investigation of expectation gap in egypt

Managerial Auditing JournalAn investigation of the expectation gap in EgyptR. Dixon A.D. Woodhead M. Sohliman

Article information:To cite this document:R. Dixon A.D. Woodhead M. Sohliman, (2006),"An investigation of the expectation gap in Egypt",Managerial Auditing Journal, Vol. 21 Iss 3 pp. 293 - 302Permanent link to this document:http://dx.doi.org/10.1108/02686900610653026

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An investigation of theexpectation gap in Egypt

R. Dixon and A.D. WoodheadDurham University Business School, Durham, UK, and

M. SohlimanArab Academy, Alexandria, Egypt

Abstract

Purpose Investors and financial statement users may have differing beliefs about theresponsibility of an independent accounting firm performing an audit of a clients financialstatements. This study aims to investigate the existence of an audit expectation gap between auditorsand financial statement users in Egypt.

Design/methodology/approach The research method adopted in this study is identical to thatused by Schelluch, Best et al. and Fadzly and Ahmed.

Findings The results found evidence of a wide audit expectation gap in Egypt in the areas ofauditor responsibilities for fraud prevention, maintenance of accounting records, and auditorjudgment in the selection of audit procedures. To a lesser extent, an expectation gap was foundconcerning the reliability of audit and audited financial statements, and the usefulness of audit.

Research limitations/implications The different economic and cultural conditions in Egyptmay restrict the generalisability of this study.

Practical implications In order to reduce the expectation gap and improve decision-making byfinancial statement users, the results of this study support the adoption of the long-form audit report,augmentation of the auditing framework, strengthening of the auditors integrity, and finallyeducating users on the nature and functions of audit.

Originality/value This paper contributes to the understanding of the diverse nature of theexpectations gap by examining the different economic and cultural setting of Egypt.

Keywords Auditing, Financial reporting, Expectation, Egypt

Paper type Research paper

IntroductionVarious studies have confirmed the existence of the audit expectation gap: Gay andSchelluch (1993) in Australia; Humphrey et al. (1993) in the UK; Frank et al. (2001) inthe US; and Best et al. (2001) in Singapore. The expectation gap was found to beparticularly wide on the issues of the auditors responsibilities for fraud prevention anddetection, and the auditors responsibilities for maintenance of accounting records andexercise of judgment in the selection of audit procedures (Best et al., 2001). It isimportant to understand which area the public has highest expectations. It has beenargued that in order to reduce the expectation gap, improvement in the wording of thereport will contribute to ensuring the level of assurance provided and the extent ofwork performed are clearly communicated (Gay et al., 1998). The quality andusefulness of an auditors report are consequently important topics to be explored.

The main objective of this study is to examine the existence of any expectation gapbetween auditor and users in Egypt. The expectation gap may arise through diverseperceptions of the role of auditors. Egypt is an important location for this study as it

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Investigation ofthe expectation

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Managerial Auditing JournalVol. 21 No. 3, 2006

pp. 293-302q Emerald Group Publishing Limited

0268-6902DOI 10.1108/02686900610653026

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has undergone significant levels of privatization which may well impact on theperception of the auditor. Egypt also has a different cultural background to prior workin this field.

The expectation gapOver the last two decades, the Anglo Saxon world has experienced a spate of corporatefailures, financial scandals and audit failures, which have placed the auditexpectations, gap debate firmly on the agenda of the accounting profession,regulators and the public (Dewing and Russell, 2002). There is widespread concernregarding the existence of an expectations gap between the auditing profession andthe public (Lowe, 1994; Koh and Woo, 1998). Prior research on the expectationsproblem is substantial. This is not surprising given that the expectations gap betweenauditors and financial statement users has existed for the past 100 years although theterm has been introduced to the auditing scene only during the last 20 years or so(Humphrey et al., 1993).

The definition of the expectations gap varies among researchers. The expectationsgap can be defined as:

. . . the difference between what the public and financial statement users believe auditors areresponsible for and what auditors themselves believe their responsibilities are (AICPA, 1992).

