Audit Pricing and their Determinants in

Developing Economies: A Comparative Study of

in India, Pakistan and Bangladesh


Dr. Monirul Alam Hossain
Assistant Professor in Accounting
Department of Accounting and MIS
University of Hail
P.O. Box 2440
Hail, Kingdom of Saudi Arabia.
Tel: +966-6-5345382 (Residence)
FAX: +966-6-531-0500
E-mail: monirulhossain@yahoo.com or
mahossain108@hotmail.com,
hossain@uoh.edu.sa




















Draft: September, 2002
1

Audit Pricing and their Determinants in
Developing Economies: A Comparative Study of
in India, Pakistan and Bangladesh

Abstract

The present study examined the corporate attributes explaining variation in audit fees of listed
companies in three developing countries, India Pakistan and Bangladesh. 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. 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 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), 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, 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 seven
variables 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.


2

Audit Pricing and their Determinants in
Developing Economies: A Comparative Study of
in India, Pakistan and Bangladesh
1.1 Introduction

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 prior
similar 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 for
audit 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 and
Bangladesh, 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, and
Section 1.7 concludes the chapter.

1.2 The Nature of Audit Services Market in India, Pakistan and
Bangladesh

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 in
Bangladesh, 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 listed
companies 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 chartered
accountant. 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 Big
Five in Bangladesh and these links are shown in Table 1. In Bangladesh, the audit of the
3
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 1
International 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, all
audit 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 was
promulgated 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 excluded
the listed financial companies excluded from the sample, this study was restricted to listed non-
financial companies only
1
. 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 usually
provide 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 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), 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, we
will 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.

1
If 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.
4

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 relationship
between 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 for
profitability. 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 any
negative 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 a
significant 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 audit
firms 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 al used market based measures of risk. It is expected that audit fees would be higher
with 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 audit
risk. 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.
5


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 of
overseas 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 a
complexity 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 audit
complexity meant that the size effect was not affected by the inclusion of the variable.

Multinatioanlity

Several justifications may be offered for the inference this subsidiaries of multinational
companies 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.
.
6

4 Multiple regression model for audit fees

Multiple linear regression has been used to test the hypotheses of the study. In the model, the
audit fees has been used as the dependent variable as in equation (1):
Y= o + |
1
NPMARGIN+ |
2
MULTICOM + |
3
DERATIO + |
4
SALES + |
5
INLINK +
|
6
ROASSET +

c .................(1)

where, Y= auditfee (in Tk. or Rs.).
o = the constant, and
c = 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 regression
Variable
Labels
in the OLS
Corporate Attributes
Definition Expected
Relationship
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

7

1.5 Results of the Study
The 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 statistics
It 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 4700.00 472.06 686.27
DERATIO 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 2512.41
ROASSETS 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 ranged
from 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 Companies
Table 3 (b)
Descriptive Statistics for Pakistani companies
Variable N Minimum Maximum Mean Standard
Deviation
AUDITFEE (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 .38
MNCS 103 .00 1.00 .13 .33
NPMARGIN 103 -5795.32 18.63 -56.74 571.34
ROASSETS 103 -223.3513 17.29 -1.86 26.07
SALES (IN LAKH RS.) 103 1.17 243461 10538.48 26996.42
8

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 audit
fees 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.


9

1.5.1.3 Descriptive Statistics for Bangladeshi Companies
Table 3 (c)
Descriptive Statistics for Bangladeshi companies
Variable N Minimum Maximum Mean Standard
Deviation
AUDITFEE 78 3200 655481 86270.8 142196.8
DERATIO 78 .00 23.12 1.42 3.15
INLINK 78 .00 1.00 .22 .42
MNCS 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 the
sample 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 Companies
The 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 fees
variables, 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 s 0.01) between
sales 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 of
multinational 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 the
magnitude of the correlation between variables seems to indicate no severe multicollinearity
problems.

