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Big 4 auditor
Big 4 auditor affiliation and affiliation
accruals quality in Bangladesh
M. Humayun Kabir
Department of Accounting, Faculty of Business, 161
Auckland University of Technology, Auckland, New Zealand
Divesh Sharma Received 25 June 2010
Reviewed 30 August 2010
School of Accountancy, Coles College of Business, Accepted 5 September 2010
Kennesaw State University, Kennesaw, Georgia, USA
Md Ainul Islam
School of Accounting and Commercial Law,
Victoria University of Wellington, Wellington, New Zealand, and
Amirus Salat
Department of Accounting and Information Systems,
University of Dhaka, Dhaka, Bangladesh

Abstract
Purpose – Bangladesh is an emerging economy and international audit firms operate there through
affiliated local audit firms. The Bangladesh audit market can be characterized as an intensely
competitive small audit market with relatively poor demand for high-audit quality. In addition,
Bangladesh has a relatively small and under developed but growing capital market that is
characterized by poor corporate regulation and weak investor protection. The purpose of this paper is
to examine the association between Big 4 affiliated auditors and accruals quality in Bangladesh.
Design/methodology/approach – Following prior literature, this paper uses both absolute
discretionary accruals and signed discretionary accruals as proxies of accruals quality. The sample is
382 firm-year observations and covers fiscal years 2000-2003.
Findings – It was found that the association between Big 4 affiliates and accruals quality in
Bangladesh depends on measures of accruals quality and accruals models used. Overall, Big 4
affiliates do not have a positive impact on accruals quality of their clients in Bangladesh.
Originality/value – This paper contributes to the literature on audit quality and accruals quality.
The results potentially suggest that Big 4 affiliates do not have any positive impact on accruals quality
of clients in an intensely competitive audit market where the demand for quality audit is poor and
monitoring is lax and raise potential implications for policy makers and market participants in
Bangladesh.
Keywords Bangladesh, Audit quality, Accruals quality, Big 4 affiliates, Investor protection
Paper type Research paper

The authors thank two anonymous reviewers for their helpful comments on the paper and
Managerial Auditing Journal
appreciate the comments of the participants at the AFAANZ/IAAER Conference 2008 (Sydney), Vol. 26 No. 2, 2011
the Tenth International Conference on Accounting and Business, 2008 (Shanghai) and the pp. 161-181
q Emerald Group Publishing Limited
20th Asia-Pacific Conference on International Accounting Issues, 2008 (Paris) on an earlier 0268-6902
version of this paper. DOI 10.1108/02686901111095029
MAJ 1. Introduction
26,2 This study examines the association between Big 4 affiliated auditors and accruals
quality in Bangladesh. Prior research shows that earnings of Big 4 clients are of higher
quality than non-Big 4 clients (Becker et al., 1998; Francis et al., 1999; Francis, 2004) with
the gap in earnings quality widening with variations in investor protection (Francis and
Wang, 2008). The Big 4 international audit firms tend to operate in smaller capital
162 markets through a local audit firm and Bangladesh is one such setting where this unique
alliance occurs[1]. Despite the emergence of audit services provided by a Big 4 through
an affiliated audit firm, prior research does not examine how audit quality differs
between clients of a Big 4 affiliate and local non-Big 4 affiliated auditors. Prior research
on investor protection and audit quality excludes countries not represented in the
La Porta et al. (1998, 2006) measures of investor protection. The countries typically
represented in the La Porta et al. (1998, 2006) measures of investor protection tend to be
mature and larger economies. Smaller and emerging economies that relatively recently
adopted regulations towards better investor protection have not been widely studied.
The authors study Bangladesh because it:
.
is an emerging economy whose capital market has undergone significant
regulatory reforms;
.
is one of the unique regimes where the Big 4 operates through a local audit firm;
. is not represented in the La Porta et al. (1998, 2006) measures of investor
protection; and
.
has an institutional environment that differs from the USA and such differences
have implications for audit quality.

Accruals quality may become increasingly important to capital market participants

