Auditing and accounting
There are various ways to define accounting. Hence, the American Accounting Association’s (AAA) definition was adopted in this study. This is because it is widely accepted in accounting literature. The AAA defines accounting as “the process of identifying, measuring and communicating economic and financial information to permit informed judgement and decision by the users of the information” (cited by Glautier and Underdown [23]; Olojede [47]). There is general acceptability that information derived from the financial statements is used for making economic decisions [70]. Thus, accounting information should be able to assist the users in his desire to “predict, compare and evaluate” his decision options [16, 34]. The relevance, reliability, and comparability of information generated from financial statements become effective when it truly represents the ‘economic substance’ of an entity [67, 73].
Accounting information constitutes a major part of the total corporate information. Due to control and conflict of interest that arise between the principal and the agent, an independent person is engaged to verify the report of the agent to give credence to it due to the separation of ownership. The credibility that is added by auditing strengthens the quality of information in the financial statements. Flint [21] observed that auditing came into existence because interested individuals or groups were not able to obtain information or assurance needed on their own. He described audit function as a social control mechanism used to monitor conduct, evaluate performance, and enforce accountability. This is the whole essence of agency theory. Mautz and Sharaf [42] expressed the primary objective of audit is to examine the measurement and communication in property accounting. They further postulated that, “accounting information must be reliable. Otherwise, the existence of auditing is of no value” [47].
Auditing is an independent examination of the books and accounts with a view to reporting on the fairness of the financial statements. An auditor expresses opinion on truth and fairness of the financial statements prepared by the directors [18]. The American Accounting Association (AAA) through the Committee on Basic Auditing Concepts provided a definition, which is more acceptable. The committee’s definition as cited by Arens et al. [10] expounded auditing as “a systematic process of objectively obtaining and evaluating evidence regarding assertion about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users”. This implies that an auditor must demonstrate professional prowess. He must be methodical, objective, and analytical in the conduct of his work, and be able to communicate effectively the results of his work to the stakeholders.
The agency theory, accounting theory, and auditing theory are intertwined. Although auditing and accounting are different phenomena, the two are, however, complementary. While accounting is concerned with the preparation and presentation of financial reports, auditing on the other hand entails an independent examination of accounts in order to give it credibility. Where an auditor accepts the responsibility for preparing accounts he only acts in that capacity as an accountant and not, as an auditor. This is why, it is important to state expressly the scope and nature of work in the letter of engagement [74]. Otherwise, the conflicting roles could undermine the independence of the auditor.
Audit expectation gap
The agency problem led to the services of auditors. The shareholders expect the auditors to give credence to the financial statement presented to them. Despite the importance of audit function, to define the role of auditors in the most acceptable way has always been a difficult task [8]. This challenge creates a perception gap between the users and auditors. The perception gap appears to have been exacerbated by the financial scandals of big companies like Enron and WorldCom. Liggio [38] introduced the phrase “audit expectation gap”. In his paper, he described the audit expectation gap as the difference in the perception of the users and auditors regarding the level of performance exhibited by the auditors in the course of their work. The Cohen Commission [14] expanded this definition to cover the gap that may exist between what the public expects and what the auditors can reasonably achieve. Porter [54] noticed that the definitions of Liggio [38] and Cohen Commission [14] failed to acknowledge that there could be sub-standard performance by the auditors. She attributed the recent increase in criticism of and litigation against auditors to the inability of the auditors to keep pace with the public demands (also cited by Akinbuli [5]). She defined audit expectation gap as the gap between the society’s expectations of the auditors and the performance of the auditors.
Salehi [60] stated that “the audit expectation gap refers to either or both of these two: (1) differences in opinion on actual performance and expected performance of auditors (2) existence of these opinion differences between the auditors and users of accounts independently and comparatively”. Public expectation can be described as a burglar alarm system, a radar system, a safety net, independent auditor, and coherent communication, which contradicts basic tenants of audit [72]. Lee et al. [35] in their study concluded that the users and the auditors perceive the nature and objectives of auditing differently. According to them, it is the conflict in by the two groups that is called “audit expectation gap”. Ojo [45] defined audit expectation gap as “the difference between what the users of financial statements perceive an audit to be and what the audit profession claim is expected of them in conducting an audit”. Within the context of regulation, audit expectation gap is defined as “an outcome of the contradiction of minimum government regulations and the profession’s self-regulation, particularly the over-protection of self-interest, which has widened the expectation gap” [62]. Onulaka [51] suggested that audit expectation gap is the difference between what the public and users of financial statements believe the responsibilities of auditors should be and what the auditors believe their responsibilities are.
