QUALITY OF BANK AUDIT IN BANGLADESH AND RELATIONSHIP ...€¦ · Bangladesh. Fifty-six scheduled...

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ELK ASIA PACIFIC JOURNAL OF FINANCE AND RISK MANAGEMENT ISSN 2394-0409; DOI: 10.16962/EAPJFRM/issn.2394-2325; Volume 6 Issue 2 (2015) www.elkjournals.com ……………………………………………………………………………………………………………… 44 QUALITY OF BANK AUDIT IN BANGLADESH AND RELATIONSHIP BETWEEN AUDIT QUALITY AND SHARE PRICE Nafees Reza Student, School of Business, Independent University, Bangladesh Tel: +8801710371371 Email: [email protected] Maqbool Kader Quraishi Lecturer, School of Business, Independent University, Bangladesh Tel: +8801775618288 Email: [email protected] ABSTRACT Keywords: Listed banks in Dhaka Stock Exchange, Loan classification, Loan provision, Auditor independence, Auditor ethics, Audit quality, Share price 1. Introduction Banks play significant role in the economy. They hold public savings and finance businesses. In order to gain efficiency, banks need to get larger, and becoming a public company is one way to achieve that. Among the fifty-six scheduled banks, thirty banks are public company. To become a public company, banks need to issue IPO and then trading goes to the secondary market. Once trading starts, share prices are largely depend on supply and demand. Demand of a particular share is generally depend on the investors’ confidence. Investor’s confidence mostly depends on the financial performance of the banks. Moreover, financial statements must have to be certified by an auditor. According to Levitt, (1998) audit quality is recognized to influence financial reporting and have an impact on investors’ confidence. Banking sector is largely dependent on the loans, advances and investments. The loan recovery rate is relatively poor in Bangladesh. Fifty-six scheduled banks are operating in Bangladesh and among them only thirty banks are listed in Dhaka Stock Exchange (DSE). This study examines the audit quality of thirty listed banks and determines whether there is any relationship between audit quality and share price. Here the term audit quality refers to the audit or’s ability to discover breach in client’s financial statements and report that breach, and share price represents the value of company’s future earnings. Since investors have vital interest in companies’ financial statements and audit provides a reasonable assurance about the quality of the financial statements, audit quality can intensely influence share price. The audited financial statements of thirty listed banks and their share prices have considered for this study. Results have shown that three listed banks have poor audit quality in the year 2013. The share prices of these banks are relatively low compared to the other banks. Results of this study are dependent on the loan, advances and investment, and share price data. This study will give the idea about the audit quality of thirty listed banks within Bangladesh. Additionally, it will also provide the knowledge about the relationship between audit quality and share price.

Transcript of QUALITY OF BANK AUDIT IN BANGLADESH AND RELATIONSHIP ...€¦ · Bangladesh. Fifty-six scheduled...

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ISSN 2394-0409; DOI: 10.16962/EAPJFRM/issn.2394-2325; Volume 6 Issue 2 (2015)

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QUALITY OF BANK AUDIT IN BANGLADESH AND RELATIONSHIP BETWEEN AUDIT

QUALITY AND SHARE PRICE

Nafees Reza

Student, School of Business,

Independent University, Bangladesh

Tel: +8801710371371

Email: [email protected]

Maqbool Kader Quraishi

Lecturer, School of Business,

Independent University, Bangladesh

Tel: +8801775618288

Email: [email protected]

ABSTRACT

Keywords: Listed banks in Dhaka Stock Exchange, Loan classification, Loan provision, Auditor independence,

Auditor ethics, Audit quality, Share price

1. Introduction

Banks play significant role in the economy.

They hold public savings and finance

businesses. In order to gain efficiency, banks

need to get larger, and becoming a public

company is one way to achieve that. Among

the fifty-six scheduled banks, thirty banks are

public company. To become a public

company, banks need to issue IPO and then

trading goes to the secondary market. Once

trading starts, share prices are largely depend

on supply and demand. Demand of a

particular share is generally depend on the

investors’ confidence. Investor’s confidence

mostly depends on the financial performance

of the banks. Moreover, financial statements

must have to be certified by an auditor.

