The negative implications of the Audit Expectation Gap

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The term 'audit' is derived from the Latin word 'audire', which means 'to hear' and auditor literally means 'hearer.' The adoption of this term was based on the role of audit function in the sense that the persons responsible for maintenance of accounts were expected to be an unbiased and experienced person, who used to "hear" the accounts prepared by others and express his/ her opinion about the correctness of the accounts.

According to Epstein and Geiger, 1994, a review of the evolution of audit objectives over the period 1840 to 1940 suggested that statement verification was the primary concern of auditors in relation to public companies in the period 1830 to 1860. In the early 1900s, more emphasis was placed on fraud detection, auditors were engaged to provide almost "absolute" assurance against fraud and intentional mismanagement. However, there was a shift from fraud detection to determining fairness in financial statement reporting due to burgeoning volume of business activity and the increased importance of corporate enterprises. At present, the audit philosophy focuses mainly on expressing a fairness opinion on the reliability of financial statements prepared with accordance to the approved accounting standard.

Although the profession has had a transition from the role of detecting fraud by verifying all transactions and amounts to determining truth and fairness in financial reporting, the high expectations among users remained unchanged. This effectively creates a gap between auditors' and users' expectations of the audit function. The audit expectation gap becomes a significant issue for the damage it could bring to the essence of the auditing profession: trust.

1.1 Definition of Audit Expectation Gap

The audit expectation gap has become a topic of considerable interest worldwide for research in the last thirty years. It is because of the occurrence of series of corporate failures, financial scandals and audit failures and their subsequent impact on the audit profession.

The audit expectation gap has a long and persistent history. Prior research on the existences of audit expectations gap evinces that the expectations gap between auditors and financial statement users has existed for the past 100 years although the term has been introduced to the auditing scene only during the last 20 years or so. The central issues incorporated within it are fraud detection, auditor independence, public interest reporting and the meaning of audit reports. (Humphrey et al., 1992).

The term 'expectation gap' is commonly used to describe the situation whereby a difference in expectation exists between a group with a certain expertise and a group, which relies upon that expertise. In another words, audit expectation gap is the difference between the levels of expected performance "as envisioned by the independent accountant and by the user of financial statements". This notion was first introduced by Liggio to the auditing profession in 1974.

The Cohen Commission (Commission on Auditors' Responsibilities, 1978) further extended this definition by adding that a gap may exist due to the difference between what the public expects or needs and what auditors can and should reasonably expect to accomplish. 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. Monroe and Woodliff (1993) asserted that the gap also relates to the varying interpretation of the messages conveyed by the audit report.

According to Porter (1993), the gap comprises two components: the "reasonableness gap" and the "performance gap". The reasonableness gap explains the expectation gap as the result of differences between what society expects auditors to achieve and what auditors can reasonably expect to accomplish. Conversely, the performance gap views the issue as the differences in the public's expectations of auditors and their perceptions of auditors' performance. The performance gap is further subdivided into :

i) "deficient standards" (i.e. the gap between the duties which can reasonably be

expected of auditors and auditors' existing duties as defined by the law and professional promulgation), and

ii) "deficient performance" (i.e. the gap between the expected standard of performance of auditors' existing duties and auditors' performance, as expected and perceived by society).

Other than that, a few researchers also attempt to define the audit expectations gap in general terms. For example, Jennings et al. (1993) defined the audit expectations gap as 'the differences between what the public expects from the auditing profession and what the auditing profession can actually provide. Humphrey (1997) defines it as 'a representation of the feeling that auditors are performing in a manner at variance with the beliefs and desires of those whose benefit the audit is carried out'. According to Humphrey (1997), this definition can be extended to include other issues such as the adequacy of auditing standards and the quality of audit delivery.

Generally, the audit expectations gap refers to the gap between what the users of the performance audit reports expect the auditors could and should achieve, and what auditors believe they could and should achieve.

1.2 Evolution of Audit Expectation Gap

The following studies bring out the nature of audit expectation gap prevailing in different countries of the world. Most of the studies ascertain the auditors' and the public's view of the roles and responsibilities of auditors through the use of questionnaire surveys.

The foundations for research in audit expectation gap were laid down in the seminal works of Lee (1970) and Beck (1974), who investigated the duties which auditors were expected to perform.

In the USA, Baron et al. (1977) examined the extent of auditors' detection responsibilities with respect to material errors, irregularities and illegal acts. They attempted to establish whether there are any differences in the perceptions regarding auditors' detection and disclosure duties between the auditors and users of accounting reports (financial analysts, bank loan officers and corporate financial managers). They found that auditors and users of accounting reports have significantly different beliefs and preferences on the extent of auditors' responsibilities for detecting and disclosing irregularities and illegal acts. In particular, users held auditors to be more responsible for detecting and disclosing irregularities and illegal acts than the auditors believed themselves to be.