Monroe and Woodliff (1993) defined the audit expectations gap as the difference inbeliefs between auditors and the public about the duties and responsibilities assumedby auditors and the messages conveyed by audit reports. Jennings et al. (1993), in theirstudy on the use of audit decision aids to improve auditor adherence to a standard,are of the opinion that the audit expectations gap is the difference between what thepublic expects from the auditing profession and what the profession actually provides.Porter (1993) carried out an empirical study of the audit expectation-performance gapand defined the expectations gap as the gap between societys expectations of auditorsand auditors performance, as perceived by society. It is seen to comprise twocomponents:

(1) reasonableness gap (i.e. the gap between what society expects auditors toachieve and what the auditors can reasonably be expected to accomplish); and

(2) performance gap (i.e. the gap between what society can reasonably expectauditors to accomplish and what auditors are perceived to achieve).

The performance gap is further subdivided into deficient standards, i.e. the gapbetween the duties which can reasonably be expected of auditors and auditors existingduties as defined by the law and professional promulgation, and deficientperformance, i.e. the gap between the expected standard of performance ofauditors existing duties and auditors performance, as expected and perceived bysociety.

Porter (1993) conducted an empirical study in New Zealand to test the postulatedstructure of the audit expectation-performance gap and to establish the compositionand extent of the gap and its constituent parts. Using a mail survey, Porter ascertainedthe opinions of interested groups (auditors, officers of public companies, financialanalysts, auditing academics, lawyers, financial journalists and members of thegeneral public) regarding auditors existing duties, the standard of performance of

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these duties, and the duties that auditors should perform. The findings from the surveyrevealed that 50 per cent of the gap is attributable to deficient standards, 34 per centfrom society holding unreasonable expectations of auditors, and 16 per cent fromperceived sub-standard performance by auditors.

Humphrey et al. (1993) provide an introduction to the expectations gap literatureand provides a general definition. He defined the expectations gap as:

. . . a representation of the feeling that auditors are performing in a manner at variance withthe beliefs and desires of those for whose benefit the audit is carried out.

He also notes that the expectations gap can be defined more narrowly as arole-perception gap, that is, the expectations of users are capable of comparison witha predetermined notion of what is reasonable to expect auditors to provide. In turn thisleads to the idea of an ignorance gap, that is, the expectations gap can be closed (or atleast narrowed) by the education of users. Conversely, Humphrey notes that thedefinition can be broadened to embrace wider issues such as the adequacy of auditingstandards and the quality of audit delivery.

The expectations gap exists when auditors and the public hold different beliefsabout the auditors duties and responsibilities and the messages conveyed by auditreports (Wollf et al., 1999; Koh and Woo, 1998; Frank et al., 2001). According to Godsell(1992):

. . . there is a widespread belief that a person who has any interest in a company(shareholders, potential investors, take-over bidders, creditors, etc.) should be able to rely onits audited accounts as a guarantee of its solvency, propriety and business viability. Hence, ifit transpires, without any warning that the company is in serious financial difficulty, it iswidely felt that somebody should be made accountable for these financial disasters, and thissomebody is always perceived to be the auditors.

These misperceptions of the public feed the legal liability crisis facing the accountingprofession (Maccarrone, 1993). The accounting profession argues that one cause of theexpectations gap is the publics failure to appreciate the nature and limitations of anaudit (Frank et al., 2001). That is, the public in general has come to view audits asguarantees of the integrity of financial statements and as an insurance policy againstfraud and illegal acts (Epstein and Geiger, 1994). Also, Kelly and Mohrweis (1989)explained that the expectations gap has been most conspicuous in legal decisions.Judicial litigants often appear to apply, as a standard, the concept that an audit is acomprehensive check on a corporations financial activities. A business failure is ofteninterpreted to be an audit failure, regardless of the level of procedures and testsperformed by the auditor. Auditors can perform their audits in strict accordance withgenerally accepted auditing standards and still be found negligent in not preventingrisks to financial statement users (Almer and Brody, 2002).

