if companies from the financial sector,
i.e. banks, insurance, and investment companies pay significantly differently in audit
fees from the non-financial sector. A large number of companies in Bangladesh follow
the same fiscal year-end as the Government, June 30. In response to higher demand
during this time frame the companies requiring services from the accounting firms
during this time (BUSY) are likely to pay higher in fees. The dummy, BUSY, is given
the value of 1 if the fiscal year for the company ends on June 30 or 0 otherwise.
Descriptive statistics is presented in Table VIII while the results from the regression
model are reported in Table IX[9]. The adjusted R2 for the model is 58 percent. Audit
complexity (COMPLX) is significantly related to audit fee, however, with a negative
sign. Size of the auditee (SIZE) and multinational affiliation (MULTI) have a significant
positive effect on audit fees. As the b coefficient of the size variable suggests, a one unit
increase in client size (in terms of log of million Tk. of assets), audit fees increase
by 0.58 units on a log scale. In a market of declining audit fees, this may appear
counter intuitive. However, it should be emphasized that Table IX reports the results

Variable N Minimum Maximum Mean Standard deviation

LOGFFE 208 3.85 5.75 4.71 0.38


COMPLX 205 0.00 0.97 0.36 0.23
PRFT 201 2.03 1.35 0.02 0.29
SIZE 208 0.90 4.91 2.75 0.80
OWNERSHIP 208 0.00 1.00 0.61 0.49
CRISK 201 0.01 62.76 3.00 6.99
SIZEAF 208 0.00 1.00 0.34 0.48
ARISK 206 0.00 1.00 0.20 0.40
MULTI 208 0.00 1.00 0.04 0.19
CTZ 208 0.00 1.00 0.27 0.45 Table VIII.
FIN 208 0.00 1.00 0.24 0.43 Descriptive statistics for
BUSY 208 0.00 1.00 0.93 0.26 regression variables
JAEE Variable Coefficient t-statistic Significance
2,1
Constant 4.157 35.94 0.00
COMPLX 0.21 3.89 0.00*
PRFT 0.04 0.62 0.53
SIZE 0.58 8.89 0.00*
62 OWNERSHIP 0.11 2.11 0.04**
CRISK 0.07 1.30 0.19
SIZEAF 0.07 1.31 0.19
ARISK 0.10 1.65 0.10
MULTI 0.28 5.42 0.00*
CTZ 0.10 1.66 0.10
FIN 0.22 3.64 0.00*
BUSY 0.00 0.07 0.94
Table IX. Adjusted R2 58%
Determinants of audit
fees in Bangladesh Notes: *Significance at the 1 percent level; **significance at the 5 percent level

of cross-sectional variations in audit fees in the terminal year. The results here suggest
that regardless of a declining trend in real audit fees, in a given year, e.g. in 2003,
bigger clients pay significantly higher audit fees and vice versa. The reported decline
in Table IV refers to a time series decline in real audit fees, which means, over time
and on average, audit fee levels have been on the decline. It does not contradict
the cross-sectional variations in audit fees reported in Table IX. Firms in the financial
sector (FIN) also tend to pay high in audit fees. The ownership structure variable,
OWNERSHIP, is significantly inversely related to audit fees. Profitability of the auditee
(PRFT), client risk (CRISK), size of the auditing firm (SIZEAF) and the timing of
the auditing services rendered (BUSY) do not seem to have any impact on audit fees.
Furthermore, reported results provide weak support of positive relationship between
audit risk (ARISK) and audit fee and negative relation between lower category
companies (CTZ) and audit fee. The results reported in the present study are, in
general, consistent with the empirical evidence reported in the extant literature except
for the variable audit complexity (COMPLX). The reported significant inverse
relationship between audit fee and audit complexity is contrary what is reported for
other countries. Further examination of the issue reveals that the traditional way of
measuring audit complexity, i.e. as the total of inventory and receivables as a
proportion of total assets, may not adequately capture the phenomenon for a number of
reasons. First, it could be argued that auditing receivables may not actually take
as much audit effort as it appears, rather with the advent of revaluation option and
impairment testing requirements under IAS 16 and 36, respectively, auditing non-
current assets could pose more challenge. Second, using a relative rather than an
absolute measure of complexity many mean that smaller companies who pay smaller
audit fees but have a higher proportion of inventory and receivables might be affecting
the results. Sensitivity tests show that once the proportion of inventory (as opposed to
both inventory and receivables) in total assets and natural log of absolute value of
inventory are used as complexity measures, the significance of the variable disappears.
Moreover, a closer look at the data reveals that different large group of companies,
owned by the same group of individuals, in Bangladesh tend to employ the same
accounting firm to audit all their operations across industries[10]. In the process,
possibly, these accounting firms providing service develop efficiency and economies Audit services
of scale in dealing with these large complex groups of companies and accept lower fees in Bangladesh
in return for volume. It is, possibly, for that reason audit complexity shows up to be
significantly negatively related to audit fees. A second sensitivity test using non-
financial firms in our sample finds evidence of a BigN premium and a significant
impact of audit risk on audit fees. All other results remain the same. This suggests
that auditors affiliated to the Big-4 and other international firms do command 63
significantly higher audit fees in the no-financial services segment of the audit services
market. This result is consistent with the findings of most other studies reported in
audit fee literature. The significant negative coefficient of the ownership structure
variable, OWNERSHIP, confirms what the Agency Theory predicts firms with more
diverse ownership in Bangladesh pay more in audit fees. This finding is in conformity
with the general view of monitoring cost component of agency cost as found in
developed capital markets. As Jensen and Meckling (1976) and Watts and Zimmerman
(1986) suggest principals use auditing as a means of monitoring mechanism and bear
the cost to monitor agent behavior. As our findings suggest, this cost decreases
(increases) as managerial ownership increases (decreases) because agency conflict and
hence dependence on external monitoring, decreases with increases in inside
ownership. This reveals the value assigned to auditing as an external monitoring
mechanism in developed and emerging markets alike and reinforces the role played by
auditing in resolving agency conflict.

