Audit Expectation Gap: An Empirical Review of the Literature

By

Muhammad TankoDepartment of Accounting

Kaduna state university

Abstract

The studies in the area of audit expectation gap mostly use survey questionnaires to identify the nature of the gap or where the gaps are; while others see the impacts of the gap; and how to reduce the gap. Different respondents have been used in the literature to elicit their opinion, for example, auditors, lawyers and judges (lowe, 1994), jurors (frank and lowe 1994), investors (Epstein and gregor 1994), shareholders (beck 1994) various groups (Humphrey 1993) chartered accountants, financial directors, investment analyst, bankers and financial analyst. The conclusion of the researches is that the gap does exist and it affects the auditing profession negatively. Therefore, measures should be taken to ensure it is minimize or reduced.

Introduction

The word ‘audit expectation gap’ was first used in the literature by Liggio in early

1970s. But, the issues related to expectations gap, appeared to exist since late 19th

Century (Humphrey et al.1992). At present, there is no generally accepted definition

of the meaning of the audit expectations gap. Several accounting researchers and

professional accounting bodies have offered their definitions. On the issue of its

existence, the literature has explicitly accepted the existence of the problem of

expectation gap. Datuk (2007) for example observed that ‘there has been disparity in

the public’s expectations of the duties of auditors’ and scope of audit, and auditor’s

own ideas of their roles. The responsibility of any wrong doing in any company is on

the auditors among others. Furthermore, Rahim (2007) also opined that ‘there are

misconceptions that, it is the auditor’s role to prepare the company’s set of accounts

and that the onus is upon directors and management of a company to ensure that the

financial statement is prepared in compliance with accounting standards and statutory

requirements. The auditor’s responsibility is to express an opinion as to whether the

set of accounts gives a true and fair view of the company in accordance with the

financial reporting framework’. Lee (2009) also concluded for Malaysia ‘that if the

audit profession is to survive in the long term, remedies are desperately needed to

restore the image of the auditing profession as a credible, independent, objective,

professional evaluator of financial transactions and reports. Thus, the effort to re-

establish the image of the auditing profession through narrowing the audit expectation

gap is as crucial’.

Loggio (1974) defined the term audit expectation gap as the difference between the

levels of expected performance as envisioned by both the user of a financial statement

and the independent accountant. Furthermore, Humphrey and Turley (1992), sees the

expectation gap as the difference between the levels of expected performance as

interpreted by the independent accountant and the user of financial statements. Pierce

and kilcommins (1996), also observed that the audit expectation gap exist when the

external auditor’s understanding of their role and duties is compared against the

expectations of user group and the general public. Tricker (1982) viewed the

expectation gap as the result of a natural time lag in the auditing profession

identifying and responding to continually evolving and expanding public

expectations. Other authors argued that it was the consequence of the contradictions

in a self-regulated audit system operating with minimal government intervention as

evidenced in Hopwood (1990) and Humphrey (1991).

The audit expectations gap centres on several issues, most notable among them are;

the auditor’s roles and responsibilities as opined by Porter, (1993); Fazdly and

Ahmad, (2004); and Dixon et al., (2006). The nature and meaning of audit report

messages opined by Monroe and Woodliff, (1994); and Gay et al., (1998). Audit

independence as opined by Sweeney, (1997); Lin and Chen, (2004); and Alleyne et

al., (2006). Furthermore, Humphrey (1997) classified the issues on the audit

expectations gap into four main areas: audit assurance, audit reporting, audit

independence and audit regulation.

While most of the researches conducted in the area of the expectation gap are based

on the private sector, the research in the public sector has received little attention by

researchers. Pendlebury and Shreim (1991), Chowdhury and Innes (1998) and

Chowdhury et al. (2005) are some of the prominent researches conducted in the area

of public sector. Just as the private sector, research has indicated that the audit

function in the public sector also changes over time. Lee et al (2009) opined that the

public sector audit was concerned with regularity, legality and probity of government

expenditures. The focus is to see that the budgetary allocations to the various

government agencies are expended according to the purpose to which they have been

set up and that the accounts prepared by such agencies were properly presented in

conformity with the provisions of the law. Glynn, (1985); Pollitt et al., (1999); and

Lee et al (2009) are of the view that the traditional audit functions have been

expanded to include wider monitoring functions over government agencies. They

contended that ‘the auditors’ task now, is to examine whether programmes

implemented by government agencies have been implemented economically,

efficiently and effectively. This is widely known as Performance Audit or Value for

Money (VFM) audit’. Guthrie and Parker, (1999) further opined that the objective of

the auditors work is to ensure that the government agencies are accountable not only

for the resources they used but also for the effectiveness with which they used those

resources. Accordingly, the public sector audit is now concerned with terms such as

‘accountability’, ‘output’, ‘efficiency’, and ‘value for money’.

