Business group affiliation, earnings management and audit quality: evidence from Bangladesh

Muttakin, Mohammad, Khan, Arifur and Mihret, Dessalegn 2017, Business group affiliation, earnings management and audit quality: evidence from Bangladesh, Managerial auditing journal, vol. 32, no. 4/5, pp. 427-444, doi: 10.1108/MAJ-01-2016-1310.

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Title Business group affiliation, earnings management and audit quality: evidence from Bangladesh
Author(s) Muttakin, Mohammad
Khan, ArifurORCID iD for Khan, Arifur
Mihret, DessalegnORCID iD for Mihret, Dessalegn
Journal name Managerial auditing journal
Volume number 32
Issue number 4/5
Start page 427
End page 444
Total pages 16
Publisher Emerald Group Publishing
Place of publication Bingley, Eng.
Publication date 2017-04-21
Keyword(s) Bangladesh
earnings management
audit quality
business groups
Summary Purpose – This study aims to investigate the moderating role of audit quality on the association betweenbusiness group affiliation of firms and earnings management in the South Asian emerging economy ofBangladesh.Design/methodology/approach – A usable sample of 917 firm-year observations was drawn fromcompanies listed on the Dhaka Stock Exchange from 2005 to 2013. Data were collected from the annual reportsof sample companies. Earnings management was measured using the absolute value of discretionaryaccruals, and two proxies were used to measure audit quality: auditor size and industry specialisation.Findings – Results showed that the level of discretionary accruals is positively associated with businessgroup affiliation status, and higher audit quality reduces this association. This suggests that in environmentswithout strong investor protection, complex ownership structures create opportunities for controllingshareholders to expropriate minority shareholders. The controlling shareholders could then mask thispractice through earnings management. The findings also show that in environments lacking strong investorprotection, audit quality can help improve earnings quality for group-affiliated firms.Practical implications – The results suggest that financial statement users need to consider auditquality for a reasonable evaluation of the earnings quality of business groups. The study also informsregulators by illuminating audit quality as a key area of focus in any effort directed at enhancing stock marketefficiency through improved earnings quality in environments where business group affiliation is prevalent.Originality/value – This study documents empirical evidence on the moderating effect of audit quality onthe positive association between business group affiliation and earnings management.
Language eng
DOI 10.1108/MAJ-01-2016-1310
Field of Research 150103 Financial Accounting
1501 Accounting, Auditing And Accountability
Socio Economic Objective 970115 Expanding Knowledge in Commerce
HERDC Research category C1 Refereed article in a scholarly journal
ERA Research output type C Journal article
Copyright notice ©2017, Emerald Group Publishing
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Document type: Journal Article
Collections: Faculty of Business and Law
Department of Accounting
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