The History Of The Expectation Gap Accounting Essay



The audit expectation gap is defined as "A mismatch between what society expects of auditors and what it perceives they deliver" (Porter, et al., 2008). Its occurrence has been documented all over the world and although the term was not introduced until 1974, the problem extends back over 100 years (Chandler & Edwards, 1996). Failure to meet society's expectations has led to widespread condemnation of, and legal action against, auditors and this has resulted in a lack of confidence in the audit profession. Furthermore large corporate scandals over the past 20 years have certainly not helped regain any lost confidence. As explained by Porter (1991, 1993), the gap has two major components: the reasonableness gap and the performance gap. In this report I will analyse both components and any past attempts to address the issues in each. In addition I will give my own recommendations to how the gap could potentially be reduced, highlighting any barriers to their execution.

Reasonableness Gap

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The reasonableness gap is defined by Porter, et al., (2008) as the gap between the duties society expects auditors to perform and those it is reasonable to expect of auditors. This element involves the duties that auditors are not required to carry out by auditing regulations, or those that they may not be able to perform due to costs outweighing potential benefits, which the public unjustly expects auditors to carry out. The main driving factor in this problem is the inexperience of the general public and their lack of knowledge of auditor's roles. The public are not well informed on audit regulations, so they have expectations that far exceed regulatory requirements. In fact research by Porter and Gowthorpe (2003) shows that in the year 2000 half the duties expected by the UK public were deemed unreasonable, and of the reasonably expected just over half were actually required of auditors. If the reasonableness gap is to be reduced then there is a clear need to educate the public on the legal requirements of, and the methods used by auditors. This is backed up by research which shows that investors with relevant knowledge will likely require lesser audit assurance (Epstein & Geiger, 1994). One possible solution would be to take time out of the AGM for the purpose of educating uninformed stakeholders. The problem with this is that it only covers AGM attendees and not the rest of the public and hence there will always be some who, through their lack of knowledge, still hold unreasonable expectations. It would possibly be more beneficial to include a brief section in the audit report which lists the auditor's duties and perhaps some references throughout the report to show where they have been met. Unfortunately this has the downside of filling up the audit report with extra information which many will find to be an inconvenience.

One of the main concerns for auditors is the cost-benefit of the duties they are to perform, if the costs associated with a specific duty exceed the benefits then it is not in the auditor's interest to carry it out. As the public are not paying the audit fees they have no concern with the cost-benefit and therefore they naturally will have unrealistically high expectations. Lee et al (2009) argues that unreasonable expectations have a harmful effect on the profession because public cannot see the contribution auditors make to society. Lee's suggestion for reducing the gap is to force society to contribute to auditors costs. This could help align the interests of society and auditors, as well as giving the audit firms the extra money to allow them to perform some of society's expected, even though not currently required duties. Auditors being able to perform these extra duties could help to reduce the reasonableness gap but there is of course a risk that this could backfire and lead to even more unwanted pressure on and increased expectations of audit firms. On many occasions where fraud has taken place and auditors do not discover it they are criticised, a lot of the time this is because of society's misguided belief that auditors check every transaction made by the audited company, when in fact they use a variety of sampling methods. Gray and Manson (2008) suggest that technology, which allows testing for every transaction highlighting any which stand out, has gone some way to meet the unreasonable expectation that auditors check every transaction. Not all audits that take place will be able to utilise this technology though as it is dependent on the systems in place at the company being audited. Furthermore implementing new systems is extremely costly and therefore the cost-benefit problem is again raised.

Performance Gap

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The performance gap is defined by Porter, et al., (2008) as the gap between the duties society expects of auditors and what it perceives auditors actually accomplish. This element may be broken up into two parts: the deficient standards gap and the deficient performance gap, I will cover each separately.

Deficient Standards Gap

Porter, et al., (2008) defines the deficient standards gap as the gap between the duties reasonably expected of auditors and auditors' existing duties as defined by law, auditing standards, other regulations and professional promulgations. Research indicated that of 23 duties reasonably expected of auditors in the UK only 13 of them were actually required by auditing standards (Porter & Gowthorpe, 2003). The fact the there are duties which are deemed reasonable but are not a regulatory requirement indicates a deficiency in auditing standards.