in Bangladesh. Francis et al. (2004) find that accruals quality has cost of capital
consequences. Bangladeshi companies have normally relied heavily on bank financing.
Companies are now increasingly turning to the stock market for financing. For example,
the number of listed companies in Dhaka Stock Exchange (DSE) increased from 192 in
1995-1996 to 259 in 2003-2004 (Bangladesh Bank, 2010). The stock market is also
attracting more investors than ever before. For example, turnover in the DSE increased
from BDT 8,199.10 million in 1995-1996 to BDT 24,770.00 million in 2003-2004
(Bangladesh Bank, 2010)[2]. The market capitalization of companies listed with DSE
increased from BDT 79,361.7 million at the end of 1995-1996 to BDT 141,851.00 million
at the end of 2003-2004 (Bangladesh Bank, 2010). Thus, given the increasing importance
of the stock market to both companies and investors, accruals quality may be increasing
in importance to companies, investors and regulators in Bangladesh.
To enhance the reputation of its capital market, Bangladesh attracted the international
Big 4 audit firms to operate through a local audit firm. Four local audit firms are affiliates of
the Big 4 auditors; Rahman Rahman Huq (RRH), Hoda Vasi Chowdhury, A Qasem & Co.
and S F Ahmed are associated with KPMG International, Deloitte Touche Tohmatsu,
PriceWaterhouseCoopers and Ernst & Young, respectively[3]. This paper refers to these
four audit firms as Big 4 affiliates and unaffiliated local audit firms as local or non-Big 4
firms. The Big 4 monitors the affiliated audit firm through periodic audits of a sample of
engagements. The intent of these periodic audits is to ensure the affiliated Big 4 complies
with the quality control parameters set by the Big 4. Non-compliance can result
in termination of the Big 4 affiliation. Local audit firms not affiliated with a Big 4 are not Big 4 auditor
subject to periodic reviews by any entity or regulator. Therefore, one expectation is that affiliation
clients of a Big 4 affiliate would exhibit higher accruals quality than clients of local auditors.
However, there may be no difference in accruals quality between clients of affiliated
Big 4 and other auditors in Bangladesh, because her institutional environment appears to
offer low investor protection for the following reasons. First, the World Bank (2003)
reported that the external audit provides poor quality audits in Bangladesh because of 163
poor regulatory oversight. Second, the concentration of ownership in founders, families
and closely related parties diminishes the demand for a high-quality audit and increases
the scope for expropriation of minority shareholders[4]. The appointment of an external
auditor to opine on the annual financial statements may be a compliance exercise rather
than an audit of substance. Third, the appointment of a Big 4 affiliate may be for
impression management purposes; portraying an image to the market about the quality
of the firm’s earnings. Related is the plausibility that the local audit firm seeks out an
affiliation to enhance its reputation and thereby impresses and gains potential new
clients in the small and competitive audit market. Such impression management
techniques usually are devoid of leading to higher accruals quality (Merkl-Davies and
Brennan, 2007). Fourth, the heightened potential for agency problems has not been
effectively addressed by the recently adopted Bangladesh Securities and Exchange
Commission (Bangladesh SEC, 2006) corporate governance requirements. The
Bangladesh SEC requires only one independent director on the board of a listed
company which is in stark contrast to majority board independence requirements in
other countries. As there is no prior Bangladesh evidence on the association between Big 4
affiliation and accruals quality, it is an open empirical question that this paper addresses.
Francis (2004) reviews the US evidence on audit quality and notes that it is not clear
whether the US evidence on audit quality generalizes to audits in other countries. Audit
quality is influenced by auditor incentives, which are, in turn, affected by the institutional
environments (e.g. litigation risk exposure, monitoring and enforcement regimes) in
which auditors work (Francis, 2004; Khurana and Raman, 2004; Venkataraman et al.,
2008). Since variation in institutional environments exists, a strong case exists for
investigating the association between audit quality and accruals quality in different
institutional environments. As noted earlier, the accounting and auditing environment in
Bangladesh is distinctively different from that of the USA. Thus, this study adds to the
literature on audit quality and accruals quality by responding to calls for more
international research on auditing practices by Francis (2004).
The authors use both absolute discretionary accruals and signed discretionary
accruals as measures of accruals quality. They use absolute and signed residuals from
the Dechow and Dichev (DD, 2002) model modified by McNichols (2002) (hereinafter
“modified DD model”) to measure absolute discretionary accruals and signed
discretionary accruals, respectively. Using 382 firm-year observations for fiscal years
2000-2003 from the DSE, the authors find the coefficient on Big 4 affiliates is positive
and statistically significant when both absolute discretionary accruals and signed
discretionary accruals are used as dependent variables. However, additional analyses
show that the results on the association between Big 4 affiliates and accruals quality
depend on measures of accruals quality and accruals models used.
Findings of this study potentially suggest that the Big 4 affiliates do not have a
positive impact on the accruals quality of their clients in Bangladesh. Clients may be
MAJ hiring a Big 4 affiliate, and local audit firms may be seeking out an affiliation with a Big 4
26,2 firm, for impression management purposes. This paper adds to the literature by
demonstrating that Big 4 affiliates may have no positive impact on accruals quality in
a small and emerging market with poor regulations and low investor protection.
Results of this study have potential implications for regulators such as the
Bangladesh SEC and multinational donor agencies such as the World Bank and the
164 International Monetary Fund. The findings suggest that the nature of the institutional
environment in Bangladesh potentially limits the benefits to be derived from audits
conducted by a Big 4 affiliate. The authors argue that affiliation with a Big 4
international accounting firm may not improve the quality of the audit provided by the
local affiliate vis-à-vis other local audit firms unless there is market demand for quality
differentiated audits and a strong monitoring and enforcement regime is in place. The
hiring of a Big 4 affiliate as a means to improve audit and accruals quality and thus,
enhance the reputation of the Bangladesh capital market does not appear to be a
substitute for stringent regulations. A preliminary investigation of the audit fees paid
to a Big 4 affiliated audit firm suggests there are no benefits in terms of higher accruals
quality. The findings raise further research questions pertaining to motives for hiring a
Big 4 affiliated audit firm.
A caveat is in order now. This study covers only a single country with a small capital
market and the sample, especially the sample of firms audited by Big 4 affiliates, is small.
While this reflects the situation in Bangladesh, the results may not be generalizable to
countries having similar institutional environments. This offers opportunities for
further research.
The remainder of this paper is organized as follows. The next section briefly
reviews the Bangladesh audit environment and the Section 3 discusses measures of
accruals quality. The authors then explain the research method followed by the results
in Sections 4 and 5. Section 6 concludes the paper.

