The Understanding Of The Financial Reporting Environment In Saudi Arabia Accounting Essay

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This study was designed mainly to enhance the understanding of the financial reporting environment in Saudi Arabia by determining whether the International Standards on Auditing are capable of overcoming the existing expectation gap.

Because of their explanations and illustrations of auditor responsibility, auditing standards are crucial to those who use accounting reports, including shareholders, creditors, and governments. The international auditing standards committee (1979) created auditing standards with the primary objective of providing guidelines to the profession. Another main purpose of forming international standards was to harmonize auditing in different countries, especially those that lack local standards (Abdel-Qader, 2006).

The Saudi Organization for Certified Public Accountants (SOCPA) has issued national auditing standards in the country. According to the Financial Standards Foundation Report on Saudi Arabia published in March 2010, SOCPA has declared aligning national standards to the international standards of auditing (ISAs) as one of its fundamental objectives. SOCPA compares national pronouncements with international requirements, such as the ISAs and US auditing standards in order to reduce differences where possible.

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In Saudi Arabia, users and the majority of the public often misunderstand the function of audits, leading to what is known as an expectation gap (Haniffa & Hudaib, 2007). This gap exists when auditors and the public hold different beliefs about auditors' duties and responsibilities as well as the messages conveyed by audit reports (Koh & Woo, 1998). There are two different types of gaps: reasonableness and performance (CICA, 1988; Porter, 1991). The former appears when society expects auditors to do more duties than what can be reasonably expected. The second exists when the auditors' accomplishment falls short of society's reasonable expectations (Porter et al., 2003).

According to Porter's (1993), an expectation gap appears due either to deficient standards or deficient performance. In Saudi Arabia the expectation gap emerged as a result of failure by auditors, the professional body (SOCPA), and the state were unable to meet society's expectations (Haniffa & Hudaib, 2007).

Therefore, this study's main objective is to enhance understanding of the financial reporting environment in Saudi Arabia. The study aims to determine whether the ISAs can overcome the expectation gap obstacle. Furthermore, this study seeks to remedy these problems by discovering the strengths and weaknesses of the ISAs.

Literature Review

Interpretations of international standards on auditing are needed in local contexts. Many have criticized the auditing profession's lack of such interpretations (Zaid, 1997; Al-Wabil, 1990; Abdel-Karim, 1990). Although auditors' responsibilities have been explained in audit reports, there is still a mismatch between what society expects and actual auditing requirements as set forth by the ISAs (Porter et al., 2008).

The common response to this problematic issue is to create more accounting and auditing standards and guidelines (Humphrey et al., 1993). However, Porter et al., point out that auditing standards need to include some duties that are not required of auditors in order to narrow the gap (2008). For example, users of audit reports' often ask auditors to prevent fraud and illegal acts; in contrast, auditors disagree that this service should be one of their responsibilities (Monroe & Woodliff, 1993; Humphrey et al, 1993).

Previous studies in the US (AICPA, 1978; Schelluch, 1996), Singapore (Best et al., 2001), and Egypt (Dixon et al, 2006) have confirmed the existence of an audit expectations gap, leading to wide debate about this gap. Humphrey et al. (1993) divided the debate as follows: auditors' role and responsibilities; the quality of the audit function; the profession's structure and regulation; and the nature of audit report messages. Monroe and Woodliff (1993) further explored the debate and added topics including auditors' responsibilities, reliability of the financial statements, and prospects of the audit entity. In addition, Schelluch (1996) and Best et al. (2001) add another issue to the debate: which the usefulness of audited financial statements to decision-making.

No research currently exists examining the focus of this study: the effects of using ISAs in Saudi Arabia to narrow the expectation gap.

Research Questions

Despite the fact that there have been actual steps undertaken to converge Saudi auditing standards with ISAs, insufficient information is available to the public. In addition, most previous literature discusses the expectation gap separately from the effects of using ISAs in Saudi Arabia. In other words, there is only a preliminary understanding of potential effects of using ISAs to reduce this expectation gap. Thus, this study attempts to call the attention of auditing scholars in Saudi Arabia to how applying ISAs affects the expectation gap. To achieve this objective, the following research questions are proposed:

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- What are the strengths and weaknesses of the International Standards on Auditing?

- Do the International Standards on Auditing provide any useful guidance for overcoming problems related to the expectation gap?

- If there is a gap between the perceptions of stakeholders and those of external auditors, how can we bridge it?