Although studies have been documented in the area of expectation gap for both the

public and private sectors in the developed economies, there is the absolute scantiness

and inadequacy of such literature documented for the developing economies. It should

be noted that, while in the developed economies there is a developed system in the

public sector auditing, the composition of public sector administration in the

developing economies is still in its infancy. Furthermore, Dye and Stapenhurst,

(1998); Berglof and Thadden, (1999); Chang, (2001); Sandholtz and Koetzle, (2000),

opined that the developed countries are usually characterised by a high-level of

accountability, a clean and efficient bureaucracy and judiciary and a transparent

administration, these characteristics significantly contrast to developing countries.

Kaufmann, (1997); Gray and Kaufmann, (1998); Sandholtz and Koetzle, (2000)

further identified the problem of the possibility of fraud, corruption and economic

mismanagement in the public sector in developing countries as compared to the

developed economies. Similarly, as for the private sector, the developed economies

have more developed, integrated and independent private sector as when we

compared with what is obtainable in the developing economies.

Additionally, researchers also claim cultural factors of one country could have

implications on the attitudes and perceptions towards accounting and auditing

systems. Agacer and Doupnik (1991); and Patel et al. (2002), among others, argued

that the adoption of accounting and auditing systems of developed countries in

developing countries might face many cultural obstacles such as in the interpretation

of standards, audit procedures and codes of conduct. Among the possible cultural

factors are the level of transparency (Gray, 1988), conservatism and collectivitism

(Gray, 1988; Schwartz, 1994) and power distance (Hofstede, 2001; Ding et al., 2005;

Ali, 1999). In a high power distance society, for example, researchers such as Patel et

al. (2002), Hofstede, (2001) and Ding et al. (2005) suggest that individuals would

respect and value the views or orders of elders, superiors and authority. Consequently,

they would ‘accept a hierarchical order in which everybody has a place which needs

no further justification’ (Salter and Frederick, 1995). Thus, it is possible this factor

will significantly influence the perceptions of the users and auditors on the functions

of performance audit and auditors work.

All these factors can certainly change the outcome of research conducted in the

developed economies as compared to the developing economies like Nigeria. Apart

from the scantiness of the research in the area of audit expectation gap in the

developing countries, the term as it is may be detrimental to the financial reporting

and auditing process. Lee and Ali (2008) opined that audit expectation gap is

detrimental to the financial reporting and auditing process, as the public may perceive

the work performed by external auditors as unsatisfactory. Therefore, the audit

expectation gap is crucial to the audit profession as they determine the value of

auditing and the reputation of auditors in modern society.

Literature Review

Studies in the area of audit expectation gap are numerous and cover most developed

economies of the world, especially, the United States and the Great Britain. Although,

literature is being developed in the area of expectation gap for developing countries,

only a few countries have documented the existence of the audit expectation gap, this

specifically, includes Nigeria. For the review of the empirical literature we intend to

cover studies based on the countries the studies took place and the area covered by the

studies. We therefore, cover such countries as the United States, Britain, Australia,

Saudi Arabia, Egypt, India, China, South Africa, Malaysia, and Nigeria.

In the United States, Baron et al (1977) conducted a research with the aim of finding

out the preferences and beliefs of auditors on the one hand and the users of audit

report on the other hand. In their findings they disclosed that the latter seemed to hold

the auditor responsible for detecting and disclosing irregularities and illegal acts than

the auditors expected themselves to be. They therefore, documented substantial

differences in-terms of the perception of the two groups.

Libby (1979) sampled highly experienced bankers although not representing the

generality of the user group of financial statement he found that fears of

miscommunication between auditors and users were perhaps unjustified. Bailey et al

(1983) identified education as the main cause of the audit expectation gap. They

therefore concluded that more knowledgeable users place less responsibility on

auditors and less sophisticated members of the public. Nair and Rittenberg (1987)

found that an expanded audit report has the likely chance of changing users’

perception about the relative responsibilities of management and auditors. Therefore

they placed the responsibility of audit expectation gap on the inadequacy of the audit

report and that once it is expanded; it has the tendency of reducing the gap. This was

in line with the outcome of the research conducted by Kelly and Mohrweis (1989)

who found that users’ perception of the purpose and nature of an audit significantly

changed by wording modifications in audit report.

Miller et al (1990) also investigated the issue of audit reports among bankers and

concluded that expanded audit reports are more useful and understandable than the

short form audit reports. Lowe and Party (1993) compared the views of potential

jurors with the views of auditors on eight questions that address the knowledge of

auditing, the auditors’ role and general attributes towards the auditing profession.