2. Bangladesh audit environment and accruals quality

The Bangladesh SEC was established in 1993 to protect capital market participants, oversee
issuance of securities and develop and regulate the Bangladesh securities market. The
SEC has the authority to impose penalties on companies issuing misleading information
and not complying with the legal corporate accounting and disclosure requirements[5].
According to a World Bank review, the Bangladesh institutional environment
suffers from several significant defects. For example, while the Registrar of Joint Stock
Companies (RJSC) has the legal authority to enforce the provisions of the Companies
Act, the RJSC lacks the technical competence to monitor compliance with accounting
and auditing matters (World Bank, 2003, para 23). The World Bank reported that the
RJSC did not monitor or take action against companies that failed to file annual audited
financial statements (World Bank, 2003, para 23). The World Bank (2003, para 24) also
noted that the SEC did not have sufficiently qualified staff to effectively monitor the
accounting practices of listed firms.
The Institute of Chartered Accountants of Bangladesh (ICAB), like its peers in
developed nations such as the USA, the UK and Australia, regulates its members.
Similar to mechanisms overseas, the ICAB established an Investigation and Disciplinary
Committee (IDC) that is empowered by the bye-laws of the ICAB to investigate
complaints against its members. However, the World Bank found that the ICAB failed
to enforce its regulations when its members breached auditing and ethical standards Big 4 auditor
(World Bank, 2003, para 27 and 34). The World Bank (2003, para 12) also reported that affiliation
the IDC is not proactive in disciplining errant practitioners.
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 in Bangladesh. The total
number of companies listed on the DSE was 256 in 2004[6]. These listed firms were
shared between 50 and 60 audit firms suggesting that the competition for clients is 165
intense. The ratio of listed companies per auditor is significantly less than that in
developed and high investor protection countries like the USA and the UK. Thus, audit
firms in Bangladesh are likely to face greater economic incentives to acquiesce with client
reporting practices. Since the enforcement of regulations is weak and the market for audit
services is spread thinly, the cost of breaching independence and not protecting their
reputation may be lower than the economic benefits extracted from client fee revenues.
Overall, the nature of the institutional environment and the lack of effective audit
regulation, together with the small and intensely competitive audit market raise
interesting implications for the association between Big 4 affiliates and accruals quality
in Bangladesh. Prior research predominantly in the USA reports that the accruals
quality of non-Big 4 clients is lower than that of Big 4 clients (Becker et al., 1998;
Francis et al., 1999; Krishnan, 2003). In addition, in a high investor protection market like
the USA, Big 4 audit firms have incentives to provide high-quality audits (Francis and
Wang, 2008). Discovery of an audit failure leads to litigation, loss of reputation and
future client revenues (DeAngelo, 1981; Krishnan, 2003).
In Bangladesh and based on US evidence, it may be expected that Big 4 affiliated
audit firms will provide high-quality audits which manifests in observable differences in
accruals quality between Big 4 affiliates and local audit firms. This is so because there is
some monitoring by the international Big 4 of the affiliated audit firms. The Big 4
affiliates must comply with the quality control standards set by the international Big 4
audit firm. Failure to comply with these quality control standards can result in loss of
the Big 4 affiliation, loss of reputation, and thus, loss of client and fee revenues. The audit
fee charged by a Big 4 affiliate is not trivial. For example, the Big 4 affiliates earned
average audit fees of BDT 230560 and BDT 226021, while local firms earned average
audit fees of BDT 57068 and BDT 53191 in 2005 and 2006, respectively[7]. These fee
differences of about 400 per cent are statistically significant ( p , 0.01) and economically
important.
However, given the nature of the weak regulatory and investor protection regime in
Bangladesh, it is plausible that Big 4 affiliates and local firms face the same set of
incentives and thus, they may not provide quality differentiated audits. To attract
investors, obtain less costly finance and comply with the Bangladesh public company
requirements, clients may hire Big 4 affiliated auditors for impression management
purposes. Merkl-Davies and Brennan (2007) document that firms engage in impression
management to achieve some ulterior objective such as attempting to conceal or divert
attention away from the quality of their reports and earnings. Moreover, local auditors
may also seek to form an alliance with a Big 4 firm for impression management
purposes. If this is the case, then a Big 4 affiliate can market itself as a higher quality
auditor and charge fee premiums but in fact provide audits that parallel the quality
of local audit firms. Given the alternative arguments, this paper does not predict a
directional association between Big 4 affiliates and accruals quality in Bangladesh.
MAJ 3. Accruals quality
26,2 The most direct manifestation of audit quality is the auditor opinion on financial statements
(Francis, 2004). This paper does not use auditor opinion as the outcome variable because
qualified audit opinions are infrequent and adverse opinions are rare in Bangladesh. So
following prior research (Becker et al., 1998; Francis et al., 1999; Francis, 2004), this study
uses accruals quality as the outcome variable because accruals incorporate the effects of
166 accounting estimates and judgments made by management. The Bangladesh Standard on
Auditing (BSA) 540 requires the auditor to assess the accounting estimates made by
management and obtain sufficient appropriate evidence regarding those estimates (ICAB,
2006). Further, BSA 700 requires the auditor to state in the audit report that an audit
includes assessing the accounting principles and significant estimates made by
management and evaluating overall financial statement presentation (ICAB, 2006).
Different models have been used in the literature to measure accruals quality. For
example, Healy (1985) and DeAngelo (1986) treat total accruals and first difference in
total accruals, respectively, as discretionary. Jones (1991) runs firm-specific regressions
of accruals on changes in revenue and property, plant and equipment (PPE) and treats
the residual from the model as discretionary. Various modifications to Jones’ (1991)
model have been used in the literature. In one modification known as Modified Jones
Model, changes in receivables are deducted from changes in revenue to determine the
non-discretionary accruals and discretionary accruals in the event period (Dechow et al.,
1995). Kothari et al. (2005) propose a performance-matched accruals model. DeFond and
Jiambalvo (1994) and Subramanyam (1996) apply the Jones (1991) model to
cross-sectional samples. Dechow and Sloan (1991) develop an industry-based model to
determine non-discretionary accruals. DD (2002) regress working capital accruals on
lagged, current and future cash flows from operations and treat the standard deviation in
residuals from the model as an indication of accruals quality. McNichols (2002) extends
DD’s (2002) model by including changes in sales and PPE as additional independent
variables. Ball and Shivakumar (2006) extend Jones’ (1991) and DD’s (2002) models by
incorporating the impact of asymmetrical timeliness of earnings in those models.
There is no conclusive evidence on which accruals model best measures accruals
quality (Gul et al., 2009). This paper uses the DD (2002) model modified by McNichols
(2002)[8]. Francis et al. (2004) report that accruals quality measured using parameters
in the DD (2002) model has the largest cost of capital consequences. However,
McNichols (2002) documents that the explanatory power of the modified DD model is
higher than that of the DD (2002) model and the Jones (1991) model, and concludes that
both the DD (2002) model and the Jones (1991) model are probably misspecified. Hence,
this study uses the DD (2002) model extended by McNichols (2002). Since Bangladesh
listed companies increasingly rely on the stock market for external financing, the
accruals quality measure used in this paper is more appropriate in Bangladesh context.
Finally, the authors cannot use models (Kothari et al., 2005) that impose minimum data
requirements (number of firms per industry) because of the small country setting of
this study. The authors estimate the following accruals model:
TACCt ¼ a1 þ a2 CFOt21 þ a3 CFOt þ a4 CFOtþ1 þ a5 DSALESt þ a6 PPEt þ 1t ð1Þ

where:
TACC ¼ total accruals (change in (current assets-cash) less change in current
liabilities less depreciation).
 CFO ¼ net income less total accruals. Big 4 auditor
DSALES ¼ change in sales revenue. affiliation
PPE ¼ property, plant and equipment.
All variables are deflated by average total assets. Since CFO is not publicly available in
Bangladesh (methodology section), the authors calculate CFO using the indirect method[9].
The authors estimate model (1) for each of the four years 2000-2003 to estimate
167
accruals quality[10]. Following prior literature (Becker et al., 1998; Francis et al., 1999;
Krishnan, 2003), this study uses both absolute discretionary accruals (jDACCj) and
signed discretionary accruals (DACC) as measures of accruals quality. Absolute
discretionary accruals and signed discretionary accruals are measured as absolute and
signed residuals, respectively, from model (1). Absolute discretionary accruals treat both
income-decreasing and income-increasing accruals symmetrically, and higher absolute
discretionary accruals indicate poor earnings quality (Gul et al., 2009). On the other hand,
when signed discretionary accruals are used as a proxy for accruals quality, positive
discretionary accruals indicate management uses accruals to increase reported profit
and hence, poor accruals quality. The interpretation of negative discretionary accruals is
not straightforward, however. Since negative discretionary accruals indicate
income-decreasing accruals, it is consistent with conservatism and higher accruals
quality. At the same time, it is consistent with big bath behavior also (Gul et al., 2009).

4. Methodology
4.1 Data and sample
The authors hand-collect audited financial statement data from the Balance Sheet
Analysis of Joint Stock Companies Listed on the Dhaka Stock Exchange (hereinafter
BASA), published by the Bangladesh Bank, the central bank of Bangladesh. The BASA
provides selected financial statement data for listed non-financial companies for a
maximum of five years. This is the most comprehensive public source of accounting
information in Bangladesh. They hand-collect data from the 2003-2005 publications of
BASA to minimize loss of data and thus maximize the sample size. The 2005 publication of
BASA was the latest at the time of collecting data. The earliest reported data year is 1998
and the most recent is 2004[11]. Not all companies are consecutively represented in the
BASA publications. The authors begin with 1,205 firm-year observations and eliminate
606 observations because of missing data and 164 observations because they cannot
identify the auditor. This leaves them with 435 firm-year observations. After excluding
outliers at the 1 and 99 per cent levels, the authors have a final sample of 382 firm-years.
To address the representativeness of the sample, it is compared to the BASA
population. Table I shows that the industry distribution of the sample is consistent with the
industry distribution of the BASA population. About 78 per cent of the sample comprises
the textile, food, engineering, and pharmaceuticals and chemical industries. Table I shows
that the Big 4 affiliates are concentrated in three industries: food, engineering, and
pharmaceuticals and chemical industries. Given that Big 4 affiliates appear to be
industry-specific, this paper controls for industry fixed effects in empirical analyses.

