The Audit Expectation Gap
Is the audit expectation gap a predictable process?Bachelor thesis: Accountancy & Control
Daphne Kraan 10355146
Faculty: Economics and Business Supervisor: J.J. Schipper RA
Samenvatting
Deze scriptie gaat over de audit expectation gap. Er wordt gekeken naar onderzoek wat gedaan is in ontwikkelende landen in minder ontwikkelde landen. Onderzocht wordt of er zich een voorspelbaar patroon voordoet in de ontwikkeling van
onderzoeken naar dit onderwerp. Dit wordt onderzocht door voor elk type land een volgorde van fases vast te stellen waardoor de onderzoeksonderwerpen heen gaan. Aan het eind van deze scriptie zullen de twee volgordes van fases met elkaar worden vergeleken. De resultaten van deze scriptie komen er op neer dat er zich een zekere vorm van voorspelbaarheid voordoet. Beide type landen gingen door dezelfde fases heen. Echter moet wel gezegd worden dat er wel een verschil is in diepte niveau van de onderzoeken tussen de twee type landen. Dit zou te maken kunnen hebben met het verschil in sociale en economische omstandigheden. Daarnaast wordt ook geconcludeerd dat onderzoek in ontwikkelde landen zich al één fase verder bevind dan in niet ontwikkelde landen.
Abstract
This thesis is on the topic of audit expectation gap. Focussing on research done in developing and developed countries. Investigating if there is a predictable pattern in research development. As said, research between developing and developed
countries is being compared. For each type of country a sequence of research development is composed, and in the end these two sequences will be compared. The final results of this thesis state that there is some kind of predictability in research development. Both types of countries went through the same kind of
phases. Side note that needs to be made, is that studies on developed countries are on a different in-depth level compared to studies on developing countries. This may be due to social and economic differences between the two types of countries. Also, developed countries are one phase further in doing research on the audit expectation gap than developing countries.
Verklaring eigen werk
Hierbij verklaar ik, Daphne Kraan, dat ik deze scriptie zelf geschreven heb en dat ik de volledige verantwoordelijkheid op me neem voor de inhoud ervan.
Ik bevestig dat de tekst en het werk dat in deze scriptie gepresenteerd wordt origineel is en dat ik geen gebruik heb gemaakt van andere bronnen dan die welke in de tekst en in de referenties worden genoemd.
De Faculteit Economie en Bedrijfskunde is alleen verantwoordelijk voor de begeleiding tot het inleveren van de scriptie, niet voor de inhoud.
Inhoud
Samenvatting ... 2
Abstract ... 3
Verklaring eigen werk ... 4
1. Introduction ... 6
2. The audit expectation gap – the definition and structure ... 8
3. Research in developed countries ... 10
3.1 What is being discussed? ... 10
3.2 Factors that influence the audit expectation gap in developed countries ... 11
3.3 Solutions to narrow the audit expectation gap ... 14
4. Research in developing countries ... 16
4.1 What is being discussed? ... 16
4.2 Factors that influence the audit expectation gap in developing countries ... 17
4.3 Solutions to narrow the audit expectation gap ... 19
5. Discussion ... 21
5.1 Research in developed countries – analysis ... 21
5.2 Research in developing countries – analysis... 23
5.3 Comparing research in developing with research in developed countries ... 25
5.3.1 Phase 1 ... 25 5.3.2 Phase 2 ... 25 5.3.3 Phase 3 ... 26 5.3.4 Phase 4 ... 27 5.3.5 Phase 5 ... 27 5.3.6 Conclusion ... 28 6. Conclusion ... 29 References ... 30 A-references ... 30 B-references ... 33
1. Introduction
“Lehman report casts auditors in poor light” is a headline out of the Financial Times from the year 2010 (Sanderson, 2010). The auditing profession has been dealing with problems and accusations for many years. Does this mean auditors are delivering bad performances or is there something more going on?
Auditors have a social function. According to society (non-auditors), they are the ones that need to give a fair and honest point of view of a company and give a warning about the risks to users of financial statements (Kaplan, 1987). This is rather not reality. Auditors can do an audit according to the GAAP rules and still not protect users from any risks of fraud, or other undetected misstatements (Lowe, 2011). Society has other expectations of auditors than what the auditors have of
themselves. The performance of auditors is not what society expects it to be (Porter, 1993). This difference is known as the audit expectation gap.
The audit expectation gap has been studied for many years. Liggio (1974) was one of the first researchers to define this phenomenon with the term audit expectation gap. After him, many researchers contributed to this area. Many of them found
empirical evidence for the existence of a gap between auditors and users of financial statements about the responsibilities of the auditor during an audit. For example, a study has been done in Egypt, where an expectation gap was found on the
responsibilities for fraud prevention and maintenance of accounting records (Dixon, Woodhead and Sohliman, 2006). Finally, research has been done on the factors that influenced the gap. For example, Haniffa and Hudaib (2007) stated that auditors’ responsibilities should be documented more clearly, to make sure that the division of tasks is needless to say for everyone.
