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The audit profession was puts under scrutiny after the collapse of Worldcom and Enron as well as their auditor, Arthur Anderson (Economist, 30 November 2002 cited in Matthews, 2006). As a result, most of the major accounting firms were more strictly on the rules and measures to make a high level of audit quality and independence since auditors are puts into high level of criticism and litigation (Accountant Today, June 2008). In the modern auditing world, publics may increase the expectation on auditing profession due to the changing of environment and the financial scandals on current business world. The credibility, prestige and profit potential on auditors' work maybe reduce if the auditors don't meet publics' expectation (Teck Heang Lee, Dr. Azham Md. Ali & Shamini Kandasamy, 2008).
Therefore, external auditors' role is important for business today because there have many company scandals exposed. These will bring the problems in fraudulent of financial reporting as much as the truthful & fairness of financial statements. In order to provide the truthful & fairness of financial statements to stakeholders or publics, external auditors should enhance the reliability and credibility of financial statements.
Besides, external auditors are required to determine whether the financial statements are prepared in accordance with the accepted accounting policies and principles. The auditor has to verify whether the accounts are prepared in compliance with the Companies Act, accounting standards and auditing standards and the financial reporting framework. Currently, most of the big companies like Enron are doing complex business. For sure, complex businesses sure are having complex transactions for their day-to-day operation. This will lead to difficulty in reporting the measurement, valuation and disclosure of the companies' financial statements. Hence, external auditors are helping companies to measures, valuation and disclose the transactions in order to form an opinion that financial statements are free from material misstatements.
2.0 Audit Expectation Gap
Most commonly, users have a high expectation on auditors to provide a "perfect" assurance when auditing a company. Auditors were engaged to provide almost "absolute" assurance against fraud and intentional mismanagement. 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.
Responsibilities of an auditor will widen shareholders and publics expectation gap, for example in preparing the accounting records and financial statements, prevention and detection of fraud, and in internal control (Mohamed and Muhamad Sori, 2002, Fadzly and Ahmad, 2004, Lee et al., 2007). Normally, external auditors act as an independent and objective party in order to determining the accuracy and reliability of financial statements when performing an external financial audit. To determine the financial statements reliability, auditors must assess client firm's monetary position like assets, liabilities and equity capital. External auditors may not give accurate view on company's performance to the investors and lenders. This may put auditors into dilemma since there is a premium for auditors to have a greater tolerance in assessing the reliability of financial statements. So, auditors must balance between upholding their principles of professionalism, quality and integrity, and on the other side retaining clients and profits also in order to avoid widening the clients' expectation (Alexander Chan, 2002).
In Enron case, the firm's external auditor, Arthur Andersen, has grabbed attention from most of the media when the scandal was exposed. FromÂ the perspective reviewÂ of the parties, Enron intentionally makes the company financial statements positively. From the viewpoint of the party under review, the firm has an interest in having financial statements that reflect positively upon the organisation. Having smaller leverage ratios is beneficial to a company, because investors most likely to invest in a smaller leverage company and company also easier get a loan from creditÂ institutions. Credit agencies are more willing to lend to and investors generally favor companies with smaller leverage ratios. Therefore, Enron Company is likely to appoint auditors who can explainÂ its favorableÂ financial position ofÂ the business. So when choosing among accounting firms, companies will be more inclined to conduct business with auditors that can interpret their financial positions favourably. Arthur Andersen are able to hidden some misstatement of Enron's financial statements since Andersen was responsibilities on auditing and accounting of the company. The misleading makes investors believe that company was more profitable than the actual performance of company. Arthur Andersen was responsible for the firm's auditing and accounting, it had a direct role in the formation of Enron's financial statements, the same documents that mislead investors in believing that the energy giant was more profitable than it actually was (Alexander Chan, 2002). As a result, the impact on audit profession would bring down the audit function value since public confidence on auditors' contribution may not longer exist. 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.