4.2 Models
To investigate the association between Big 4 affiliates and accruals quality, the authors
estimate the following ordinary least squares regressions:
MAJ
Panel A: sample by industry
26,2 Industry Total Sample (%) Big 4 affiliate (%) BASAa (%)
Food 66 17.28 15.38 20.21
Fuel and power 8 2.09 9.62 2.66
Textile 115 30.11 1.92 22.87
Pharmaceuticals and chemicals 58 15.18 30.77 14.36
168 Engineering 59 15.45 23.08 11.17
Jute 11 2.88 0.00 2.66
Paper and printing 8 2.09 1.92 4.79
Cement 12 3.14 3.85 4.26
Misc. 45 11.78 13.46 17.02
Total 382 100.00 100.00 100.00
Panel B: sample by year
2000 2001 2002 2003 Pooled
Full sample 107 99 90 86 382
Big 4 affiliates sample 13 16 12 11 52
Table I. Note: aBalance sheet analysis of Joint Stock Companies listed on the Dhaka and Chittagong Stock
Sample description Exchanges, published by the Bangladesh Bank – the Central Bank of Bangladesh

jDACCj ¼ a1 þ a2 BFA þ a3 AUDSIZE þ a4 NEGNI þ a5 jTACC_ATAj

þ a6 LOGTA þ a7 TL_TA þ a8 OC þ a9 AUDCHANGE ð2Þ
þ industry and year fixed effects þ 1

DACC ¼ a1 þ a2 BFA þ a3 AUDSIZE þ a4 NEGNI þ a5 jTACC_ATAj

þ a6 LOGTA þ a7 TL_TA þ a8 OC þ a9 AUDCHANGE ð3Þ
þ industry and year fixed effects þ 1
where:
jDACCj ¼ the absolute magnitude of residuals from model (1).
DACC ¼ the signed residuals from model (1).
BFA ¼ 1 if the auditor of the firm is a Big 4 affiliate and 0 otherwise.
AUDSIZE ¼ size of the auditor, measured as the number of sample
companies audited by the auditor.
NEGNI ¼ 1 if net income is negative (i.e. net loss), and 0 otherwise.
jTACC_ATAj ¼ the absolute value of total accruals scaled by average total
assets.
LOGTA ¼ the natural logarithm of total assets.
TL_TA ¼ total liabilities divided by total assets.
OC ¼ the length of operating cycle measured as (average days in
inventories þ average days in receivables)/365[12].
AUDCHANGE ¼ 1 if there is a change in the auditor in the fiscal year and 0
otherwise[13]. Industry and year fixed effects are represented by
eight industry dummies and three year dummies.
In models (2) and (3), in addition to the variable of interest, BFA, this paper controls for Big 4 auditor
auditor size (AUDSIZE) because DeAngelo (1981) argues audit firm size is synchronous affiliation
with audit quality and in Bangladesh, the Big 4 affiliated auditors are not the largest
firms. The study includes negative income (NEGNI), size (LOGTA) and length of the
operating cycle (OC) because DD (2002) find that their measure of accruals quality is
associated with these variables[14]. The study controls for absolute value of total accruals
scaled by average total assets (jTACC_ATAj) because prior research (Becker et al., 1998) 169
reports this variable affects accruals quality. This paper controls for leverage (TL_TA)
and auditor change (AUDCHANGE) because prior research finds these associated with
accruals quality (Becker et al., 1998; Press and Weintrop, 1990; DeFond and Jiambalvo,
1994). Models (2) and (3) include industry fixed effects (INDUSTRY) because:
.
in the sample, clients of Big 4 affiliates and local auditors do not appear to be
randomly distributed across industries; and
.
accruals quality is not computed on an industry basis.

Finally, this paper controls for year fixed effects because it uses a pooled cross-sectional
sample and accruals quality may vary over time.

5. Results
5.1 Descriptive statistics
Table II presents the descriptive statistics for groups of firms audited by Big 4 affiliates and
local auditors. According to Table II, clients of Big 4 affiliates have higher average jDACCj
and DACC than their local counterparts and the difference is significant ( p , 0.01).

Big 4 affiliate (n ¼ 52) Local audit firm (n ¼ 330)

Variables Mean SD Mean SD t-valuea

jDACCj 0.048 0.046 0.031 0.032 3.355 * * *

DACC 0.019 0.064 20.003 0.044 3.355 * * *
AUDSIZE 4.404 1.636 5.291 5.106 1.242
NEGNI 0.060 0.235 0.230 0.420 2.842 * * *
jTACC_ATAj 0.070 0.073 0.063 0.071 0.569
LOGTA 8.777 1.131 8.155 1.246 3.384 * * *
TL_TA 0.600 0.399 0.638 0.326 0.748
OC 0.722 1.181 0.948 1.236 1.233
AUDCHANGE 0.270 0.448 0.480 0.500 2.886 * * *
GROWTH 0.135 0.177 0.072 0.335 1.338
NI_ATA 0.095 0.094 0.017 0.061 7.784 * * *
CFO_ATA 0.130 0.120 0.053 0.097 5.174 * * *
Notes: Significance at: *10, * *5 and * * *1 per cent levels; aMann-Whitney test yields similar results;
variable definitions: jDACCj, the absolute magnitude of the residual from model (1); DACC, the signed
residual from model (1); AUDSIZE, the number of sample companies audited by the auditor in a given
year; NEGNI, 1 if the sample firm has net loss in the fiscal year and 0 otherwise; jTACC_ATAj, the
absolute magnitude of total accruals scaled by average total assets; LOGTA, the natural logarithm of
total assets; TL_TA, total liabilities divided by total assets; OC, the length of operating cycle measured
as (average days in inventories þ average days in receivables)/365; AUDCHANGE, 1 if there is an
auditor change, 0 otherwise; GROWTH, the percentage change in sales; NI_ATA, net income deflated Table II.
by average total assets; and CFO_ATA, cash flow scaled by average total assets Descriptive statistics
MAJ Clients of Big 4 affiliates are significantly ( p , 0.01) larger (LOGTA) and more profitable
26,2 (NI_ATA) than clients of local auditors. Similarly, clients of Big 4 affiliates report
significantly ( p , 0.01) greater cash flow and net losses (NEGNI) less frequently than local
audit firm clients. A significantly ( p , 0.01) lower proportion of clients of Big 4 affiliates
change their auditor compared to clients of local auditors[15]. The results reported above
are similar if the Mann-Whitney non-parametric test of differences is used.
170
5.2 Modified DD model estimation
Table III reports the correlation matrix and the results of estimating model (1). The
maximum Pearson correlation of 0.247, which is between current cash flow and changes
in sales[16], is well below the 0.80 threshold beyond which multicollinearity problems
may arise (Gujarati, 2003).
DD (2002) predict a negative sign for the coefficient on current cash flow and
positive signs for the coefficients on past and future cash flow. The coefficients on all
the CFO variables-lagged, current and one-period ahead-have the predicted signs and
each coefficient is significant in each of the four years. Further, changes in sales and
PPE have the expected positive and negative signs, respectively, each year and the
coefficients are significant in all four years. The adjusted R 2 ranges from 0.607 to 0.807
and the overall model is significant ( p , 0.01). These results suggest the estimation of
accruals quality in this paper is comparable to DD (2002) and McNichols (2002).