Lowe (1994) in a study he conducted comparing the perceptions of auditors and the

judicial litigants regarding their expectations of the auditing profession and more

specifically to ascertain the legal implication of audit expectation on the auditing

profession. He found that there exist expectation gap between the judge’s expectation

and the professions expectation. Therefore, judges were found to expect more from

the auditors than the auditor’s believed. In an extension to this Jennings et al (1991)

also found that the attitude of judicial litigants towards the gap determined the

outcome of auditor liability. A further study in this direction was carried out by

Anderson et al (1998). They compared the auditor’s opinion with that of the legal

community and the auditors’ attribution of responsibility in relation to fraud

detectability and going concern predictability as identified and highlighted in the

auditing standards and legal proceedings. Following the same methodology of

Jennings et al (1991) and including mitigating variables such as collusion, materiality,

evidence reliability and timing of unpredicted events related to the detectability and

predictability of financial statements problems in situations involving auditor

litigation. They found out that judges were affected by such variables and

corroborated evidence that judges’ attitude played a critical role in the evaluation of

auditors’ responsibility. The outcome of this study means that efforts could be made

by the auditing profession to clarify the nature and inherent limitations of the audit to

help shape such attitudes. However, they further found that judges did not hold the

auditors fully responsible for losses including that of third parties due to business

failures.

In a similar vein, Frank et al (2001) examine the perception of judicial third parties,

jurors, accounting students, and auditors; regarding their expectations of the

profession. They found wide divergences in terms of perception particularly in Jurors

expectation that auditor should be more responsible for financial statements. They

further found high expectations in terms of auditor’s responsibility to search for fraud

and irregularities regardless of its size and that auditor should be an insurer against

large stockholder losses.

In another dimension of measuring the expectation gap, Epstein and Geiger (1994)

conducted a survey of investors to gather information on various aspects of financial

reporting issues. More specifically, they targeted the level of assurance they believed

auditors should provide with respect to error and fraud. They eventually found out

that investor sought very high levels of financial statement assurance and that an

expectation gap do exist between auditors and investors on the level of assurance the

auditors provide. McEnroe and Martens (2001) further investigated the wording of the

audit opinion and certain dimensions of the attest function in the area of disclosure,

internal controls, fraud and illegal operations. They found that the investing public

required more from the auditors in the issuance of an unqualified opinion especially

as it relates to the variables mentioned. They further found that pronouncements such

as the expectation gap statement on auditing standards that were release about a

decade earlier were not effective in reducing the public’s expectation of the auditing

profession in terms of the extent to which the auditor presents an unqualified report

based on inabilities in disclosure, internal control, fraud and illegal operations. They

therefore found that investors always expect the auditor to act as a public watchdog.

Arrington et al (1994) in their study criticize the auditors in terms of their ability to

detect fraud, and to predict failures of companies they have audited. Libby (1979)

found that fears of miscommunication between auditors and users were unjustified.

However, the research has restricted respondents that are highly experienced in bank

operations and therefore, may not reflect the generality of the users. In the same

manner Barley et al (1983) found that larger gap might exist between auditors and less

sophisticated members of the public as his sample of those respondents combined

more knowledgeable and sophisticated respondents with those less knowledgeable.

In terms of content of the audit report, Nair and Rittenberg (1987) found that an

expanded audit report has the capacity of changing user’s perceptions about the

relative responsibilities of management and auditors. Kelly and Mohrivers (1989) also

found that user’s perception of the nature and purpose of an audit were significantly

changed by wording modifications in audit report. Miller et al (1990) in their study

that compared the usefulness and understandability of audit report found that bankers

found expanded audit reports were useful and understandable than the previous short

form audit.

The earlier studies in the United Kingdom on audit expectation gap date backs to the

1979s. Lee (1970) for example, on his survey study of three audits oriented groups.

He found conflicting views as to the expectation gap among the respondents. These

respondents were the auditors, the audit client and the audit beneficiaries. With the

auditors group including the qualified and non-qualified staff of audit firms and audit

partners while the audit beneficiaries group included the private investors,

institutional investors and other interested parties such as the bankers. The audit

included company directors, their secretaries and accountants. In all the study found

lack of understanding by both the auditors and the two groups. The Beattie et al.,

(1988) study examined a large set of 45 economic and regulatory factors that could

impair or enhance auditor independence, using questionnaire surveys of UK audit

partners, finance directors and financial journalists. At a level of 50 per cent of audit

fee, the corresponding threat rankings were fifth, tenth and seventeenth and at the

level of 25 per cent of audit fee they dropped to fourteenth, eighteenth and twentieth

ranks. NAS fees also increased economic dependence among the top threat factors.

Holt and Moizer (1990) examine audit expectation gap between accountants and a

group he termed sophisticated users. The sophisticated users were individuals who

worked in stock broking firms, insurance companies, investment trusts, self investing

pension funds and bankers. In their findings they documented differences in

perceptions of the meaning of audit reports between the two groups of accountants

and the sophisticated users. Hetherly et al (1991) investigated the audit expectation

gap on the change in the standard form of audit’s report. They sampled MBA

students in the United Kingdom and found that changing the wording of the standard

short form audit’s report resulted in different perceptions of the meaning of audit

reports for the MBA students. However, the study found that perceptions of

managements and auditor’s responsibilities were not significantly influenced by the

modified wordings.

