Introduction
Various auditing literature has described and demonstrated extensively the existence of an expectations gap created by the fact that society may have expectations of auditors that go beyond the responsibility required by the professional regulations and standards. Over the years the auditing profession has been the subject of misconceptions, one of these being that auditors can provide absolute assurance about the accuracy of a company's financial statements. Since the profession has become controversial over the past decade drawing out society's expectations of the role and duties of auditors is vital in taking steps to align these expectations with auditor performance, thereby improving the profession's image.
Expectations Gap
In order to critically discuss and analyse why the expectation gap has been, and continues to be an issue, it is important to start by examining the definitions and understanding the term "Expectations Gap" up to present. The issue revolving round the expectations gap debate relates to the different and inconsistent meanings attributed to the definition by users of financial statements, the public and the audit profession.
The first use of the phrase 'expectations gap' can be traced to the United States, where the phrase has until recently been given much more public prominence. In 1974, Liggio define the expectation gap as the difference between the actual and the expected performance. This definition is extended by the Cohen Commission's terms of reference on auditors responsibilities in 1978, where the expectation gap is represented by the gap between the public expectations and needs, and the expected accomplishment of the auditors.
Guy and Sullivan (1988), developed on the definition and realise there is a difference between what the public and financial statement users believe accountants and auditors are responsible for and what the accountants and auditors themselves believe they are responsible for. Other authors argued that it was the result of the inconsistencies in a self-regulated audit system operating with minimal government intervention as evidenced in Hopwood (1990); Humphrey (1991). In 1993 Jennings et al, Monroe and Woodliff, and AICPA in their study on the use of audit decision aids to improve auditor adherence to a 'standard', gave similar definition and are of the opinion that the audit expectations gap is the difference between what the public expects from the auditing profession and what the profession actually provides. Concerns over ambiguities in the role and responsibilities of auditors have led to the establishment of several government and professional investigations, which form an important part of the expectation gap literature. These include the Cohen Commission (1978); Metcalf Committee (1976); and Treadway Commission (1987); in the United States, the Cross Committee (1977); and Greenside Committee (1978); in the United Kingdom and the Adams Committee (1977) and MacDonald Commission (1988) in Canada. A common finding in all these investigations is that a gap between audit performance and expectations exists. There is no doubt that the expectations gap still persist because different authors have confirmed and reported the existence in the US, UK, Ireland, Australia, South Africa , Denmark, Singapore, Malaysia, China, Barbados, Egypt, Lebanon and Saudi Arabia, among others.
Problems Associated with Expectations Gap
The expectations gap has been classified by the profession as a problem caused by the public's misunderstanding of the audit function. A common explanation provided by the auditing profession for the existence of the audit expectations gap has been "that the investing public expects too much and remains largely ignorant as to the precise nature, purpose and capacities of the audit function" (Humphrey et al., 1993). The expectations gap continues to be one of major issues confronting the accountancy profession because users of corporate reports, investors, journalists, politicians and others expect auditors to detect and report material fraud and irregularities, amongst other things. The profession continues to argue that the public misunderstands the role of the auditor, and that fraud detection and reporting is not a major audit objective. Despite such divergence in views and beliefs, the profession appears to believe that the expectations gap can be eliminated.
Another reason why the gap remains an issue is that the greater the expectations gap, the lower the credibility of the profession which reduces the earning potential and prestige associated with profession.
The expectation gap is also an issue for the public, investors and politicians because, in a capitalist economy, the process of wealth creation and political stability depends heavily upon confidence in processes of accountability, of which an external audit of financial statements is considered to be an important part. More facts to prove it's an issue is that it has attracted many institutional interests around the globe as it is considered to be a threat to effective corporate governance and legitimacy of the institutions of auditing according to (American Institute of Certified Public Accountants,1978; Chartered Association of Certified Accountants, 1986a, 1986b; Canadian Institute of Chartered Accountants, 1988) (The Committee on the Financial Aspects of Corporate Governance, 1992) (Auditing Practices Board, 1992, 1994a).
What is also noticeable is that the major crises to have hit the audit profession, and the major investigations into the nature of the audit services market and its regulation have been closely related to the failure of auditors either to detect a number of major frauds or to provide an advance warning of an impending corporate collapse.
Previous Attempts to Narrow the Gap.
The responses of the auditing profession in the United Kingdom to the expectations gap can be seen to have two seemingly contrasting, but ultimately compatible, forms: a defensive response, stressing the misconceived nature of public expectations and perceptions regarding the role and performance of auditors; and a constructive response, seeking to convey a willingness to widen the scope of the audit. (Humphrey et al, 1992).