According to Levitt, (1998) audit quality is

recognized to influence financial reporting

and have an impact on investors’ confidence.

Banking sector is largely dependent on the

loans, advances and investments. The loan

recovery rate is relatively poor in

Bangladesh.

Fifty-six scheduled banks are operating in Bangladesh and among them only thirty banks are listed in Dhaka Stock

Exchange (DSE). This study examines the audit quality of thirty listed banks and determines whether there is any

relationship between audit quality and share price. Here the term audit quality refers to the auditor’s ability to

discover breach in client’s financial statements and report that breach, and share price represents the value of

company’s future earnings. Since investors have vital interest in companies’ financial statements and audit

provides a reasonable assurance about the quality of the financial statements, audit quality can intensely influence

share price. The audited financial statements of thirty listed banks and their share prices have considered for this

study. Results have shown that three listed banks have poor audit quality in the year 2013. The share prices of

these banks are relatively low compared to the other banks. Results of this study are dependent on the loan,

advances and investment, and share price data. This study will give the idea about the audit quality of thirty listed

banks within Bangladesh. Additionally, it will also provide the knowledge about the relationship between audit

quality and share price.

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For this reason, Bangladesh Bank introduced

loan classification and loan provisioning.

Every bank is required to classify their loans

according to the loan performance and

maintain loan provisioning according to the

loan classification, but some banks do not do

proper loan provisioning. Therefore, these

wrongdoings cast doubt upon the credibility

of the financial statements of this sector. In

this case, proper audit can restore the

credibility in this sector and that may

elevated investors’ confidence. The objective

of this study is to evaluate the audit quality,

determine the relationship between the audit

quality and share price.

2. Statement of the problem

Audit quality is one of the most important

parameter that can strongly influence share

price by impelling investors. The value of

company’s share depends on the company’s

earnings, however sometimes company’s

managers manipulate the earnings report to

match a predetermined target. In an ideal

scenario, an appropriate audit can effectively

constrain the earnings misrepresentation and

financial statement manipulations.

In idyllic situation, auditors are independent

in appearance and they are independence of

mind. Moreover, they uphold ethics while

they are doing audit. Moreover, investors

take investment decision upon the audited

financial statements.

In Bangladesh, auditor’s independence and

ethics are not properly maintained. This is

because; the size of the market for audit

services in Bangladesh constrains the

bargaining power of the audit firms and thus

affects the quality of audits. The total number

of companies listed on the DSE is 307. These

listed companies are shared among around

180 audit firms suggesting that the

competition for clients is intense. Thus,

auditors in Bangladesh are to be expected to

face greater financial inducements to comply

with client reporting practices. Since the

market size for audit service is small, the cost

of breaching independence and not upholding

their ethics may be lower than the economic

benefits extracted from client fee revenue.

For this reason, sometimes auditors do

involve in transgressions and that may affect

the investor’s decisions.

The purpose of this study is “To evaluate

audit quality (auditor independence,

auditor ethics) and identify whether there

is any concerning relationship between

audit quality and share price.”

3. Literature Review

3.1 Auditor Independence

According to the IESBA (International Ethics

Standards Board for Accountants) code,

independence contains:

(a) Independence of mind

Mind considered as independent when

auditor express a conclusion without being

affected by any influences so that auditor can

exercise objectivity and professional

skepticism.

(b) Independence in appearance:

Independence in appearance refers that third

party consider auditors as independent.

According to Magill and Previts (1991),

auditor’s independence is an attribute that

increases the trustworthiness. Knapp (1985)

define auditor independence as the ability to

resist client pressure.

Generally Accepted Auditing Standards

(GAAS) states that independence in mental

attitude must be maintained in all matters

relating to the assignment by an auditor. SEC

considers that if reasonable investors, who

have knowledge of all appropriate

circumstances and facts, would conclude that

auditor is not exercising objective and

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impartial judgment then an auditor is not

independent (SEC 2000, p.3). Auditor

independence provides assurance that an

impartial and skilled professional examines

financial statements (SEC 2000, p. 2). Elliot

and Jacobson (1998) added that this

assurance enhances credibility to financial

statements, adding significant value to the

entire capital markets system. According to

Kinney (1999), legislation and regulation can

ensure auditor independence. Overall, the

independence of auditors increases the

creditability of audit report.

