Corresponding author: Reiner Quick ( quick@bwl.tu-darmstadt.de ) Academic editor: Barbara Majoor
© 2020 Reiner Quick.
This is an open access article distributed under the terms of the Creative Commons Attribution License (CC BY-NC-ND 4.0), which permits to copy and distribute the article for non-commercial purposes, provided that the article is not altered or modified and the original author and source are credited.
Citation:
Quick R (2020) The audit expectation gap: A review of the academic literature. Maandblad Voor Accountancy en Bedrijfseconomie 94(1/2): 5-25. https://doi.org/10.5117/mab.94.47895
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The audit expectation gap is a phenomenon that exists for many years. In particular, the audited financial statements beneficiaries’ expectations exceed what auditors can reasonably be expected to accomplish. This paper reviews the extensive body of academic literature which has investigated the audit expectation gap for many years. The focus lies on survey-based research which is the dominating research method applied. The objective is to provide an overview of the existing literature and to summarize its findings and implications. The most frequently identified gaps refer to fraud detection. Education and the expansion of the auditor report are two response strategies often analysed by prior research.
Audit expectation gap, auditor report, education, fraud
Misperceptions of auditors’ roles and responsibilities may compromise the benefit of statutory audits and the reputation of the profession. Therefore, this literature review is of interest to auditors, users of financial statements, standard setters and regulators. Auditors may consider to overfulfill their existing duties and users can find out about their unreasonable expectations and modify them. Standard setters and regulators must take actions to close or at least to narrow the audit expectation gap, and, therefore, need to know what misperceptions exist and how they differ between various stakeholder groups.
External auditing and assurance are key contributors to financial stability, trust and market confidence, because auditors provide an independent professional opinion on whether the financial statements give a true and fair view. In order to enhance the reliability of financial statements, which are used by investors to make decisions, the auditor issues an auditor report, which investors use as one basis for making sound judgments, which in turn promotes efficient capital markets. Hence, the basic function of statutory audits is to reduce agency costs.
Auditors are regularly criticized whenever companies fail shortly after an unmodified audit opinion was issued or when auditors fail to detect fraud (recent cases include e.g. Voltabox and Steinhoff in Germany, Carillion and BHS in the UK, Toshiba in Japan, and Linkway Trading owned by the Gupta family in South Africa). Such allegations are often driven by the fact that the public has specific expectations of the scope of the statutory audit and auditors’ services which exceed auditors’ performance as perceived by the public (
The AEG is detrimental to the financial reporting and auditing process, as the public may perceive the work performed by external auditors as unsatisfactory. Therefore, the AEG is critical to the auditing profession, because greater unfulfilled expectations from the public impair the value of auditing and the reputation of auditors and, accordingly, the credibility, earnings potential and prestige associated with the work of auditors (
It is the purpose of this paper to review the existing, and extensive, literature on the AEG. The following section provides a general overview on the AEG and defines it, distinguishes its components, mentions typical areas where differences in expectations arise, and discusses causes for and response strategies to the AEG. In the next section an overview on prior research is given and its findings are discussed. A final concluding section discusses implications, mainly for regulators, makes suggestions for future research, and points out limitations of this literature review.
The performance gap can be further subdivided into a gap between the duties which can be reasonably expected of auditors and auditors’ existing duties as defined by regulation (deficient standards), and a gap between the expected standard of performance of auditors’ existing duties and auditors’ perceived actual performance (deficient performance).
Typical areas where differences in expectations arise are (
Different underlying explanations have been suggested for the existence of the AEG. In particular, the auditing profession has attributed it to a misperception of audits by users and the public (
There are two main response strategies to the AEG, namely a defensive and a constructive approach (
We conducted a broad search of the literature with the keyword „expectation gap“ combined with „audit“ or „auditor“. I focused on major auditing (IJA, AJPT, MAJ) and accounting research journals (from the latest journal ranking of the German Academic Association for Business Research
It is important to note that Table
Survey research on the AEG.
