In recent years, the auditing profession has been involuntary place in the spotlight due to the existence of most extraordinary scandals in history such as the case of Enron, World.Com and Tyco in United States (US), Parmalat in Italy, Transmile and Megan Media in Malaysia. Due to this, there is wide concern on the existence of expectation gap. The expectation gap exists when auditors and the public hold different beliefs about the auditors duties and responsibilities and the messages conveyed by audit reports. (Hian and E-Sah, 1998)
Generally, the actual role of the external auditor is to examine the financial statements as in transactions to ensure financial reports is true and fair view complying to the auditing standards and code of ethics. Besides that, external auditors has to plan and report in consistent with quality control to enable audit is complete and reasonably assured. (Pickett and Pickett, 2005)The auditors claimed that whenever a financial scandal strikes the Malaysian news headlines, the public perceives the auditors as having not performed their work diligently. This is because the public does not have the necessary knowledge, ability or even desire to assess the quality of an audit. (Teck et al, 2009)[online]
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There are many factors pertaining to the misinterpretations of the public towards the auditing profession as a whole. One of the causes of this unreasonable expectancy gap is due to the misconception of the audit report. There are various interpretations toward the messages in audit report which led to term called "reasonableness gap" and "performance gap"- Appendix A. (Mohamed and Ahmad, 2004) [online] Less significant than the expanded audit report, business crises also leads to new expectations and requirements of accountability. Such changes in expectations and requirements will in turn lead to new demands on the audit function and eventually to changes in auditing standards and practice. (Teck et al, 2009)[online]
Impacts of Audit Expectation Gap
The most noticeable effort taken by the auditing profession so far is the revision on the wordings of the audit report. (Mohamed and Ahmad, 2004) [online] Whilst the new audit report was found to be effective in reducing some areas of the gap and improving users' decision-making process, a survey was conducted in Singapore and Australia where there were also concerns over the increase of the gap areas pertaining to fraud detection and prevention as well as reliability of information presented in audited statements. (Mohamed and Ahmad, 2004) [online] Not surprisingly, key stakeholders appealed for a more user-friendly product because the existing audit report was not sufficient and effective enough for the modern business densities. (Abdullah, 2010)
Another positive impact towards the gap between the auditors and the public is the issue on the quality control of audit. The Malaysia Institute of Accountants (MIA) issues standards on quality control for audit as well as the Malaysian Approved Standards on Auditing which are adopted from international quality control and auditing standards issued by the International Federation of Accountants (IFAC). These quality control and auditing standards are required to be complying with approved company auditors who are all members of the MIA when carrying out audits on financial statements of companies of other entities. To further enhance the quality of audits in Malaysia, the MIA in 2002 initiated a quality assurance programme for audit firms through the process of Practice Review. The process involves mandatory inspection of audit firm's practices in carrying out audit work, in order to assess due compliance with quality control, auditing and ethical standards and to monitor the quality of audits of financial statement carried out by company auditors. (Accountants Today, 2006) [online]
Generally, through existence of publics' perceptions, it can be observed that since the fall of giant corporations such as Enron and WorldCom, auditing standards have been revamped to re-emphasise the auditors' responsibilities to detect fraud. (Teck et al, 2009)[online] An audit professor also remarked that one of the ways is to issue new auditing standards which require more to be done by the auditors. For instance, The International Auditing and Assurance Standards Board (IAASB) Clarity Project was launched to encourage greater use of its standards and facilitate the process of translation of these into other languages. (Jones, 2010) [online] An additional auditing standard revamp will be the International Standard on Auditing, (ISA) 200 that requires auditors to maintain an attitude of professional scepticism. (Jones, 2010) [online] Besides that, the problem of perceived deficient standards is indeed natural as it evolves discipline alterations for auditing profession according to society's expectations and these expectations are not static. As a result, perceived deficient standards will exist at all times for a good change. (Teck et al, 2009)[online]
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In Malaysia, a great deal of attention has also been paid to improve the quality of audit and thus financial statements with the aim of enhancing corporate and market reputation. The establishment of the Audit Oversight Board (AOB) in the year 2010 was a clear signal that the watchdogs intend to upgrade audit quality. (Jennifer Lopez,2010) [online] They collaborated with local supervisory bodies for example National Bank, Companies Commission of Malaysia (CCM), Malaysia Institute of Accountants (MIA) and other self-regulating boards from additional countries such as United States, Britain, Australia as well as Singapore to safeguard rewarding implementation of a dynamic and independent audit oversight framework. Eventually, this board has carried out inspections to ensure audit firms comply with International Standards on Quality Control and engagement reviews. Further, the AOB appealed their task is to safeguard auditors of Public Interest Entities (PIEs) apply audit finest practices. Besides that, AOB also list members, sanctions and standard setting. (Yap, 2010) [online]
Despite the unreasonable expectations issues evolved, there is still insistence that the value of audit is still requisite besides recognising that auditors could have been able to give warnings ahead of the financial crisis. Michael Izza, the chief executive of the Chartered Accountants of England and Wales agreed that the value of audit today's modern capital market is still very vital. (Sanderson, 2010) [online] Though, the ACCA Council member as well as the director of national accounting and audit of Deloitte UK questioned the necessity of audit. (Abdullah, 2010) Witnessing the case of Parmalat, if it was not for a stipulation in Italian law that requires companies to rotate auditors every nine years, the financial oversight would not have been detected. The newly appointed auditors Deloitte & Touche questioned the gaps in Parmalat's accounts. (New Straits Times, 2010)