The ownership of direct or indirect material

investment in a client firm can affect the

auditor’s independence in appearance (Elder,

R.J., Arens, A.A. and Beasley, M.S. 2008).

Therefore, SEC imposed some regulation to

maintain auditor independence. In 2003, SEC

enforced Sarbanes Oxley Act (SOX) that

bans the auditors to have direct or indirect

relationship with the client. Moreover, it also

bans some services such as consulting

services (Elder et al., 2008). There are some

unconscious biases which hinders the auditor

independence such as excessive familiarity,

long-term attachment with the client (Barret,

2001; Umar and Anandarajan, 2004;

Ainsworth, 2006). Some discounting factor

like damage relationship between the

auditors and client’s management might

affect the auditor’s current judgment that

affects auditor’s independence of mind.

According to agency theory, the management

of organizations may not present full and fair

financial information to the external users.

For this reason, independence is required. An

audit report provided by the external

independent auditors increase the

creditability of audit report so that users can

rely on the information presented.

3.2 Relationship between Auditor

Independence and Audit Quality

Auditor independence is one of the pillars of

audit quality (Beattie V, Fearnley S, Brandt

R, 2001). Richards (2006) states that audit

quality will get lower when auditor

independence is lower. Baotham (2009)

suggested that audit quality is significantly

influenced by auditor’s independence.

Srinivasan K, Zhou J, Zhou N (2002) tested

the effects of auditor’s independence in audit

quality by testing a sample of several

Anderson’s clients. The result showed that

auditor independence not only affects the

audit quality but also affects the credibility of

the audited financial reports. Pike (2003) also

claimed that when the auditor is not

independent, the determination to produce

high quality audit becomes low since the

auditor does not make a serious attempt to

detect material misstatement in the financial

statements and when it is identified, the

auditor will not necessarily report it

Kim, J., Song, B.Y. and Tsui, J. (2007) states

that long-term attachments whether financial

or psychological, may affect the auditor

independence, and this may deteriorate the

audit quality because it might hinder the

auditor from carrying out his/her duty to

detect material misstatements in client

financial report and report them.

3.3 Auditor Ethics

According to Hosmer (1994, p. 20), ethical

principles vary with cultural, social, and

economic conditions. Rather than subjective

statements, they are objective statements that

excel countries, religions, and times. David

Satava, Cam Caldwell, Linda Richards

(2006) suggested that auditors duties are

based on ethical principles, which do not to

change irrespective of the company involved

or any financial benefits to forgo their duties.

Moreover, they are committed to honor

duties to the societies to the society that

involve the prosperity of all stakeholders.

According to Bartels, L., Harrick, E., Marel

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E., & Strickland, D. (1998), ethical issues

come under into consideration once two

criteria are met: volition and consequences.

First, an auditor must have a choice when

he/she dealing with the ethical issues.

Secondly, there must have consequences for

his/her choice.

Windsor (1996) suggested three types of

auditor. Three types are self-governing,

pragmatic and accommodating. Windsor use

Kohlberg’s theory as the ground to make

these divisions. Kohlberg’s proposes three

broad levels of superiority in ethical

reasoning. The first one is pre-conventional

level. Here, self-interest influences the

decision. The second is called conventional

level. In this level, individuals rely upon rules

and regulations to determine the right from

wrong. Post-conventional is the third level.

On this level individual decides right from

wrong using universal ethical principles such

as justice and fairness. Willingham and

Carmichael (1968) described ethics as the

written code of relational norms, which

guides the range of appropriate behavior in

various situations. The codes guides the

proper ways of relating to clients, the public,

superiors or subordinates.

According to Miller and Bahnson (2004)

auditors are responsible to protect the

investors but many auditors fail to do their

job, and then the objectivity of the auditor

and the accuracy of the client’s financial

statements are immediately suspected.

Sometimes auditors involved in unethical

activities because of their economic

dependence, since they are hired and fired by

their own clients (Moore, D. A., Tetlock, P.

