Expectations Gap

Contents
Introduction:...............................................................................................................2
Nature of Expectations Gap:......................................................................................2
Issues in the expectation gap:....................................................................................5
Auditor independence:............................................................................................5
Auditors role in detecting fraud:..............................................................................6
Expectations of public related to the issues:...............................................................7
Reducing the gap in expectations:.............................................................................8
Conclusion:.............................................................................................................. 10
References............................................................................................................... 12

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Introduction:

The existence of expectations gap is described by many literatures in various ways

by the fact that, may be the need of the users are beyond auditors roles and

responsibilities and recently many misconceptions has grown over the assurance

given by them. To improve the image and performance of the auditing profession

there is a vital role of the expectations of the society and to align them with the roles,

duties and the performance of the auditor. In this essay we will discuss about the

differences that are perceived by the users of the financial statement and other

public users whether auditors are clearly meeting the users requirements by

following the responsibilities which they are meant to fulfil or not. This essay also

focusses on the expectations gaps and the assurance being provided. This essay

will provide the general nature of expectation gap, its issues with the societys

expectation of auditors and their performance. Finally, we will conclude with some

suggestions on how can those expectation gaps can be closed or narrowed.

Nature of Expectations Gap:

Auditing plays a vital role in serving the public according to their interest to maintain

trust and confidence to the reporting methods. It also strengthens the accountability

practices. However, there have been some scandals recently like Enron and

WorldCom failure that the trust and confidence towards the auditors and their

performance has been questioned. The failure of such big companies has been

linked to the auditing profession. So what actually happened and what changed has

to be made in order to improve the transparency in the audit and its accountability. It

has been observed that there might be a gap where the expectations of the society

from auditors and their actual performance which is perceived by society may be

different (Porter, 1993). The fact that the auditors do not meet these expectations

gives rise to concern about auditing that is expressed through the notion of the audit

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expectations gap (Humphrey, et al., 1993). This gap is known as expectations gap in

the literature which was first proposed by Liggio (1974, p. 27) and defined as the

difference between the levels of expected performance as envisioned by the

independent accountant and by the user of financial statements. After that, several

authors came with their own views and explained it differently. The gap might be

between the beliefs or desires that one party has and the beliefs and desires that

another party has, or between a belief and the facts that make the belief true or false

(Dennis, 2010, p.133). Humphrey et al (1992) observed that the common factor in

several author views is that auditors are performing in such a manner that there is a

variance with the desires and belief of the interested users of the audit. According to

Pierce and Kilcommins (1996, p.1), " the audit expectations gap occurs when their

role and duties is compared against the expectations of user groups and the general

public". In contrast with the definition by several authors expectations gap lies under

the word expectations, percieveness and the performance. It is very important that

we distinguish between the auditors perceptions towards their work and the whole

profession expectations itself and also the interpretation by the standard setters.

So, why there is the expectation gap? Why auditors cannot fulfil the users

expectations? In the example of Enron failure why auditors could not find out the

fraud? It is clear from these questions that the auditor was expected to discover

going concern problems or the fraud during their audit. These gaps are may be

arising due to lack of certain procedures of how to do the auditing, unreasonable

expectations from the public or management, lack of audit education or the maybe

the rules set by standard setters are not strong enough. Pierce and Kilcommins

(1996) who argued that there may be a misunderstanding and the misinterpretations

of the meaning of the auditing and profession itself by the users. So, the expectation

gap exists because of the differences between the view of the users and the auditor

or it is the gap between the public requirements and the audit objectives, remains a

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questionable debate whether its a myth or reality. It Is not just about the gap in

beliefs but also what public desire (Dennis, 2010). However, the term expectation

gap itself looks confusing because of the different views towards it and how we

analyse the term.

Through an empirical study, Porter (1993) found out that the expectations gap mainly

has two components which is Reasonableness gap and Performance gap.

Reasonableness gap is the gap between what the society expects auditors to

achieve and what the auditors can reasonably be expected to accomplish. The main

reason for this gap is because of unreasonable expectations by the users. It arises

due to lack of societal and technological sophistication and clarification of audit role

(Gray, et al., 2015). Salehi (2011) mentioned that the expectations term which is

perceived by the users are different. They normally misunderstand and misinterpret

the performance expectations of the auditors and look for an absolute assurance.

Nowadays, absolute assurance cannot be met and it has been replaced with

reasonable assurance. Despite this change in business environment, public expects

same absolute assurance, which they used to get during 1990s, hence created the

gap of reasonable gap.

Performance gap is the gap between what society can reasonably expect auditors to

accomplish and what auditors are perceived to achieve. This gap is further divided

into two as Deficient Standard gap and Defiecient Performance gap. Performance

gap is purely linked with the way auditors perform their duties and responsibilities.