5.3 Big 4 affiliates and accrual estimation error

Table IV reports the correlation matrix (Panel A) and the results of regressing jDACCj
and DACC on BFA and the control variables (Panel B). The maximum Pearson
correlation in Panel A is 0.368, which is between TL_TA and NEGNI[17]. This is less than
the 0.80 threshold beyond which multicollinearity concerns may arise (Gujarati, 2003).
Panel B of Table IV shows that the coefficients on NEGNI, jTACC_ATAj, TL_TA and
AUDCHANGE are statistically significant in both models (2) and (3). These observations
are consistent with the prior accruals literature. More importantly, the coefficient on
BFA is positive and significant ( p , 0.01) when jDACCj is the dependent variable, thus
suggesting that clients of Big 4 affiliates have higher absolute accruals estimation errors
relative to local audit firm clients. The overall model is significant ( p , 0.01) with
comparatively good explanatory power (adjusted R 2 ¼ 0.37). When DACC is the
dependent variable, BFA is positive and significant ( p , 0.05), suggesting that clients of
Big 4 affiliates have higher income-increasing accruals than clients of local auditors.

5.4 Additional analyses

Accruals quality is subject to measurement error. To enhance the robustness of the
results, the authors estimated accruals quality using alternative accruals models and
re-estimated models (2) and (3). The results are reported in Table V. First, following
McNichols (2002), working capital accruals is used as the dependent variable in model
(1) and models (2) and (3) are re-estimated using absolute and signed residuals from that
model as proxies for accruals quality. The results are reported in second and third
columns of Table V. As the second column shows, BFA is positive and significant
( p , 0.05). However, BFA is not significant when model (3) is re-estimated (third
column). Second, the authors use DD (2002) model and absolute and signed residuals
from that model as dependent variables in models (2) and (3). The results are reported in
Panel A: correlation matrix: Pearson (Spearman) correlations below (above) the diagonal a
CFOt2 1 CFOt CFOtþ 1 DSALES PPE
CFOt2 1 1.000 0.344 0.255 0.113 0.150
CFOt 0.187 1.000 0.377 0.247 0.167
CFOtþ 1 0.058 0.232 1.000 0.268 0.155
DSALES 0.071 0.247 0.201 1.000 2 0.091
PPE 0.063 0.072 0.073 20.084 1.000
Panel B: regression results: TACC t ¼ a1 þ a2 CFOt21 þ a3 CFOt þ a4 CFOtþ1 þ a5 DSALES t þ a6 PPE t þ 1t
Variables (predicted sign) 2000 estimate t-value 2001 estimate t-value 2002 estimate t-value 2003 estimate t-value
Intercept (?) 0.022 1.617 0.008 0.696 0.001 0.093 0.001 0.091
CFOt2 1 (þ ) 0.208 3.045 * * * 0.270 5.999 * * * 0.370 3.359 * * * 0.169 1.924 * *
CFOt (2) 20.591 211.807 * * * 2 0.738 212.590 * * * 2 0.901 213.087 * * * 20.709 2 7.839 * * *
CFOtþ 1 (þ ) 0.166 2.407 * * * 0.194 4.428 * * * 0.117 1.682 * * 0.218 3.326 * * *
DSALES (þ) 0.0374 1.326 * 0.065 1.937 * * 0.125 4.715 * * * 0.062 2.188 * *
PPE (2 ) 20.072 2 3.908 * * * 2 0.039 22.638 * * * 2 0.020 21.195 20.025 2 1.954 * *
n 107 99 90 86
Adjusted R 2 0.607 0.650 0.807 0.618
F-statistic 33.725 * * * 37.362 * * * 75.610 * * * 28.475 * * *
Notes: Significance at: *10, * *5 and * * *1 per cent levels; all variables are defined in Table II; acorrelation coefficients in italic are significant at the 5 per cent
level; reported t-values are based on White’s (1980) corrected SE
affiliation

DD (2002) model
Results of the modified
Big 4 auditor

Table III.
171
 26,2

172
MAJ

Table IV.

quality analysis
Results of accruals
Panel A: correlation matrix: Pearson (Spearman) correlations below (above) the diagonal a
BFA AUDSIZE NEGNI jTACC_ATAj LOGTA TL_TA OC AUDCHANGE
BFA 1.000 0.093 2 0.144 0.016 0.210 2 0.066 2 0.130 2 0.160
AUDSIZE 20.064 1.000 2 0.111 20.044 0.150 0.001 0.039 2 0.140
NEGNI 2 0.144 2 0.067 1.000 0.241 2 0.225 0.261 0.226 0.048
jTACC_ATAj 0.029 2 0.062 0.274 1.000 2 0.118 0.097 2 0.140 0.102
LOGTA 0.171 0.214 2 0.199 2 0.115 1.000 0.016 0.091 2 0.158
TL_TA 20.038 2 0.044 0.368 0.242 2 0.172 1.000 0.143 0.001
OC 20.063 2 0.046 0.207 0.153 2 0.007 0.126 1.000 2 0.051
AUDCHANGE 20.146 2 0.208 0.048 0.058 2 0.170 0.017 0.053 1.000
Panel B: regression results
Model: jDACCj ¼ a1 þ a2 BFA þ a3 AUDSIZE þ a4 NEGNI þ
a5 jTACC_ATAj þ a6 LOGTA þ a7 TL_TA þ a8 OC þ Model: DACC ¼ a1 þ a2 BFA þ a3 AUDSIZE þ a4 NEGNI þ
a9 AUDCHANGE þ industry and year a5 jTACC_ATAj þ a6 LOGTA þ a7 TL_TA þ a8 OC þ
fixed effects þ 1 a9 AUDCHANGE þ industry and year fixed effects þ 1
b
jDACCj DACC c
Variables Estimate t-value Estimate t-value
Intercept 0.037 2.544 * * 0.054 3.062 * * *
BFA 0.018 3.111 * * * 0.017 2.142 * *
AUDSIZE 0.000 0.596 0.000 0.714
NEGNI 0.011 2.487 * * 2 0.037 25.802 * * *
jTACC_ATAj 0.124 4.541 * * * 2 0.173 24.084 * * *
LOGTA 2 0.002 2 1.633 2 0.002 21.147
TL_TA 0.033 3.862 * * * 2 0.038 23.805 * * *
OC 2 0.000 2 0.141 0.001 0.848
AUDCHANGE 2 0.010 2 3.369 * * * 2 0.008 22.043 * *
Industry fixed effects Included Included
Year fixed effects Included Included
n 382 382
Adjusted R 2 0.368 0.401
F-statistic 12.699 * * * 14.447 * * *
Notes: Significance at: *10, * *5 and * * *1 per cent levels; acorrelation coefficients in italic are significant at the 5 per cent level; babsolute residual from
model (1); csigned residual from model (1); all variables are defined in Table II; and the reported t-values are based on White’s (1980) corrected SE
 j DWCACCj a t-value DWCACCb t-value jDWCACCjc t-value DWCACCd t-value