Author(s) | Year | Country/ Countries | Subjects | Objectives/Methodology | Key Results |
---|---|---|---|---|---|
Beck | 1973 | Australia | shareholders | • role that society assigns to auditors • 32 assertions about accountants |
• society also expects the provision of assurance about the company and its officials and a protection against inefficiencies and managerial malfunctions |
Baron/ Johnson/ Searfoss/ Smith | 1977 | USA | large-firm audit partners, small-firm CPAs, bank loan officers, financial analysts, corporate financial managers | • auditor‘s responsibility for detecting and disclosing corporate irregularities and illegal acts | • non-auditors indicate a higher level of responsibility than auditors • adoption of professional standards can narrow the AEG |
Campbell/ Mutchler | 1988 | USA | auditors, commercial lending officers | • perceptions about auditor’s role in the presence of going concern uncertainties and the nature of the going-concern opinion | • AEG in auditor’s role is not wide |
Jennings/ Reckers/ Kneer | 1991 | USA | judges | • nine different beliefs, including auditor’s responsibility for fraud detection | • auditors are expected to actively search for fraud • significant differences between auditors and judges concerning the role and responsibility of auditors |
Schleifer/ Shockley | 1991 | USA | Big 8 auditors, non-Big 8 auditors, bank loan officers, certified financial analysts | • accountants‘ and financial statement users‘ reactions to 14 policies designed to enhance auditors independence | • support of the fourteen policies to enhance auditor independence differs significantly between groups |
Hatherly/ Innes/ Brown | 1991 | UK | MBA students | • whether an expanded auditor report can close the AEG | • expanded auditor report changes reader perceptions • expanded auditor reports heightens expectations with regard to aspects not included in the report, i.e. a halo effect might even widen the AEG |
Humphrey/ Moizer/ Turley | 1993 | UK | chartered accountants in public practice, corporate finance directors, investment analysts, bank lending officers, financial journalists | • principal aspects of the audit process and the nature of auditor responsibilities • assessment of the performance of auditors against various attributes • perceptions about auditors‘ reporting of information and the extent of audit work (six mini case studies) |
• AEG for various aspects of the nature of the audit function and the perceived performance of auditors • critical components of the AEG include the auditor’s role in relation to fraud detection; the extent of auditor’s responsibility to third parties; the nature of balance sheet valuations; auditors’ independence; and aspects of the conduct of audit work |
Garcia-Benau/ Humphrey/ Moizer/ Turley | 1993 | UK/Spain | chartered accountants in public practice, corporate financial directors, users of financial deposits (including investment analysts, bankers, and financial journalists) | • nature of audit expectations and perceptions of audit performance in Spain and the UK • a semantic differential testing instrument containing 19 key auditing activity constructs, with 62 questions on the role and nature of auditing and the performance of auditors |
• AEGs are observed in both countries between auditors, financial directors, and users of financial statements, but they are far less extensive in Spain |
Porter | 1993 | New Zealand | financial community (e.g. auditors, officers of public companies, financial analysts, auditing academics), general public (such as lawyers, financial journalists, and members of the general public) | • 30 suggested duties of the auditor | • components of the AEG: half (50 %) is attributable to deficient standards, 34 % results from society holding unreasonable expectations of auditors, and 16 % derives from perceived sub-standard performance by auditors |
Gloeck/ De Jager | 1993 | South Africa | auditors, company directors and chairpersons, internal auditors, brokers, bank managers, accountants, others | • perceptions and opinions of financially knowledgeable persons regarding the audit function compared to those of auditors • focus point of the local AEG against the background of the international scenario |
• AEG focuses on the lack of independence and objectivity of auditors, uncertainties regarding the role of the auditor; and the dissatisfaction with the compulsory audit of small owner-managed companies |
Lowe | 1994 | USA | judges, auditors | • judicial and auditor attitudes toward the auditing profession • 8 questions on audit knowledge, the auditor’s role, and the general attitude toward the profession |
• large divergence in perceptions between the two groups |
Epstein/ Geiger | 1994 | USA | investors | • level of assurance for detecting material misstatements as a result of error and as a result of fraud | • 47 % (71 %) wanted absolute assurance that financial statements are free of material misstatements due to errors (due to fraud) |
Monroe/ Woodliff | 1994 | Australia | auditors, accountants, directors, creditors, shareholders, students | • impact of a change in the wording of the auditor report • 48 bipolar phrases about relative responsibilities of auditors, preparers of financial reports, reliability of the underlying financial information, evaluation of the future prospects of the firm |
• AEG between auditors and user groups confirmed • modified wording of the auditor report eliminates some differences, but also creates new AEGs |
Gramling/ Schatzberg/ Wallace | 1996 | USA | students, auditors | • auditing and the auditing process • the auditor’s role with respect to audit clients and audited financial statements • parties to whom auditors should be responsible • prohibitions and regulations of an audit firm • performance attributes of auditing • likely actions to be taken by auditors in specific circumstances |
• although the perceptions regarding some components of the audit process and the roles and responsibilities of auditors did change after students completed an auditing course, significant differences in perceptions still exist between professional auditors and students |