Prior researchEmpirical studies confirm the existence of an expectations gap, specifically in areassuch as the nature of the audit function, the perceived performance of auditors, theauditors duties and role, the independence of auditors, and the non-audit services.For example, Epstein and Geiger (1994) conducted a survey of investors to gatherinformation on various aspects of financial reporting issues, in particular on the level ofassurance they believed auditors should provide with respect to error and fraud.


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The survey results suggested that investors seek very high levels of financialstatement assurance and there exists an expectations gap between auditors andinvestors on the level of assurance an audit provides.

In the UK, Humphrey et al. (1993) examined the expectations gap by ascertainingthe perceptions of individuals of audit issues through the use of a questionnaire surveycomprising a series of mini-cases. The respondents included chartered accountants inpublic practice, corporate finance directors, investment analysts, bank lending officersand financial journalists. The survey revealed a significant difference between auditorsand respondents (representing some of the main participants in the company financialreporting process) in their views on the nature of auditing. The results confirmed thatan audit expectations gap exists, specifically in areas such as the nature of the auditfunction and the perceived performance of auditors.

Schelluch (1996) found that the expectations gap detected in prior research studiesdealing with auditor responsibilities appeared to be reduced over time with theintroduction of the long-form audit report. Differences in beliefs between auditorsand users (company secretaries and shareholders) appeared to be reduced inareas specifically addressed in the wording of the expanded report. However, theexpectations gap continued to exist after the introduction of the long-form audit report inrelation to financial statement reliability. This finding appears to indicate continueddifficulties being experienced by users in understanding audited financial statements. Thestudy also appeared to indicate that users were generally unhappy with the role played bythe auditing profession particularly with respect to auditor independence and the level ofvalue (i.e. credibility) added to the financial statements from the auditing process.

Research methodThe research method used in this study is almost identical to that used in Schelluch (1996),Best et al. (2001) and Fadzly and Ahmed (2004). Schelluch (1996) developed a semanticdifferential instrument to measure the messages communicated through audit reports.Best et al. (2001) used the same approach in measuring the expectation gap in Singapore.Fadzly and Ahmed (2004) used the same instrument as Schelluch and Best et al., withminor modifications, in measuring the expectation gap in Malaysia. In this study, in orderto measure the expectation gap in Egypt, the same semantic differential belief statementswere used with some modifications. Questionnaire techniques have been adopted incollecting primary data process as it provides an efficient way of collecting responses froma large sample size. The questionnaire has been designed to ensure that the precise datarequired would be collected from respondents to achieve the objectives of this study.

The original construction of the questionnaire was retained so that each pair ofstatements is evaluated using a seven-point Likert scale. Participants were asked tochoose a number from the scale that identified their level of agreement to either one of thestatements. The questionnaire is divided into two sections. The first section collecteddemographic data related to participants qualification, experience, and occupation. Thesecond section contained 16 semantic differential belief statements. As in the Best et al.(2001) and Fadzly and Ahmed (2004) studies, three factors were measured by these beliefstatements: responsibility, reliability, and decision usefulness. Statements 1-7 related toauditors responsibilities, statements 8-13 related to the reliability of audit and auditedfinancial statements, and statements 14-16 related to usefulness of audited financialstatements.

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ParticipantsIn this study, survey participants were broken into three groups: auditors, bankers, andinvestors. As in the Best et al. (2001) study, participants in the groups auditors and bankerswere selected using systematic random sampling from appropriate categories of theEgyptian business listed telephone directory. The group investors included the generalpublic, financial analysts, and brokers. Participants in this group were selected usingsystematic random sampling from the Egyptian alphabetic telephone directory for thegeneral public participants, and from appropriate categories of the Egyptian businesslisted telephone directory for financial analysts and stockbroker participants. Theseparties were grouped together as proxies for investors. The participants consisted of 100participants from each of the three groups: auditors, bankers and investors. All participantswere given the survey questionnaire, a cover letter, and a prepaid return envelope.

