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Abstract

We present empirical evidence regarding the association between audit quality and real earnings management in case of the capital market of Bangladesh. Our analysis visualizes a panel of 2195 firm data with year-level observations which are listed on the Dhaka Stock Exchange throughout the period of 2000–۲۰۱۷٫ We report inverse association between ‘big 4’ audit firms’ service and levels of real earnings management practices. This result suggests that the client pool of big audit firms are less likely to engage in earnings management. This particular result is also consistent with the ‘big 4’ audit firms’ commitment to their reputation and long track-records of noted exhibition of due diligence. Also, we find no association between industry-specialized auditor (in terms of audited assets) and real earnings management. This result provides important insights to the nature of competition in the audit market of Bangladesh. Finally, we also observe no correlation between audit specialization (in terms of audited revenue) and real earnings management. This pattern invokes significant findings regarding the industrial depth of specialization of Bangladeshi firms. It also uncovers whether ‘specialized’ provision of audit service can meaningfully serve the more ‘generalized’ nature of industrial composition of the firms active in the capital market of the country.

Introduction

Bangladesh has graduated from the category of ‘least-developed countries’ to the status of a ‘developing country’ back in 2018 (Khatun 2018). Bangladesh achieved this recognition from United Nation with respect to compliance to all of the three requirements for graduation (GNI Per Capita, Human Assets Index and Economic Vulnerability Index). The country has maintained more than six percent average GDP growth rate in last 10 years (MOF 2018). The International Monetary Fund (IMF) predicts that Bangladesh will be able to maintain the growth rate (Ahasan 2019). For the coming years. PricewaterhouseCoopers expect that by maintaining this growth rate, Bangladesh’s economy will be the 23rd largest in the world by 2050. Despite the episodes of developmental success story of Bangladesh, the capital market of Bangladesh is widely regarded as inefcient to supply the required funds for burgeoning corporate sector.

During the last seven years, Performance of Bangladesh Capital market has not been consistence with developments in the macro-economic realm. In 1st July, 2010, General Index of Dhaka Stock Exchange was 6153 and in 1st July 2017, it was 5654. During this period, there was a decrease of five hundred points, yet GDP growth rate was more than 6.5 percent on average. There may be diferent reasons underlying this anomaly. In 2010, Bangladesh Capital Market witnessed a massive downside of its indexes. Government formed an investigation committee to fnd out the reasons for this unusual drive of the market. This committee mentioned diferent reasons for such anomalous behavior of the market.