Audit Pricing India Pakistan Bangladesh

8/11/2019 Audit Pricing India Pakistan Bangladesh

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Audit Pricing and their Determinants in

Developing Economies: A Comparative Study of

in India, Pakistan and Bangladesh

Dr. Monirul Alam HossainAssistant Professor in Accounting

Department of Accounting and MISUniversity of Hail

P.O. Box 2440Hail, Kingdom of Saudi Arabia.

Tel: +966-6-5345382 (Residence)FAX: +966-6-531-0500

E-mail:[email protected]

[email protected],[email protected]

Draft: September, 2002
http://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bmailto:[email protected]:[email protected]:[email protected]://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=bhttp://us.f328.mail.yahoo.com/ym/[email protected]&YY=23949&order=down&sort=date&pos=0&view=a&head=b


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Audit Pricing and their Determinants inDeveloping Economies: A Comparative Study of

in India, Pakistan and BangladeshAbstract

The present study examined the corporate attributes explaining variation in audit fees of listedcompanies in three developing countries, India Pakistan and Bangladesh. The dependentvariables used in this study are audit fees (AUDITFEE) which has been extracted from the

corporate annual reports of the three countries under study. Some of the explanatory variables

used in the study have taken into the account from previous studies undertaken by otherresearchers. A model of audit fees consisting six company characteristics has been developed

from earlier studies. The corporate attributes examined in this study are size of the company

(sales), debt-equity ratio, profitability (rate of return on assets and net profit margin), subsidiariesof multinational companies, and international link of audit firms. Of the six explanatory

variables, INLINK and MNCS are dummy variables. For the convenience of comparison, we

will compare our results with similar prior research, where possible. The following paragraphs

provide the underlying rationale behind the hypothesised relationship between each of the sevenvariables and audit fees.

The results of audit fee determinants suggest that for Bangladesh and India only size (sales) were

significantly positively associated with audit fee levels, while in the case of Pakistan size (sales)and a subsidiary of a multinational company variable were found to be positively associated with

audit fees. The auditee size (sales) is consistent with the findings of other previous studies.

However, the common regression model formulated in this study has provided significant

deviation from the earlier studies. The study suggests that the audit services market in India,Pakistan and Bangladesh may have some interesting characteristics but further study is needed.


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Audit Pricing and their Determinants inDeveloping Economies: A Comparative Study of

in India, Pakistan and Bangladesh

1.1Introduction

This chapter focuses on the audit fees and a set of the determinants of audit fees in three

developing countries, India, Pakistan and Bangladesh. This is a replication and extension of priorsimilar studies. The objective of this study is to support the evidence of the relationship between

audit fees and audit fees determinants in India, Pakistan and Bangladesh. It is interesting to see

that these are the three developing where studies of audit determinants and audit fee determinants

previously made. It has been argued that very little is known about the structure of the market foraudit services, its pricing and other related issues in a developing country context (Karim and

Moiser, 1997). The aim of this paper is to examine the relationship between the variation of

audit fees and a set of audit attributes in India, Pakistan and Bangladesh.

The analysis in this chapter involves developing a regression model to explain the level of audit

fees of the sample companies in India, Pakistan and Bangladesh. The chapter is organised as

follows. Section 1.2 describes the nature of the audit services market in India, Pakistan andBangladesh, Section 1.3 presents the audit attributes and audit fees relationship, Section 1.4

presents the multiple regression model for audit fee determinants, Section 1.5 describes the

results of the study, Section 1.6 compare the results of the study with earlier research, andSection 1.7 concludes the chapter.

1.2 The Nature of Audit Services Market in India, Pakistan andBangladesh

A number of regulatory rulings in India, Pakistan and Bangladesh require companies to have

their accounts audited by a chartered accountant. These include the Companies Act 1913 inBangladesh, Companies Act 1956 in India and Companies Ordinance 1984 in Pakistan. Apart

from the companies acts or ordinances, in Bangladesh, the Income Tax Act 1922, the Income

Tax Ordinance 1984 and the Securities and Exchange Rules 1987, require the audit of the listedcompanies to be performed by professional chartered accountant(s). Similarly, in Pakistan, the

Securities and Exchange Rules, 1982 and the Income Tax Act states that the audit work of the

listed companies must be performed by chartered accountant(s). Hence, the listed companies in

India, Pakistan and Bangladesh are statutorily required to be audited every year by a charteredaccountant. In India, Pakistan and Bangladesh, most audit firms are sole proprietorship, however,

there are a few audit firms which are partnership firms. There are no audit firms in the sample

countries which can be referred as limited company (either public or private).