ResultsAt the end of the data collection period, response rates from these groups and otherdemographic details are shown in Table I.

The results from Table I indicate that an overall response rate of 37 per cent wasreceived from the participants, which is a creditable result for this type of data collectionmethod. The qualifications and experience of the respondents in relation to accountingappear high. These levels of experience appear to indicate that the respondent groups arevery informed about the uses of financial statements and the auditing process per se andthus any measure of the expectation gap taken from this study should be considered to bestronger and more reliable than if respondents were largely inexperienced with regard tothese issues. The investors group shows low results with five investors from 33 havingexperience in accounting. These findings reflected the nature of the investors in Egypt.

The results from Table II show that occupational experience of respondents wasquite widespread with about 74 per cent of the respondents possessing more than fiveyears experience in their occupation. Table II provides evidence of the fact thatrespondents to the survey had considerable experience in their areas of expertise andtherefore should provide experienced judgments on the issues in the survey. Noevidence was found of any non-response bias for respondents within the same group.

Following the method utilised in Schelluch (1996), Best et al. (2001) and Fadzly andAhmed (2004), any significant difference detected in mean test scores between auditorand non-auditor groups (bankers and investors) indicates the potential existence of theexpectation gap. Tables III-V measure the level and nature of the expectation gap inEgypt by providing details of the mean responses for each of the respondent groupsboth within groups and across groups and by detailing the results of theMann-Whitney U-test for significant differences between the three respondent

Response receivedAccountingexperience

Accountingqualification

Group Survey sent n Per cent Yes No Yes No

Auditors 100 45 45 45 0 45 0Bankers 100 34 34 32 2 20 14Investors 100 33 33 5 28 4 29Total 300 112 37 82 30 69 43

Table I.Response rates and

demographic details ofparticipants


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groups. The results of these tests indicated that, the distribution of data in the majoritycases was not normal, as indicated in the Kolmogorov-Smirnov test. Where significantdifferences were found between the three groups within these tables of results, it maybe claimed that an audit expectation gap exists in Egypt and the extent of this gapdepends on the magnitude of these differences.

1-5 years 6-10 years 11-15 years Over 15 yearsGroup n Per cent n Per cent n Per cent n Per cent

Auditors (n 45) 9 20 18 40 10 22.2 8 17.8Bankers (n 34) 8 23.5 15 44.1 7 20.5 4 11.9Investors (n 33) 12 36.4 16 48.4 3 9 2 6.2Total (n 112) 29 25.9 49 43.7 20 17.8 14 12.6

Table II.Occupational experienceof responses

Mean responsesStatements Auditors Bankers Investors Across groups

1. The auditor is responsible for detecting all fraud 3.56 2.29 * 2.09 * 2.532. The auditor is responsible for the internal control

structure in the entity 4.04 2.24 * 2.06 * 3.203. The auditor is responsible for maintaining

accounting records 4.51 4.18 * 3.33 * 4.064. Management has responsibility for producing the

financial statements 2.76 3.12 4.39 3.355. The auditor is not responsible for preventing fraud 4.44 5.35 * 5.39 * 4.716. The auditor is unbiased and objective 1.00 2.35 * 4.61 * 2.177. The auditor does exercise judgment in the

selection of audit procedures 1.11 2.53 * 4.06 * 2.37

Note: *Significantly different from auditors at p # 0.05

Table III.Comparative meanresponse responsibilitystatements


8. Users can have absolute assurance that thefinancial statements contain no materialmisstatements 2.24 2.71 * 3.64 * 2.49