E., Tanlu, L. and Bazerman, M. H., 2006).

Ethics in auditing is very necessary for doing

audit in banking sector. People do consider

banks as a system of wealth creation. Auditor

should maintain ethical principles while they

are auditing. There are number of issues

which auditor should judge ethically such as

loan collection rate from the debtors, loan

provision etc.

3.4 Relationship between Auditor Ethics and

Audit Quality

According to Dedoulis (2006) audit ethics

includes a set of rules and principles intended

to exclude undesirable activities in the audit

work. It refers to the public interest, integrity

and audit quality. Auditor, who has greater

audit ethics, inclines to better protect public

interest and increase the audit quality. It is

difficult to reclaim a reputation of

creditability in the public eye. Thus audit

ethics reassures auditors to concern with

audit morality in the audit process and gain

audit quality. According to Schwartz (2002),

audit ethics includes trustworthiness, respect,

responsibility, fairness, caring, and

citizenship. Therefore, it is positively related

to and audit quality.

3.5 Audit Quality

Audit quality has been defined as outcome on

the existence of certain qualities of auditors.

DeAngelo (1981) defines audit quality as the

auditor’s ability to discover the breach in

client’s financial statements and report that

breach. This definition refers the two

components of audit quality: the probability

that an auditor discovers existing

misstatements and appropriately acts on the

discovery. The first component refers to the

auditor’s competence to detect the

misstatements in the financial statements and

the second component refers to the auditor’s

independence, skepticism and ethics. These

two components actually suggest that audit

quality can be influenced by different aspects

of the audit. The discovery of misstatements

requires proper resources and those resources

be effectively used in the audit process.

Additionally, auditor needs to take proper

action at the end of audit report.

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Government Accountability Office (GAO

2003, 13) defines audit quality as auditor

perform auditing compliant with Generally

Accepted Auditing Standards (GAAS) to

provide reasonable assurance that audited

financial statements are not materially

misstated and financial statements are

prepared in accordance with Generally

Accepted Accounting Principles (GAAP).

Carcello (2002) indicate that audit quality is

directly linked to the amount of audit work.

Casterella, J. R., K. L. Jensen, and W. R.

Knechel. (2009) stated poor audit quality as

they believe poor audit quality is observable

with reflection if there is any litigation or

claim for malpractice against the audit firm.

U.K.’s Financial Reporting Council (FRC)

(2008) identified five drivers for audit

quality. They are: (1) the culture within an

audit firm; (2) personal attributes and skills

of audit staff and audit partners; (3) the

usefulness and reliability of audit reporting;

(4)the effectiveness of the audit process; and

(5) factors affecting audit quality outside the

control of auditors

Francis (2011) proposed another framework

based on a structural view of the audit

environment. Francis (2011) argues that six

levels of analysis influence audit quality.

They are: (1) audit inputs, (2) audit processes,

(3) audit industry and audit markets, (4)

accounting firms, (5) institutions, and (6)

economic significances of audit outcomes.

The various frameworks for audit quality

highlight that both theoretical and practical

perspective the evaluation of audit quality is

a multidimensional challenge. According to

Palmrose (1988) actual audit quality can be

measured by litigation activities. Krishnan &

Schauer’s (2000) measured audit quality

based on how audited financial statements

comply with the Generally Accepted

Accounting Principles. According to

Krishnan and Schauer (2001), material

deviation from the standards reflects poor

audit quality. This study measures audit

quality by examining that whether thirty

listed banks have deviated from the standards

that are set by Bangladesh Bank.

3.6 Relationship between Audit Quality and

Share Price

Lev (1989) stated that the value of company’s

share represent the value of its future

earnings. Therefore, it explains that why

investors have vital interest in companies

earnings report. Subsequently, to match

predetermined target company managers use

certain kinds of strategies to manipulate their

earnings that help to attain smooth income,

triumph high earnings level and power the

company’s stock price (Schipper, 1989;

Healy & Wahlen, 1999). Audit provides

shareholders and potential shareholders

reasonable assurance that management’s

financial statements are free from material

misstatements (Watts & Zimmerman, 1986).