This count as expectation because when there is deficient standard, the

expectations which are reasonable cannot be met due to the restrictions by the

standard setters and show the deficiency in the standard. The reason for the

deficient standards is due to the lack of independence in the profession. Defiecient

performance gap is raised when auditors are blamed as they are not performing up

to the reasonable responsibilities expected by the society and performing below the

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standards. The reasons might be due to the dependence of auditors on

management, self and conflicting interest of the auditors etc. This arise due to lack of

competence practitioner independence. For e.g. strong stakeholder may force

competence and practitioner independence on auditor by override (Gray, et al.,

2015).

Issues in the expectation gap:

There are several issues which are incorporated within the term expectations gap.

There has been a numerous research to confirm that the expectations do exist in

different countries and environments and there are several factors behind the

existence of the expectation gap (Porter & Gowthorpe, 2004). Among the possible

causes or issues in the expectation gaps some are fraud detection responsibilities of

the auditors, auditor independence, erroneous expectations, nature of the audit

process, public interest reporting etc.

Auditor independence:
Auditor Independence is the fundamental aspect of the auditors professionalism. The

mission of the auditor is to guarantee the truthfulness of the financial reports of the

going concern and it is only possible if they maintain a fully independent position

from them. Any link or sectional interests between the company and the auditor

definitely affects the way auditor work to get the true and fair view of the audit report.

Thus, the independence is an essential requirement. Mostly investing public perceive

that the auditor is the one to whom they can trust for the independent guarantor of

the financial information of the particular company. There is a view that they are the

independent agents for the shareholders who look after the accounting actions on

managerial agents. Looking at the scandals like Enron, World Com collapse we can

say that there was at least a lack of the independence in the profession. These arise

because these companies retained the same auditors for many years where

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relationships became even stronger between the management and the audit staffs.

May be there was economic incentives for auditors which deviate the audit staff to

act in a truly independent manner (Sikka, 2009). In reality the change in the auditors

became infrequent at those times and thus the danger of lack of audit independent

remains real. Example of Enron and Arthur & Andersen had the same issues where

auditing company was in the favor of what Enron wants to show to the public by

inflating the profits and also they supplied internal audit services, advised on the off-

balance sheet financing and tax avoidance schemes and in return Arthur & Andersen

got huge amount of fee where audit staffs got benefitted and fulfilled their personal

interests.

Auditors role in detecting fraud:

From the point of the view of the auditor they provide a true and fair view of the

financial statements at the end of accounting period to the public but public

perceptions towards them is different. They think that the detection of the fraud by

the auditors is one of the important role of them which created an expectation gap

between them. This counts as expectation because public perception is that the role

of the auditors in detecting the fraud should be more active and accurate. But for the

auditors they are just the watch dog not a bloodhound, which means they can be

vigilant for any wrong doing and not suspecting anyone without the valid reason. The

investors and even the management sometimes cannot understand that how

possibly an auditor can detect the fraud within an organization, given that their role is

only about checking whether the financial statements are true by properly stating all

the figures correctly in the statement. This misunderstanding of the auditors role is

creating the expectation gap and became one of the main issues where the role and

performance are being compared. Expectations of public might be something like

auditor will cross check each and every transaction to ensure everything is correct

but the reality is different and may be below the public high expectations.

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Expectations of public related to the issues:

Users of financial reports such as investors, creditors, management, and the public

have their own different views of what auditor should be doing and the reliability of

the audit report. Financial statements should be free from all the errors and frauds

for them to assess the viability and solvency of the business. Expectations of all the

parties are high as they think that auditor can do more than what they should do thus

the resulting gap between the expectation of the users and the reality led the

profession questionable and suspicious. The quality of audit is dependent very much

on whose eyes one looks through (Knechel, et al., 2013). Management are looking

on creating the value for money from external audits by providing assurance and

advising in their financial information. Investors are focused on the report in which

that can be satisfied that the company is going concern as it is fruitful to invest in that

company. Creditors who has suffered loss previously are asking how the auditors

cannot be unaware of the future breakdown of the company and predict before it

happens.

As mentioned by Dennis (2010) if we do the conceptual enquiry we can re-describe

the terms expectations gap in the terms of beliefs and desires. According to him

issue may be the gap of perceiveness and the expectations between the public and

the regulators of the auditors role. So, it is actually the gap in desires of what both

the parties want to do something from the auditors. If not, it can be easily

characterized as an unreasonable and give rise to unreasonable expectations.

The issue here is revolving around the current understanding to the expression of

the auditing expectations. The issues are mainly comprising of beliefs, facts and the

desires of the auditors role expected by the users. However, it must be noted that the

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expectation gap comes from the deficiency of either performance or excessive

expectations (Knutson, 1994). Differences in the expectations and the

misconceptions towards the auditors role will persist unless timey solution sand

effective steps are implemented.