9. The auditor does not agree with the accountingpolicies used in the financial statements 1.35 4.29 * 3.42 * 2.93

10. The extent of assurances given by the auditor isclearly indicated 1.78 2.24 3.64 2.46

11. The financial statements give a true and fair view 1.78 2.35 * 4.42 * 2.7312. The entity is free from fraud 4.27 3.29 * 3.67 * 3.7913. The extent of audit work performed is clearly

communicated 2.53 2.24 3.64 2.77


Table IV.Comparative meanresponse reliabilitystatements

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Auditors responsibilitiesSeven statements on responsibility address the issues of fraud detection andprevention, internal control, scope of auditors legal responsibility, financial statementpreparation, auditors objectivity, and audit procedures. The results in Table IIIindicate significant differences in all responsibility areas except for financial statementpreparation (statement 4), where all three groups were in agreement and had strongbeliefs that management has responsibility for producing financial statements.

The results indicate that auditors believe they have little responsibility for frauddetection and prevention (statements 1 and 5), whilst bankers and investors appearedto place significant responsibility on auditors for these tasks. This would appear to bethe area of greatest gap in expectations in Egypt. The results of this study agree withthe findings of Best et al. (2001), Schelluch (1996) and Fadzly and Ahmed (2004)concerning previous evidence of the existence of an expectation gap with regard toauditors responsibility for fraud prevention and detection. The results in Table IIIindicate that an audit expectation gap was detected between auditors and users(bankers and investors) regarding the auditors responsibility for the soundness of theinternal controls of the entity (statement 2). This conforms to the findings of Best et al.(2001) and Fadzly and Ahmed (2004), where investors in Singapore and Malaysia werealso found to believe that auditors are responsible for ensuring sound internal controlin the audited entity. As indicated by Schelluch (1996), this could be reduced by the useof improved audit report wording.

The results also indicate that auditors believe management is responsible formaintenance of accounting records, whereas users (bankers and investors) appear toattribute some responsibility for this issue (statement 3) to auditors. Also, auditorsbelieve they should exercise considerable judgment in the selection of audit procedures(statement 7), but users appear to indicate that some of this judgment should begiven to management. An audit expectation gap was also detected between auditorsand users regarding whether the auditor is unbiased and objective (statement 6).The results of Schelluch (1996) indicate that the adoption of the long-form audit reportin Australia assisted in reducing the audit expectation gap on all of these issues withthe exception of the auditors responsibility for fraud prevention.

Reliability of audit and audited financial statementsStatements on reliability deal with issues of the extent of assurance provided by audit,accounting policies, audited financial statements being true and fair, fraud within theaudited entity, and audit reports effectiveness in communicating the extent of auditwork performed. Table IV provides details of the results of the mean responses


14. The audited financial statements are not useful inmonitoring the performance of the entity 5.96 5.35 * 4.42 * 5.32

15. The audited financial statements are not usefulfor making decisions 6.49 5.59 * 4.76 5.71

16. The entity is well managed 1.78 2.24 3.64 2.46


Table V.Comparative mean

response decisionusefulness statements


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concerning six reliability statements associated with the use of audited financialstatements.

In this table, no evidence was found of an expectation gap existing in Egypt (i.e. nosignificant differences between the groups) concerning the extent of assurances givenby the auditor (statement 10) and the clear communication of the extent of audit work(statement 13). However, evidence of an expectation gap appeared between auditorsand users (bankers and investors) concerning the level of assurance that financialstatements contain no material misstatements (statements 8). Also, the results inTable IV indicate that evidence of an expectation gap appeared between auditors andusers regarding the auditors agreement with the entitys accounting policies(statement 9). These finding are contrary to the findings of Best et al. (2001), as theyfound that a potential audit expectation gap existed on the issue of assurance andcommunication of the extent of audit work. However, Schelluch (1996) found thatrespondent groups were in agreement on the issue of accounting policies and extent ofassurances. Also, the results in Table IV indicate that evidence of an expectation gapappeared between auditors and users regarding whether financial statements give atrue and faire view (statement 11). This finding is contrary to the findings of Schelluch(1996) who found a significant difference between auditors and investors concerningthis issue. This result may reflect some potential disillusionment with financialstatements in Egypt.