The confidence that the society places in the effectiveness of the audit work and the opinion of the auditor are the pivots on which audit function rests. When there is betrayal of confidence, the efficacy of the audit function is undermined [19, 55].
Components of audit expectation gap
The Canadian Institute of Chartered Accountants [40] sponsored a study on audit expectation gap, and the outcome (MacDonald Report) of the study conceptualized a model, which divided audit expectation gap into unreasonable expectation, deficient performance, and deficient standards. Building on this model, Porter [54] classified the expectation gap into two components to assist in reducing the audit expectations gap by treating each case on its own merit. Following her survey in New Zealand, she re-named the audit expectation gap as the “audit expectation-performance gap” and structured it into ‘reasonable gap’ and ‘performance gap’. The reasonable gap described the difference between “what the public expects auditors to achieve and what they can reasonably be expected to accomplish”. On the other hand, performance gap is the difference between “what the public can reasonably expect auditors to accomplish and what auditors are perceived to achieve”. She further divided performance gap into ‘deficient standard’ and ‘deficient performance’. Deficient standard is the gap between “what can reasonably be expected of auditors and auditors’ existing duties as defined by the law and profession standards”. Deficient performance is the difference between “the expected standard of performance of auditors’ existing duties and auditors’ perceived performance, as expected and perceived by the public”.
The concept of audit materiality as a component of audit expectation gap has little attention in accounting literature [4, 27, 43]. However, it can be examined from two perspectives: the first relates to individual items in the financial statements, and the second relates to the financial statements as a whole [27]. Boterenbrod [13] studied audit expectation gap between companies and their auditors, using materiality of the financial statements as a whole for measurement. The results of his work showed that the materiality-level assumption by the preparers of the accounts was lower than what the auditors applied. However, many expectation gaps, which give rise to different structures and components, do exist in the literature [30, 46]. Hence, ACCA [1] proposed that the audit expectation be divided into three components and went into proposing different solutions into reducing them. The new components are knowledge gap, performance gap, and evolution gap. The knowledge gap is the difference between what the public thinks auditors do and what the auditors actually do. This takes into cognizance the fact that the public can misunderstand auditors work. The performance gap concentrates on where auditors fail to comply with the regulations or standards. The evolution gap focuses on the areas of audit where there is need for evolution based on the general public demand, technological changes and where the overall audit process can be improved through value addition.
Causes of audit expectation gap
The audit expectation gap, which has become a threat to the auditing profession, is attributed to many factors. Tricker [71] observed that audit expectation gap is caused by the time lag in the auditing profession in identifying and responding to continually evolving and expanding public expectations. Wolf et al. [75] traced audit expectation gap to lack of perceived independence and argued that the audit report becomes a document that promotes company’s image. Lee et al. [37] attributed the causes to misconception, ignorance by the users, unreasonable public’s expectation, weak legislations, and poor quality work by the auditors. The causes also include uncertainty in the nature of auditing [60], the consequence of self-regulation of auditing profession with little or no interference by government [52], the ignorance, misunderstanding, and unreasonable expectations of the users about audit functions [48]. In addition, Shaikh and Talha [64] stated that reasons for audit expectation gap include corporate failures that made the public to lose confidence in the audit process, the retrospection, evaluation of audit performance, and response time lag due to evolutionary development in auditor’s role. Ruhnke and Schmidt [58] attribute the causes of audit expectation to exaggeration of the audit expectation gap by the public, inability of the public to accurately assess the performance of the auditors, deficiency in auditors’ performance, and auditors are not fully aware of their responsibilities.
Consequences of audit expectation gap
The audit expectation gap is not without some consequences. Sikka et al. [66] expressed that audit expectation gap has negative impact on the auditing profession. According to them, it undermines the credibility, earnings potential, and reputation associated with audit work. They further stated that in a capitalist economy, the process of wealth creation and political stability depends on the level of confidence people have in the process of accountability. Hence, the audit expectation gap could be injurious to the users of accounting information, regulators, investors and government. The public trust is the ‘heartbeat of any profession’. When the trust is lost, the result is credibility problem and erosion of value attached to the profession [11]. The corporate failures are taken to be synonymous with audit failures. This perception by the stakeholders increases the liability risks and the amount of criticisms against the auditors [36, 39].