10

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* 1.000
MNCS .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 s0.001)
*coefficient of correlation significant at 5% level or better (p s0.05)
11
1.5.2.2 Correlation analysis for 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 on
assets may be an issue while collinearity across the other variables is not. Table 4 (b)
shows noteworthy collinearity (p s 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 return
on 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 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 seems to indicate no severe multicollinearity problems.

12

Table 4 (b)
Spearman Rank Correlation for Pakistani companies

VARIABLES AUDITFEE DERATIO INLINK MNCS NPMARGIN ROASSETS SALES
AUDITFEE 1.000
DERATIO -.045 1.000
INLINK .372** -.336** 1.000
MNCS .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
** coefficient of correlation significant at 1% level or better (p s0.001)
*coefficient of correlation significant at 5% level or better (p s0.05)

13

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 r
for 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 s 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 and
subsidiaries 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.



14
Table 3 (c)
Spearman Rank Correlation for Bangladeshi companies

VARIABLES AUDITFEE DERATIO INLINK MNCS NPMARGIN ROASSETS SALES
AUDITFEE 1.000
DERATIO -.240* 1.000
INLINK .231* -.086 1.000
MNCS .316* -.263* .377** 1.000
NPMARGIN .292** -323** -.014 .330** 1.000
ROASSETS .257* -.410** .037 .423** .862** 1.000
SALES .514** -.280* .257* .378** .564** .560** 1.000
** coefficient of correlation significant at 1% level or better (p s0.001)
*coefficient of correlation significant at 5% level or better (p s0.05)


15
1.5.3.1 Results of Regression Analyses for the Indian
Companies

It was hypothesized that for the sample companies, sales turnover, profitability (rate
of return on assets and net profit margin), debt-equity ratio, multinationality, and
international 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 R
2
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 R
2

indicate that 60.7 percent of the variation in the dependent variable in our model is
explained by variations in the independent variables. The R
2
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.




16
Table 5 (a)
Summary of the regression output
(Results for Indian sample companies)

Coefficient of multiple regression (Multiple R) .798
Coefficient of determination (R
2
) .637
Adjusted R
2
.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 Standardized
Coefficients

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



17
1.8.3.2 Results of Regression Analyses for
Pakistani Companies

It 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 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 R
2
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 R
2
indicate that 24.90 percent of the variation in the
dependent variable in our model is explained by variations in the independent
variables. The R
2
can be compared favourably with those reported The R
2
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.



18
Table 5 (b)
Summary of the regression output
(Results for Pakistani sample companies)
Coefficient of multiple regression (Multiple R) .542
Coefficient of determination (R
2
) .293
Adjusted R
2
.249
Standard Error 237.9312

Analysis of Variance
D.F. Sum of Squares Mean Squares
Regression 6 2256419 376069.9
Residual 102 5434681 56612.26
F ratio = 6.643
------------------ Variables in the Equation ------------------

Unstandardized Coefficients Standardized
Coefficients

Variable B Standard Error Beta T Sig T
(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


19

1.8.3.3 Results of Regression Analyses for Bangladeshi Companies
It 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 associated
with 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 R
2
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 R
2

indicate that .161 percent of the variation in the dependent variable in our model is
explained by variations in the independent variables. The R
2
can be compared
favourably with those reported The R
2
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.



20
Table 5 (c)
Summary of the regression output
(Results for Bangladeshi sample companies)

Coefficient of multiple regression (Multiple R) .476
Coefficient of determination (R
2
) .227
Adjusted R
2
.161
Standard Error 130225.8

Analysis of Variance
D.F. Sum of Squares Mean Squares
Regression 6 124902.6 8693.802
Residual 71 7505.727 1268.802
F ratio = 3.468
------------------ Variables in the Equation ------------------

Unstandardized Coefficients Standardized
Coefficients

Variable B Standard Error Beta T Sig T
(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


21
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 were
used, 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. The
auditee 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.


22
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