Intercept 0.038 2.585 * * 0.024 1.225 0.031 2.311 * * 0.017 0.851

BFA 0.013 2.173 * * 0.001 0.113 0.011 1.984 * * 0.002 0.221
AUDSIZE 0.000 0.701 0.001 1.100 0.000 0.971 0.000 0.669
NEGNI 0.010 1.889 * 2 0.048 26.197 * * * 0.010 2.055 * * 20.055 27.096 * * *
jWCACC_ATAj 0.254 5.301 * * * 2 0.068 21.096 0.309 7.161 * * * 20.062 20.934
LOGTA 2 0.003 2 2.001 * * 0.000 0.178 20.003 22.189 * * 0.002 0.777
TL_TA 0.024 2.366 * * 2 0.039 23.051 * * * 0.023 2.296 * * * 20.034 22.484 * *
OC 0.002 0.981 2 0.001 20.191 0.001 0.596 20.001 20.437
AUDCHANGE 2 0.001 2 0.361 2 0.013 22.627 * * * 20.000 20.140 20.010 21.994 * *
Industry and year fixed effects Included Included Included Included
n 382 382 382 382
Adjusted R 2 0.378 0.295 0.452 0.302
F-statistic 13.188 * * * 9.372 * * * 17.510 * * * 9.680 * * *
Notes: Significance at: *10, * *5 and * * *1 per cent levels; ajDWCACCj is the absolute residual from the following model: WCACC ¼
a þ b1 CFOt21 þ b2 CFOt þ b3 CFOtþ1 þ b4 DSALESt þ b5 PPEt þ 1t ; bWCACC is the signed residual from the following model: WCACC ¼
a þ b1 CFOt21 þ b2 CFOt þ b3 CFOtþ1 þ b4 DSALESt þ b5 PPEt þ 1t ; cjDWCACCj is the absolute residual from the following model:
WCACC ¼ a þ b1 CFOt21 þ b2 CFOt þ b3 CFOtþ1 þ 1t ; dWCACC is the signed residual from the following model: WCACC ¼ a þ b1 CFOt21 þ
b2 CFOt þ b3 CFOtþ1 þ 1t ; WCACC ¼ working capital accruals, deflated by total assets; jWCACC_ATAj ¼ absolute working capital accruals, deflated
by total assets; all other variables are defined in Table II; the reported t-values in parentheses are based on White’s (1980) corrected SE

Regressions using
affiliation

accruals quality
Big 4 auditor

alternative measures of
Table V.
173
MAJ fourth and fifth columns of Table V. In the fourth column where the dependent variable
is absolute residual from the DD (2002) model, the adjusted R 2 is 0.45 and the overall
26,2 model is significant ( p , 0.01). BFA is positive and significant ( p , 0.05). In the last
column where the dependent variable is signed residual from the DD (2002) model, the
adjusted R 2 is 0.30 and the overall model is significant ( p , 0.01). However, BFA is not
significant at conventional levels. Thus, while the results on the association between Big
174 4 affiliates and absolute discretionary accruals are robust to alternative accruals models,
the results on the association between Big 4 affiliates and signed discretionary accruals
depend on accruals models used. Collectively, these findings potentially suggest that the
Big 4 affiliates do not have a positive impact on the accruals quality of their clients in
Bangladesh.
It is possible that self-selection bias affects the findings. Prior research documents that
clients self-select auditors (Chaney et al., 2004). Descriptive statistics in Table II suggest
self-selection bias. Clients of Big 4 affiliates report losses less frequently, are larger and
more profitable than clients of local auditors. To control for possible endogeneity, this
paper employs two-stage least squares (2SLS) regressions approach. In the first stage, the
predicted value of BFA is obtained, which is then used in the second stage regression.
Specifically, following Chaney et al. (2004), the authors run the following auditor choice
model and replace BFA in models (2) and (3) with the fitted value from this model:
BFA ¼ a1 þ a2 AUDSIZE þ a3 NEGNI þ a4 jTACC_ATAj þ a5 LOGTA
þ a6 TL_TA þ a7 OC þ a8 AUDCHANGE þ a9 ATURN þ a10 CURRENT
þ a11 QUICK þ a12 ROA þ a13 ROA* NEGNI þ a14 CFO ð4Þ
þ industry and year fixed effects þ 1
where:
BFA ¼ 1 if the auditor of the firm is a Big 4 affiliate and 0 otherwise.
AUDSIZE ¼ size of the auditor, measured as the number of sample
companies audited by the auditor.
NEGNI ¼ 1 if net income is negative (i.e. net loss), and 0 otherwise.
jTACC_ATAj ¼ the absolute value of total accruals scaled by average total
assets.
LOGTA ¼ the natural logarithm of total assets.
TL_TA ¼ total liabilities divided by total assets.
OC ¼ the length of operating cycle measured as (average days in
inventories þ average days in receivables)/365.
AUDCHANGE ¼ 1 if there is a change in the auditor in the fiscal year and 0
otherwise.
ATURN ¼ Asset turnover, measured as sales divided by average total
assets.
CURRENT ¼ Current ratio, measured as current assets divided by current
liabilities.
 QUICK ¼ Quick ratio, measured as quick assets divided by current Big 4 auditor
liabilities.
affiliation
ROA ¼ Return on assets, measured as net income divided by average
total assets.
CFO ¼ cash flow from operations.
Industry and year fixed effects are represented by eight industry dummies and three
175
year dummies.
The results of 2SLS regressions are reported in Table VI. When model (2) is
re-estimated using 2SLS approach, the overall model is significant ( p , 0.01) and BFA
is positive and significant ( p , 0.01). BFA is positive and significant ( p , 0.01) when
model (3) is re-estimated using 2SLS approach. Thus, the results hold good when
self-selection bias is controlled for.