Reducing the audit expectation gap
The inherent attributes of the audit expectation gap make its elimination difficult [29, 66]. The perceived performance of an auditor is dynamic. As such, its measurement is difficult. What is, therefore, possible is to reduce it. The extant literature showed a number of ways on how to reduce it. These include enlarging the auditor’s responsibilities regarding fraud, errors, and illegal acts; an expanded audit report, audit education, and enhancing the perceived independence of an auditor [40, 44, 63, 66]. In addition, the audit expectation gap can be bridged through mandatory audit rotation, regulating the appointment of auditors and limiting the mix services audit can render [69]. Some studies suggested the use of structured methodologies in the course of an audit assignment. This method would enhance the quality of audit work and improve users’ satisfaction, and consequently, reduce the audit expectation gap [31]. However, there is no consensus among the researchers on the use of this method in reducing the audit expectation gap.
Theoretical review
There are many theories relating to the responsibilities of the auditors and the subject of audit expectation gap, but for the purpose of this study, the role conflict theory was selected and discussed briefly. This is because it is relevant and thus provides theoretical foundation for the empirical study.
The role conflict theory
The theory provides a theoretical explanation for the existence of audit expectation gap. Rizzo et al. [57] developed the role conflict theory. The theory rests on the premise that the auditor has a responsibility to examine the books of accounts and give credence to the financial statements prepared by the board, and the stakeholders expect the auditor to undertake this assignment faithfully [32]. According to the theory, the auditor assumes the status of a professional person in a social system. As such, the auditor must comply with the role specifications provided to him by the society. Where there is a breach, compliance can be enforced through social action and this may even entail penalties, where it is necessary [17]. Biddle and Thomas [12] described the auditors’ role as “the interactions of the normative expectations of the various interest groups in the society. These interest groups are different role senders who may have direct or indirect relationship to the role position”. This implies that an auditor is not only responsible to the shareholders, but also to other stakeholders who are the users of accounting information.
From Davidson [17] work, the stakeholders include management, institutional investors, financial analysts, tax authorities, and creditors. All these groups have different expectations, which are in most cases not constant. The expectations of the groups change occasionally because they have to re-define their role specifications and interplay with other societal factors. The multi-dimensional expectations are the basis for role conflict. Most times an auditor’s obligation to first comply with professional rules and regulation governing his work makes him to conflict with his role as a ‘watch-dog’ to the users of accounts, while at the same time he must protect his own interest. Similarly, when there is a misunderstanding of the nature of auditors’ responsibilities, the users’ expectation varies and because there are many users of accounting information, their individual expectations may also vary [59]. What determines the magnitude of audit expectation gap is the extent to which auditor is able to provide a trade-off between all the conflicting interests [7].
Empirical review
There are many prior studies both in developed and emerging countries on the subject of audit expectation gap. These studies [3, 9, 11, 22, 26, 41, 51, 54, 61, 68] mostly used survey questionnaire to identify the inherent attributes of the gap, its effects, and ways of narrowing it. The research studies outcomes largely showed the presence of users misunderstanding as regards auditor’s duties and responsibilities. Audit environment, however, influenced the divergent views among the various groups. We have reviewed previous studies, and some of the findings are reported below.
Haniffa and Hudaid [25] studied audit expectation gap by considering the tradition and culture in Saudi Arabia. They collected data, using mailed questionnaire and semi-structured interviews. Descriptive statistics and Mann–Whitney U test were employed for data analysis. The findings showed that the performance gap significantly exists in the area of auditors’ responsibilities as statutorily provided for and those reasonable expectations of the public in Saudi Arabia. Salehi et al. [62] examined audit independence and expectation gap in Iran. The questionnaire was distributed to 214 investors and 227 chartered accountants. The data collected were analysed through descriptive statistics and Mann–Whitney U test. The results revealed a significant expectation gap between the investors and auditors on actual level of audit independence in Iran. Lee et al. [37] examined the causes and remedies of audit expectation in Malaysia. The data were gathered from 35 people through semi-structured interviews. They noted some complexities in the reasons for audit expectation gap. They attributed the causes to misconception, ignorance by the users, unreasonable public’s expectation, weak legislations, and poor quality work by the auditors. Humphrey et al. [28] investigated the audit expectation gap in the UK. They used series of unstructured interviews to obtain data from the management, auditors, investors, regulators, and other undefined respondents. Their results showed that auditors’ and financial statements users’ perceptions were different in respect of the nature and conduct of an audit. They also confirmed that the concept of accrual reporting in accounting contributes to the problem of audit expectation gap. Porter [54] investigated audit expectation gap in New Zealand and observed significant difference in the belief statements of the auditors and audit beneficiaries in relation to the auditors’ duties. She noted several differences in attitude. For instance, the audit beneficiaries were of the view that auditors should act as a watch-dog to the public, but the auditors did not agree with this position. Salehi [61] investigated audit expectation gap in Iran and used a new approach to measure the gap. He adopted Porter [54] model in measuring the audit expectation gap, and the results confirmed the existence of audit expectation gap in Iran. Farasangi and Nohongdari [20] reviewed the relationship between audit expectation gap from attitude of accreditation of independent auditors and non-payment of granted facilities in Iran. Their results showed a high positive relationship between expectation gap from attitude of accreditation of independent auditors and non-payment of granted facilities. Alawi et al. [6] examined the determinants of audit expectation gap in the Kingdom of Bahrain and concluded that the skills of auditors, efforts of the auditors, the knowledge of the public on audit function, and users’ needs from auditors have significant impact on audit expectation gap in Bahrain.