A lot of research is done on the topic of audit expectation gap. But until 2000, no attention was paid to the gap in developing countries (Taylor and Simon, 2003). This changed after 2000, when more and more developing countries became the topic of research for research on the audit expectation gap.
Between all studies done on the topic of the audit expectation gap a difference can be made between two time-periods, and therefore two types of countries:
developing and developed countries. The first period from 1970 until 1999, and the second, from 2000 until 2014. In the first time period many research has been done in developed countries, like the United Kingdom, United States of America and
Australia. In the second time period research has been done in developing countries, like Malaysia, China, Lebanon, Egypt and so on. This creates the question if these developing countries are going through the same phases as developed countries:
Do studies in developing countries follow the same process as in developed countries on the topic of the audit expectation gap?
Together with this main research question, questions arise like if social and economic differences between these countries have an impact on the research done.
To find an answer to the main research question the following research method will be managed. A literature review will be done from 1970 until 1999 and from 2000 until 2014. Within these two time periods a general overview will be given of topics researchers wrote about. Also an overview will be given on the causes and solutions of the audit expectation gap named in these time periods. After this
information is given, per time period a sequence of development in research will be composed. During the discussion these two sequences will be compared. During this comparison will be looked at a possible predictable pattern of the research on the audit expectation gap.
Chapter one will give an introduction. Chapter two will provide the basic information about the audit expectation gap. Chapter three and four will give an overview about the literature written about, and research done in developed and developing countries. Chapter five will form the discussion. Chapter six will give an overall conclusion.
2. The audit expectation gap – the definition and structure
For many years the audit expectation gap has been researched. Therefore, many researchers developed their own definitions of the audit expectation gap, orcontributed to definitions that had been made already.
The existence of the audit expectation gap was first recognized at the beginning of the 20th century (Porter et al., 2004). Already in 1932 Limperg wrote about the auditors not meeting the expectations society had of them. Limperg wrote in his essay:
“No more confidence may be placed in its fulfillment than is justified by the work carried out and by the competence of the accountant, while, conversely, the function must be fulfilled in a manner that justifies the confidence placed in its fulfillment”.
These were one of the first signs of the audit expectation gap, but it did not receive that term until 1974. Carl Liggio is stated to be the first one to use the term of the audit expectation gap. Because of that, he was also one of the first to give a definition to the term. He defined it as the difference in expectation level about the performance of the auditor, between the auditor and users of financial statements. In 1978 this definition was altered by the Commission on Auditor’ Responsibilities (CAR). The CAR altered the definition in a way that they broadened the definition from the difference between auditors and users of financial statements, to auditors and the general public. Subsequently, Monroe and Woodliff (1993) altered it to the difference between auditors and the general public about the auditors
responsibilities. These studies served as a foundation for new studies about the audit expectation gap. So it was for Porter in 1993. Porter created one of the most used definitions of the audit expectation gap. She divided up the gap into two components.
1. Reasonableness gap
This includes the difference in what an auditor can achieve and what society expects the auditors to achieve.
2. Performance gap
This includes the difference in what society expects auditors to do, which is also realistic, and what is observed that auditors achieved. This definition can be subdivided into two parts:
a. Deficient standards: The difference between which tasks can be expected to be performed by the auditor, in a realistic form, and which tasks are prescribed by law and professional codes that must be performed by the auditor.
b. Deficient performance: The difference between the expected performance of the standard tasks of the auditor and the perceived performance as expected and perceived by society.
3. Research in developed countries
In the first period of literature written about the audit expectation gap, a lot of research has been done on defining the specific definition of the audit expectation gap, the existence of the audit expectation gap in developed countries, solutions to narrow the gap and the effect of these new solutions on the audit expectation gap. In this chapter, an overview will be given of the literature written about studies on the audit expectation gap in developed countries.
3.1 What is being discussed?
This first period of literature is between 1970 and 1999. Most studies in this period were performed in developed countries like the United Kingdom, United States of America and Australia. During this period the definition of the audit expectation gap has been formed. Many researchers debated about this definition and presented their own version of the term.
Another significant thing for this time period is that the main emphasis is not on finding general empirical evidence of the audit expectation gap. This has been researched, but it often functioned as a basis for the main research topic of that particular study. Most researchers used it as a base for studying the audit expectation gap under certain conditions. For example, during going-concern situations (Campbell and Mutchler, 1988).