Using the education and reassurance approach to narrow the expectation gap, At one level, the profession has emphasized the "unreasonable" nature of the investing and general public's expectations of auditors. At another level, it has sought to reassure the public and regulators that, notwithstanding appearances to the contrary, all is well with the state of professional auditing and that notable failures do not mean any deterioration in the general level of audit quality and performance.
The implementation of auditing education has been suggested as a means of reducing the expectations gap but would not on its own be sufficient to solve the problem of all components of the expectations gap. Audit education has partly solved the problem of unreasonable expectations but not address deficient standards and substandard performance. Porter (1993) adds that in order for audit education to be effective, society should be educated on duties which may reasonably be expected of auditors. The MacDonald Commission expressed their opinion that audit education was unlikely to be effective in reducing the gap since it concluded that, public expectations were reasonable and achievable. Educating the Public in emphasising the need to be better educated as to the "true" responsibilities of auditors, much emphasis has been placed upon the manner in which the profession informs the public of its responsibilities and duties. In this respect, changes to the wording of the audit report, and the publication of a number of professional statements describing in general terms what auditors do, have both been favoured as ways of closing the expectations gap. Another measure adopted to close the gap is the Publication of professional auditing statements.
Acting creatively and accepting additional duties and responsibilities has also been a measure employed to narrow the gap, where the auditing profession puts itself forward as willing to accept additional duties and to consider the need for extending auditing to include areas not currently covered, e.g. reporting on interim financial statements and assessing aspects of financial management.
Further measures were taken to narrow the gap by reassuring the public, where the profession seeks to counter public concern over its performance by emphasizing that little, if anything, is wrong with the auditing profession and reaffirming its claim of best serving the public interest. Much of this response has seen the profession attempting to maintain the image of the auditor; to reassure financial statement users and regulators that, despite, perceptions to the contrary, auditors remain independent, and are not pressured or slaved to corporate management.
According to Sikka et al (2003), the nature of the components of the expectations gap make it difficult to eliminate. Perceived performance of auditors is an element which is difficult to measure and changes constantly. It is however possible to substantially reduce but not totally eliminate. He further argued that the expectations gap can be addressed by the audit profession widening the responsibilities of auditors.
Suggestions, Recommendations and Conclusion.
I believe in closing the gap, questionnaires should be given out and surveys conducted frequently to ensure that this role is one which is perceived by the greater part of users of financial information as that which constitutes the role of the auditor. Users of financial information should also be made aware that the fraud and error role is applicable to material misstatements. The role of the auditor in verifying financial statements and providing an opinion in relation to those statements is one which relies on too much judgment, is too subjective and creates greater possibilities of widening the expectations gap.
Examining various ways through which the individual components of the expectations gap could be reduced, i think one must address the substandard performance component, bringing back the fraud and detection role should help reduce this component.
Reasonable expectations of the public could be ascertained through education of the public about the role of the auditor and the auditing standards relating to his role. Public education about the auditor's role could be facilitated through annual shareholders' meetings and other events which are organised for the purposes of educating users of financial information, because it would be easier to educate users of financial information as opposed to members of the general public especially since not all members of the public use financial information.
In narrowing the expectation gap in the future I strongly believe and suggest reinforcing the monitoring of auditors' performance. For the clear reason that this measure has succeeded in the past and if this activity is continued and strengthened, through less leniency being granted where breaches of auditing or other professional standards are found, and more tough sanctions being imposed when substandard performance is faced. This I believe would close the gap substantially.
Moreover, improving the quality control in audit firms could also be a way to close the gap.
The monitoring of auditors' performance has helped to affect improved performance, but to ensure that all auditors perform their duties to a satisfactory standard on every audit; effective quality control systems within audit firms are needed. Enhancing the education of auditing practitioners may also be helpful in closing the gap, where further education, possibly through compulsory professional development sessions, be required of all existing, as well as trainee, auditors about their responsibilities under the law, regulations and professional rule, and also about the standard of work that is required.
In addition, introducing new auditing standards may reduce the gap if the auditing profession are willing to broaden its responsibilities through the issue of new or revised auditing standards to embrace these duties that can reasonably be expected of auditors.
However, it seems that the disposition of the profession to accept any extended responsibilities is hindered by concerns about the perceived potential increase in exposure to legal liability rather than encouraged by the potential benefits to be gained from better meeting society's expectations and be thereby enhancing the value of the audit function in society.
Educating society about the audit function and the work of the auditor has been use in the past and may still be employed to tackle one of the major problems of the gap caused by public ignorance. I suggest a more effective way might be to seek opportunities to educate influential journalists, formally and informally, about the audit function and the work of auditors. If they begin to understand the work of the profession better, they may report adverse events affecting auditors in a more informed and less sensational manner