Pierce/ Kilcommins | 1996 | Ireland | students | • user misunderstanding AEG including four elements: duties, ethical and legislative framework, liability, and auditor report • impact of education on the misunderstanding AEG |
• significant reduction in all elements of the misunderstanding AEG for those groups who had studied either a module or a course in auditing during the period |
Innes/ Brown/ Hatherly | 1997 | UK | auditors, MBA students | • impact of an expanded auditor report on the AEG • 18 dimensions of audit attributes |
• existence of an AEG • expanded auditor report reduces AEG and did not create new AEG • in some cases perceptions are moved away from those of auditors by expansion |
Beattie/ Brandt/ Fearnley | 1998 | UK | financial journalists | • views on auditor independence | • perceptions of auditor independence are a fundamental part of AEG • regulatory changes have reduced the AEG, although problems still exists in the area of non-audit services • most significant threat to independence is economic and personal pressure on the partner as an individual, an area difficult to regulate |
De Martinis/ Kim/ Aw | 2000 | Singapore | auditors, preparers, users (e.g. financial controllers, financial/credit analyst, lawyers, bankers, company directors, tax consultants) | • extent of the AEG with regard to expectations and perceptions about the duties and responsibilities of auditors, including those related to fraud prevention and detection | • AEG prevails where respondents have relatively little business work experience and no university qualifications • AEG is not affected or constrained by political, legal, social, or economic factors |
Koh | 2000 | Singapore | auditors, managers | • existence of an AEG with respect to audit objectives • list of 13 possible audit objectives |
• non-auditors place greater demands on audits and auditors • non-auditors expect auditors to detect and prevent major errors, fraud and illegal acts and to guarantee the accuracy of financial reports, and to satisfy tax and other government authorities |
McEnroe/ Martens | 2001 | USA | audit partners, investors | • auditors’ responsibilities involving various dimensions of the attest function, i.e. mainly items of the auditor report | • existence of an AEG • investors have higher expectations for various facets and/or assurances of the audit than auditors |
Best/ Buckby/ Tan | 2001 | Singapore | auditors, bankers, investors (general public, financial analysts, brokers) | • messages communicated by the short-form audit report in Singapore | • evidence of a wide AEG, particularly in the areas of auditor responsibility for fraud prevention and detection and maintenance of accounting records, the freedom of the entity from fraud and the exertion of auditor judgment in the selection of audit procedures |
Frank/ Lowe/ Smith | 2001 | USA | auditors, jurors, students | • eight questions categorized into three groups: (1) audit knowledge; (2) the auditor‘s role; and (3) general attitudes toward the profession | • large divergence in perceptions among group • perceptions from jurors are different, e.g. regarding managements‘ and auditors’ responsibilities for the financial statements or auditor’s role in fraud detection |
Leung/ Chau | 2001 | Hong Kong | bankers, auditors | • whether an expanded auditor report can close the AEG | • expanded auditor report reduces perceptual differences on dimensions addressed in the report, but could lead to a larger AEG in the long run |
Manson/ Zaman | 2001 | UK | auditors, financial directors, investment analysts, corporate bankers | • whether an expanded auditor report can align the views of auditors, preparers and users | • expansions are successful with regard to issues dealt with in the expanded auditor report |
Dewing/ Russel | 2002 | UK | fund managers | • perceptions of the definition of the AEG, its constituents, and the extent to which the AEG might be narrowed by audit regulation | • awareness of AEG and concern about the scope and responsibilities of the auditor, and the monitoring of auditor‘s work, and agreement on the potential of increased regulation to narrow the AEG • fund managers who were not qualified accountants were particularly concerned that auditors were not perceived as independent • establishment of an Accountancy Foundation should provide greater independence to the investigation and disciplinary processes |
Fadzly/ Ahmad | 2004 | Malaysia | auditors, investors, brokers, bankers | • opinions and beliefs about the audit functions • 17 semantic differential belief statements grouped into three factors: responsibility, reliability, and usefulness |
• results indicate wide AEGs and misconceptions about audit • AEGs are mainly related to the responsibilities concerning the preparation of financial statements, internal control, accounting records, and fraud |
Porter/ Gowthorpe | 2004 | UK/New Zealand | auditors, auditees, audit beneficiaries from the financial community, audit beneficiaries from outside the financial community | • structure, composition and extent of the AEG • identification and tentative explanation differences in the AEGs in UK and NZ, and from 1989 and 1999 • 51 actual and potential responsibilities of auditors |
• extent of AEG in UK and NZ similar, but AEG’s components differ (reasonableness gap main UK driver; deficient standards gap main NZ driver) • AEG narrowed over time |
Lin/ Chen | 2004 | China | audit beneficiaries (e.g., investors, creditors, government officials, business management, and academics), auditors | • rise of the AEG and related auditing issues contextual to the business and auditing environment in China | • groups agree that the audit function potentially enhances the truthfulness and reliability of financial statements and play a positive role in the Chinese economy • rising AEG with respect to audit objectives, auditor’s obligation to detect frauds, auditor independence, third-party liability of auditors, and the impact of government sponsorship on the credibility of audit services |