Some other topics discussed in this time period are the factors that influence the audit expectation gap, and why they influenced the audit expectation gap. For example, auditor responsibility is a topic that reappeared in most studies. As a result of these studies, new solutions to narrow the audit expectation gap were
proposed/introduced. Followed by studies which researched if these newly introduced solutions have the desired effect on the gap. For example, do new standards really define the auditors’ tasks in a better way?
Finally, although a lot of solutions are offered, some researches doubt if it is even possible to close the audit expectation gap (Sikka et al, 1998).
3.2 Factors that influence the audit expectation gap in developed countries
A lot of factors have been found, that seem to have an influence on the audit
expectation gap. First of all, a discussion has been conducted on the function of the auditor. In 1932, Limpberg stated that the function of the auditor is to be the
“confidential agent of the community.”. He has assigned auditors this term, because of his opinion that the general public lacks expertise about the auditor’
responsibilities, tasks and standards. The debate about the auditors’ responsibilities is something from all times. Baron et al. (1977) did a survey to find out if there was an expectation gap between auditors and non-auditors about these responsibilities. They were mainly focussed on two issues: auditors’ responsibilities for detecting misstatements and fraud, and his responsibilities for disclosing misstatements and fraud. The survey concluded that an expectation gap did exist between auditors and non-auditors on these two topics. The overall conclusion of this research seemed to be that non-auditors have higher expectations of auditors on these two topics than auditors have of themselves.
This study done by Baron was part of a bigger research established by the American Institute of Certified Public Accountants (AICPA). The AICPA created the Commission on Auditors’ Responsibilities (CAR) to do this research. Their main goal of this research was to study if an audit expectation gap existed and how this gap could be narrowed. They had to form conclusions and develop recommendations (Arrington et al., 1983). After four years of research they finished their task, and came to the conclusion that a gap existed on many topics. The most significant thing about this research seems to be that users of financial statements actually do have quite reasonable expectations, but that many users do not understand the function of an auditor and what his tasks are. Also, the CAR states that it is the auditor’ job to narrow the gap. The gap could be narrowed by making changes in preparation and presentation of financial information (Commisions on Auditors’ Responsibilities, 1978).
The CAR found that an audit expectation gap existed. But the main topic of existing seems to be in the area of fraud detection and prevention. Users seem to assume that it is the auditors’ task, and that it is one of the most important objectives of an audit. The AICPA states that one of the auditors’ tasks is to prevent fraud and
to search for it, but that auditors also need to make sure that they and their clients are aware of the limitations of what an auditor can do and assure on this topic.
As named in paragraph 3.1 researchers also looked at the existence of an audit expectation gap in certain situations. In 1988, Campbell and Mutchler did research on the audit expectation gap on the field of going-concern uncertainties. Which is part of the discussion on auditors’ responsibilities. They researched the difference in expectations on the auditor’s role in creating a going-concern opinion. Campbell and Mutchler defined three types of roles for an auditor during a going-concern process: (1) state out the red flags for users of financial statements, (2) make sure that the presentation of financial information is according to the General Accepted Accounting Principles (GAAP), and (3) make sure that assets and liabilities are classified in a correct way and that the maximum value is gotten out of the
assets. Most auditors who filled out the survey, created by Campbell and Mutchler, choose option three (42 percent) as their main task, followed by option one (39 percent) and option two (19 percent). For users of financial statements option one is the most important task of an auditor, and option three as the least important task. This would imply an expectation gap. From a different perspective, you could say that both parties attain a high level of importance for task one, and that a possibility of narrowing the gap would be possible here (Campbell and Mutchler, 1988).
Overall, the tasks and responsibilities of auditors seem to be unclear to all parties. Limpberg (1932), stated that this is due to lack of expertise about each other’s responsibilities. Porter (1993), did research on this topic, which Limpberg named as the main reason. She divided the audit expectation gap into three parts: reasonableness gap, deficient standards and deficient performance. This study by Porter results that the auditors did not recognize five of their already existing duties. Most of these unrecognized duties have to do with detecting and reporting fraud, theft and illegal acts. This study also showed that in general auditors do have the most knowledge about their duties, followed by users of financial statements, which have a similar level of knowledge, but just a little less than auditors. The general public did have significantly less knowledge about the auditor's duties. Sixty percent of the general public claimed to have limited to none knowledge about the auditor tasks.
The previous study could be an occasion to study if education has an effect on the audit expectation gap. Monroe and Woodliff (1993) have done this, and shown
that education does have an effect on the audit expectation gap. A group of students was tested before a semester of education on auditing and were tested again after this semester on the topic of auditor responsibilities. After this semester the students' opinions about the level of auditor responsibilities changed. This last result was compared with a test that certified auditors filled out, and this comparison showed that after a semester of education the expectations of auditors and students came closer to one another. The positive effect of education on the audit expectation gap is also supported by Jenkins (1990).