None of the international Big Six (now Big Five) have any offices in Bangladesh, like in India

and Pakistan. However, some Bangladeshi audit firms have links with international Big Six and

non-Big Six audit firms, in many cases these firms perform the audit of the clients of the BigFive in Bangladesh and these links are shown in Table 1. In Bangladesh, the audit of the


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subsidiaries of multinational companies are usually performed by the audit firms having link

with the Big Five audit firms. These audit firm act as associates of the Big Six audit firms.

Table 1International Links of Audit Firms

Name of the firm International firm with which linked

Rahman Rahman Haq and Co. KPMG and Price Waterhouse

Hoda Vasi Chowdhury and Co. Deloite Touche Totmatsu

S F Ahmed and Co. Ernst and Young

Howlader Younus and Co. Ernst and Young (was Arthur Young)

A Quasem and Co. Coopers and Lybrand

M J Abedin and Co. Moore Stephen

Source: Karim and Moiser (1997)

In India, the audit of the listed companies had been performed long before by the chartered

accountants. In India and Pakistan, any local audit firm can not be found until. Before 1961, allaudit work was carried out by foreign audit firms. The Ordinance of 1961 created the Institute of

Chartered Accountants of Pakistan (ICAP) (and the then East Pakistan) were members of the

Institute. After the emergence of Bangladesh, the Chartered Accountants Ordinance of 1973 waspromulgated making way for Bangladeshi chartered accountants to establish their own institute

(Karim and Moiser, 1997).

1.6 Audit Attributes and Audit Fees Relationship

The present study examined the corporate attributes explaining variation in audit fees of listed

companies in three developing countries, India Pakistan and Bangladesh. As this study excludedthe listed financial companies excluded from the sample, this study was restricted to listed non-

financial companies only1. The dependent variables used in this study are audit fees

(AUDITFEE) which has been extracted from the corporate annual reports of the three countries

under study. Unlike the USA, the listed companies in India, Pakistan and Bangladesh usuallyprovide data on audit fees in their company annual reports. Some of the explanatory variables

used in the study have taken into the account from previous studies undertaken by other

researchers. A model of audit fees consisting six company characteristics has been developedfrom earlier studies. The corporate attributes examined in this study are size of the company

(sales), debt-equity ratio, profitability (rate of return on assets and net profit margin), subsidiaries

of multinational companies, and international link of audit firms. Of the six explanatory

variables, INLINK and MNCS are dummy variables. For the convenience of comparison, wewill compare our results with similar prior research, where possible. The following paragraphs

provide the underlying rationale behind the hypothesized relationship between each of the seven

variables and audit fees.

1If the financial companies were included in the sample, the researchers could include one variable

(financial/nonfinancial) to establish the relationship between the audit delay and the variable.


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Auditee Size

In most of the similar previous studies total assets have been used as the size measure and

auditee size has found to be closely associated with audit fees. In many cases researchers

transformed size measure either into its square root or natural log because the relationshipbetween audit fee and auditee size is unlikely to be linear due to economies of scale in the

auditor's production function (Karim and Moiser, 1997). In the present study, sales have been

used in the model. The variable was labelled SALES.

Auditee Profitability

In the previous studies, auditee profitability as measured by net profit margin or return on

shareholders' equity has been used to explain the link between profitability and audit fees. In the

present study, the net profit margin and rate of return on total assets are used as the proxy forprofitability. These variables were labelled as NPMARGIN and ROASSETS in the study.

International links of audit firms

Audit firm size has been regarded as one of the important audit attributes in similar previous

studies. INLINK is a dummy variable is used in the regression analysis, 1 for the audit firms

having international link with international audit firms including Big Five, otherwise a 0.

Researchers like Simunic (1980) in the USA and Firth (1985) in New Zealand did not find anynegative or positive relationship between audit fees and international link of the audit firms.

Whereas, other researchers like Taffler and Ramalinggam (1982), Francis (1984), Palmrose

(1986), Francis and Stokes (1986) and Francis and Simon (1987) found that there exists asignificant positive relationship between the variables.