Specht/ Sandlin | 2004 | USA | auditors | • appropriateness and efficacy of fraud renouncement | • scepticism among auditors regarding its effectiveness in reducing the AEG |
Alleyne/ Howard | 2005 | Barbados | auditors and users | • auditors’ responsibility for uncovering fraud, the nature and extent of fraud | • AEG is wide, as auditors felt that the detection of fraud is management’s responsibility, while users and management disagreed |
Dixon/ Woodhead/ Sohliman | 2006 | Egypt | auditors, investors, bankers | • AEG between auditors and financial statement users • semantic differential belief statements grouped into three factors: responsibility, reliability, and usefulness |
• wide AEG in the areas of auditor responsibilities for fraud prevention, maintenance of accounting records, and auditor judgment in the selection of audit procedures |
• smaller AEG concerning the reliability of audits and audited financial statements, and the usefulness of audits | |||||
Schelluch/ Gay | 2006 | Australia | company secretaries/ accountants, shareholders, auditors | • messages communicated through auditor reports on prospective financial information • 47 unique bipolar adjectival statements |
• significant differences in beliefs between auditors, users and preparers of prospective financial information, concerning forecast reliability and the role and responsibilities of auditors and management |
• auditors believe that forecasts are more reliable than users or preparers, and that they have a higher level of responsibility and accountability than is attributed to them by users or preparers • beliefs were affected by the type of auditor report (positive vs. negative) |
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Sidani | 2007 | Lebanon | accounting and non-accounting professionals | • existence of an AEG • 9 questions covering aspects of the AEG |
• significant reasonableness gap • AEG concerning the understanding of the audit profession • significant difference in perceptions of the role of the auditor with respect to fraud detection |
Haniffa/ Hudaib | 2007 | Saudi Arabia | auditors (large and small), financial directors, credit managers, investment analysts/funds managers, shareholders (substantial and non-substantial), representatives from governmental bodies | • perceptions about audit performance of auditors • impact of the business and social environment on the perceptions of audit performance |
• AEG concerning responsibilities arising from legal pronouncements, responsibilities related to detecting and reporting fraud, and provision of non-audit services • performance gap arises from four factors in the auditing environment: licensing policy, recruitment process, political and legal structure, and dominant societal values |
Lee/ Gloeck/ Palaniappan | 2007 | Malaysia | auditors, auditees (bankers, investors, brokers, general public), audit beneficiaries (company directors, accountants) | • existence and nature of an AEG • 48 duties of the auditor covered in 34 questions |
• auditees and audit beneficiaries placed much higher expectations on the auditors’ duties than auditors • unreasonable expectations by users; deficient standards of auditing; and deficient performance of auditors |
Lee/ Ali | 2008 | Malaysia | auditors, corporate managers | • knowledge of the auditors and corporate managers of the auditors’ duties • perceived performance of auditors in relation to these required duties • 26 items related to the legal requirements of auditors |
• existence of knowledge gap and deficient performance gap |
Saha/ Baruah | 2008 | India | chief finance officers, chartered accountants in practice, bankers, financial journalists | • levels of expectation difference • series of statements of assertions designed to elicit opinion on the role and nature of auditing |
• significant differences between auditors (CAs in practice) and other audit user groups in their views and opinions as to the precise nature of auditing and the work that auditors perform • AEG is an outcome of a variety of aspects such as the nature of the audit process, the audit function, the constituent boundaries surrounding the audit and the performance of the auditors • the AEG is not a consequence of a general negative attitude toward the profession • views of society and users of auditor reports about the intensity of audit work not totally irrational |
Salehi/ Azary | 2008 | Iran | auditors, bankers | • AEG in auditor’s responsibility between auditors and bankers • five statements about importance of auditing and financial reports, 13 statements on audit responsibilities regarding fraud and illegal acts |
• significant AEG in areas of auditor’s responsibilities to detection of fraud and illegal acts |
Mahadevaswamy/ Salehi | 2008 | India, Iran | auditors, investors | • existence of an AEG and country comparison • seven-section questionnaire |
• wide AEG in both countries and little differences |
Kasim/ Hanafi | 2008 | Malaysia | auditors, accountants, accounting educators | • existence of an AEG • six independent variables: auditors and audit process, auditors’ roles with respect to audited financial statements, auditors’ roles with respect to audited client, parties to whom auditors should be responsible, possible prohibition and regulation on audit firm, and performance attributes of auditors |
• existence of an AEG |
Hassink/ Bollen/ Meuwissen/ De Vries | 2009 | Netherlands | business managers (CFOs, financial controllers, supervisory board members), bankers, auditors | • AEG concerning the role of the auditor in corporate fraud cases • several statements about the definition and scope of fraud and auditors’ responsibilities concerning fraud among audit clients |
• substantial AEG in the context of fraud, both with respect to the auditor’s performance as well as the auditor’s formal obligations standards • compared to bankers, business managers are less inclined to judge auditors’ performance of existing duties as inadequate |