In a similar context, Low (1980) examined the extent of auditors' detection and disclosure responsibilities concerning errors, irregularities and illegal acts as perceived by auditors and non-auditor groups in Australia. It was found that both groups differed significantly in their perceptions of the extent of auditors' detection and disclosure responsibilities, and that an expectation gap existed between the two groups. This finding is consistent with that of Beck (1974), who reported that shareholders had higher expectations of auditors than what most auditors would consider reasonable.

In Singapore, Low et al., (1988) examined the extent of the expectation gap between auditors and financial analysts on the objectives of a company audit. The results indicated that both groups perceived the traditional objective of the audit (i.e. expressing an opinion on financial statements) as one of the primary audit objectives. However, besides this objective, respondents possessed an array of beliefs as to what they considered as audit objectives. Financial analysts perceived an audit as setting a seal on the accuracy of the financial accounts of the company. Further their perceptions of fraud prevention and detection responsibilities of auditors are more demanding than those that the auditors believed they themselves should possess.

Gaa (1991) pointed out that the audit expectations gap was a direct result of the 'political game between two contending parties', between the public and the auditors. This view is supported by Sikka et al. (1998) in which they argued that historical and political contexts can give indication 'within which expectations are formed, frustrated and transformed. They contend that audit as a social practice is subjected to constantly shifting meanings because the social context of auditing changes continuously through interaction and negotiation. The conclusion from this perspective is that the audit expectations gap will continue to exist.

In the UK, Humphrey et al. (1993) examined the expectation gap by ascertaining the perceptions of individuals of audit expectations issues through the use of a questionnaire survey comprising a series of mini-cases. The issues investigated include the following:

1) What is and should be the role of the auditor?

2) What should be the prohibitions and regulations placed on audit firms?

3) What decisions could auditors is expected to make?

The respondents included chartered accountants in public practice, corporate finance directors, investment analysts, bank lending officers and financial journalists. The results confirmed that an audit expectation gap exists, specifically in areas such as the nature of the audit function and the perceived performance of auditors. The critical components of the expectation gap were found to include auditors' fraud detection role, the extent of auditors' responsibilities to third parties, the nature of balance sheet valuations, the strength of and continuing threats to auditors' independence, and aspects of the conduct of audit work (e.g. auditors' ability to cope with risk and uncertainty).

Epstein and Geiger (1994) conducted a survey of investors to gather information on various aspects of financial reporting issues, in particular on the level of assurance they believed auditors should provide with respect to error and fraud. The survey results suggested that investors seek very high levels of financial statement assurance and there exists an expectation gap between auditors and investors on the level of assurance an audit provides.

Hudaib (2002) conducted a survey on audit perception gap in Saudi Arabia. He conducted a survey using a combination of mail questionnaires and semi-structured interviews. He found that the ideology and legal structure in the Saudi environment significantly affect audit perceptions gap.

Fadzly and Ahmad (2004) examined perceptions on 'what auditors are doing' by comparing auditors' and users' perceptions in Malaysia. The study comprises of two parts. In the first part respondents' opinions and beliefs about audit functions were accumulated to find the evidence of expectation gap. In the second part a controlled experiment was used on investors to find the effect of reading material in the form of brochure on respondents' expectations. The brochure contained information about the audit functions and specifically addresses the issues that are susceptible to misconceptions among the users such as auditor's responsibilities to accounts and financial statements and internal control and fraud. The results indicated that after reading the brochure there were no significant differences in students' and auditors expectations.

Lin and Chen (2004) investigated the rise of expectation gap and related auditing issues under business and auditing environment in the People's Republic of China. The study obtained substantial evidences on the emergence of 'audit expectation gap' in China, with respect to audit objectives, auditor's obligation to detect and report fraud, auditor independence and third party liability of auditors.

The result revealed that there was an expectation gap with respect to objectives of auditing function, auditor's obligation to detect and reporting frauds or irregularities, and third-party liability of auditors and the impact of government sponsorship on the credibility of audit services.

The independent audit function would enhance the truthfulness and reliability of financial statements and play a positive role in the Chinese economy. Declining government controls in the economy, made independent audits provided by public accountants to have much more important in the Chinese economy.

Auditors and audit beneficiaries were dissatisfied with the present status of auditor independence in China. They concluded that much must be done to improve public accounting practices in China to bridge the expectation gap.