Holt and Moizer (1990) studied another possible influence on the audit expectation gap. They researched if different types of audit reports resulted in a different effect on its users. They used eight different reports to test if there is a difference in interpretation between auditors and users of these reports. The studied showed that the auditors did create a different interpretation from each report. For users, this was not the case. The only two aspects on which users significantly have a different interpretation were on the subjects whether the financial statements meets all company goals, and whether the going-concern of the company is assured. When the results of auditors and users were compared, it showed that both groups did not have the same interpretations. Significant is that users tend to find financial
statements less reliable than auditors do. Holt and Moizer (1990) were not the only ones to test the effect different audit reports. In 1991, research done by Hatherly et al. Also proved that changing the words influenced the interpretations made from the audit reports. Monroe and Woodliff (1994), did specific research about the audit expectation gap in Australia. They also tested the effect of five different audit reports. They did not only look at the perceived message, but also the message about the responsibility of the auditor and the going-concern advice given in the audit report. Their results also showed that changing words did have a significant effect on the beliefs about auditors’ responsibilities.
3.3 Solutions to narrow the audit expectation gap
Some researchers state that particular issues contributing to the audit expectation gap cannot be solved by a permanent solution (Chandler and Edwards, 1996). Sikke et al. (1998) states that the nature of the audit expectation gap makes it difficult to completely close the gap. Although it is possible to reduce the gap to a certain level.
In an attempt to close the audit expectation gap, the AICPA released in 1985 nine new auditing standards. These standards were mending to clarify the auditors’ responsibilities on the detection of fraud, to function as a help to perform an effective audit and to improve the jargon used in financial statements to make sure users would get the right message (Guy and Sullivan, 1988). These nine standards should make expectations of both parties, auditors and non-auditors, come closer.
One of the other solutions given is to change the wording in the audit report. This solution is based on another definition of the audit expectation gap. This other definition of the audit expectation gap is that a gap exists when there is a difference in beliefs about the responsibilities of an auditor between the auditors and the public and the message channelled by the audit report (Monroe and Woodliff, 1994). This definition is also supported by Lowe (1994). Kelly and Mohrweis (1989) found that that users were influenced by the words that were chosen to write in the audit report. This is supported by the Commission on Auditors’ Responsibilities (1978). After the research they proposed seven wording changes, to make the audit report more understandable. Therefore, changing the wording in the audit report may be an aid to narrow the audit expectation gap. A solution that extends on the previous one, is the extended audit report. Also recommended by Pierce and Kilcommins (1995). It should give users more information about what an auditor can do, and what its limitations are. Also Miller et al. (1990) found proof that an extended audit report would have a positive influence. In their research they found that bankers valued an extended audit report at a higher worth than a short-form report. And extended audit report significantly improved the users' understanding of the audit, and the
responsibilities of the auditor (Gay and Schelluch, 1993).
Education also is one of the given solutions to narrow the audit expectation gap. Already in 1983 (Bailey et al.) is found that users of financial statement with more than average knowledge of the audit report, placed less responsibilities with the
auditor. This supported by the research done by Woodliff and Monroe (1993). Some said that education would not be enough to make the expectations of both parties to come together. O’Malley (1993) therefore proposed that auditor would take on some extra responsibilities. Mainly on the topic of the detection and prevention of fraud.
4. Research in developing countries
In the second period of literature written about the audit expectation gap, much research has been done on the existence of the audit expectation gap in developing countries. Countries like Malaysia, China, Lebanon, Egypt and many more. In this chapter an overview will be given of the literature written about these developing countries and the audit expectation gap.
4.1 What is being discussed?
A little till none research had been done on the audit expectation gap in developing countries. This is named as one of the main reasons to start the research on this gap in developing countries. In these studies the main goal is to find empirical evidence of an existence of an audit expectation gap. In most developing countries an existing gap was found, and for some countries it is even called a big gap (Best and Tan, 2001). Research has been mostly done between groups like, investors, bankers, auditors and students.
Because these countries are dealing with a developing situation, they are interested in how they can develop their audit profession in such a way that it is more beneficial for their local economy and it stimulates growth. For example, foreign and local investors rely on the financial statements for investment decisions. When these financial statements are not reliable enough, investors are likely not to invest in the economy. When the quality of the financial statement can be assured, investors are more likely to consider investing, and therefore may stimulate and help the economy grow (Fadzly, 2004; Best and Tan, 2001).
Other papers take one of the factors that are named to influence the audit expectation gap in the developed countries as their topic, and research if this is also the case in the developing countries. Here you can think of fraud detection and prevention, or auditor independence (Howard, 2005). Another reason to research the audit expectation gap in developing countries is that most of these countries have a different cultural background than most developed countries. They researched if this has an influence on the audit expectation gap (Dixon et al., 2006). The causes of the audit expectation gap and the way the gap is bridged may not be generalizable on all countries, due to environmental characteristics of specific countries and cultures (Haniffa and Hudaib, 2007).