Salehi/ Mansoury/ Azary | 2009 | Iran | investors, chartered accountants | • auditor independence as a key element of the AEG • 9 questions regarding to the level of audit independence |
• significant difference regarding the actual level of economic dependence of the auditor from the client • auditors believe that external factors are more relevant for independence than internal factors, while investors believe the opposite |
Siddiqui/ Nasreen/ Choudhury-Lema | 2009 | Bangladesh | auditors, bankers, students | • existence of an AEG • 12 questions on auditor responsibility, audit reliability, and decision usefulness of audited financial statements • the effect of audit education in reducing the AEG |
• significant AEG • audit education significantly reduces the AEG, especially in the area of audit reliability • the introduction of accounting scandal cases in the auditing curricula creates some unreasonable expectations regarding audit responsibility |
Onumah/ Simpson/ Babonyire | 2009 | Ghana | auditors, company accountants, shareholders, bank loan officers, lawyers, general public | • existence of an AEG and factors influencing it | • different understanding of the work of auditors, different perceptions with regard to auditors’ responsibility for detecting and reporting fraud and irregularities, users expect a higher level of assurance • views of company accountants are close to those of auditors |
Noghondari/ Foong | 2009 | Iran | bank loan officers | • effect of accounting knowledge and experience on the AEG | • existence of a large AEG • accounting knowledge mitigates the extent of the AEG, but not accounting experience • negative relationship between the AEG and loan decision performance |
Porter/ Ó hÓgartaigh/ Baskerville | 2009 | UK/New Zealand | auditors, auditees, financial community audit beneficiaries, non-financial community audit beneficiaries | • structure, composition and extent of the AEG • differences between the countries and over time • list of 55 actual and potential responsibilities of auditors |
• structure and composition of the AEG are similar in both countries • AEG is significantly wider in NZ • in UK the AEG narrowed substantially over time, in NZ it widened slightly • deficient standards and reasonableness components contribute most |
Lee/ Ali/ Gloeck/ Yap / Ng / Boonyanet | 2010 | Thailand | auditors, financial analysts, brokers, managers, company accountants | • existence and nature of an AEG • 48 duties of the auditor covered in 34 questions |
• AEG exists with respect to 18 duties • unreasonable expectations and deficient standards are the more relevant components |
Adeyemi/ Uadiale | 2011 | Nigeria | auditors, stock brokers, investors, company accountants, managers | • existence of an AEG and the perceptions of user groups on its existence | • different perceptions on the existence of an AEG, existing duties and responsibilities of auditors, and the usefulness of the auditor report for investment decisions |
Adeyemi/ Olowookere | 2011 | Nigeria | auditors, bankers, investors, stockbrokers, students, company accountants | • existence and nature of an AEG | • wide AEG in the areas of auditors’ responsibility for fraud prevention and detection |
Pourheydari/ Abousaiedi | 2011 | Iran | auditors, investors, brokers, bankers | • perceptions on the role of auditors • existence of an AEG • 17 semantic differential belief statements on responsibility, reliability, and decision usefulness |
• AEG exists in the areas of auditor responsibility for fraud detection, soundness of the internal controls, and preparation of the financial statements |
Bedard/ Sutton/ Arnold/ Phillips | 2012 | USA | professional investors, non-professional investors | • whether investors understand that information outside the financial statements is not audited and differentiate the level of assurance | • professionals are more likely than non-professionals to correctly identify which financial statement components are audited • many investors in both groups believe that information outside of the financial statements is audited when in fact it is not • demand for audits of information that is currently unaudited |
Porter/ Ó hÓgartaigh/ Baskerville | 2012a | UK/New Zealand | auditors, auditees, financial and non-financial community audit beneficiaries | • differences in the extent, structure and composition of the AEG in NZ and UK • integrated list of 55 actual and potential responsibilities of auditors |
• similarity in the responsibilities comprising the components of the AEG in the two countries • extent of AEG 40 % wider in NZ than in UK |
Gunathilaka | 2012 | Sri Lanka | auditors, business managers, investors | • AEG in terms of auditor responsibility, reliability of audit function and usefulness of audit • 20 statements on auditor responsibilities, reliability and usefulness of audit service |
• significant perceptual differences in the areas of responsibility for frauds detection and prevention; preparation and presentation of financial statements; assurance on financial statements; objectivity of auditors; and auditor independence • auditors place a lesser degree of reliability on audit than the society • accounting education significantly reduces AEG |
Eny/ Ifurueze/ Enyi | 2012 | Nigeria | auditors, accountants in business, bankers, investors | • existence and components of an AEG | • different expectations regarding the role of audits, the reliance upon an unqualified audit opinion, and the independence of auditors |
Oseni/ Ehimi | 2012 | Nigeria | auditors, investors, stockbrokers, managers | • existence, level and nature of an AEG | • wide AEG regarding auditor duties and responsibilities, in particular concerning fraud prevention and detection |
Olagunju/ Leyira | 2012 | Nigeria | auditors, users | • existence of an AEG | • misunderstanding gap • misperceptions relate e.g. to going concern, fraud detection and independence |