Humphrey et al (1993) developed a mail survey with respondents as the chartered

accountants that are in practice, investment analyst, corporate finance director’s bank

lending officers and financial journalist. The mail survey mainly centered on audit

expectation issues such as the role of auditors, the prohibitions and regulations

imposed on auditors and the decision that the auditors are expected to make. His

findings of their study show that there exists the expectation gap in such functions of

the auditor that relates to his role in the detection of fraud, his responsibilities to third

parties, the intensify of continuing threats to auditors’ independence and the conduct

of auditors’ performance. Concerning the gap in the conduct of the auditors’

performance, the study found significant gap in the area of the auditor’s ability to

cope with risk and uncertainty and the nature of his performance on balance sheet

valuations.

In another perspective on the study of the audit expectation gap in the UK, Manson

and Zaman (2001) investigated the perception difference among three respondents

group that included the auditor’s the directors as the preparers of financial statement

and users of the financial statement. They found significant differences existing on

the reporting pattern of auditors on the company’s going concern status and the

auditors’ findings in relation to fraud and illegal acts. They also found that auditors

are reluctant to going beyond the present commitment in expressing audit opinion in

financial statement.

Dewing and Russel (2002) conducted a survey study with UK find mangers as the

primary stakeholders. The study included the definition of the term expectation gap,

and its constituents. It also covers the extent to which the expectation gap could be

narrowed by audit regulation. The study also concentrated on the auditor’s role as to

the existence of gap in respect of the auditor’s responsibility to going concern issues.

They found that there is the need for straitened auditor independence, extended audit

scope and responsibilities of the audits and greater independence in the monitoring of

auditors work and less restriction on auditors liability in disagreement. Therefore,

they suggested the establishment of an independent body that will control the audit

and institute disciplinary process in the audit process; however, they do not provide

the scope and coverage of the body.

In Australia, low (1980) took the sample of auditors and non-auditor group and

studied the extent of the auditors’ detection and disclosure responsibilities in relation

to error, irregularities and illegal acts. His findings reveal the existence of an

expectation gap in the perception of the auditors and non-auditor groups. These

findings are consistent with the findings of Beck (1974). Gay and Schellunch (2006)

investigated the wording changes in the standard audit report and the subsequent

revised standard increased user understanding of audits and the financial reporting

process. The study found that audit reports worded in the revised standard

significantly increased user’s understanding of the audit process, the auditor’s role,

the nature and limitations of financial reports. It was also found that there are lesser

impact with director’s responsibility for material errors and the basis of the audit

opinion. Monroe and Woodliff (1993) investigated the influence of education on

undergraduate students’ beliefs about the messages communicated through audit

reports. The study found evidence of an expectation gap between audit reports

preparers and undergraduate students with no auditing experience. It was concluded

that education has significantly affected the students’ beliefs.

Monroe and Woodliff (1994) took the sample auditors and financial statement users

such as the auditors, accountants, creditors shareholders and students in the business

area. In their survey, they investigated the roles played the auditors and what the

nature of audit should be. They found that apart from the expectation that auditors

should be responsible to detect fraud and illegal acts, auditors were also expected to

be responsible for preventing fraud and to indicate the degree of confidence that the

audit opinion expressed is correct. It was also found that auditors were expected to

take on an expanded role as the society’s corporate watchdog. This was consistent

with the findings of Kertherly et al (1991) that investigated vacuum that existed

between the auditor and the other respondents.

Schellunch (1996) considered the perception of auditors, company secretaries,

accountants and shareholder on long form audit reporting covering areas such as the

relative responsibilities of auditors and management and the reliability and decision

usefulness of the financial statement. His findings shows that there exist expectation

gap in the areas of responsibility and reliability of the statement, clarity of

communication of the extent of audit work performed and the credibility of the

profession. He also affirms that the expectation gap on long firm audit report appears

to be reducing since its start up.

Gay et al (1997) also surveyed the users’ perceptions of auditor’s responsibilities for

the prevention, detection and reporting of fraud and other irregularities such as illegal

acts and errors. These findings showed that users may have reasonable expectation of

auditors in respect of their duties in the area of prevention of fraud and the detection

of illegal acts. However, they also found the existence of deficient standard gap

existing in relation to immaterial fraud. The study further found that, certain

characteristics among the respondents eliminate the degree and intensity of the

expectation gap. Such characteristics include users who had considerable business

experience, and they are familiar with financial reports, had investments experience

and undertook auditing as a subject in their tertiary studies.