One of the issues which make up the deficient standards gap is going concern, which can be defined as "a term for company that has the resources needed in order to continue to operate indefinitely" (Investopedia, 2012). Auditors come under fire when a firm goes under and the audit report suggests no problem with going concern. The problem arises because stakeholders expect auditors will highlight any potential issues as regards to going concern but there is a lack of requirement to inform appropriate authorities. (Gray and Manson, 2008) suggest that expansion of auditors duties will help to alleviate this problem and it has been somewhat addressed by standards such as ISA240, ISA 570 and SAS 130, which requires discussions between auditors and directors on the matter, with directors required to prove their company is a going concern.

Deficient Performance Gap

The deficient performance gap is defined by Porter, et al., (2008) as the gap between the standard of performance of auditors' existing duties expected by society and auditors' performance of these duties as perceived by society. Auditor's performance is seen to be substandard in numerous areas as indicated by Porter & Gowthorpe, (200

3) which indicates that out of 13 existing UK auditors duties only 6 were deemed to be performed satisfactorily.

There are several ways to explain the lacking performances of auditors and Humphrey et al. (1992) suggests that one explanation is the low level of audit fees. The fees charged by audit companies are not high enough for them to provide the level of performance expected of them. Inexperienced staff are used for the day to day work on an audit, as the cost of their time is much lower than more senior staff. The combination of a lack of experience and knowledge from staff, with relatively short time spent on each company, is bound to lead to subpar audit quality. Experienced auditors are extremely valuable and as such, are able to move to countries and companies where they will be better remunerated for their work. This leaves smaller companies with a lack of experience in their workforce and little chance of satisfying public expectations. However the introduction of new rules and regulations by regulatory bodies, notably the companies act 1989, mean there is less of an argument for poor performance being caused by incompetent staff as there is a certain requirement for a minimum level of qualifications. The introduction of these new rules could be seen as part of the reason that the deficient performance gap has become less of an issue (Porter & Gowthorpe, 2003).

A further problem is a lack of independence from auditors. Auditor independence is characterised by integrity and an objective approach to the audit process (ICAEW, n.d.). If an auditors independence is deemed to be compromised then so is the integrity of the audit report. It is paramount that society perceives auditors to be independent as otherwise the whole audit function cannot work (Porter, et al., 2008). The main driver behind this problem is closeness between auditors and their clients, whether it is due to an existing personal relationship, a striving for personal gain or as a look for reappointment. In addition if the audit firm is providing other services on top of auditing, for example consultancy, there is a cause for concern that the auditors may overlook certain issues in the audit report so they are less likely to lose the clients business. This problem is exacerbated when there is high economic dependence on the client's fees due to them making up a large percentage of the auditors income. A good example of this is the Enron scandal where Arthur Anderson's independence was compromised due to huge fees being paid to them for other services which ultimately led to their reputation being so badly damaged that they went bust. As a possible solution Humphrey, et al (1993) suggested an independent office with the role of scrutinising auditor appointment, performance and fees. The problem with this is that independence cannot be guaranteed although there could be some benefit to be seen from the added pressure on auditors.


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Thanks to new regulations over the past 30 years the composition of the gap has changed, with the reasonableness gap growing and the performance gap reducing (Porter & Gowthorpe, 2003). Accounting and auditing standards evolve at such a rate, that the knowledge of auditors, let alone the general public, is going to be difficult to keep up to date. Consequentially auditors will always get some criticism for failure to perform all the duties required of them and it would seem there can never be a point where the expectations gap, especially the reasonableness component, can be fully eradicated. However it is not out of the question for the gap to be further reduced through new research on the topic and execution of the recommendations below.


I would suggest that the gap needs to be addressed by both auditors and the public. The primary concern is the education of the public, it is impossible to educate everyone but if the individuals who have relatively high interest in the field are better informed then this can only serve to reduce the gap. I would suggest a multi pronged attack as the best way to reach as many members of the desired audience as possible. A combination of targeted workshops, increased coverage at AGMs, additions to audit reports and clear statements of auditors roles, on both auditors and regulators websites, will certainly go some way to reducing the gap even with the continuous change of audit regulations inhibit the effect somewhat. To address the performance gap it is important that the auditors are also kept up to date on their duties and any changes or additions to them. In order to achieve this I would recommend a compulsory monthly subscription of some form which highlights any new changes to regulations on the horizon and provides material to educate auditors on how to comply with these new regulations. In addition workshops relating to these new regulations should take place within audit firms to ensure staff are kept up to standard. Furthermore new standard specifically to address the gap should be developed. Finally I would advise that, although there would be a cost involved, audit committees be replaced by independent shareholder committees, which choose the auditors instead of directors, along with compulsory audit rotation to try and retain auditor independence.