Saeidi | 2012 | Iran | auditors, financial managers, investors | • existence of an AEG concerning auditors’ responsibilities for preventing and detecting fraud • 34 statements on fraud definition, auditors’ responsibility for detecting fraud, auditors’ responsibility for further investigating suspicions of fraud, and reporting detected fraud |
• financial managers and investors have higher expectations than auditors with respect to fraud detection and prevention |
Kamau | 2013 | Kenia | auditors | • existence of an AEG | • AEG exists • auditor efforts, lack of auditor skills to detect frauds, and little society/public knowledge significantly influence the AEG • lack of structured audit methodologies, lack of auditor independence and narrower audit scope do not |
Olowookere/ Soyemi | 2013 | Nigeria | auditors, bankers, investors | • existence of an AEG • 13 semantic differential belief statements grouped into three factors: responsibility, reliability, and decision usefulness |
• AEG exists • expectations of auditors and users differ with regard to auditors’ duty for fraud detection and prevention and with regard to the assurance level |
Enofe/ Mgbame/ Aronmwan/ Ogbeide | 2013 | Nigeria | auditors, managers, investors, public | • reasonableness AEG • questionnaire with 13 questions |
• existing AEG regarding assurance level, financial report preparation, fraud prevention and detection, auditors’ responsibilities to shareholders |
Okafor/ Otalor | 2013 | Nigeria | accounting students and teachers, accountants in practice, investing public | • role of the auditing profession in narrowing the AEG | • many of the public expectations are unreasonable |
Tanko/ Dabo | 2013 | Nigeria | chartered accountants in practice, chartered accountants not in practice, bankers, financial directors, credit managers, investment analysts, fund managers, accountancy students, shareholders, government employees | • whether the auditor report can reduce or even eliminate the AEG • 61 construct question items |
• AEG exists • improved auditor report is necessary |
Agyei/ Kusi Aye/ Owusu-Yeboah | 2013 | Ghana | auditors, stockbrokers | • existence of an AEG | • AEG concerning auditor responsibility for fraud detection and prevention, and the soundness of the internal control structure of the auditee |
Devi/Devi | 2014 | Pakistan | bankers, investors | • variables that cause an AEG • variables are audit reliability, audit responsibility and usefulness of audited financial statements • 16 semantic differential belief statements |
• AEG is caused by reliability and usefulness of audited financial statement • reason behind AEG is lack of proper education and understanding regarding audit standards and audit practices so it will be reduced by giving adequate knowledge and awareness of audit to the users of financial statements |
Ruhnke/ Schmidt | 2014 | Germany | auditors, academic faculty, financial journalists, investors, bank representatives, management representatives, supervisory board members | • causes of the AEG • impact of proposed changes to the current statutory audit regime • key issues: compliance with financial reporting standards, level of assurance, going concern, fraud, management audit |
• public has exaggerated expectations of auditors’ responsibilities under current standards • other causes of the AEG: public’s difficulty in assessing the performance of auditors, deficiencies in auditors’ performance • auditors are not fully aware of their responsibilities • increased information content of auditor report is expected to narrow the AEG • mandatory rotation and ban on non-audit services may reduce AEG to a lesser extent |
Rien | 2014 | Indonesia | bankers, accountant educators | • existence of an AEG • 16 semantic differential belief statements |
• evidence of AEG, in particular regarding auditor responsibility for fraud prevention and detection and maintaining accounting records |
Idowu/ Oluwatoyin | 2014 | Nigeria | accounting students | • impact of audit education on an AEG • questionnaire with 10 statements |
• knowledge and exposure of accounting students reduce the existing AEG • misperceptions with regard to e.g. discovering fraud and disclosing illegal acts |
Ogbonna/ Appah | 2014 | Nigeria | representatives of firms | • AEG variables and accounting performance indicators • relationship between an AEG and firms’ performance |
• variations in earnings per share and return on capital employed are attributable to variations in error and fraud detection and the expressed audit opinion |
Onulaka | 2014 | Nigeria | auditors, fund managers, stockbrokers, financial analysts | • perceptions on the existence of the AEG and on the usefulness of the audit process • whether the AEG has an effect on the volume of transactions on capital markets |
• wide AEG in the areas of auditors’ responsibility for fraud prevention and detection • AEG has a negative impact on the transaction volume |
Onulaka | 2015 | Nigeria | auditors, accountants not in public practice, investors, stockbrokers, financial analysts | • relationship between the self-regulation of the accounting and auditing profession and an AEG • whether the establishment of the Financial Reporting Council affects an AEG • whether self-regulation contributes to a deficient standard gap • list of semantic differential belief statements |
• strong relationship between self-regulation and AEG • establishment of an independent public oversight board has a positive impact on AEG • deficient standard gap is not only associated with self-regulation but also with other legal pronouncements |
Köse/ Erdoğan | 2015 | Turkey | auditors, bankers, investment analysts | • existence of an AEG between auditors and the beneficiaries of the audit services • questionnaire with statements about the role of audit and auditors and the responsibility of auditors |
• existence of an AEG • expectations of users exceed the responsibilities and the role of auditors • there is both the reasonableness gap and the performance gap • unreasonable expectations decrease with experience • as education level increases the AEG diminishes |