4.2 Factors that influence the audit expectation gap in developing countries
In most developing countries an audit expectation gap is found. But the biggest influencing factor in the gap may differ from country to country. One of the biggest influencing factors in developing countries is the misunderstanding about the auditor responsibilities. Every group, like auditors, bankers and investors, have their own opinions about which responsibilities belong to an auditor. For example, this is the case in the study in Malaysia (Fadzly, 2004) and Bangladesh (Siddiqui, 2009). On the other hand, in Lebanon this was not the case. Users and auditors did not have
conflicting views of the auditing profession. But this did not represent a positive view on the impression that auditors make (Sardani, 2007).
An agreement on the responsibilities of auditors does not exist for all of the responsibilities. In developing countries this is mainly the case for fraud detection and prevention. This is one of the top results for most studies. For example, bankers and investors place most of the responsibility of prevention and detection of fraud with the auditor, while the auditors believe they have little until none responsibility (Best and Tan, 2001). In China, it is concluded that users of financial statements and auditors hold different beliefs on this topic. Here auditors believe that it is the task of the management to make sure that the financial statements give a fair and trustworthy perspective on the company, while users place this task with auditors (Lin and Chen, 2004). In China, also 44,6 percent of the auditors disagreed with the statement that an audit is to prevent and stop fraud, while non-auditors strongly agreed. This result is supported by the studies done in Egypt and Lebanon (Dixon, et al., 2006; Sidani, 2007). Conversely, in Malaysia auditors as well as non-auditors were aware of the fact that prevention of fraud is beyond the tasks of the auditor (Lee, 2009).
The prevention and detection of fraud also has to do with the
independence of the auditor. In China, the current independent position of the auditor could be questionable. And from the research of Lin and Chen (2004), it is stated that as well as auditors, as non-auditors agreed that independence is one of the most important things. In their opinion the independence could be better in China. This is also the case in Lebanon, where most companies are owned by a few families. Families that just want the lowest tax payment possible, and this could negatively effect on the independence of the auditor (Sardani, 2007). In Iran, the maintenance of the auditor independence is one of the most important factors for financial
statement users. Therefore, security about auditor independence is one of the factors that could help close the audit expectation gap. The more independent an auditor is, the more confidence the financial statement users will have in the work the auditor does (Salehi, 2009).
Sometimes auditing standards are the ones that make it unclear which tasks belong to an auditor and which not, and therefore may contribute to the expectation gap. In the study of Lin and Chan (2004), it is stated that standards should be clearer on the topics of auditor responsibility. Especially on the topics of fraud prevention and detection and auditor independence. This to create more guidelines for auditors to work with and to refer to to non-auditors. Also a lack of knowledge of the auditing standards is a contributing factor to the expectation gap. In Malaysia (Fadzly et al., 2004), the expectation gap exists mostly on the part of preparing financial
statements. Brokers and investors think this responsibility lies with auditors. This is in opposition to the Malaysian standards which state that it is not the auditor's task. Another thing that makes standards difficult is that most developing countries do not always apply international standards. This has the result that the auditing quality may differ between countries. And following those investors may not always want to invest, due to the lack of use of international standards (Sardani, 2007).
Another responsibility on which groups do not agree is on the topic of
maintenance of accounting records. In China the non-auditor group states that it is the auditors tasks to make sure that the clients’ accounting records are accurate and use legal formats, while 43,4 percent of the auditors disagrees with this statement (Lin and Chen, 2004). Also, this result is supported by the study in Egypt (Dixon, et al., 2006). From auditors is expected to share in the blame when fraud is being detected in combination with a business failure (Fadzly, et al., 2004).
All these influences create unreasonable expectations about the performance of an auditor. Which might have a negative impact on the audit profession, and people undermine the value of the work the auditors do (Lee, 2009). Trust in the auditing profession is needed in these developing countries for them to further develop their economy (Lee et al., 2010).
4.3 Solutions to narrow the audit expectation gap
Not in al researches a solution is given to narrow the audit expectation gap. Most researches state that there is a lack of knowledge, or the education degree is not at an adequate level. Therefore, if a solution has given it mostly is about education. Education has proven to give a better understanding of the auditing profession, and what its limits are (Lee, 2009). Siddiqui (2009), states that the auditing courses bridge the audit expectation gap in the areas of auditing reliability. It helps to create a more reliable view on the auditors. Lee (2009), recommends to give free seminars about the auditing profession should give a certain kind of basis to the general public. An interest in these seminars should be created with higher publicity, through for example mass media. On the other hand Fadzly (2004) states that it is not possible to educate the general public via formal education that is also used at universities. This vision is backed up by Lee (2009), adding that not many people have the opportunity to receive education on such a level in developing countries. Besides, there is a lack of interest amongst the general public to invest in this specific knowledge (Lee, 2009). Ojo (2006) therefore stated that education would only be effective if it educated the users of financial statements, instead of the general public.