In this study, in the cases of India and Pakistan, international audit firms have their offices and

labelled as INLINK. However, in the case of Bangladesh, it was difficult to partition the auditfirms in the absence of internationally recognised Big and non-Big firms category (Karim and

Moiser, 1997). In this study, for Bangladeshi audit firms, the criterion used to identify Big Six

audit firms has been followed as in Karim and Moiser and labelled as INLINK.

Auditee Risk

In the earlier and subsequent studies auditee risk has been used as an audit attribute. There are

researchers who used liquidity and debt-equity ratios as the measures of while other researchers

like Chan et alused market based measures of risk. It is expected that audit fees would be higherwith higher auditee risks involved and vice versa.In the previous studies, the measures of audit

risk used represents debt-equity ratio, and inexistence of accumulated loss. In this study, debt-

equity ratio and the existence of loss in clients accounts have been used as the measures of auditrisk. The PROFIT variable has been given the value of one if the company had an accumulated

loss and zero otherwise. Debt-equity ratio was measured as the ratio of debt to equity. The

model shows the impact of debt-equity ratio and existence of profit on audit fee levels.


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Audit Complexity

Audit complexity has been used as an audit attributes in many similar previous studies to explain

audit fees. The measures used are number of branches, number of subsidiaries, number ofoverseas subsidiaries, number of industries in which the client operates, the absolute amount of

inventory and receivables, and the proportion of assets in inventory and receivables (Karim and

Moiser, 1997). Again, the diversification of activities of the auditee has also been used as acomplexity measure by Simunic (1980) and Chan et al (1993). and (Anderson and Zeghal,

1994). However, in all cases the variables were proved to be insignificant. In this study, the

proportion of assets in the form of inventory and receivables was used as the measure of audit

complexity as adopted in (Karim and Moiser, 1997). The use of a relative measure of auditcomplexity meant that the size effect was not affected by the inclusion of the variable.

MultinatioanlitySeveral justifications may be offered for the inference this subsidiaries of multinationalcompanies variable. The most important reason that it has been found that the audit of

multinational companies are performed by international auditing firms or more likely Big Six

who have brand name or reputation and provide high quality audits. In the samples of India,Pakistan and Bangladesh, all the MNC subsidiaries are found to the clients of big audit firms and

pay higher than average audit fees. A dichotomous variable called MNCS was used with the

value of one if the company was a subsidiary of a multi-national parent and zero otherwise.

.


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4 Multiple regression model for audit fees

Multiple linear regression has been used to test the hypotheses of the study. In the model, theaudit fees has been used as the dependent variable as in equation (1):

Y= NPMARGIN+ MULTICOM + DERATIO + SALES+ INLINK + ROASSET +

where, Y= auditfee (in Tk. or Rs.).

the constant, and

the error term.The definitions of the seven corporate attributes and their expected effect on audit fees in the

regression model along with expected signs and relationships are presented in Table 2.

Table 2

Definition of Audit Attributes and Expected Effect on Audit Fees in the regressionVariable

Labels

in the OLS

Corporate Attributes Definition ExpectedRelationship

with Audit

Fees

INLINK International link of auditing

firms

Sign of the international link of audit firms

represented by a dummy variable; companies

with the international link assigned a 1 and

otherwise a0.

Positive

ROASSET Rate of Return of Assets Rate of Return of Assets of the firm at the end of

the period

Positive

NPMARGIN Net Profit margin Net Profit margin of the firm Positive

MULTICOM Subsidiary of a multinational

company

Subsidiaries of the multinational parent

companies having more than 51% shares of the

company

Positive

SALES Total sales turnover Total sales of the company during the year Positive

DERATIO Debt to equity ratio Long term debt divided by shareholders equity

at the end of the financial year

Positive

AUDITFEE Audit fees paid by the company The amount paid to the audit firm for the audit Positive


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1.5 Results of the StudyThe results are presented in three sections. In the first section the summary of the descriptive

statistics of the dependent variable (AUDTFEE) and seven independent variables has been

presented followed by a multivariate analysis of correlation coefficient and finally, the results of

our multiple regression model of audit fees and seven corporate attributes are presented.Spearman rank-correation co-efficients, and Ordinary Least Square (OLS) regression were used

to test the hypotheses of the study.

1.5.1 Descriptive statisticsIt has been noted that in this study the audit fees received from the auditee companies has been

considered.