Gbadago | 2015 | Ghana | final year MBA accounting students | • level of knowledge of students on auditors’ responsibilities | • existence of an AEG, e.g. regarding assurance level, scope of the audit of transactions, auditor report guarantees financial soundness |
Litjens/ Van Buuren/ Vergoossen | 2015 | Netherlands | bankers, preparers, auditors | • whether the AEG may be explained and reduced by frequently mentioned user information needs and changes in the auditor report | • bankers have the largest AEG followed by managers and auditors • bankers require additional information, management is reluctant to let the auditor provide sensitive information and auditors try to minimize their risks • impact of the frequently proposed actions on the AEG is limited and differs significantly between groups • only information about the audit process and the continuity of the audited entity may reduce AEG of all groups |
Salifu/ Mahama | 2015 | Ghana | auditors, bankers, students of the Institute of Chartered Accountants | • existence of an AEG | • wide AEG with respect to detecting and preventing fraud and errors, the soundness of the internal control structure, the exercise of professional judgment, the level of assurance, and that an unqualified auditor report means that the entity is well managed |
Füredi-Fülöp | 2015 | Hungary | finance and accounting managers and accountancy service providers, bankers and financial consultants, auditors | • causes and typical compositions of an AEG • auditors’ functions, tasks, responsibilities and independence |
• AEG stems from the combination of the deficient performance of auditors, deficiencies in audit standards, unreasonable expectations and false interpretations of audit functions |
Ali/ Aamir/ Raza / Naqvi | 2015 | Pakistan | auditors, accountants, accounting educators | • existence of an AEG | • AEG exists, e.g. regarding management efficiency, fraud detection, internal control quality |
Bazrafshan | 2016 | Iran | auditors, university students | • AEG concerning fraud risk indicators • questionnaire with 61 fraud risk indicators |
• significant difference in evaluating importance of fraud risk indicators between groups |
Salehi | 2016 | Iran | certified accountants, professional investors | • existence and extent of an AEG • perceptions on actual and expected levels of audit effectiveness |
• AEGs regarding measuring financial performance (e.g. assurance on financial health), financial control (e.g. preventing fraud and error), finding misstatements (e.g. detecting illegal acts by management), mainly driven by reasonableness gap |
DiGabriele | 2017 | USA | accounting academics, accounting practitioners, users of financial statements | • existence of an AEG with regard to the financial evaluation fitness of auditors | • significant differences in the expectations between users and practitioners and between users and academics |
Füredi-Fülöp | 2017 | Hungary | preparers, analysts, beneficiaries of financial statements | • causes and typical composition of an AEG • appropriate combinations of solutions for narrowing the AEG |
• AEG stems from the combination of the deficient performance of auditors, deficiencies in audit standards, unreasonable expectations and false interpretations of audit functions • users expect greater responsibilities of auditors for fraud prevention and detection • enhanced auditor reports could narrow AEG • users are not completely satisfied with auditor independence |
Masoud | 2017 | Libya | auditors, auditees, audit beneficiaries | • existence and extent of an AEG | • existence of an AEG • deficient standards account for 49 %, deficient performance for 15 % and unreasonable expectations for 36 % |
Boterenbrood | 2017 | Netherlands | auditors, preparers | • AEG measured by total materiality | • preparers assume lower materiality levels than auditors |
Shikdar/ Faruk/ Chowdhury | 2018 | Bangladesh | university faculty members of accounting and auditing, auditors, students of accounting bodies | • variables that reduce the audit AEG • variables include e.g. audit education, expanded auditor reports, structured audit methodology, external monitoring, improved internal quality control, audit committees |
• the identified variables reduce the AEG significantly |
Toumeh/ Yahya/ Siam | 2018 | Jordan | auditors | • factors that affect an AEG and solutions that may narrow it to a least possible extent | • lack of awareness (unreasonable expectations) amongst users of financial statements has greatest impact on increasing AEG • uncertainty in auditor’s independence has less impact on increasing AEG in the audit process • strengthening of auditor independence and improving supervision of auditing profession are suggested |
Alawi/ Wadi/ Kukreja | 2018 | Bahrain | (unclear) | • determinants of an AEG • potential determinants are the efforts of auditors, the skills of auditors, the knowledge of the public about the audit profession and the users’ needs from auditors |
• the level of the AEG is affected by auditor efforts, the number of users’ needs, the possessed skills of auditors, and (to a lower extent) the knowledge of society |
Azagaku/ Aku | 2018 | Nigeria | customers, investors, employees, managers, general public | • existence of an AEG | • existence of an AEG, e.g. with regard to auditor responsibility toward fraud |
Hussain/ Khalid/ Ashraf | 2018 | Pakistan | shareholders, directors | • major factors causing the AEG | • failure to detect errors, fraud and illegal acts are main drivers |
Fulop/ Tiron-Tudor/ Cordos | 2019 | Romania | students, used as proxies for different categories of stakeholders | • whether audit education has an effect on the existence of the AEG | • audit education is impactful on the audit reasonableness gap |
From the survey-based AEG research results I can conclude that the most frequently identified gaps refer to the prevention, the detection and the disclosure of major errors, fraud and illegal acts (e.g.