To educate users of financial statements, a proper engagement letter coming with the financial statement should narrow the gap. Such a letter must state which party, the client or the firm, carries which responsibilities, what the objective is of the audit and what the limitations are of the tasks of the auditor (Lee, 2009). These letters must create more realistic expectations amongst users.
More solutions were given to adjust or extend the audit report. Best and Tan (2001) proposed to switch from a short-form to a long-form audit report. A long-form report should make clear about the division of responsibilities. This solution is also
recommended by Dixon et al. (2006) in his research in Egypt. Overall, it should better the communication between auditors and users.
Another solution that is given is about auditing standards. In the study in Saudi Arabia it states that the role, and therefore its responsibilities, of an auditor should be more specified in legal documents (Haniffa and Hudaib, 2007). Lee (2009) says that auditors should take on more responsibilities for due to a big demand from users. For example on the topic of fraud prevention and detection. When these extra
should be introduced to make sure that wrong expectations are avoided (Haniffa and Hudaib, 2007). Besides adding new rules the implementation of international auditing standards could be a solution to narrow the audit expectation gap (Best and Tan, 2001).
As said earlier, not all researchers focus on giving solutions to narrow the gap. Most of them focus on finding empirical evidence of the audit expectation gap, and investigate the influencing factors. The topic of solutions to narrow the audit
5. Discussion
In the two previous chapters an overview is given of the two time periods in which a lot of literature is written about the audit expectation gap. In this chapter a sequence of development will be composed for each time frame. After this the two frames will be compared based on these sequences.In the end a conclusion will be made if research on the audit expectation gap follows a predictable pattern.
5.1 Research in developed countries – analysis
Chapter three gave an overview of studies written about developed countries. In this paragraph a sequence of research development will be formed and explained.
Phase 1: defining definition of the audit expectation gap
The first studies were dedicated to defining the term of the audit expectation gap. Liggio (1974) is on the first researchers to give a definition to the audit expectation gap. In the following years the Cohen Commission (1978) extended this definition. This concluded to the audit expectation gap being the difference in expectation between the auditor and the general public. Later on in 1992 the AICPA gave a definition as the audit expectation gap being the difference between what the users of financial statements and auditors believe about the responsibilities of auditors are. But the most commonly used definition of the audit expectation gap is the one
created by Porter (1993) which divided the audit expectation gap into four parts: the reasonableness gap, the performance gap, deficient standards gap and deficient performance gap.
Phase 2: Find empirical evidence
While this was not the main topic of most research to find empirical evidence in general, they did start off with these kinds of researches. Quickly is transformed to topics of finding evidence in certain situations like going-concern situations.
Phase 3: Findings contributing factors
Many researchers have tried to find solutions to narrow the audit expectation gap. For example, the Commission on Auditor’s responsibilities (1983) studies for four
years in areas that influenced the audit expectation gap. They concluded that a gap existed in the area of auditor responsibilities and the knowledge about it, but also fraud detection and prevention is a common named topic.
Phase 4: Solutions to narrow the gap
From an early perspective of time they relatively quickly searched for solutions to narrow the audit expectation gap. The Commission on Auditors’ Responsibilities (1983) already made recommendations on how to narrow this audit expectation gap. Releasing new standards were also one of the solutions to narrow the gap. By introducing new standards, they hoped to clarify the audit expectation gap. For example, this is done by the AICPA in 1985. Holt and Moizer (1990) looked at the influence on different kind of audit reports, and if any improvement of audit reports to narrow the gap could be taken from these results. Also solutions like educating the users of financial statements and auditors taking on some extra responsibilities were promoted in 1993 (Woodliff and Monroe; O’Malley).
Phase 5: Impact of newly introduced solutions
In this first time frame, the impact of newly introduced solutions is researched. For example Guy and Sullivan (1988), researched the impact of the nine introduced standards by the ACPIA on the audit expectation gap. Also CarsCallen (1989) gave a commentary on the research done by the ACPIA and its effects on the gap. Hatherly (1991) did a research on the effects of the expanded audit report on the expectation gap.
To give these five different phases in a model:
Define definition Find Empirical Evidence Name contributing Factors Find solutions to narrow the gap Impact of new solutions
5.2 Research in developing countries – analysis
One of the main reasons to start doing research in developing countries is that none till little research had been done. With the main goal to find if an audit expectation gap exists in these countries. Most researchers use definition terms based on research done in developed countries. Often is referred to the definition of the audit expectation gap made by Brenda Porter (1993).