Recently, the auditors' role in detecting fraud has been emphasised by the entire world after the failure of large corporate like Enron in US, Polly Peck in UK and Parmalat in Italy (Jayalakshmy, 2005). The failure of large corporations such as Enron in the US, Parmalat in Italy and Polly Peck in the UK has again focused the world's attention on the role the auditors have in regards to detecting fraud (Jayalakshmy, 2005). Publics bear in mind that auditors is the person who's responsible on auditing companies' financial statement and accurately defined the financial statements position. Consequently, the scandals of those companies make the public asking the question about "where are the auditors?" (Moeller, 2004).The question that has been raised among the public is 'where were the auditors?', as they were thought to be responsible for auditing the books of the failed companies and determining whether the financial statements were accurately stated (Moeller, 2004). As a reactionÂ of business failuresÂ and perceivedÂ failuresÂ on theÂ audit profession, the regulatory bodies and government shouldÂ implement new rules, statutoryÂ requirements and standards which can improve audit quality and reinforce independence of auditors in order to meet public's expectations on audit profession. In order to meet the public's expectations of the audit profession, the governments and regulators have to gave rise to various new statutory requirements, regulations and standards that were aimed at strengthening the auditors' independence and improving the quality of their work to response on the corporate collapses and perceived audit failures. The example of the new regulation or standards are Sarbanes-Oxley Act in the USA, Corporate Laws Amendment Act, Companies Amendment Act and Auditing Profession Act in South Africa and CLERP 9 in Australia (Marx, Ben CA(SA), BCompt (Hons), MCompt, 2009). Examples of these are the Sarbanes-Oxley Act in the USA, CLERP 9 in Australia and the Auditing Profession Act, Corporate Laws Amendment Act and Companies Amendment Act in South Africa (Marx, Ben CA(SA), BCompt (Hons), MCompt, 2009). Under the new regulation, the reliability, integrity and quality of financial information can be improve when auditors giving a transparent, objective and relevant audit works in financial reporting. Under the new regulatory, auditors could give a relevant, objective, and transparent financial reporting process in reporting financial results and conditions to improve the quality, integrity, and reliability of financial information. As a result, information regarding with company's future prospects and performance can be received by persons who's participant in corporate governance such as governing bodies, board of directors, management, external and internal auditors as well as audit committee (Zabihollah Rezaee, 2004). By doing so, corporate governance participants, including the board of directors, the audit committee, management, internal auditors, external auditors, and governing bodies have typically sufficient information about the company's performance and future prospects (Zabihollah Rezaee, 2004).
Besides, due to the scandals on the auditing profession, publics will concern more on auditors' professional principles to ensure the integrity and reliability of the financial reports (Zabihollah Rezaee, 2004). In order to fulfil publics' expectation, most of the audit firms will expand the responsibilities, duties and enhancement of auditors' performance currently. Institute of Chartered Accountants in Australia (ICAA), recommended that the audit profession should expand the scope of audit so that the services provided by the auditors are able to meet the demand of the public ('Financial Report Audit: Meeting the Market Expectation', 2003). The ICAA report explained that, in view of litigation and accusation against the auditing profession, encouragement should be given to promote the evolution of expanded audit services. The expansion of the scope of audit includes the core audit services and extended audit services, for examples compliance reporting, evaluation of internal control system, direct reporting by auditors to regulators, fraud detection, and involvement of auditors in interim financial information (Teck Heang Lee, Dr. Azham Md. Ali, Shamini Kandasamy, 2008). As a result, auditors are able to narrowing publics' expectation gap and increase the integrity and reliability in audit functions.
However, the expansion of auditors' responsibilities may not be an effective way to meet publics' expectations. The competency of auditors in providing additional services needs to be considered closely because it'll compromise auditors' independence. For example, auditors may fail to evaluate the going concern of the business as they may lack the relevant experience in performing such duties. This is mainly because such duties are not part of the present statutory duties in Malaysia. Hence, the auditors' expertise in such an area is in question. Furthermore, the going concern of a business will be subject to unavoidable business risks due to changes in the overall economic condition of the country. Therefore, the feasibility of expanding the auditors' responsibilities needs to be evaluated on a case-to-case basis in order to ensure that the auditor have the ability to perform these additional duties.
