The market for audit services
AKM Waresul Karim
Saint Mary’s College of California, Moraga, California, USA, and
Roosevelt University, Chicago, Illinois, USA
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
The empirical literature on audit pricing, concentration, drivers of audit fees and Big-4
premium is in mature phase. Besides the USA (Simunic, 1980), similar studies were
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Journal of Accounting in Emerging
Vol. 2 No. 1, 2012
r Emerald Group Publishing Limited