Chapter four gave an overview of studies written about developing countries. In this paragraph a sequence of research development will be formed and explained.
(Phase 1: Professionalize)
Most countries deal with a developing situation. This makes them curious into the methods to invest in their economies. These countries need to make sure that they professionalize in every aspect possible (Fadzly, 2004) to stimulate their economy. As a consequence the audit profession also needs to professionalize, and the audit expectation gap is something that could stand in the way of a growing economy. Therefore, research on the audit expectation gap is needed. Most researchers often use research methods which are based on research methods used in developed countries. This makes it easy comparable, and could make it possible to generalize reasons for the expectation gap and solutions to narrow it. Although some
researchers are skeptical about this, due to the fact that most developed countries have a different cultural and social environment than developed countries. Side note to this phase is that it started off as the reason to start doing research, but it also is the reason for doing research in the following phases. Therefore, you could say, this is not actually a real phase, but ongoing reason to do research. This is the reason why this phase is between brackets.
Phase 2: Find empirical evidence
Most researches did find empirical evidence of an existing audit expectation gap. These expectation gaps exist, mainly on the topics of auditor responsibilities and the knowledge about these responsibilities (Best et al., 2001). In most studies a very wide expectation gap is found compared to developed countries, which made
indicate that developing countries are only at the beginning of the finding out about, and learning to narrow the audit expectation gap.
Phase 3: Name the influencing factors of the audit expectation gap
There are a few factors which are named as contributing to the audit expectation gap. Each of these influencing factors emanate from auditors’ responsibilities. These contributing factors include the detection and prevention of fraud, auditor
independence, education about the auditor responsibilities and auditing standards.
Phase 4: Find solutions to narrow the gap
Not all researchers name solutions to narrow the gap. They advise this as a topic for further research. But solutions that are named very often are education of users of financial statements, via seminars and engagement letters, improving auditing
standards and taking on extra responsibilities. Some researchers name solutions that are specifically applicable to their own research, other and most researches in these developing countries name solutions that are based on researches from developed countries.
To represent these four different phases in a model:
(Professionalize) Find Empirical Evidence Name Contributing Factors Find solutions to narrow the gap
5.3 Comparing research in developing with research in developed countries
In this paragraph the two time frames will be compared. A comparison will be made on the whole sequence, but also per phase.
5.3.1 Phase 1
Phase one is a phase that is dealing with reasons to start doing research in
developed or developing countries. In developed countries the first researches were all about finding a definition for a not yet defined phenomenon. When researchers started doing research in developing countries, the audit expectation gap was
already defined as a term. For these researchers, it would not be a necessary step to take.
Secondly, during the time that the term was being defined in developed countries, they came to a realization of how big of a problem this phenomenon was for the auditing industry. For researchers in developing countries, they already knew about the audit expectation gap, due to prior research. Curiosity about if the same impact exists in these developing countries, may have triggered researchers to start studying this topic. Coming along the fact these countries are dealing with a
developing economy. Coping with a developing economy, these developing countries are looking for ways to professionalize their auditing profession and with an indirect effect professionalize their economy. Trying to attain a higher standard of quality and assurance, the audit expectation gap could be one of the reasons that are standing in the way of reaching this higher standard. Therefore researches tried to find out if in the developing countries an audit expectation gap exists. The used research methods properly used in developed countries, as a base for their own studies.
To conclude, the first step in both sequences does differ from each differ from each other, due to different reasons.
5.3.2 Phase 2
The second step in both sequences is finding empirical evidence of the existence of an audit expectation gap. For the first timeframe they mostly did this in developed countries like United Kingdom, United States of America and Australia. But just after a few researches the main purpose was not to find a general audit expectation gap
anymore. To further explain this, in the beginning the Commission on Auditors’ Responsibilities (1985) did a big research on the existence of the audit expectation gap in the United States of America. But quickly researches were more interested in the existence of an audit expectation gap in certain types of areas or certain
situations. For example, going-concern uncertainties, or the area of fraud detection and prevention.
For most researches done in developing countries an overall existence of an audit expectation gap is researched. A focus like in developed countries does hardly appear. A reason for this difference might have to do with the number of developed countries versus developing countries. This last type has a bigger number, shown by researches done in the second time frame. Another reason could be the difference in time. In the first period just a few countries were blossoming countries and therefore a more in-depth study could be done in these countries, because only these
countries were relevant. Now-a-days more countries would belong to developed countries and more research could be done on the general existence of the audit expectation gap in these countries.
To conclude, both sequences do contain the same step as phase two, but the difference in level of in-depth research.