Public was misunderstand the auditors' actual duties, for example, guarantee the completeness and accuracy of the FS and prevent and detect of fraud and errors of the FS (e.g. Fadzly and Ahmad, 2004; Alleyne et al., 2005; and Lee et al. 2007b). Therefore, steps should be takenÂ to giveÂ public user's a betterÂ understanding ofÂ the objectiveÂ ofÂ the auditingÂ and auditorsÂ actualÂ work in order to reduce the expectations amongst auditors, directors and shareholder as well. It's recommended that professional accountant body can conduct free seminars regularly to present to the public what are the functions of auditing as well as the actual auditors' role. The awareness of the auditing and public interest could be created if the publicity levels become higher. To achieve it by using mass media, the explanation for nature, objective and limitations of auditing with a specified column will be published in a weekly basis newspaper.
Besides, a better way to avoid high expectation from auditees is to educate auditees by gives an appropriate letter of engagement. It is suggested that contents of the letter of engagement should review by MIA to ensure that the descriptions of actual auditors' role are comprehensive, relevant, and easily understand to auditees. This not only can improve communication between auditors and auditees, the misunderstanding of responsibilities of auditors could reduce also.
To improve awareness of auditing on shareholders, auditors can explain to the shareholders the goal of an audit function and what could shareholders reasonably expected on auditor's works by attached the objectives of auditing on the agenda when shareholders attending the AGM or published in the annual report . In addition, auditors can arrange a question-and-answer session for shareholders as part of the AGM, to give a conversation between shareholders and auditors to discuss any questions about the audit function.
Moreover, the pre-admission assessment can be implementing to improve the professional accountant's quality. So, accountant was recommended to take part in the assessment programme before become a member of the professional accountant's body. Offer a free programme like professional development is another ways to enhance the professional and value of an auditor. In order to ensure existing members have updated knowledge in the accounting and auditing world, professional body like MIA is suggested to organize a free professional development programme for auditors to enhance the value of continuing competency.
Nevertheless, it's suggested that implementation of audit regulations should be oversee by an independent government. An independent government agency should create to oversee the companies' framework on auditor remuneration, audit appointment and the audit practice. The problems on low audit fees and auditors' appointment can be overcome as well as enhancing the audit function effectiveness. Company should give a written letter of requisition to the independent government agency when company needs assigned an appropriate external audit to provide auditing services. Moreover, the independent government agency would determine the standardised auditing fees.
Auditors should continue to focus on anti-fraud education and training programs for the audit staff and clients. The AICPA has recently issued SAS No. 99 which provides guidance in identifying fraud risk factors and applying proper audit procedures to address these risk factors. The AICPA has also released an exposure draft on seven proposed SASs related to audit risk. This proposed SASs would require more in-depth understanding of the client's entity and its environment, including its corporate governance and internal controls. A more rigorous assessment of the risks of financial statement fraud based on this understanding and improved linkage between the assessed risks and the nature, timing, and extent of audit procedures performed in response to those risks (Zabihollah Rezaee, 2004).
The review of the causes of an audit expectation gap shows that the reasons for such a problem are indeed varied and complicated. They arise from a combination of misconceptions and ignorance on the part of users; the complicated nature of the audit function; unreasonable expectations on the part of stakeholders and the public and inadequate performance by auditors, situations that are in turn caused by the various reasons discussed above, plus inappropriate legislation in Malaysia. Given the diverse range of problematic factors contributing to the existence of the expectation gap, it is argued that neither the auditors nor users should be solely blamed for the present "audit expectation gap" crisis (Teck Heang Lee .Azham Md Ali, 2009) .
The auditing profession believes the increase in litigation against, and criticism of auditors can be traced to the audit expectation gap. The audit expectation gap is detrimental to the auditing profession as it has a negative impact on the value of auditing and the reputation of auditors in modern society. A review of methods (i.e. education, expanded audit report, structured audit methodologies, expansion of auditorsÂ¡Â¯ responsibilities and enhancement of auditorsÂ¡Â¯ performance) shows that most of the proposed solutions for reducing the audit expectation gap in the literature are unlikely to be implemented in view of the practical issues raised in the paper. Hence, these methods are only likely to be effective o theoretical grounds. Thus, further research needs to be conducted to investigate more effective ways in reducing the audit expectation gap (Teck Heang Lee, Dr. Azham Md. Ali, Shamini Kandasamy, 2008).