1.5.1.1 Descriptive Statistics for Indian Companies

Table 3 (a)Descriptive statistics for Indian companies

Variable N Minimum Maximum Mean Standard

Deviation

AUDITFEE (in thousand Rs.) 80 2.5 4700.00 472.06 686.27DERATIO 80 .00 .98 .96 1.30

INLINK 80 .00 1.00 .30 .46

MNCS 80 .00 1.00 .28 .45

NPMARGIN 80 -22468.90 57.3 -283.21 2512.41ROASSETS 80 -12.97 17.75 4.12 5.83

SALES (IN LAKH RUPEES) 80 7.90 410550 29073.92 62604.16

Table 3 (a) shows that for India the audit fees for each of the 80 listed sample companies rangedfrom a minimum of Rs. 2,500 to a maximum of Tk. 47,00,000. The mean of average audit fees is

Rs. 4,72,000. This evidence suggests that there is a diversity of the audit fees paid by the sample

Indian listed companies.

1.5.1.2 Descriptive Statistics for Pakistani CompaniesTable 3 (b)

Descriptive Statistics for Pakistani companies


DeviationAUDITFEE (in thousand Rs.) 103 10.00 1638.00 171.79 274.60

DERATIO 103 .00 4.16 .70 .84

INLINK 103 .00 1.00 .18 .38MNCS 103 .00 1.00 .13 .33

NPMARGIN 103 -5795.32 18.63 -56.74 571.34

ROASSETS 103 -223.3513 17.29 -1.86 26.07SALES (IN LAKH RS.) 103 1.17 243461 10538.48 26996.42


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Table 3 (b) shows that for Pakistan, the audit fees for each of the 103 listed sample companies

ranged from a minimum of Rs. 10,000 to a maximum of 16,38,000. This means of average auditfees is Rs. 1,71,000. This evidence suggests that there is a diversity of the audit fees paid by the

sample Pakistani listed companies. The table also indicates that the Pakistani companies usually

pay less as audit fees than their Indian counterparts.


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1.5.1.3 Descriptive Statistics for Bangladeshi CompaniesTable 3 (c)

Descriptive Statistics for Bangladeshi companies


DeviationAUDITFEE 78 3200 655481 86270.8 142196.8

DERATIO 78 .00 23.12 1.42 3.15

INLINK 78 .00 1.00 .22 .42MNCS 78 .00 1.00 8.974E-02 .29

NPMARGIN 78 -316598.00 36.31 -4072.94 35846.10

ROASSETS 78 -150522.00 24.28 -1929.61 17043.29

SALES (IN LAKH TK.) 78 18.02 88785.65 3473.31 10265.90

Table 3 (c) shows that for Bangladesh, the audit fees for each of the 78 listed sample companies

ranged from a minimum of Tk. 3,200 to a maximum of Tk. 6,55,481. This means of average

audit fees is 86,271. This evidence suggests that there is a diversity of the audit fees paid by thesample Bangladeshi listed companies. The table also indicates that the Bangladeshi companies

usually pay less as audit fees than their Indian and Pakistani counterparts.

1.5.2 Correlation Analysis

To examine the correlation between independent variables, Pearson product moment correlation

coefficients (r)were computed. A correlation matrix of all the values of r for the explanatory

variables along with the dependent variables was constructed for the three countries under study

and are shown in Table 4 (a), 4 (b) and 4 (c) respectively.

1.5. 2. 1 Correlation Analysis for Indian CompaniesThe Pearson product-moment coefficients of the correlation between the log of assets and audit

fees variable is higher than the coefficient of the correlation between audit delay and all other

corporate attributes. Table 4 (a) suggests that the correlation between sales and audit feesvariables, and net profit margin and rate of return on assets may be an issue while collinearity

across the other variables is not. The table shows noteworthy collinearity ( p 0.01) betweensales and audit fees (.680), rate of return on assets and debt equity ratio (-.354), and between net

profit margin and rate of return on assets (.768), and between audit fees and subsidiaries ofmultinational companies (.321). However, Kaplan (1982) suggests that multicullinearity may be a

problem when the correlation between independent variables is 0.90 or above. However, Emory

(1982) considered more than 0.80 to be problematic. It is evident from the table that themagnitude of the correlation between variables seems to indicate no severe multicollinearityproblems.