5.3.3 Phase 3
The third step is finding the contributing factors that influence the audit expectation gap. The researches done in developed countries results in factors that had to do with auditor responsibilities. The biggest audit expectation gap was found in the area of fraud detection and prevention, and concluding that as well as auditors as non-auditors were not sure about which responsibilities belong to the auditor and which not (Commission on Auditors’ Responsibilities, 1983; Porter, 1993). It is good to state that between the developing countries economic and social environment may differ, and that contributing factors may not be generalizable in the same perspective on every country (Siddiqui, 2009). In most developing countries, there is found that, also knowledge about the auditors’ responsibilities is a big problem (Fadzly, 2004). Also the area of fraud detection and prevention is named as the area where the gap is the biggest. The reason why fraud detection and prevention is the area where the gap is the biggest may differ between developed and developing countries. In developing countries, it could be a bigger issue compared to developed countries.
This could be caused by poor monitoring by regulatory parties in developing countries, when compared to developed countries (Siddiqui, 2009).
To conclude, both sequences contain the same phase as third. Both are dealing with the same reasons of contributing factors. But the reasons that these factors are influencing the audit expectation gap may differ between developed and developing countries.
5.3.4 Phase 4
The fourth step is about finding solutions to narrow the gap. On this topic a difference exists between developed and developing countries. Developed countries are one to a few steps further in research on finding solutions. Not all researchers in developing countries, even name solutions that could result in narrowing the gap. They suggest this part for further research. Sometimes they name solutions that are taken from researches done in developed countries. But in general the most named solution in the developing countries is education. Education of users of financial statements as well as educating auditors. Solutions also named are improving standards and taking on extra responsibilities (Holt and Moizer, 1990). Developed countries, mostly do name the same solutions to narrow the gap, but they are on a different level than developing countries. Developed countries are already dealing with higher levels of education of auditors, and already do have standards. While developing countries, or inhabitants of these countries, don not always have the resources to offer or to get the same level of education as offered in developed countries. Also developing countries don not always deal with the same well defined standards as in developed countries (Siddiqui, 2009).
To conclude, developing countries as developed countries, both offer
solutions. But developed countries are just searching for solutions on a different level than developing countries.
5.3.5 Phase 5
The fifth step is only applicable developed countries. The fifth phase talks about the impact of new solutions. Some researches done in developed countries comment on the effect of newly introduced solutions. For example, the commentary of Guy and Sullivan (1989) on new introduced standards by the ACPIA. In developing countries
this is not the case yet. This might be due to the fact that they are not on the same level of creating and implementing solutions as developed countries. Sometimes in developing countries solutions are not even offered and are recommended as a topic for further solutions. Therefore, it is not yet a topic of discussion in these countries. 5.3.6 Conclusion
Developing countries
Developed countries
Comparing the two sequences of research development, the following conclusion can be made. There is some kind of predictable pattern in the development of research on the audit expectation gap. Both types of countries went through the stages of finding the existence of the gap and naming the contributing factors. Although the level of in-depth studies may differ between these two types of countries.
Also, both types of countries are working on solutions to narrow the gap, but developed countries are in a further stadium. This is the same for research on the impact of new solutions. Therefore, it would be interesting for further research to see if developing countries are going through the phases of finding solutions and
researching the impact of them, like developed countries did in the past.
Another thing that is noticeable is that although both types of countries are going through the same phases, it takes developing countries longer to get from one phase to another. This may be due to the economic and social environment they are dealing with, which is not on the same quality level as in developed countries. But this is also could be caused by the number of developed countries versus developing countries and the difference in spirit of age.
Define definition Find Empirical Evidence Name Contributing Factors Find solutions to narrow the gap Impact of new solutions
(Professionalize) Find Empirical Evidence Name Contributing
Factors
Find solutions to narrow the gap
6. Conclusion
Audit expectation gap is a topic that has been researched for many years. This time period can be divided in two timeframes. The first, from around 1970 until 1999, and the second, from 2000 until 2014. In the first timeframe many research has been done in developed countries, like the United Kingdom, United States of America and Australia. In the second timeframe research has been done in developing countries, like Malaysia, China, Lebanon, Egypt and so on. This created the question if these developing countries are going through the same research phases as the developed countries did in the first timeframe. Making it more concrete, does researching the audit expectation gap has predictable pattern?
In this thesis a literature review has been given from both periods. Closely looking at what is written about in literature, factors that are influencing the gap and solutions that are offered that could close the audit expectation gap. Finally a
comparison has been made between the two timeframes, and therefore the two types of countries. Concluding that there is some kind of predictable pattern. Both types of countries went through the same stages of research. Although an important side note has to be made. This includes the fact that developing countries are dealing with a different economic and social environment, which makes them stay at a different level of quality and standards than developed countries. Which has as a
consequence that it might take a longer time for developing countries to get from one phase into the next. Also developed countries are further in the development of solutions and researching the impact of these solutions than the developing countries, which are just discovering possible solutions.
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