The public and audit expectation gap: what are the Implications?

The word “audit” derives from the Latin word “audire” which means “to hear.” According to Wikipedia, during the days of old when manual bookkeeping was prevalent, auditors in Britain used to “hear” the accounts read out for them and checked that the organisation’s personnel were not negligent or fraudulent (emphasis is mine). In that light, it was identified that the most important duty of the auditor was to detect fraud.

That said, audit or auditing is generally synonymous with an examination, investigation, review, scrutiny, survey or verification. Broadly, audit has been defined as “an “independent examination of financial information of any entity, whether profit-oriented or not, irrespective of its size or legal form when such an examination is conducted with a view to express an opinion thereon.” Auditing also attempts to ensure that the books of accounts are properly maintained by the organisation as required by law.

To ensure the independence of an audit requires the appointment of a third-party or an independent auditor. In Ghana, Section 139 of the Companies Act (Act 992) 2019 as amended provides for the appointment of an independent auditor. It is sufficing to say that the confidence and trust that the public places in the effectiveness of an audited statement and the opinions of the auditor are the pivots around which audit function revolves. So when there is betrayal of that trust and confidence, the relevance of the audit function is seriously undermined.

Indeed, experiences over the years in the performance of audit functions by independent auditors to meet the expectations of its users therefrom emerged what is known as perception gap or audit expectation gap between auditors at one side and the public at the other side. The perception gap appears to have been worsened by the financial scandals of big companies like Enron and WorldCom. In Ghana, the revocation of licenses of some banks and other financial institutions between 2017 and 2019 also reinforced the perception gap. In this regard, this purposive article further discusses the phenomenon of audit expectation gap and how it can be addressed.

Audit Expectation Gap

Brenda Porter in “Accounting and Business Research- Volume 24” attributed the criticisms against auditors to the inability of the auditors to keep pace with the public demands. She defined audit expectation gap as the gap between the society’s expectations of the auditors and the performance of the auditors. To buttress same views on public demands, R. Glynne Williams in “Principles and Practice of Auditing” described public expectation “as a burglar alarm system, a radar system, a safety net, independent auditor, and coherent communication, which contradicts basic tenets of audit.”

It is worth noting that different schools of thought have used different terminologies to describe audit expectation gap. Nonetheless, they conveyed same understanding of the issue. Brenda Porter, for instance, re-named the audit expectation gap as the “audit expectation-performance gap” and structured it into ‘reasonable gap’ and ‘performance gap’. In that regard, she described the “reasonable gap” as the difference between “what the public expects auditors to achieve and what they can reasonably be expected to accomplish”. On the other hand, “performance gap” is the difference between “what the public can reasonably expect auditors to accomplish and what auditors are perceived to achieve”. She further divided performance gap into ‘deficient standard’ and ‘deficient performance’.

Deficient standard is the gap between “what can reasonably be expected of auditors and auditors’ existing duties as defined by the law and profession standards”. To my mind, I will explain deficient standard as the gap between reasonable expectation and the reality. Deficient performance is the difference between “the expected standard of performance of auditors’ existing duties and auditors’ perceived performance, as expected and perceived by the public”.

Audit expectation gap has largely been attributed to many factors. For instance, there is a viewpoint that ignorance, misunderstanding or inability of the public to accurately assess the performance of the auditors causes audit expectation gap.

Components of audit expectation gap

Apart from other descriptive terminologies, I will veer into these three generally accepted types of audit expectation gap.

-Knowledge gap

The ‘knowledge gap’ means “the difference between what the public think auditors do and what auditors actually do.”

What Auditors Do

An independent auditor worth its salt is engaged to render an opinion on whether a company’s financial statements are presented fairly, in all material respects, in accordance with international financial reporting standards and other standards in force. It is believed that when an audit is carried out in compliance with approved standards on auditing and relevant ethical requirements, it puts the auditor in a position to form his professional opinion. To form an opinion, the auditor takes a risk-based approach with a questioning mind to gather relevant and sufficient knowledge (information or evidence) to gain a reasonable assurance of whether financial statements are free of any material misstatement of accounts or facts due to fraud or error. Some of the more important auditing procedures include:

• Engaging management, the internal auditor and other stakeholders to gain an understanding of the company itself
• Identifying and communicating significant risks or threats.
• Examine whether there are conditions or events which in aggregate raise substantial doubt about the company’s ability to continue to do business (as a going concern.)
• At the end of the audit exercise, the auditor may offer objective advice for improving financial reporting or internal controls to improve a company’s performance.

Indeed, the knowledge gap recognises that the public more often misunderstand audit. They hold the view that auditors are responsible for preventing corporate failure. But the independent auditor is not involved in the day-to-day running of the company as it is the responsibility of management under the supervision of shareholders or board of directors to act on auditor’s professional advice.  The independent auditor’s engagement or statutory audit exercise ends after presenting the financial statements.

Performance gap

The performance gap focuses on areas where auditors do not do what auditing standards or regulations required of them. This could be due to insufficient focus on audit quality or differences in interpretation of auditing standards. By extension, ‘performance gap’ is the difference between what auditors actually do and what auditors are supposed to do, given the requirements of auditing standards and regulations. Performance gap can also be traced to apparent lack of independence to perform the audit function from which the audit report becomes a mere document to promote the company’s image of being compliant.

Any form of manifest deficiencies in auditors’ performance or when an auditor is not fully aware of their responsibilities hurts the reputation of the industry when such audited entities fail (corporate failure), and further widen the audit expectation gap. It is a standard requirement that auditor should have systems and processes that seek to ensure quality in their engagements with regard to standards and regulations.

-Evolution gap

The ‘evolution gap’ is defined as the difference between what auditors are supposed to do if they actually follow the requirements of auditing standards and regulation and what the public wants auditors to do. The evolution gap indicates the areas of the audit where there may be a need for evolution, taking into account the general public demand, technological developments and how the overall audit process could be improved to satisfy the public interest. It has been observed that audit expectation gap is caused by the time lag in the auditing profession in identifying and responding to continually evolving and expanding public expectations.

Implications of audit expectation gap

Real or perceived audit expectation gap has negative impact on the auditing profession. It undermines the credibility, earnings potential and erode the reputation which is the bedrock of audit work. It has been established that wealth creation and political stability depend on the level of confidence the public have in accountability and transparency watchdogs or institutions. Hence, the audit expectation gap could be injurious to the users of accounting information, regulators, investors and government. The crux of the matter is that when public trust is lost, it creates credibility problem and erosion of value attached to the profession. As a result, corporate failures are taken to be synonymous with audit failures with the public blaming auditors for failing in their watchdog roles. This perception by the stakeholders increases the liability risks and the amount of criticisms against auditors.

To close or narrow the audit expectation gap is of paramount importance to all stakeholders. In this vein, there is the need for concerted efforts by all stakeholders connected to the audit profession to work more closely to improve standards with clear intentions to enhance quality of audit reports while ensuring the deterrence and detection of financial reporting fraud. It is a fact that upholding high ethical standards is of the essence in the audit profession. I also strongly believe that clear understanding of the respective roles and responsibilities of stakeholders coupled with effective communication without any form of prejudices can help control the phenomenon of audit expectation gap.

Bernard is a Chartered Accountant with over 14 years of professional and industry experience in Financial Services Sector and Management Consultancy. He is the Managing Partner of J.S Morlu (Ghana) an international consulting firm providing Accounting, Tax, Auditing, IT Solutions and Business Advisory Services to both private businesses and government.

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