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Table 4 (a)

Spearman Rank Correlation for the Indian companies

VARIABLES AUDITFEE DERATIO INLINK MNCS NPMARGIN ROASSETS SALES

AUDITFEE 1.000

DERATIO .129 1.000

INLINK .165 -.284* 1.000MNCS .321** .087 .236* 1.000

NPMARGIN .078 -.257* -.045 -049 1.000

ROASSETS .032 -.354** .012 -.022 .768** 1.000

SALES .680** .273* .167 .249* -.160 -.105 1.000

** coefficient of correlation significant at 1% level or better (p 0.001)

*coefficient of correlation significant at 5% level or better (p 0.05)


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1.5.2.2 Correlation analysisfor the Pakistani Companies

The Pearson product-moment coefficients of the correlation between the subsidiaries of

the multinational companies and international link of the audit firms variables is higher

than the coefficient of the correlation between every other corporate attributes. Table 4 (b)suggests that the correlation between the subsidiaries of multinational companies and

international link of the audit firms variables and net profit margin and rate of return onassets may be an issue while collinearity across the other variables is not. Table 4 (b)

shows noteworthy collinearity (p 0.01) between the subsidiaries of the multinational

companies and international link of the audit firms variables (.749), sales and audit fees

(.604), between audit fees and international link of the audit firms variables (.372),between the subsidiaries of the multinational companies and audit fees variables (.441),

between international link of the audit firms and debt-equity variables (-.336), between

rate of return on assets and debt-equity variables (-.256), between international link of the

audit firms and rate of return on assets (.293), between sales and international link of the

audit firms (.257), between subsidiaries of the multinational companies and rate of returnon assets (.300), and between sales and subsidiaries of the multinational companies (.298),

between net profit margin and rate of return on assets (.885). However, Kaplan (1982)suggests that multicullinearity may be a problem when the correlation betweenindependent variables is 0.90 or above. However, Emory (1982) considered more than

0.80 to be problematic. It is evident from the table that the magnitude of the correlation

between variables seems to indicate no severe multicollinearity problems.


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Table 4 (b)

Spearman Rank Correlation for Pakistani companies


AUDITFEE 1.000

DERATIO -.045 1.000

INLINK .372** -.336** 1.000MNCS .441** -.310 .749** 1.000

NPMARGIN .169 -.130 .193 .190 1.000

ROASSETS .276* -.256** .293** .300** .885** 1.000

SALES .604** .107 .257** .298** .222* .356** 1.000




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1.5.2.3 Correlation Analysis for Bangladeshi Companies

To examine the correlation between independent variables, Pearson product moment

correlation coefficients (r)were computed. A correlation matrix of all the values of rfor the explanatory variables along with the dependent variables was constructed and

is shown in Table 3. The Pearson product-moment coefficients of the correlation

between net profit margin and rate of return on assets variables is higher than the

coefficient of the correlation between every other corporate attributes. Table 4 (c)

shows noteworthy collinearity (p 0.01) between sales and audit fees variables (.514)between debt-equity and net profit margin variables (-.323), between international

link of audit firms and subsidiaries of mutinationality variables (.377), between audit

fees and rate of return on assets (.257), between audit fees and net profit margin

(.292), between subsidiaries of mutinationality and debt-equity variables (-.263),

between debt-equity and rate of return on assets (.410), between net profit margin and

subsidiaries of mutinationality (.330), between rate of return on assets andsubsidiaries of mutinationality (.423), between subsidiaries of mutinationality and

sales (.378), sales and net profit margin (.564), and between net profit margin and rate

of return on assets variables (.862). However, Kaplan (1982) suggests that

multicullinearity may be a problem when the correlation between independent

variables is 0.90 or above. However, Emory (1982) considered more than 0.80 to be

problematic. It is evident from the table that the magnitude of the correlation between

variables seem to indicate no severe multicollinearity problems.