Audit quality can influence the quality of

reported earnings by effectively constraining

earnings misrepresentation and financial

statement manipulation (Badawi, 2008;

Enofe, 2010). Since, investing decision on

stocks heavily relied on audited financial

statements; investors depend on auditors to

confirm the accuracy and completeness of

financial information (kane, 2004).

According to Levitt, (1998) audit quality is

recognized to influence financial reporting

and strongly impact on investors’ confidence.

Eventually that affects the share price. Some

prior studies (Teoh & Wong, 1993; Heninger,

2001, Balsam, Krishnan & Yang, 2003) have

attempted to establish a distinct relationship

between audit quality and share prices of a

company.

3.7 Share Price

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Share price is the price of a single saleable

share of a company. Generally, when a

company wants to raise capital, going public

is one way to raise capital. Here, company

needs to issue IPO (initial public offering).

After issuing IPO, trading goes to the

secondary market. Once trading starts, share

prices are largely depend on the supply and

demand. Some issues like long-term earning

potential, good audit quality, favorable news

may attract more buyers, and sooner or later

it will increase the share price. On the

contrary, a company with poor financial

performance, poor audit quality may lessen

the shareholder’s confidence, which will

induce more shareholders to sell shares. As a

result, supply of the share will rise and

demand will fall. Ultimately, share price will

fall.

Figure 1: Conceptual framework

4. Research Questions

Q1: Is there any relationship between auditor

independence and audit quality?

Q2: Is there any relationship between auditor

ethics and audit quality?

Q3: Is there any relationship between audit

quality and share price?

5. Research Hypotheses

H01: There is no relationship between auditor

independence and audit quality

Ha1: There is a relationship between auditor

independence and audit quality

H02: There is no relationship between auditor

ethics and audit quality

Ha2: There is a relationship between auditor

ethics and audit quality

H03: There is no relationship between audit

quality and share price

Ha3: There is a relationship between audit

quality and share price

6. Methodology

The main purpose of my data collection is to

assess the impact of auditor ethics and auditor

independence on share price. I used

secondary source to collect my data. I

collected data from annual reports, journals

and websites. I collected audit report, loan

outstanding and loan provision data from

annual reports of the year 2013, and share

price of listed banks from DSE website. I

used audit report, loan outstanding and loan

provision data to measure the audit quality.

Afterwards, I used share price data to

determine whether there is a relationship

between audit quality and share price.

7. Research Design

Research can be designed in seven

categories. These are given below:

Auditor

Independence

Auditor Ethics

Audit quality Share price

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i. The Method of Data Collection: I used

monitoring method to collect data. This

is because I inspected bank’s annual

report and DSE website without

attempting to elicit response from

anyone.

ii. Researcher Control of variables: In this

research, I have no control over the

variables. I actually report what is

happening. So this research is

considered as ex post facto design.

iii. Degree of Research Question

Crystallization: Between Exploratory

Studies and Formal Study, my research

design could be categorized as Formal

Study. This is because the purpose of

my research is not to develop any

hypothesis or question for the further

future research. The goal of my

research is to test the hypothesis.

iv. The Purpose of Study: The purpose of

the study is categorized as Descriptive.

In this research, I am trying to measure

the effect of audit quality on share

price.

v. The Time Dimension: Time dimension

is categorized as Cross-Sectional

Study. Cross-Sectional Study is carried

out once and represented a snapshot of

one point in time, which is very much

similar to my research. I have used

2013 year’s data to do this research.

vi. The Topical Scope: The topical scope

for my research is statistical study

because I use statistical data to test my

hypotheses.

vii. The Research Environment: Among

Field Setting, Laboratory Research and

Stimulation; my research environment

is specified as Field Settings. This is

because; I conduct the survey within an

original environment.

8. Sampling

Sampling is the act, process, or technique of

selecting a representative part of a population

for determining parameters or characteristics

of the whole population. For doing this

research, I have selected thirty listed banks

among the 307 listed companies of DSE.

I used non-probability sampling procedure

because I did not randomly select my sample.

In non-probability sampling, I followed

purposive sampling procedure. This is

because; I selected thirty listed banks for their

unique characteristics.

