The Impact of the Expectation Gap to Auditor and the Possibility to Eliminate Such Gap - Research Paper Example

The Impact of the Expectation Gap to Auditor and the Possibility to Eliminate Such Gap Chapter Introduction 1 Background or the Reasons for the Study In relation to the modern phenomena of global auditing and accounting system, audit expectation gap can be witnessed as a serious concern, having major influences on the modern accounting firms. The classic failure of Enron to meet its corporate governance practices along with the collapse of Anderson, one of the leading assurance providers can be duly recognised as certain adverse impacts of expectation gap to auditors (Ojo, 2006). The consequences of the above discussed aspects further resulted a major concern for the modern organisations to develop and comply with a strong set of responsibilities with the involvement of independent accounting professionals (Abbott & et. al., 2007). The concept of expectation gap to the auditors can be defined as a difference persisting between prospect outcome regarding the perceived roles of the auditors and expected claims of the auditors while preparing varied financial statements (Cascarino, 2007.). The expectation gap to the auditors generally refers to be one of the essential aspects for the firms to differentiate the anticipations of audit profession and auditors’ perception towards a particular auditing process (Fadzly & Ahmad, 2004). In order to identify the major impacts of auditor expectation gap, lowering credibility and authenticity of the auditing works can be attributed to a major concern for the organisations while intending to sustain in this competitive landscape (OLeary, 1998). In this context, the expectation gap to the auditors build a major obstacle for them to perform adequate level of fairness in their respective accounting works and also reduce their perceived value towards meeting the desired needs of the valuable stakeholders (Chambers & Rand, 2011.). The issue is often considered to promote numerous types of unethical conducts regarding the governing practices that lead towards lowering the image of the firms operating in a particular business industry (Bogdanoviciute, 2014). Weakening internal control of the firms can also be duly considered as one of the major impacts derived from the expectation gap to the auditors. In this regard, it can be stated that the expectation gap can radically influence the practice of corporate governance framework within varied firms. It is worth mentioning in this regard that corporate governance and ethics are viewed as essential requirements for any business that aids in sustaining in this competitive market scenario (Tricker & Tricker, 2012). Compliance with the corporate ethics and government code are vital functions of the top management level, which assists them in taking important decisions (Aldhizer & Cashell, 1996). However, corporate governance and ethics may vary within the organisations according to their size and industry specifications, wherein the role of international policy standards like International Financial Reporting Standards (IFRS) and Financial Reporting Standards (FRS) play an imperative role. In this regard, a significant gap persisting within the auditing practices of the auditors can make major changes in the corporate governance framework of the organisations that further lowers reliability and credibility of their auditing works at large. Based on the above discussion, this research study intends to discuss about the compliance and the disclosure of the principle of governance related to modern auditing and accounting firms with focus on the provisions that can reduce vulnerable impact of expectation gaps to auditors (Rittenberg & et. al., 2011.). In relation to the modern accounting phenomena, a strong set of governance principles that are followed by the firms can get affected due to the existence of expectation gap to the auditors. According to UK’s corporate governance code, effectiveness, as a provision, includes specialised skills, competencies along with the knowledge of the Executives and the Board Committee members. Effectiveness, as the corporate governance principle assists the top-level management officials of the organisations discharge their respective responsibilities along with duties efficiently. Based on this principle, it is necessary for the companies to implement formal and rigorous procedures to appoint the new Directors within the board, who are expected to allocate sufficient time for the accomplishment of predetermined organisational targets (Rezaee, 2009; Sherer & Turley, 1997). Besides, within the UK’s corporate governance regulations, it can be ascertained that the Directors must be provided with adequate training on a regular basis. It is projected that the process of providing adequate training and developmental support to the Directors can reduce possible gaps of expectation to the auditors by a certain level (Tsamenyi & Uddin, 2009). In the context of unabated changes in the global auditing and accounting frameworks, the issue associated with expectation gap to auditors is emerging as a greater interest for the firms to avoid numerous future challenges. In this similar context, it can be apparently observed that the above stated issue impose adverse impacts on the overall performance of the organisations that eventually hinders them to attain