6. Conclusion
This study investigates the association between Big 4 affiliates and accruals quality in
Bangladesh. Absolute and signed residuals from the modified DD (2002) model are used
as proxies for accruals quality. Using 382 firm-year observations from the DSE for fiscal
years 2000-2003, the study finds that a Big 4 affiliate is positively associated with the
absolute value of residuals from the modified DD (2002) model, thus indicating that
clients of Big 4 affiliates have higher absolute accrual estimation errors than clients of
local auditors. Further, a Big 4 affiliate is positively associated with signed residuals
from the modified DD (2002) model, indicating that clients of Big 4 affiliates have higher
income-increasing accruals than clients of local auditors. The results on the association
between Big 4 affiliates and absolute discretionary accruals hold good across alternative
accruals models and when self-selection bias is controlled for. However, the results on
the association between Big 4 affiliates and signed discretionary accruals depend on
accruals models used. Thus, the association between Big 4 affiliates and accruals quality
in Bangladesh depends on measures of accruals quality and accruals models used.
Collectively, these findings potentially suggest that the Big 4 affiliates do not have a
positive impact on the accruals quality of their clients compared to local audit firms not
affiliated with a Big 4 auditor in Bangladesh.
The findings differ from those in the USA (Becker et al., 1998; Francis et al., 1999) but
are broadly consistent with Francis and Wang (2008). Becker et al. (1998) and Francis et al.
(1999) find that Big 4 clients have lower discretionary accruals (higher accruals quality)
than their non-Big 4 counterparts. Francis and Wang (2008) find that the Big 4 are
positively associated with accruals quality in strong investor protection regimes but
negatively associated in weaker regimes. The Bangladesh audit environment is
characterized by an intensely competitive market for audit services, poor demand for
quality audit services, and poor monitoring and enforcement regime. Thus, although Big 4
affiliates may be monitored by their respective international Big 4, the results suggest
such monitoring may not manifest in the measures of accruals quality the paper examines.
A potential explanation of the findings of this study is that clients hire a Big 4
affiliated auditor to convey the impression that their earnings is of high quality than
clients audited by local auditors, when in fact that may not be the case. Because larger
firms are more visible to the market, and firms with greater resources including better
profits and cash flow can afford to pay audit fee premiums to a Big 4 affiliate, such firms
 26,2

176
MAJ

Table VI.

regressions
Results of 2SLS
Model: jDACCj ¼ a1 þ a2 BFA þ a3 AUDSIZE þ Model: DACC ¼ a1 þ a2 BFA þ a3 AUDSIZE þ
a4 NEGNI þ a5 jTACC_ATAj þ a6 LOGTA þ a4 NEGNI þ a5 jTACC_ATAj þ a6 LOGTA þ
a7 TL_TA þ a8 OC þ a9 AUDCHANGE þ a7 TL_TA þ a8 OC þ a9 AUDCHANGE þ
industry and year fixed effects þ 1 industry and year fixed effects þ 1
jDACCja DACCb
Variables Estimate t-value Estimate t-value

Intercept 0.057 3.266 * * * 0.078 3.418 * * *

BFA 0.078 6.047 * * * 0.091 5.363 * * *
AUDSIZE 0.001 1.852 * 0.001 1.903 *
NEGNI 0.016 3.142 * * * 20.031 2 4.605 * * *
jTACC_ATAj 0.101 3.748 * * * 20.201 2 5.652 * * *
LOGTA 20.006 23.370 * * * 20.006 2 2.840 * * *
TL_TA 0.030 5.183 * * * 20.042 2 5.577 * * *
OC 0.002 1.285 0.005 2.218 * *
AUDCHANGE 20.005 21.189 20.002 2 0.410
Industry fixed effects Included Included
Year fixed effects Included Included
n 382 382
Adjusted R 2 0.309 0.345
F-statistic 9.955 * * * 11.570 * * *
Notes: Significance at: 10 *, 5 * * and 1 * * * per cent levels, respectively; aabsolute residual from model (1); bsigned residual from model (1); endogenous
variable: BFA; instrumental variables: AUDSIZE, NEGNI, jTACC_ATAj, LOGTA, TL_TA, OC, AUDCHANGE, ATURN, CURRENT, QUICK, ROA,
ROA *NEGNI, CFO, industry and year fixed effects; ATURN, asset turnover, measured as sales divided by average total assets; CURRENT, current ratio,
measured as current assets divided by current liabilities; QUICK, quick ratio, measured by quick assets divided by current liabilities; ROA, return on
assets, measured as net income divided by average total assets; CFO, cash flow from operations and all other variables are defined in Table II
may be hiring a Big 4 affiliate for impression management purposes (Merkl-Davies and Big 4 auditor
Brennan, 2007). The univariate audit fee tests and multivariate accruals quality tests are affiliation
consistent with this explanation. The authors observed that Big 4 affiliates charged
significantly higher audit fees than non-Big 4 local firms. The audit fee difference was
more than 400 per cent. Also, local audit firms may seek out an affiliation with an
international Big 4 firm to give the impression they are of higher quality than local
auditors unaffiliated with a Big 4. Thus, Big 4 affiliates could justify charging audit fee 177
premiums. Such conjecture is consistent with the concept of impression management
(Merkl-Davies and Brennan, 2007). To provide further insight to the proposition, this
study calls for further research examining why firms appoint a Big 4 affiliate, and
whether firms switch from a local audit firm to a Big 4 affiliate. The descriptive data in
Table II suggest clients of a Big 4 affiliate have a lower incidence of auditor change
compared to clients of a non-Big 4 affiliate. This is important for an under-developed and
poorly regulated audit market because the audit fees paid to Big 4 affiliates are not trivial
and are significantly greater than those paid to local audit firms not affiliated with a
Big 4. Further research is encouraged to explore the benefits a Big 4 affiliation brings to
the local audit firm and the capital market generally. The initial results in this study
suggest a Big 4 affiliation does not bring benefits to the capital market in terms of higher
reported accruals quality. The Bangladesh regulators may be interested in such issues
as they gradually improve the regulation of capital market and audit firms.
This study is subject to the following caveats. First, it is widely recognized that any
proxy for accruals quality is not error free. Although the study employs primary and
additional measures to enhance the reliability of the results, the authors acknowledge
the noise in the proxies for accruals quality may affect the results. Although the authors
considered using audit opinions as a proxy for audit quality, it was discovered that the
variation in audit opinions was negligible thus limiting its use as a dependent variable.
Most audit opinions were clean opinions.
Second, the relatively small sample may affect the results, which is a function of the
size of the Bangladesh capital market and data availability. Future research may
investigate the association between Big 4 affiliates and accruals quality in similar
accounting and audit environments. Finally, the association between a Big 4 affiliate and
accruals quality may improve overtime particularly as international monitoring agencies
such as the World Bank pressure the Bangladesh government to strengthen its oversight
of financial reporting and the capital market. One recent development in Bangladesh is
the SEC’s requirement for boards of directors to comprise at least one independent
director. The extent to which Bangladesh companies comply with this requirement,
and how such developments affect the capital market and the demand for higher audit
quality in a small and emerging economy presents opportunities for future research.