Schellunch and Gay (2006) considered auditors and other respondents as company

secretaries, accountants and shareholders. They investigated the implications of the

expectation gap on forecasting of financial information centering on statement

reliability, responsibilities of auditors and management and future prospects of the

entity. The findings of the report revealed that auditors perceived forecasts to be

more reliable and that auditors had a higher level of responsibility and accountability

than that perceived by the other respondents.

In New Zealand Porter (1993) carried out a research to determine the nature,

composition, and extent of the audit expectation gap. Porter sees the gap as it relates

to the duties of auditors, their performance standards and the duties that the auditors

ought to perform. The respondents used included auditors, auditing academics,

lawyers, financial journalists and members of the general public. The auditor used

mailed questionnaires. The findings of the study revealed that there exists audit

expectation gap and that the gap is as result of the following factors in different levels

of percentages. Deficiency in standard 50% unreasonable expectation auditors 34%,

and perceived substandard performance by auditors 16%, perceived substandard

performance by auditors 16%. Cameron (1993) also conducted a study on

relationship between public accountants and their small business clients. He restricted

his respondents to public accountants, small business and associated third parties such

as bankers, business consultants and enterprise agencies. The research tested the

concern as to auditors’ expected performance as against their actual performance.

The study found that their actual performance. The study found that there are high

expectation as to the auditor providing compliance services general business and

accounting related advise and above all show concern and enquire into clients’

financial health and problems. Therefore, it was concluded that the auditor has fallen

below expected performance.

In Egypt Dixon et al (2006), using a questionnaire method, with respondents as

auditor’s bankers and investors investigated the auditors’ responsibilities in the audit

of financial statement. They found that there was substantial evidence of an expected

gap especially on issues of the auditors’ responsibilities for fraud prevention and

detection, the auditor’s responsibility for maintenance of accounting records, exercise

of judgment in the selection of procedure, soundness of internal control and the

auditors’ and objectivity. Consistent with studies of Schellunch (1996), Best et al

(2001) and Fadzly and Ahmad (2004) they documented the reliability and usefulness

of the audit and audited financial statement.

In Saudi Arabia, Roszaini and Muhammad (2007) tested whether there is expectation

gap with cultural context in the kingdom specifically with the roles specified in the

statutory pronouncements and those roles that can reasonably be expected by the

auditors. They use both mailed survey questionnaire and semi-structured interview on

auditors, credit manager, financial analysts, shareholders, financial directors and

representative of government bodies. The findings of their study documented four

areas in the auditing environment that brought about performance gap licensing

policy, recruitment process, the political and legal structure and dominant societal

values. Furthermore, they found the influence of institutional and cultural settings as

contributing to the problem of the audit expectation gap. They therefore

recommended the inclusion of Islamic principles in auditing standards and code of

ethics is measures to reduce the expectation gap.

In South Africa, Stobie (1978), sampled the opinion of investment analysts, directors,

private and institutional investors, management consultants, financial editors, banks,

stockbrokers and public accountants on issues pertaining to audit functions and audits

reports. The research concluded that a expected gap do exist in the standards short-

form audit report as it is unacceptable due to its communicative deficiencies,

furthermore, the gap exist in terms of the inadequacy of information in the audit

report. Communication of the attest function insufficiency of the paper recommended

the support for an expansion of audit to new areas of coverage.

Gloeck and Jager (1993) sampled the opinion of two groups, the auditors and non-

auditors. They found expectation gap existing in the area of the independence of the

auditor especially as it relates to fraud and going concern issues and the compulsory

audit of small owner-managed companies.

In China, Lin and Chen (2004) conducted an investigation with mail questionnaire.

The respondents included audit beneficiaries such as investee, creditors, government

officials, business management and academics on the one hand and the public practice

on the other hand. The findings revealed that audits play vital role in improving the

Chinese economy thereby enhancing the truthfulness and reliability of financial

statements. However, the gap existed among the respondents in the areas of audit

objectives, auditor’s obligation to detect fraud, third party liability of auditors and the

impact of government sponsorship on the credibility of audit services, in an attempt to

find the reason for the gap, they documented that it existed because of the unique

institutional setting of auditing in the republic of china where auditing functions were

subjected to government intervention and were mainly employed for compliance

audit. Loung and Chau (2001) conducted a study to investigate the effect of the

expanded auditors’ report as a strategy in narrowing the audit expectation gap in

Hong Kong. They surveyed the auditors and banks through a draft questionnaire.

They found that the revised auditors’ report was able to achieve more consensuses

between the auditors and bankers. They also documented the existence of expectation

gain the area of technical details of an audit, the perceived usefulness of an audit and

audited financial statement. The report also shows high expectation in the area of

auditor’s duty to detect fraud and perform extensive audit related works by the banks.

