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The impact of audit quality on real earnings management: evidence from Bangladesh

Author

Listed:
  • Nitai Chandra Debnath

    (Bangladesh Institute of Capital Market)

  • Suman Paul Chowdhury

    (BRAC University)

  • Safaeduzzaman Khan

    (Bangladesh Institute of Capital Market)

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 2000–2017. 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.

Suggested Citation

  • Nitai Chandra Debnath & Suman Paul Chowdhury & Safaeduzzaman Khan, 2022. "The impact of audit quality on real earnings management: evidence from Bangladesh," International Journal of Disclosure and Governance, Palgrave Macmillan, vol. 19(2), pages 218-231, June.
    • Handle: RePEc:pal:ijodag:v:19:y:2022:i:2:d:10.1057_s41310-021-00137-x
    DOI: 10.1057/s41310-021-00137-x
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