Notes
1. Some other countries where the Big 4 operates through an affiliate are Egypt, Fiji, Indonesia,
Philippines and Turkey. These also are smaller capital markets with low investor protection.
2. BDT stands for Bangladesh Taka, the currency of Bangladesh. The average exchange rate
was US$1 ¼ BDT 40.84 during 1995-1996 and US$1 ¼ BDT 58.94 during 2003-2004
(Bangladesh Bank, 2010).
3. Another audit firm, ACNABIN, was associated with Arthur Andersen during the study
period. Since its clients are not included in the sample, this paper uses Big 4 instead of Big 5.
MAJ 4. For example, the mean (median) percentages of ownership of sponsors in listed firms were
44.26 per cent (48.73 per cent) and 43.87 per cent (49.55 per cent) in 2003 and 2004, respectively.
26,2
5. The Companies Act 1994 is the main regulation that deals with all companies. The Act details,
inter alia, accounting and disclosure requirements for all companies-listed and non-listed,
public and private. The Securities and Exchange Rules of 1987 details the accounting and
disclosure requirements for listed companies only. The 1987 Rules required the publication of
178 annual financial statements (balance sheet, and profit and loss account) and the audit thereof
by a chartered accountant. As a result of amendments to the Rules in 1997, the Rules now
require the publication of the cash flow statement together with the balance sheet, and the
profit and loss account, preparation of financial statements in accordance with International
Accounting Standards (IAS) as adopted in Bangladesh, the audit of annual financial
statements in accordance with the International Standards of Auditing as adopted in
Bangladesh, and publication of half-yearly statements (Hasan et al., 2007).
6. This information was accessed on 16 November 2009 from the following web site: www.
dsebd.org/mglc.php
7. The authors were able to obtain audit fees for 53 firms for 2005 and 2006. Of these 53 firms,
the Big 4 affiliates audited 12 firms and the non-Big 4 audited 41. BDT stands for Bangladesh
Taka, the currency of Bangladesh. The average exchange rate was: US$1 ¼ BDT 61.4 in 2005
and US$1 ¼ BDT 67.1 in 2006. Exchange rate information is available at: www.bangladesh-
bank.org/
8. In DD (2002) model, working capital accruals are regressed on past, current and
one-year-ahead CFO. McNichols (2002) extends this model by incorporating two additional
independent variables, changes in sales and PPE. The authors estimate a variation of this
modified model to estimate accruals quality. Unlike McNichols (2002) who uses working
capital accruals as the dependent variable in the accruals model, this study uses total accruals
as the dependent variable because depreciation, which is included in total accruals but not in
working capital accruals, is associated with PPE, one explanatory variable in McNichols
(2002). Estimation statistics in Table III show the accruals model has a very good fit.
9. See Drtina and Largay (1985) for limitations of the indirect method of calculating cash from
operations.
10. The results are qualitatively similar to those reported in this paper when model (1) is run for
the pooled cross-sectional sample.
11. There were two noticeable changes in the accounting and audit environment in Bangladesh
after the study period. First, RRH, which was an affiliate of KPMG during the study period,
became a member firm of KPMG International in 2006. It would be interesting to see whether
the accruals quality of client firms improves after RRH becomes a member firm of KPMG
though it would be difficult to investigate this issue empirically as RRH is the only member
firm of a Big 4 auditor now and the number of listed firms audited by RRH is very few. Second,
the turnover and market capitalization of firms listed on the DSE increased greatly after 2003.
The turnover increased from BDT 24,770.00 million in 2003-2004 to BDT 893,789.40 million in
2008-2009 and the market capitalization increased from BDT 141,851.00 million in 2003-2004
to BDT 1,001,433.00 million in 2008-2009. BDT stands for Bangladesh Taka, the Bangladesh
currency. The average exchange rate was US$1 ¼ BDT 58.94 during 2003-2004 and
US$1 ¼ BDT 68.80 during 2008-2009 (Bangladesh Bank, 2010). This development in
Bangladesh stock market will likely increase the importance of accruals quality of listed firms
in Bangladesh. Barring these changes, the authors are not aware of any other major change in
the Bangladesh accounting and audit environment. Thus, while the data are somewhat dated,
the data and findings of this study are very relevant even today.
12. An alternative specification used by Dechow et al. (1998) is operating cash cycle calculated as Big 4 auditor
the average days accounts receivable and inventories minus average accounts payable. The
study does not use this specification because BASA does not report accounts payable. affiliation
13. Becker et al. (1998) use two dummy variables – OldAud and NewAud – to capture auditor
change. OldAud is equal to 1 if the last sample year is followed by an auditor change and
NewAud is equal to 1 if the first sample year is the first year with a new auditor. The authors
do not have data to measure OldAud and hence, cannot implement their definitions of 179
auditor change.
14. DD (2002, Table IV, Panel C) report that standard deviation of sales and average absolute
working capital accruals are associated with their measure of accruals quality. This paper
does not use standard deviation of sales as a control variable in models (2) and (3) because it,
unlike DD (2002, Table IV, Panel C) who use a time series sample, uses a pooled cross-sectional
research design and hence cannot compute standard deviation of sales. The study does not use
absolute working capital accruals as a control variable because it, unlike DD (2002) who use
working capital accruals as the dependent variable in their accruals model, uses total accruals
as the dependent variable in model (1) and absolute total accruals, jTACC_ATAj, instead of
absolute working capital accruals as a control variable in models (2) and (3).
15. The non-parametric Mann-Whitney tests yield similar results.
16. The maximum Spearman’s correlation is 0.377, which is between current cash flow and
one-year-ahead cash flow.
17. The maximum Spearman correlation is 0.261, which is again between TL_TA and NEGNI.

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About the authors

M. Humayun Kabir is currently a Senior Lecturer of Financial Accounting at Auckland
University of Technology. His research interests are in financial reporting and corporate
governance. M. Humayun Kabir is the corresponding author and can be contacted at: humayun.
[email protected]
Divesh Sharma is a Professor at Kennesaw State University. His research interests include
auditing, corporate governance and financial accounting.
Md Ainul Islam is currently a Senior Lecturer at Victoria University, Wellington. His research
interests include auditor independence, MAS involvement of auditors, and audit services market.
Amirus Salat is an Assistant Professor at the Department of Accounting and Information
Systems, University of Dhaka. His research interests are in financial accounting.

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