9. Data Analysis and Findings

In banking sector there is lack of

transparency in loan sanction and repayment

process. Bangladesh is trying to maintain

their banking regulation and accounting

standards to the international standard. In

1989, Bangladesh Bank introduced loan

classification and loan provision with a view

to attain international standard. From 1

January 1999, revised policy for loan

classification and provision was introduced.

Bangladesh Bank classified loan as

unclassified, substandard, doubtful and bad.

Table 1: Rates of provision

If a continuous credit or demand loan remains

non-performing for six months, it is

considered as substandard loan. It is

acknowledged as doubtful, if it remains non-

performing for nine months. It is recognized

as bad/loss when loan remains non-

performing for twelve months or more. In

case of term loan that is repayable within a

Classification Rate of provision

%

Unclassified 1

Sub-standard 20

Doubtful 50

Bad/Loss 100

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maximum period of five years, if any

installment is not paid within the time

equivalent of six months then it falls under

the substandard classification. If the time of

unpaid installment is equivalent to twelve

months and eighteen months, then it is taken

into account as the doubtful and bad/loss

respectively. Rates of provision for classified

loans are given in table 1.

Total amount of loans and advancement of

thirty listed banks is BDT 3.3trillion. Among

them BDT 166billion is classified loan that is

5.05% of total amount (table – 2). These

thirty-listed banks require keeping provision

for their classified loan. However, among the

thirty listed banks, three banks did not keep

adequate provision in the year 2013.

Table 2: Classified loans, loan provision and share price

Bank Total loan

(BDT mn)

total

classified

(BDT mn)

Provision

required

(BDT mn)

Actual

provisio

n (BDT

mn)

Provision

shortfall/

surplus

(BDTmn)

*Share

price

AB Bank 140,121.30 4,636.87 3,620.97 3,980.33 359.36 25.20

Dutch Bangla Bank 105,936.99 4,175.63 3,356.549 3,356.55 0.001 87.00

Bank Asia 104,911.26 5,878.79 4,112.63 4,112.63 - 17.90

Brac Bank 119,514.55 7,600.70 5,728.62 6,988.44 1,259.82 25.80

The City Bank 89,878.63 7,251.01 2,944.00 3,645.23 701.24 16.10

Dhaka Bank 99,595.88 4,136.69 2,287.42 3,141.99 854.58 19.50

Southeast Bank 135,690.09 5,350.24 3,860.90 3,877.00 16.09 19.70

Eastern Bank 102,910.22 3,998.58 1,929.24 1,946.81 17.57 28.10

United Commercial

Bank Ltd

148,664.86 4,427.65 1,662.68 2,122.87 460.19 27.40

First Security Islami

Bank

114,601.80 2,483.82 976.48 1,005.1 28.62 11.10

ICB Islamic Bank

Limited

9,788.56 7,175.92 4,148.31 4,148.31 - 5.10

IFIC Bank 84,110.39 3,168.08 2,069.99 2,432.36 362.37 24.80

Table 2 Continued

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Bank Total loan

(BDT mn)

total

classified

(BDT mn)

Provision

required

(BDT

mn)

Actual

provision

(BDT

mn)

Provision

shortfall/

surplus

(BDTmn)

*Share

price

Rupali Bank 106,907.82 17,998.51 6,899.22 6,899.22 - 60.7

Social Islami

Bank Limited

84,776.29 4,593.33 2,773.38 2,773.38 - 11.2

Mercantile Bank

Ltd.