Reducing the gap in expectations:

There are several issues in the term expectations gap. It is very hard to completely

close the gap as the nature of the components is making it very hard to eliminate.

Several authors has defined the way to close the gap in different ways but due to its

nature of the components it is definitely difficult to eliminate (Sikkaa, et al., 1998). In

such situation narrowing the gap will be the favourable solution but the question is

how to do it? The term expectation itself is misleading and it goes around by talk of

beliefs and desires. Expectation gap varies between what someone belief and what

someone desire. According to Dennis (2010) the possible way to bridge the gap may

be done by reconfiguring the expectations gap in between beliefs and desires and

identifying the reasons for these beliefs and desire. So how can it be reconfigured?

Possible ways may be identifying the evidence of beliefs about what auditors do or

about their duties and if the unawareness has caused such beliefs it is time to

educate them. If the reasoning is based on desires, then practical reasoning from

objectives to these desires should be examined to find out the clearer view of what

they expect. The issues cannot be resolved until we find out the clear view of which

kind of expectations is involved on creating such gaps.

According to Okafor and Otalor (2013) the lack of public awareness and knowledge

is the main factor for their unreasonable expectations so, educating the auditors is

not just the only solution for reducing the gap. Beck (1973) also argued that to avoid

misconceptions of the roles of external auditors education has a fundamental

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importance but Moir (1989) argued that public education should be implemented on

the limitations of the audit. However, Porter (1993) said that education should include

the duties of auditors which can be reasonably expected. It appears form the authors

views that education is an effective approach but it should be appropriate and should

address the expectations gap. For e.g. auditors reports should clearly include the

disclaimer clauses mentioning that the report is not the guarantee of the financial

soundness or the accuracy of financial statements and auditirs can add their opinion

into it. Auditing education can be done by conducting mentoring programs, specified

policies, ethical training and education, conventional audit courses etc. (Siddiqui, et

al., 2009).

Being independent in their role will definitely reduce the expectation gap. The ways

auditors programme their roles and investigating and reporting should be

independent and they should have the freedom of selecting the appropriate strategy

when processing an audit.

Deficient standards can be reformed or revised by establishing the professional

standards and legislation that anticipates the feasible demands of the society

(Dewing & Russel, 2002) .However, Wolf et al. (1999) argued that establishing an

independent authority for auditors can enhance the auditors independence.

Ultimately it can regulate the fees and clarify their responsibilities to detect the fraud

The use of structured audit methodologies is one of the responses made by some

audit firms which can help narrowing the gap and eventually reducing the legal

liability of the auditors (Koh & Woo, 1998).

Auditors role is a key part in narrowing the gap between the expectations. Limperg

(1985) observed that the auditors have not just one responsibility rather they have

several in which in one hand they should not arouse greater expectations for public

and in the other hand that should not neglect the expectations evoked while carrying

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out the work. If they fail to do so they will face the criticism and litigation and also the

confidence towards them will be decreased.

Looking at all the literatures comments and recommendation we can say that there is

a need for the continued sensitization of the public, by both the auditors profession

and other stake holders on roles of the auditors to avoid any unreasonable

expectation by the public. There should be the improved communication and

feedback system that can find out how public view their activities. More specifically to

reduce the deficient performance gap the communication within the auditing

environment plays a vital role. It can assist in monitoring and reducing the

possibilities of the audit expectation gap. Licencing procedures should be made strict

to monitor whether auditors comply with the rules and regulations or not. This may

have direct impact on reducing the expectation gap.

Conclusion:

We can conclude from the literature that the problem of expectation gap is widely

recognized and the causes are indeed complicated. They are raised from some part

of unawareness and misconceptions by the users, auditing complexity, unreasonable

expectations, time lag, changing social expectations and also may be the inadequate

performance by the auditors. So, an attempt to fix the real problem between the gap

of expectations of beliefs, facts and desires must be put forward for the correction.

There should be clear set of roles and responsibilities by both the auditing profession

and the regulators to avoid unreasonable expectation by the public. One of the

research done by Litgens et al. (2015) suggested that the profession of audit should

take a completely different route to address the problem of expectation gap. So there

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may be the need of new research, especially in the ways of involving the users of

financial statements in the audit and how a clear communication can be shared and

to what extent and under what condition users expectations can be reduced from the

audit report and enhance the trust. Others ways of continuous monitoring of the

performance of the auditors work should be encouraged by the professional firms.

That can be done by the proper training with improved communication and feedback

system by the audition profession. However, looking at the current situation, it is

likely that this gap contributes a major problem for many years to come.

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