Monroe and Woodliff [44] examined the influence of education on respondents’ beliefs concerning information in the audit reports. The study administered questionnaire to the undergraduate students. The outcome revealed an existence of expectation gap and that education had a great influence on the students’ beliefs. They also discovered that the use of long-form of auditors’ report would significantly affect beliefs and consequently reduce the gap, but new contrasts in beliefs may emerge. Fulop et al. [22] also examined audit education role in reducing the expectation gap. Their findings indicated that audit education has a significant impact in constraining the ‘audit reasonableness expectation gap’. Schelluch [63] in his study of long audit report and audit expectation gap observed the persistence of audit expectation gap after the long-form audit report was introduced in Australia. However, perception gaps between auditors and users were narrowed down in some areas, especially in the way the expanded report was worded, although the users still believe strongly that auditors should be responsible for preventing fraud and also expressed concerns on whether the financial information can easily be verified and used consistently. Best et al. [11] investigated the impact of long-form audit report on the audit expectation gap in Singapore. They adopted Schelluch [63] research design and found a moderate audit expectation gap in Singapore, which showed an improvement over the use of short-form audit report. Mansur and Tangi [41] in their work on how to bridge the audit expectation gap concluded that it could be bridged through educating the users of financial statements and more effective communication between the auditors and the users. Taslima and Fengju [69] used existing literature to review the stakeholders’ trust towards the role of auditors and concluded that auditing profession must remove the toga of self-regulation and address the reality of audit expectation gap before this phenomenon would completely erode the trust of the stakeholders.
Adeyemi and Uadiale [3] studied audit expectation gap in Nigeria. They used survey research method and structured questionnaire in collecting data. Using purposive sampling technique, they sampled two hundred (200) respondents. For the analysis of data, descriptive and inferential statistics were used. The testing of the hypotheses was done using analysis of variance (ANOVA). It was revealed in the findings that audit expectation gap existed in Nigeria, and there was significant difference in the beliefs of the groups regarding the responsibilities of auditors. Oseni and Ehimi [50] investigated the nature and degree of audit expectation gap in Nigeria. The data were obtained through questionnaire, and 160 respondents were sampled. They used Chi-square for data analysis, and their results showed that there was an outstanding contrast in the auditor’s duties for preventing and detecting fraud. Regarding the difference in belief of auditor’s report, Tanko [68] confirmed a wide audit expectation gap on the quality of audit report in the public sector in Nigeria, while Adeyemi and Uadiale [3] observed wide expectation gap on decision usefulness of audit report in the private sector. Onulaka [51] examined the effect of audit expectation gap in the Nigerian capital market and confirmed the wide gap in the areas of auditor’s responsibility for fraud detection and prevention. Appolos et al. [9] studied new auditors’ reporting standards and its impact on the audit expectation gap. Using desk research method, they concluded that the new auditors’ reporting standards would no doubt narrow the gap regarding performance and communication, including liabilities gap.
Considering the issues reviewed, the study hypotheses are stated as follows:
H
0
1
The opinion of the users with respect to the responsibility of the auditors for the audited financial statements is not different from the auditors’ opinion.
H
0
2
The opinion of the users regarding the reliability of audited financial statements is not different from the auditors’ opinion.
H
0
3
The opinion of the users on the decision usefulness of the audited financial statements is not different from the auditors’ opinion.