97,688.50 4,659.75 3,360.97 3,420.05 59.08 15.3

Mutual Trust

Bank

58,010.82 2,155.77 1,666.01 1,933.97 267.96 18.1

Uttara Bank 64,829.77 5,209.55 1,357.66 1,419.49 61.83 24.4

Standard Bank 74,049.89 2,599.27 2,339.89 2,339.89 - 11.4

One Bank Ltd 76,573.35 3,740.75 2,617.10 2,617.10 - 12.9

Premier Bank 52,800.46 3,021.34 1,155.87 1,155.88 0.01 10.4

Prime Bank 153,588.76 7,814.50 5,423.02 5,433.24 10.22 24

Trust Bank 79,279.58 2,470.36 907.65 907.66 0.01 14.9

Pubali Bank 136,940.46 8,136.10 6,281.46 6,282.91 1.45 26.6

Shahjalal Bank 85,706.61 5,542.69 3,103.23 2,246.32 (856.91) 11.3

NCC Bank 88,146.51 4,862.41 2,663.39 2,663.39 - 11

Exim Bank 143,847.38 5,279.94 2,755.39 2,755.39 - 10.3

Al-Arafah Islami

Bank

121,298.99 3,598.83 1,128.03 1,128.03 - 14.2

National Bank

Limited

151,098.99 4,898.83 1,612.58 1,461.48 (151.1) 11.5

Islami Bank 406,804.56 14,941.90 9,037.05 9,037.80 0.75 24.9

Jamuna Bank 67,699.38 5,133.75 3,202.00 2,902.00 (300) 12.3

Total 3,305,772.65 166,941.56

*as of 2nd July, 2014

This under provisioning for classified loan

ultimately leads to overstated profit. This is

because provisioning is considered as an

expense. According to the Banking

Companies Act, Auditors are required to state

unambiguously whether financial statements

of the bank have been prepared complying

with the regulation issued by Bangladesh

Bank. The firms those were auditing these

three banks were certifying that these three

banks’ financial statements presented true

and fair view of these banks’ financial

position. In this case, audit firms who audited

these three banks have compromised their

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53

integrity, objectivity and professional

skepticism. Therefore, these audit firms are

not independent in appearance. These data

also imply that these audit firms were not

upholding their ethical principles while they

were doing audit to these three banks.

Therefore, these audit firms were not

independent and ethical. For this reason, they

did not report the misstatement that upset the

audit quality of these three listed banks. Rest

of the twenty-seven listed banks did properly

maintain the provision requirement. Audit

firms, who audited these banks, reported that

financial statements of these banks

represented true and fair view of these banks’

financial position. Considering the loan

provision data, these audit firms were

independent and maintained ethical values.

Moreover, there were no discrepancies

between the audit report and financial

statements of those twenty-three banks in

view of the loan provision data. Therefore,

the audit quality of these twenty-seven listed

banks was decent in respect of loan provision

data.

Therefore, true hypotheses are:

Ha2: There is a relationship between auditor

ethics and audit quality

Ha1: There is a relationship between auditor

independence and audit quality

Among the thirty listed banks, three banks’

audit quality was poor. These banks’ average

share price was BDT 11.7 on July 2 2014. On

the contrary, rest of the twenty-seven listed

banks’, whose audit quality was considered

satisfactorily fair in terms of the loan

provision data, average share price was BDT

22.15 on July 2 2014 that is more than double

of the poorly audited banks (Figure-2).

Figure 2: Average share price

Therefore, true hypothesis is:

Ha3: There is a relationship between audit

quality and share price

10. Limitations

The results of this study are solely dependent

on the numerical values. So, human

perception is very low in this study.

Moreover, this research portrays the

relationship between audit quality and share

price only for the banking sector among the

twenty-two sectors of Bangladesh.

11. Suggestions for Further Research

This study only gives insight about the audit

quality and relationship between audit quality

and share price of banking sector. Therefore,

further research can be done by evaluating

the audit quality of other sectors like Food

and allied sector, cement sector etcetera. This

research is based on the cross sectional data.

So, this research can be extended by using

longitudinal data.

12. Conclusion

Auditors are required to disclose any matter

regarding the violation of rules and

regulations. In this case, three banks

overstated their profit by violating loan

provision requirements that are set by the

supreme banking authority of Bangladesh.

Auditors of these three banks compromise

11.7

22.15

0

5

10

15

20

25

Banks with

poor audit

quality

Banks with

satistfactory

audit quality

Shar

e P

rice

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their independence and ethics by reporting

that those banks’ financial statements present

true and fair view of their financial position

rather than reporting the violation, and this

violation lowers investors’ confidence

resulting low share price. In order to sustain

investor’s confidence, auditors must respect

the standards that are imposed by the

authorities.

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