Concerning the components of the AEG, prior survey-based research demonstrates that unreasonable expectations and deficient performance are the key drivers, with deficient performance contributing to a much lesser extent (e.g.
Two response strategies to the AEG are intensively researched. On the one hand, the AEG prevails where users have little experience and a lack of accounting and auditing related knowledge (
Beyond surveys, a considerable number of experimental studies on the AEG exists. They also deal with the two predominating response strategies. Education may be an effective approach to narrow the gap (for Australia:
Interview-based research on the AEG shows that an AEG exists (
In the following, more detailed information on selected articles is provided. Quality and reputation of the journal, recency, and relevance from a European perspective are used as selection criteria.
Dewing and Russell (2002) present the results of a postal questionnaire survey. They describe the perceptions of UK fund managers as to the definition of the AEG, its constituents, and the extent to which the gap might be narrowed by audit regulation. Fund managers are aware of the AEG and are particularly concerned about the scope and responsibilities of the auditor, and monitoring of auditors’ work. They perceive a need to strengthen auditor independence, prefer a more frequent rotation of audit engagement partners, and wish to extend the scope and responsibility of auditors in respect of fraud and going concern. The respondents agree that increased regulation offers potential to narrow the AEG, especially as regards monitoring and discipline of auditors. A point of criticism is the fact that the authors just consider the perceptions of one stakeholder group. Fund managers are above-average informed subjects and less informed groups might perceive more and larger gaps.
A survey by
Based on a questionnaire survey conducted in Germany,
In Australia,
An expanded auditor report is an attempt to educate users and to clarify certain matters pertaining to the audit function.
To test the effectiveness of additional information in the auditor report, provided by the revised ISA 700 which came into force in 2007,
A study by
Research on the AEG is comprehensive, exists for almost 50 years, and covers a broad range of countries. This contradicts assumptions that this research is mainly limited to the UK and New Zealand (
The AEG exists for a long time and numerous regulatory efforts to narrow it were only partially successful. Research findings suggest that education might be a promising approach. However, the possibilities to implement this proposal are limited, because it seems to be impossible to educate millions of stakeholders. Another promising avenue is the expanded auditor report. The auditor report is the primary means of communication between the auditor and users of financial statements. It is the objective of expansions of the auditor report like the disclosure of key audit matters (KAM) to increase both its information content and its transparency, thereby increasing its information value and leading to the efficiency of capital markets. However, the auditor report loses its usefulness if users misunderstand it, and the disclosure of KAMs may then have the opposite effect. It should also be noted that it potentially narrows the existing gap, e.g. by avoiding unreasonable expectations, but could also create new gaps if the information is not adequately disclosed and understood. Users may e.g. perceive auditors to be responsible for the preparation of financial statements or misinterpret KAMs as qualifications of the auditor opinion. Prior experimental and archival research on KAM analyzes whether the related information is decision-useful for the providers of capital and often fails to find a significant impact (
A good example for the constructive approach are the regulatory changes regarding auditors’ responsibility for fraud detection. Historically, the main auditing objective was the discovery of defalcations. However, the emphasis on fraud detection dissipated over time. Regulators shifted auditors’ focus away from fraud detection and determining fairness of the financial statements became the focus. However, recurring major fraudulent accounting scandals resulted in a public perception of misconduct, which in turn caused regulators to increase auditors’ responsibility for fraud detection step by step (
The auditor only has a secondary responsibility and has to obtain reasonable assurance that there is no fraud which lead to material misstatements in the financial statements. In addition, the risk that a material misstatement due to fraud remains undetected is greater than the risk that a material misstatement due to error remains undetected.
Prior research reveals that the AEG differs significantly between countries (
This literature review is subject to a specific limitation. Despite an extensive and thorough search, I cannot guarantee completeness. I systematically searched for journal papers but not for working papers and books or book chapters. In addition, my review is limited to publications having the term AEG in the title or the abstract. Furthermore, I only searched for papers written in English. Finally, it was not possible to finalize my Google search (approximately 28 million hits for AEG).
Surveys are the predominant research method. They allow researchers to analyze a broad range of topics. However, participants can easily identify the research objective which in turn increases the risk for biased responses. Therefore, future research should more frequently apply experimental research approaches. In addition, given that the AEG is a very complex phenomenon, and that the previous qualitative research on the AEG is not only limited but also mostly very specific, future research projects could use interview techniques. There is also a lack of cross-country studies. Finally, a promising avenue for future might be investigations regarding the impact of recent regulatory changes, like KAM reporting or stricter regulations regarding the provision of non-audit services, on the AEG.
Prof. Dr. R. Quick is professor in auditing at Darmstadt University of Technology/Germany. His research covers audit quality, auditor independence, provision of non-audit services, auditor rotation, and assurance services.
This list can be found online: https://vhbonline.org/vhb4you/vhb-jourqual/vhb-jourqual-3/gesamtliste. The rankings are quite similar to those from other organizations, like that one from the Australian Business Deans Council.