Another approach that has impact the value of the external auditors is widening and ongoing professional education. The Malaysian Institute of Accountants through its By-Law on Continuing Professional Education (CPE) has always prioritized the need for accountants, when delivering professional services, to do with appropriate regard for the technical and professional standards anticipated as an associate of the Institute in consistent with international standards. (Shah, 2007) [online] In addition, in order to further enhance the value of auditors in conjunction to decrease the level of expectation gap is to provide a free professional development programme in regular basis to its existing members to ensure continuing competency of auditors in Malaysia as well to equip them with an understanding of the latest developments in the accounting and auditing world. (Teck et al, 2009)[online]
The auditors believed that the unreasonable expectations may have further harmful implications for the audit profession as the public may no longer be able to recognise the positive contribution of auditors to society, and this may further undermine the value of the audit function. This is because the duties unreasonably expected of auditors do not justify their efforts, particularly as such duties may not be profitable to auditors. Therefore, attention should be given to the duties that can reasonably be expected of auditors. (Teck et al, 2009)[online]
However, some auditors opined that unreasonable expectations cannot be totally eliminated from public perception because the public is not paying for the audit function. (Teck et al, 2009)[online] Auditors gripe that they are undervalued and clients gripe that auditors overprice their services. The result of this is that auditors may be wary of doing so much because they cannot afford it. (Gomes, 2010) [online] The key remark here is to pay what the auditors are worth in order to preserve their independence. The value of an audit opinion rests on the independence of the auditor. In the Malaysian milieu, audit fees are ridiculously low. (Jennifer Lopez, ACCA) [online]
In addition, another issue faced by the external auditors is their liability. Delegates consistently stated that this was a roadblock to innovation and to auditors taking on further responsibilities. (Cosgrove and Thompson, 2010) [online] It can be assumed that due to this expectation gap, the happenings of fraud have an adverse effect on the auditors' reputation. For example, Anderson, the auditor has been blamed in demolishing the audit evidence in the Enron case. (Haron, 2010) [online] On the other hand, the global roundtable has overall preview that there is still more for auditors to bring into the economy and it is the profession and the stakeholders that has to move with key solutions.(Cosgrove and Thompson, 2010) [online]
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To reduce the problem of unreasonable expectations as well as restoring the value of external auditors, steps should be taken to bring about better awareness of the objective of auditing and the work of an auditor amongst members of society in general.
As for the public, it is recommended that free seminars be conducted on a regular basis by the regulators of the accountancy profession at which the actual role of auditors and the function of auditing are clearly presented to the public. This could be achieved through the use of mass media where a special column is designated in the newspapers on a weekly basis, in which the objective, nature and limitations of auditing are explained. (Teck et al, 2009)[online] Further, when a test of questionnaire was conducted among the auditors and business students, there were similar perceptions on audit function except the area of fraud detection. The gap was lower before the students started their audit coursework. Hence, audit education could still be considered as an effective way to decrease level of expectation gap in future calls. (Mohamed and Ahmad, 2004) [online]
Besides that, auditees should also be exercised by an appropriate engagement letter may help to educate them. It is suggested that MIA should review the appropriateness of the content of the engagement letter to ensure that a relevant, comprehensive and easily understandable description of the actual role of auditors is included. This, in turn, would help to reduce misunderstanding of auditors' responsibilities and to improve communication between these two parties. (Teck et al, 2009)[online]
As per deficiency of legislation, the possible ways is research to determine the expectations of society as to the duties of auditors should be conducted on a regular basis in order to identify society's current expectations of auditors. This would provide useful information from which the regulators could revise the existing legislation, thereby ensuring that legislation remains reasonably in line with the expectations of society. (Teck et al, 2009)[online]
Coming into the limelight are the forensic accounting society due to rise of frauds and white-collar crimes. It is a combination of accounting, auditing and investigative skills assembly. It is indicated that forensic accounting can be a detached niche consulting group, compromising auditors. Yet, there is still in need of more skilled professionals to be accepted in this group of accounting. Nonetheless, at the end of the day, forensic professionals would come from the wider family of accountants and auditors. (Accountants Today, 2009) [online]
The auditing profession believes the increase in litigation and criticism of auditors can be traces to the audit expectation gap. The review of the causes of an audit expectation gap shows that the reasons for such a problem are indeed varied and complicated. The audit expectation gap is detrimental to the auditing profession as it has positive as well as negative impacts on the value of auditing and the reputation of auditors in modern society. Positive values that arose are the revision of the audit report, amendment of the auditing standards as well as improved audit quality through the establishment of Audit Oversight Board. On contrary, the negative impacts are auditors were undervalued of their independence and the unreasonable expectancy avoided innovation to take further responsibilities.
Based on the findings of the causes of the audit expectation gap in Malaysia, there are several remedies for closing the gap. There are providing free seminars through media mass, auditors to exercise appropriate engagement letter and further to implement forensic accounting. It is hoped that these proposed solutions will provide the regulators of the accountancy profession in Malaysia with some meaningful insight into ways to mitigate the audit unreasonable expectation. This, in turn, should help to enhance the quality of accounting and auditing practices in Malaysia.