In Singapore, low (1984) in his study of the expectation gap reported a significant

difference in the perception of the auditors responsibilities especially on areas

regarding the extent of assurance over fraud detection and reliabilities of information

presented in audited financial statements. Furthermore, low et al (1988) sampled

auditors and financial analyst as respondents in his study of the expectation gap as it

relates to the objectives of company audit. The two groups investigated were found to

have agreeing view that one of the primary objectives of audit was the traditional

expression of audit opinion on the financial statement. The respondents however,

shows divergence view as to the concerns of audit serving as a seal on the accuracy of

the financial accounts of the company. The report also shows that financial analysts

had higher demands of auditors in relation to auditor’s responsibilities with respect to

fraud detection and prevention as compared to those which auditors believed they

should posses.

Best et al (2001) employed the survey instrument questionnaire and tested the

difference in the views of users of audited financial reports and auditors perception of

their role. In an attempt to find ways of reducing the magnitude of the expectation

gap, they compared the outcome of their findings with that of low et al (1988) and

Schellunch (1996) on the issue of continued use of short term report produced by the

auditor. It was found that the short form audit report in Singapore exhibited wide

auditor expectation gaps in two areas that include the auditors’ responsibility in

preventing and detecting frauds and errors and errors and the auditors’ responsibility

in maintaining accounting records.

In Malaysia, Mohammed and Sori (2002) used mailed questionnaire with auditors,

clients as respondents, they also conducted interviews with auditors. The areas

covered in the research included the selection of auditors, level of satisfaction, client

intention to charge auditors, client expectation, client expectations on fraud and risk

issues and auditors responses. They found that audit expectation gap do exist in

Malaysia and a detail investigation of the root if the gap shows that it pertained to

uncertainties concerning the actual roles of the auditors, clients dissatisfaction with

auditors’ services and lack of independence and objectivity of audit firm.

Furthermore the issue of auditors been seen as guarantors of the accuracy of a

company’s financial statements and their role in the detection, discovery and reporting

of the transaction contained therein to authorities contributed to the expectation gap.

Fadzly and Ahmad (2004) surveyed auditors and major users of financial statements

comprising of the bankers, investors, and stockbrokers. Their study concentrated on

whether there exists unreasonable expectation among the groups surveyed. The study

found that an audit expectation gap exists in Malaysia particularly on issues

concerning auditors’ responsibility, more specifically the following areas were found

to record high expectation gap. Internal controls, accounting records, preparation of

financial statement and the auditor’s responsibilities for fraud detection and

prevention.

In India, Saha and Baruaj (2008) using questionnaire mailing survey with four groups

of respondents examine the audit expectation gap in the Indian environment. The

groups included in the respondents included the chartered accountants not in practice,

banks involved in corporate lending, financial officers and financial journalists. The

study cover such areas as the dependence of the users of financial statements on the

auditors and the auditing process, auditors role with respect to the audited company

financial reports, the responsibility of auditors responsibility of auditors to user group

financial statements and their attest function and the subjectivity of the audit firm to

the appropriate prohibitions and regulation of their audit practice. It is the findings of

the study that in between auditors in practice and other audit user groups there were

significant differences in their views and opinions as to the precise nature of auditing

and the very work that auditors performs. Therefore they concluded that audit

expectation gap do exist in India. Further analysis as to the reasons for the gap

revealed that areas such as the nature of balance sheet valuation, growing concern

assumptions or prediction of future, detection and prevention of fraud errors and

irregularities, reporting on material misstatement, auditor independence, auditors

ability to cope with risk and uncertainty, audit committees requirements and auditors

relationship with management.

Sutton (2002) suggest that the auditing profession has, in the past, taken the following

chronological approach to addressing expectation gaps

i. Deny the existence of deficiencies (as it relates to deficient standards)

ii. Entertain suggestions for improvements

iii. Agree to accept some proposed suggestions

A survey taken up by Lin (2004) in China with respect to audit objectives, auditor's

obligation to detect and reporting frauds and third party liability of auditors. The study

evidenced the emergence of the expectation gap in China and the majority of audit

independence by reducing governmental control or intervention and moving towards

self-regulation of the profession. This study has a limitation in the sense that it should

cast light on understanding of the institutional setting and updated development of

independent audits in China and may also serve as an annotation to the recent

accounting reform debates in the western world. This study investigated the views of

natural shareholders regarding the role of the effects on independence due to the audit

firm also providing non-audit services to their audit client. A total of 615

questionnaires were received with an overall response rate of 37.50 per cent.

Shareholders were asked whether they agreed that the independent audit enabled them

to rely on financial information of profits, dividend yield/payout ratios and

assets/liabilities. The responses of shareholders generally confirmed that the

independent audit was important in their use of financial accounting information.

Similarly, the reliability factors for the audit report of the independence of auditors

and audit firm reputation were tested. Both were believed to add credibility to the

auditors’ report.