Dixon et al., (2006) investigated the expectation gap between auditors and financial statement users in Egypt through questionnaire. The survey participants of the study were auditors, bankers and investors (general public, financial analysts and brokers). The results revealed substantial evidence of the expectation gap in Egypt, particularly, in the relation to the level and nature of auditor's responsibilities. The expectation gap was found to be particularly wide on the issue of the auditor's responsibilities for fraud prevention and detection and the auditor's responsibility for maintenance of accounting records, exercise of judgment in the selection of audit procedures, soundness of internal control, and whether the auditor was unbiased and objective. To a lesser extent, an expectation gap was found concerning the reliability of audit and audited financial statements, and the usefulness of audit.

The above studies show that the evidence of an audit expectation gap is substantial and audit expectations gap consists of different components. The Canadian Institute of Chartered Accountants (CICA, 1988) also reported that the gap consists of three main components, which are: (1) unreasonable expectation by users (2) inadequate legislation, auditing and accounting standards and; (3) inadequate performance of auditors.

In short, general confusion over the role of auditors has existed to such an extent that it has been difficult even for the profession to reach agreement on the main purpose of company auditing and the message to be sent to the investing public. Thus, actions should be taken to educate the users of financial statement in order to reduce the expectation gap.

2.0 Current Issues and Issue Related in Malaysia

Nowadays, the existence of audit expectation gap has become the considerable interested topic in worldwide. Like the countries USA, United Kingdom, New Zealand and Singapore have conducted the research about this topic for last 30 years. It is because of the occurrence of series of audit failures, financial scandals and corporate failures in those countries. Besides this, it might affect the image of audit profession in those countries also.

Different countries have different view on nature of audit expectation gap. In USA, the researchers found that auditor and the users of financial reports have significant different beliefs on extent of auditor's responsibility for detecting and disclosing illegal and irregularities acts. Moreover, some of the researchers define that United Kingdom has significant different beliefs on the role of auditor to detect the fraud, the extent of auditor's responsibilities to third parties, the aspects of conduct the audit work, the nature of balance sheet valuations and the threats to auditor's independence. Besides, the researchers mention that the user of financial reports in Singapore has expected auditor need to further their perception of detection and prevention fraud responsibilities. As we can see, the different culture society has different view on nature of audit expectation gap. However, it is not a significant different view among those countries.

In Malaysia, there are some researchers provide the evidence of existence of a great gap and misconception on audit expectation, for example the research done by Mohamed and Zauwiyah (2004) and Ariff and Rosmaini (2005). Mohamed and Zauwiyah (2004) have gathered the evidence on significant different perception on issues concerning auditor's responsibilities. A wide gap was found about the auditor's responsibilities in prevention and detection fraud, preparation of accounting transactions and report, and internal control. There is evidence provided that the gap regards to auditor's scope of legal responsibility in a business failure that due to fraud. Moreover, there is an expectation gap between the users of accounting report (investor and broker) and auditor about the useful of audited financial report for performance monitoring purpose. It is mean that the investor and broker expect the auditor have to give more confidence in financial statements for evaluating investment prospects.

The auditing profession in Malaysia are under uncertainties which there are many issues and claims that auditor often fail to meet the public's expectations. The auditing profession had also been put under critical observation after a few corporate scandals such as Transmile, Megan Media and Sime Darby.

There are some recent researches about the audit expectation gap in Malaysia as there are many studies done but not in Asia. From a study that we looked into, it stated that the causes of audit expectation gap are quite complicated..

First reason that we concluded is unreasonable expectation. Generally, according to the study, it concluded that unreasonable expectation is due to misunderstanding of the auditor's role, having a wrong concept on audit objectives and also the users exaggerating the expectations on auditor's performance. From the report, we found that the most misunderstanding and misconceptions is on auditors' responsibilities on discovering fraud in the financial report. From the interviews done, they have this perception of auditor have to verify every single transaction and make sure it is free of error, some of them even could not understand why it is possible for the auditor of Transmile and Megan Media not to discover the irregularities. Such conceptions is totally contrast with the practice in Malaysia. According to the interviews with the auditor, they claimed that they face the problem of time constraints. Besides, they stated that in the auditing standards in Malaysia, it is not necessary for them to detect fraud. Besides, auditors also said that they are lack of technical skills to detect the fake of the documents issued as if the company had the intention to cheat, with the advanced technology, they can easily come out with a fake documents that are hardly been discovered and they will have prior illegal dealing with the parties involved. Besides, the auditor said that they have to be very careful in dealing with fraud as they do not want to jeorpandize their client, and involve in problem and affect the company. Therefore, without a real material proof of misstatements, they will not raise up any issue.