Table IV indicates that auditors had significantly higher beliefs than users withregard to whether the entity is free from fraud (statement 12). This conforms to thefindings of Schelluch (1996), Best et al. (2001) and Fadzly and Ahmed (2004) regardingthis issue. The difference, however, may not raise a concern over the adverse effect ofthe expectation gap, as it shows users willingness to accept the fact that an audit maynot provide a guarantee against fraud (Fadzly and Ahmed, 2004). Also, this findingsupports the existence of an expectation gap in Egypt concerning the issue of fraud asindicated by the finding for statements 1 and 5 in Table I.

Usefulness of audited financial statementsThree statements on usefulness pertain to the use of audited financial statements indecision-making, performance monitoring, and assessing whether the entity is wellmanaged. Table V provides details of the results of the mean responses concerningthese issues.

The results in the table indicate that no evidence of an expectation gap was foundon the entity being well managed (statement 16). At the same time, evidence of anexpectation gap appeared between auditors and users (bankers and investors)concerning whether the audited financial statements are not useful in monitoring theperformance of the entity (statement 14). This finding is contrary to the findings ofBest et al. (2001) and Fadzly and Ahmed (2004) and reinforces the potentialdisillusionment with financial statements in Egypt. Related to the issue of whetheraudited financial reports are not useful for making decisions (statement 15), Table Vindicates that a significant difference exists between auditors and bankers. The higherlevel of agreement among bankers could indicate their high reliance on the auditorsopinion for credit decisions. This agrees with the findings of the studies by Schelluch(1996) and Fadzly and Ahmed (2004).

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ConclusionThe objectives of this study were to verify the existence of the audit expectation gap inEgypt as well as to compare the extent of the gap to the findings of the similar priorstudies. Consistent with the findings of Best et al. (2001) and Fadzly and Ahmed (2004),the results revealed substantial evidence of the expectation gap in Egypt particularlyin the relation to the level and nature of auditors responsibilities. The expectation gapwas found to be particularly wide on the issue of the auditors responsibilities for fraudprevention and detection and the auditors responsibility for maintenance ofaccounting records, exercise of judgment in the selection of audit procedures,soundness of internal control, and whether the auditor is unbiased and objective. To alesser extent, an expectation gap was found concerning the reliability of audit andaudited financial statements, and the usefulness of audit.

The findings indicate serious concerns for the accounting and auditing profession inEgypt. Fadzly and Ahmed (2004) explained that the existence of the expectation gapmay eventually lead to a severely tarnished reputation and negative perception of thevalue of independent audit. Prior studies have suggested solutions for reducing ornarrowing the expectation gap such as improvement of auditor-user communication(through audit reports), augmentation of the auditing framework, strengthening of theauditors integrity, and further educating users on the nature and functions of audit.

LimitationThis study suffers from several limitations. The scope of the study was limited to only300 potential respondents. The survey instrument used in this study was almostidentical to that developed by Schelluch (1996) in Australia, Best et al. (2001) inSingapore, and Fadzly and Ahmed (2004) in Malaysia. Egypt is an Arabic-speakingcountry with different economic and education conditions, so there is a risk that theremay be significant culture differences between these countries and Egypt.Accordingly, these limitations may limit the generalisability of the results.

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Wollf, F.M., James, A.T. and Gregory, A. (1999), Audit disaster futures: antidotes for theexpectation gap, Managerial Auditing Journal, Vol. 14 No. 9, pp. 468-78.

Further reading

Fadzly, M.N. and Ahmed, Z. (2003), The perceived value of financial statements audit,Proceeding of the International Conference on Quality Financial Reporting and CorporateGovernance, Kuala Lumpur, Malaysia.

Monroe, G.S. and Woodliff, D. (1994), An empirical investigation of the audit expectation gap:Australian evidence, Accounting and Finance, Vol. 34, pp. 47-74.

Corresponding authorR. Dixon can be contacted at: [email protected]

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investigation of expectation gap in egypt

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