Further discussion involved shareholder perception of audit independence in three

separate instances: audit firm receiving substantial consultancy fees; the auditor

holding shares in the audit client and the same auditor had been retained for over

seven years. Shareholder opinions revealed that auditor independence was perceived

to have been impaired by the substantial consultancy fees paid, but to a lesser extent

by share ownership. Long-term audit contracts were not perceived to impair auditor

independence. This study also refutes the idea that auditors could maintain their

independence when receiving substantial consultancy fees. Overall, the findings of

this research suggest that natural shareholders place a strong reliance on regulatory

matters such as the accounting standards and the corporation’s law for accounting

information.

Alleyne et al., (2006) investigated the appearance standard by empirically exploring

both auditors’ and users’ perceptions of auditor independence in Barbados. Firstly, the

study contributed to the existing body of knowledge in terms of providing a better

understanding of the nature of auditor independence in small developing countries.

Secondly, this study could inform policy makers, governments and professional

accounting bodies as to how auditor independence policies and frameworks could be

structured to ensure adequate regulation of the capital market. Thirdly, their study

would serve to educate users and auditors about the contextual factors surrounding the

role of auditor as well as the possible threats and enhancements factors affecting

auditor independence. The survey instrument was divided into two sections: section

one dealt with demographic factors and section two focused on 39 audit-related issues

categorized under a number of generic factors. The sampling respondents identified

comprised several groups such as auditors, financial directors, credit managers,

investment analysts, fund managers, shareholders and government departments. The

sample respondents comprised 66 auditors and 148 users. The findings of the study

revealed that economic dependence of auditor on the client, the provision of non audit

services, high competition, small firm size, being a sole practitioner, lengthy tenure

and the size and closeness of Barbadian society were found to negatively affect

perceptions.

In Hong Kong, Wa and Selva (1993) conducted the study using questionnaire survey

method. They investigated the perceptions of audit client firms on their external

auditors. The study finds significant differences in expectation with regards to

auditors’ duties and responsibilities between auditors and auditees in Hong Kong.

This shows that the auditees firm believes that the auditors are responsible for

detecting fraud and irregularities. Their perception is in abeyance to the fact that they

sign agreement letters with the external auditors and have ab-initio known that it is

not the responsibility of the external auditor to detect errors and irregularities as

enshrined in the engagement letter signed by the two parties.

In Nigeria, few studies attempted to document the problem of the expectation gap, for

instance, the study of chukwunedu (2009). The study presented the opinion of a small

number of the members of the institute of chartered accountants of Nigeria, to be

specific 162 accountants were examined. Unfortunately the study used a small size

number of the sample size, apart from the restriction of the sampled respondents to

only one part of the stakeholders on the problem. The study also used a weak tool for

the analysis of the data collected by employing percentages and chi-square. Okoye

and Okaro (2011) studied the accounting academics on the issue of whether the

injection of forensic accounting techniques, on a cost/benefit basis, in an audit is

capable of increasing the ability of the auditor to discover fraud and thus help in

bridging the audit expectation gap in Nigeria. Again the analysis in the study was

weak and restricted to only accounting academics. Finally, Adeyemi and Uadiale

(2011) attempted to investigate the audit expectation gap using Lagos state as the base

for the respondents. Apart from the restriction of the study to the Lagos state as the

base for the sample selection, the respondents used were very few and do not cover

the major stakeholders of the expectation gap. Furthermore, Adeyemi and

Olowookere (2011) using the same methodology and the restricted respondents in

Lagos examined the perception of a group of 250 respondents and restricted their

opinion to the auditors’ responsibility to fraud prevention and detection. They found

no generally accepted description of the auditor by the respondents that are basically

Lagos residents. Akinbuli (2010) provided an x-ray as to the literature on the problem

of expectation gap. The study centres on providing theoretical explanation of the term

and the implication of the problem of the expectation gap, such as the high rate of

litigation that awaits the audit profession and an alarming increase to the liability

against the auditor. The study finally recommended that the auditor improve his

performance to reduce the audit expectation gap.

Therefore, it is against this backdrop that this research work has been undertaken with

the aim of documenting whether or not the audit expectation gap exists in the

Nigerian society with the perception of diverse views of the various stakeholders in

the area of the audit expectation gap.

Conclusion

Conclusively, we can understand from the literature that the problem of audit

expectation gap is a phenomenon that has being widely recognized. Therefore, an

attempt to document the extent of its existence and the way forward for its correction

in Nigeria will be a welcome idea. The studies mostly use survey questionnaires to

identify the nature of the gap or where the gaps are; impacts of the gap; and how to

reduce the gap. Different respondents have been used in the literature to elicit their

opinion, for example, auditors, lawyers and judges (lowe, 1994), jurors (frank and

lowe 1994), investors (Epstein and gregor 1994), shareholders (beck 1994) various

groups (Humphrey 1993) chartered accountants, financial directors, investment

analyst, bankers and financial analyst. Furthermore, we tabulated the researchers

presented base on the country the studies were undertaken and those involved in the

researches.