Generally , the auditors in Malaysia agreed that unreasonable expectations towards auditors can affect the profession as the public may not able to recognize the contribution if the auditors and even undermine the value of audit function. Public often view audit in common view while the auditor see it in technical view. Public often think that auditor have to prepare the accounts, check through all the transaction which is really unreasonable to auditors. Another reason claimed by most of the auditor who had been interviewed is the high expectations is also due to the public do not have to bear the cost and they expect auditor performs work which is not feasible with the cost. However, one good thing is, the arose of audit expectations gap at least showing that the community is concerned.

The second point of the reason arose of audit expectation gap in Malaysia after the research is the deficiency of the auditor. In our opinion, instead of keep blaming the public to have some unreasonable expectation on them, they should actually look back to what they can do and did not perform well to meet the reasonable audit expectations. Sometimes, the expectations gap happened because of both the misperceptions of auditors' performance as well as the actual under-performance by auditors.

By summarizing up the words from the interviewees, the auditors appointment process is one of the cause of the deficiencies. Sometimes, the management have to power to influence the auditor's engagement and this cause threats towards auditor independency. Auditor will be put under the pressure to fulfill the client in order can be reappoint. In Malaysia, the auditor have to be extra careful when audit a company that is politically linked to another companies. In Malaysia, politically linked companies often dominated the corporate section and this put the auditor in much more pressure.

The low audit fess is also one of the reasons of deficiency. Although there is a standard and guideline for audit fees by the Malaysian Institute of Accountant, many of the Certified Practiced Accountant firms do not practice it well due to the lack of enforcement. The audit field in Malaysia is competitive, therefore firms often offer a lower price in order to get clients. The implication of the low audit fees is the bad quality of the financial reports. To reduce the cost due to the low charge, auditors are likely to reduce the audit procedure because often the client may not able to know the audit quality performed. An example case in Malaysia of the low audit fees charged is the Transmile case.

Another claims by the auditors of the deficiency is the admission process if the MIA member. The admission somehow is more advantage to the local undergraduates . The local undergraduates do not have to obtain a professional paper before they apply as a MIA member after 3-5 years of experience while the oversea undergraduates have to obtain a professional paper and 3 to 5 years of experience before they can apply to MIA for their membership. The policy of the easy path for the admission as a MIA member of local undergraduates may brought negative impact on the audit quality because somehow a person without a professional paper cannot perform as much knowledge as a person with professional paper. This will somehow cause the low quality of a qualified accountant and directly decide whether the expectation gap can be reached or not. In other countries such as US and New Zealand, it is not common to recognize a professional accountant without a professional paper, So in our opinion, it is not the MIA being too strict to the oversea undergraduates, but is it treated the local undergraduates too flexible.

Another reason of deficiency is because the global competition of human capital. The auditing field in Malaysia faces difficulties in getting qualifies auditing personnel as a result of globalizations. Many countries out there can provide better pay and privileges than Malaysia firms can, therefore skilled people tend to leave Malaysia. Because of the lack of human capital, some people keep switching themselves among those CPA firms as every firms keep offering something better to attain as many people as possible especially those excellent personnel. All these will directly affect the efficiency of audit in Malaysia as we have not enough talented people and the turnover rate is high.

The third cause of audit expectation gap in Malaysia is the deficient legislations. To further elaborate this point, we would like to discuss it into two parts: (i) a time lag between the expanding public expectations and respond time of accounting profession, and (ii) improper standards in meeting public's expectations.

A deficient legislation is the gap between what auditors should do according to the legislations and what auditors should do according to the expectation from the public. As more accounting scandals unveiled nowadays, it is normal that the auditing professions try to react to fraud proactively, although it is not being required previously. ISA 240 "The Auditor's Responsibility to Consider Fraud in an Audit of Financial Statements" and ISA 315 "Understanding the Entity and Its Environment and Assessing the Risks of Material Misstatement" are the auditing standards issued in respond to the detection of fraud. When the auditing professions do so, the public expects them to react rapidly; meanwhile the process takes longer time than they may think of (See Figure 1).

Actions taken by auditors to respond to the fraud and the change in society's expectation are not at the same pace, causing the time lag as in Figure 1.

We can see some inappropriate Malaysian legislation in meeting the expectation of the public regarding auditing issues. As Malaysian Institute of Accountants (MIA) has not issued Malaysia Standards of Auditing (MSA), the auditors are merely following the requirements of International Standards on Auditing (ISA). Therefore, the scope of covering the fraud issues is not wide enough. In addition, Section 174(8A) appears to place more responsibilities to the auditors about the reporting of fraud matter to Registrar; in fact it has limited practical implications in real life, as they do not have specific legal responsibilities to report those matters. It is hardly for an auditor to complete a job that not under his/her job scopes.


Although Malaysian could have worse wide gaps of expectations between the users and auditors compare with other country like Singapore. However, Malaysian users somehow still believe that auditors are trustworthy.