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Table 3 (c)

Spearman Rank Correlation for Bangladeshi companies


AUDITFEE 1.000

DERATIO -.240* 1.000

INLINK .231* -.086 1.000

MNCS .316* -.263* .377** 1.000

NPMARGIN .292** -323** -.014 .330** 1.000ROASSETS .257* -.410** .037 .423** .862** 1.000

SALES .514** -.280* .257* .378** .564** .560** 1.000




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1.5.3.1 Results of Regression Analyses for the IndianCompanies

It was hypothesized that for the sample companies, sales turnover, profitability (rate

of return on assets and net profit margin), debt-equity ratio, multinationality, andinternational link of the audit firm would be positively associated with audit fee

variable. It was found that the relation between the audit fee and sales was significant

at 5% level (see Table 5 (a)).. However, the relationships between audit fees and other

five audit variables were found to be insignificant. The R2 under the model was .637,

which indicates that our model is capable of explaining more than 60% of the

variability in explaining audit fees in the sample Indian companies. The adjusted R2

indicate that 60.7 percent of the variation in the dependent variable in our model is

explained by variations in the independent variables. The R2 can be compared

favourably with those reported by other similar studies. The F-ratio indicates that the

model significantly explains the variations in audit fees in India. The Durbin-Watson

(DW) statistics indicate that there is no severe autocorrelation.


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Table 5 (a)

Summary of the regression output(Results for Indian sample companies)

Coefficient of multiple regression (Multiple R) .798

Coefficient of determination (R ) .637Adjusted R .607

Standard Error 429.9940

Analysis of Variance

D.F. Sum of Squares Mean Squares

Regression 6 54809.07 3951483

Residual 73 79661.73 184894.9

F ratio =21.372

------------------ Variables in the Equation ------------------

Unstandardized Coefficients StandardizedCoefficients

Variable B Standard Error Beta T Sig T

(constant) 129.001 101.354 1.273 .207

DERATIO 49.582 63.877 .094 .776 .440

INLINK -47.898 124.225 -.032 -.419 .676

MNCS 268.959 167.467 .128 1.606 .123

NPMARGIN 2.153E-02 .031 .079 1.076 .285

ROASSETS 9.830 9.134 .083 1.076 .285

SALES 8.562E-08 .000 .781 10.920 .000


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1.8.3.2 Results of Regression Analyses forPakistani Companies

It was hypothesised that for the sample companies sales, profitability (rate of returnon assets and net profit margin), debt equity ratio, subsidiaries of multinational

companies, and international link of the audit firm would be positively associated

with audit fees. It was found that the relationship between the audit fees and the

subsidiaries of multinational companies (MNCS) and sales was significant at 5% level

(see Table 5 (b)). The association between audit fees and debt equity ratio variable

was found to be significant at only 10% level. However, the relationships between

audit fees and other three explanatory variables such as rate of return on assets, net

profit margin and international link of the audit firm were found to be insignificant.

The R2 under the model was .293, which indicate that our model is capable of

explaining 29.30% of the variability in the audit fees in the sample Pakistani

companies. The adjusted R2

indicate that 24.90 percent of the variation in thedependent variable in our model is explained by variations in the independent

variables. The R2 can be compared favourably with those reported The R2 can be

compared favourably with those reported by other similar studies. The F-ratio

indicates that the model significantly explains the variations in the audit delay in

Pakistan. The Durbin-Watson (DW) statistics indicate that there is no severe

autocorrelation.


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Table 5 (b)

Summary of the regression output(Results for Pakistani sample companies)


Coefficient of determination (R ) .293

Adjusted R .249Standard Error 237.9312



Regression 6 2256419 376069.9

Residual 102 5434681 56612.26

F ratio = 6.643


Unstandardized Coefficients Standardized

Coefficients


(constant) 66.619 36.329 1.134 .070

DERATIO 50.338 29.421 .154 1.712 .090

INLINK -31.319 94.370 -.044 -.332 .741

MNCS 399.153 107.703 .485 3.706 .000

NPMARGIN 1.6E-08 .080 -.003 -.020 .984

ROASSETS .343 1.767 .033 .194 .847

SALES 2.436E-08 .000 .239 2.727 .008


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1.8.3.3 Results of Regression Analyses for Bangladeshi CompaniesIt was hypothesised that for the sample companies sales, profitability (rate of return

on assets and net profit margin), debt equity ratio, subsidiaries of multinational

companies, and international link of the audit firm would be positively associatedwith audit fees. It was found that only the relationship between the audit fees and

sales was significant at 5% level (see Table 5 (c)). The association between audit fees

and international link of the audit firm variable was found to be significant at only

20% level. However, the relationships between audit fees and other four explanatory

variables such as debt-equity ratio, and international link of the audit firm, rate of

return on assets and net profit margin were found to be insignificant. The R2 under the

model was .227, which indicate that our model is capable of explaining 22.70% of

the variability in the audit fees in the sample Bangladeshi companies. The adjusted R2

indicate that .161 percent of the variation in the dependent variable in our model is

explained by variations in the independent variables. The R2 can be compared

favourably with those reported The R2 can be compared favourably with thosereported by other similar studies. The F-ratio indicates that the model significantly

explains the variations in the audit delay in Pakistan. The Durbin-Watson (DW)

statistics indicate that there is no severe autocorrelation.