There is the need for continued sensitization of the public, by both the auditing

profession and other stake holders on the role and duties of the auditor to avoid

unreasonable expectation by the public. The study found auditing education to be

highly correlated to reducing the expectation gap, as such; the course should be

expanded to all levels and across disciplines to have wider coverage. Attributed to the

expectation gap, is the issue of the content of the audit report. The tax authorities

could reduce the expectation gap by expanding the content of the audit report to have

an elongated audit report. A system of monitoring the performance of the auditors in

their audit work should be encouraged by the professional firms. Although there is

mandatory professional training and points are earned by the auditors and professional

members, there seems to be no enforcement or sanction on the part of the professional

bodies on those members that do not comply. There should be improved

communication and feedback system by the auditing profession on how the public

view its activities. Specifically, the communication between and within the auditing

environment will greatly assist in monitoring and reducing the possibilities of the

audit expectation gap created by the deficient performance audit. The professional

bodies can also monitor the reduction of the expectation gap through its licensing

procedures. As auditors apply for license to practice, the professional bodies could

ensure their competence and possibly organized a workshop for them to help explain

and educate them on gray areas and procedures in the audit that possibly have direct

impact and or cause the expectation gap. The shareholders association also has a role

to play in educating its members on the role of the auditor and the expectation and

coverage of the audit report. What the shareholders or investing public should expect

from the audit report and possibly its bounds on the extent of its reliability. The

judiciary also should be sensitized as to the role of the audit and the responsibility of

the auditor in terms of the coverage of his audit report and his liability to third party.

This will go a long way in reducing the gap created by the outcome of court cases on

the issue of the expectation gap between the public and the auditor. There should be

minimum standard on the charges that clients pay for audit; as this will help to control

the action of the auditor for accepting low rate that may result to deficient audit

performance.

Table 2: SUMMARY OF EMPIRICAL RESEARCH

1 USA Jakubowski et al (2002); Almer and Brody (2002); McEnroe

& Martens (2001); Frank et al (2001); Anderson & Wright

(1998); DeZoort & Lee (1998); Gramling et al (1996);

Epstein and Geiger (1994); Anderson et al (1993, 1998),

Jennings et al (1991); Frank et al (2001); Lowe and Party

(1993); Lowe (1994); Hetherly et al (1991); Baron et al

(1977); Libby (1979); Bailey et al (1983); Nair and

Rittenberg (1982); Miller et al (1990); Kelly and Mohrivers

(1989); Beattie et al (1988) &Holt and Moizer (1990)

2 UK Dewing and Russell (2002); Manson and Zaman (2001);

Porter and Gowthorpe (2004) and Humprey et al (1993);

Manson and Zaman (2001); and Deving and Russel (2002).

3 Australia Schelluch and Gay (2006); Deegan and Rankin (1999);

Schelluch (1996); Monroe and Woodliff (1994); Gay et al

(1997); Low (1980); Kertherly et al (1991); and Beck

(1974).

4 Saudi Arabia Haniffa and Hudaib (2007)

5 Lebanon Sidani (2007)

6 Egypt Dixon et al (2006)

7 India Saha and Baruah (2008); Sutton (2002)

8 Bangladesh Chowduey et al (2005)

9 China Lin and Chen (2004); Leung and Chau (2001); Lin (2004)

and Alleyner et al (2006)

10 Thailand Ongthammakul (2004)

11 Singapore Best et al (2001); Koh and Woo (2001)

12 Malaysia Fadzly and Ahmad (2004); Lee et al (2007); lee et al (2009)

13 South Africa Gloeck and De Jager (1993)

14 New Zealand Porter (1993); Humphrey et al (1993).

15 Hong kong Wa and Selva (1993)

16 Nigeria Adeyemi and Uadiale (2011); Akinbuli (2010); Okoye and

Okaro (2011) and Chukenedu (2009)

Source: Authors compilation

Table 3: Researches by Governmental Organizations

1 US Cohen Commission (1975). Statement of Issues: Scope and

Organization of the study Auditors’ Responsibilities.

Treadway commission (1978). Report of the national commission

on fraudulent financial reporting

2 Canada Adam committee (1978). Report of the special committee to

examine the role of the auditors

Macdonald commission (1978). Report of the commission to study

public’s expectations

3 UK The Institute of Chartered accountants in England and Wales

(1986). Report of the working party on the future of the audit

4 Australia The Australian society of certified practicing accountants and the

institute of chartered accountants in Australia. (1994) a research

study of financial reporting and auditing –bridging the expectation

gap

The institute of chartered accountants in Australia (2003). Financial

report audit. Meeting the market expectation

Source: Authors compilation

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