6. Concluding remarks
The present study provides a comprehensive analysis of the audit services market in
Bangladesh. Although nominal audit fees in Bangladesh seem to be increasing over
time, real, inflation adjusted, audit fees are not. Once average audit fees are adjusted
for purchasing power of the local currency, it appears that audit fees have actually
declined over the one and a half decade covered in this paper. The paper also shows
that the local affiliates of international accounting firms enjoy fee premium over the
other audit firms. However, such fee premium seems to evaporate when the audit fees
are adjusted for various proxies of value audited. A multivariate analysis shows that
the size of the auditee and being a subsidiary of a multinational parent have a
significant positive effect on audit fees. Firms in the financial services sector also tend
to pay higher audit fees. The proportion of inside ownership is significantly inversely
related to audit fees. Furthermore, reported results provide weak support of a positive
relationship between audit risk and audit fee and negative relation between lower
category companies and audit fee. One potential concern, however, that stems out of
the analysis presented in this paper is that audit quality in Bangladesh may be
declining over the years as manifested by declining audit fee trend observed when such
fees are adjusted for size, inflation, and exchange rate risk. However, to mitigate this
potential concern it could argued that the audit firms in Bangladesh may have become
operationally more efficient over the years, with larger number of clients in their
portfolio and utilize modern information technology resulting in lower fees without
necessarily compromising audit quality.
The results presented in this paper assume a uni-directional relationship between
audit fees and auditor and client-specific attributes. However, as Owusu-Ansah et al.
(2010) suggest, the relationship between audit fees and at least, audit quality,
e.g. auditor size and audit effort, as used as a proxy of audit quality by Leventis and
Caramanis (2005), may be bi-directional and hence, endogenous. This view suggests
JAEE that while audit quality drives audit fees, audit fees could also drive audit quality,
2,1 hence creating an endogeneity in the relationship between the two. In the present study,
we did not attempt testing for endogeneity as we do not have data of audit effort and
there are questions about whether auditor size is a robust enough proxy for audit
quality. However, we recommend it for further research.
Notes
64 1. When multiple studies are available on a given country/market only one citation per country
is provided.
2. It grew at an average rate of about 6 percent during the subsequent years.
3. Further major amendments were made to SER in 2006. As the sample period used in the present
study ends in 2003 a commentary on 2006 amendments is deemed redundant at this time.
4. Despite all these efforts certain limitations still remain delay in financial reporting,
enforcement of existing laws, and standards remains a serious issue with non-compliance to
many provisions, like mandatory disclosure and measurement requirements, still remain
high (Hasan et al., 2008; Imam et al., 2001).
5. Chan et al. (1993) used this variable for UK companies.
6. For example, Beximco Group has 11 exchange-listed sister companies and all of them are
audited by the same audit firm MJ Abedin & Co (local affiliate of international accounting
firm Moore Stephens).
7. A few companies were found to present four to five years annual reports in one annual
general meeting, e.g. Kohinoor Chemical Co. (BD) Ltd held its 8th, 9th, 10th, 11th, 12th,
and 13th AGMs corresponding to FY 1994-1995 through FY 1999-2000 on the same day on
June 8, 2001.
8. In the year 2000, audit fees paid by Bangladesh Bank, the Central Bank of Bangladesh, was
Tk. 190,000 while in the same year, State Bank of Pakistan and Reserve Bank of India
paid Rs. 3 million and Rs. 4.5 million, respectively.
9. Descriptive Statistics and the Correlation Matrix for all the variables included in the
multivariate analysis are reported in Table VIII and Table AI in the appendix.
10. For example, Beximco Group has 11 exchange-listed sister companies and all of them are
audited by the same audit firm MJ Abedin & Co (local affiliate of international accounting
firm Moore Stephens).

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Appendix

Variable COMPLX PRFT SIZE OWNERSHIP CRISK SIZEAF ARISK MULTI CTZ FIN

COMPLX
PRFT 0.10
SIZE 0.06 0.19**
OWNERSHIP 0.03 0.12 0.04
CRISK 0.52** 0.07 0.26** 0.03
SIZEAF 0.09 0.15* 0.39** 0.05 0.15*
ARISK 0.03 0.38** 0.25** 0.08 0.30** 0.22**
MULTI 0.02 0.03 0.11 0.30** 0.00 0.26** 0.03
CTZ 0.04 0.41** 0.26** 0.03 0.30** 0.28** 0.48** 0.12
FIN 0.10 0.29** 0.49** 0.08 0.06 0.15* 0.23** 0.10 0.19**
BUSY 0.03 0.09 0.02 0.04 0.01 0.03 0.04 0.05 0.04 0.16**
Table AI.
Correlation matrix Notes: *Significance at the 1 percent level; **significance at the 5 percent level

Corresponding author
AKM Waresul Karim can be contacted at: Wares.Karim2@stmarys-ca.edu

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