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Table 5 (c)

Summary of the regression output(Results for Bangladeshi sample companies)


Coefficient of determination (R ) .227Adjusted R .161

Standard Error 130225.8



Regression 6 124902.6 8693.802

Residual 71 7505.727 1268.802

F ratio = 3.468


Unstandardized Coefficients StandardizedCoefficients


(constant) 55354.52 18892.93 2.930 .005

DERATIO 1470.559 4867.665 .033 .302 .763

INLINK 63428.52 40560.00 .185 1.564 .122

MNCS -31850.8 60050.03 -.064 -.530 .597

NPMARGIN .337 .438 .095 .861 .392

ROASSETS .303 .874 .036 .346 .730

SALES 5.752E-05 .000 .415 3.557 .001


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1.6 Comparison of the Main Findings with the Studies in India,

Pakistan and Bangladesh

In India, the study of Simon et al (1986) showed that auditee size variable was

significant as in the present study. In the study of Simon et al (1986), the proportion

of assets in inventory and receivables, auditors opinion, number of subsidiaries wereused, however, excluded in the regression model used in this study. The major

deviation from the study of Karim and Moiser (1997) is that they found international

link of audit firms, and multinationality variables were significant, however, were not

significant in this study.

In Pakistan, the study of Simon and Taylor (1977) showed auditee size was significant

which supports the evidence of this study. The audit complexity and audit risk

variable did not used as audit variables in this study which were significant in the

study of Simon and Taylor (1977). The multinationality variable was not included in

the regression model of Simon and Taylor (1977) which was significant in this study.

In Bangladesh, the study of Karim and Moiser (1997) showed that auditee size

variable was significant as in the present study. The major deviation from the study of

Karim and Moiser (1997) is that they found international link of audit firms, and

multinationality variables were significant, however, were not significant in this

study. Apart from this, they used employment of qualified accountant, audit risk, audit

complexity, language, goverment ownership and year end date as audit variables

which were not included in the regression model in this study. The researcher did not

find any justification for the inclusion of the language variable in the study of Karim

and Moiser (1997).

1.7 Summary and Conclusion

The regression models of audit fee formulated here intended to identify the

relationship between audit fees and six audit attributes in three developing countries,

India, Pakistan and Bangladesh. Three models were developed from the earlier

studies. The results suggest that for Bangladesh and India only sales are significantly

positively associated with audit fee levels, while in the case of Pakistan sales and

multinationality variable were found to be positively associated with audit fees. Theauditee size (sales) is consistent with the findings of other previous studies. Three

other variables were found to be insignificant. The multinationality variable has been

used in this study which was significant a variable in the context of a developing

countries.

The study reveals that the audit services market in India, Pakistan and Bangladesh has

some unique characteristics. There seems to be an insignificant impact for audit

complexity and audit risk on audit fees in all these three countries. The study did not

provide the anecdotal evidence that there is a demand for higher quality audit services

which could be provided by the international Big Six.


23/23

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Francis. J., and D. Stokes. (1986). Audit prices, product differentiation, and scale

economies: Further evidence from the Australian market, Journal of Accounting

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Palmrose, Z. (1986). Audit fees and auditor size: Further evidence. Journal of

Accounting Research, Spring, pp. 97-120.

Simon, D. (1995). The market for audit services in South Africa. InternationalJournal of Accounting Education and Research, pp.356-365.

Simon, D., and J. Francis. (1988). The effects of auditor changes on audit fees:Testsof price cutting and price recovery,Accounting Review, April, pp. 255-269.

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India: an empirical examination.International Journal of Accounting Education and

Research, Spring, pp. 27-35.

Simunic, D. (1980). The pricing of audit services: Theoryand evidence.Journal of

Accounting Research, Spring, pp.161-190.

Audit Pricing India Pakistan Bangladesh

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