long-term competitiveness (Okaro, 2009). Thus, the issue concerning expectation gap to auditors is identified as an emerging issue with imposing numerous impacts on the firms. The major impact of the expectation gap can be attributed as it often lead towards lower credibility while effectively dealing with varied auditing practices. It is often found that the expectation gap to the auditors often involves major difficulties that restrict the firms towards attaining their respective predetermined business targets (Masoud, 2012). This may be owing to the reason that the perceived auditing performance of the auditors is one of the major difficulties to measure and execute effective set of activities relating to accounting. In relation to the modern auditing and accounting frameworks, it is possible for the firms to substantially reduce any sort of error linked with accounting practices through implementing different set of measures, but the gap might not be completely eliminated from different auditing practices. Specially mentioning, the decreased level of firms’ competitiveness can also be observed as one of the crucial consequences, which can be derived from the expectation gap to the auditors. The existence of significant gap relating to the ethical principles and their adequate compliance in the accounting functions can fiercely lower the competitive position and radically devastate the current financial performance of the firms (ICAEW, 2014). With regards to the increasing number of issues relating to auditing practices, number of influencing causes can be apparently identified in shaping expectation gap to the auditors. In this similar context, individualistic identities of the auditing professionals along with their changing attitudinal aspects are often found to increase the risk of expectation gap. With respect to different conventional and modern research studies, it has been revealed that the preferences of the employees in the modern day scenario have been inclined much towards individualistic identities rather than on collective values of the organisations (The Wall Street Journal, 2014). These changing preferences of the personnel and alternative interests of the auditing professionals tend to build numerous aspects that further emerge the risk of expectation gap (Volosin, 2008). 1.2 Research Aims and Objectives According to the possible impacts derived from the expectation gap of the auditors, it has been ascertained that the consequences may create difficulties for the firms. With regard to the recent collapse of various reputed business firms, it is evident that the failure in meeting the expectations of the auditors leads towards causing number of destructive aspects on the global economy. Therefore, with this concern, the study aims at critically examining the impact of expectation gap to the auditors that exist within the auditing functions of the firms. In this regard, the study primarily focuses on identifying the gap regarding the expectation of the auditors and critically assessing their impact on the organisations. In this regard, the impacts that are generally imposed will be discussed in the context of credibility, earning potential as well as sound image of the auditing operations of the firms. In addition, the study also aims to identify possible measures that will enable firms to reduce the negative impacts impose by expectation gap. In this context, the discussion explores different approaches and set of effective tools that enable auditing firms to lower the negative impact of auditors’ expectation gap. In order to critically identify the possible measures, the study would critically focus on various key aspects of impacts and their possible consequences. 1.3 Research Questions By taking into concern the impacts of expectation gap to auditors, utmost focus has been laid on gaining an in-depth understanding about various types of factors leading towards emerging such issue. In this regard, the following research questions have been framed in relation to the aforesaid research study. What are the major impacts of expectation gap to auditors and how it can lower credibility and sustainability of the organisations? What are the possible measures to eliminate auditors’ expectation gap and minimise its existence from the firms? 1.4 Literature Review The issue concerning expectation gap to the auditors is viewed to be an emerging phenomenon with imposing certain negative impacts on the auditing professionals and the overall auditing operations of the firms. In this regard, there lay huge figure of academic literatures that clearly demonstrated the impacts of expectation gap to the auditors and most vitally possible measures to eliminate such issue. Few of the major literatures regarding the primary objective of the research have been critically discussed in the following sections. 1.4.1 Impact of the Expectation Gap to Auditors According to Ruhnke and Schmidt (2014), audit expectation gap is one of the major drivers of change within a particular audit and assurance firm. Based on the study conducted by Idris & Ojemen (2004), it can be ascertained that the gap associated with the expected perceptions of the auditors often creates major difficulties as well as complexities in the auditing procedure. This can be measured in the form of lowering the credibility of the firms, resulting in deteriorating the overall performance of the auditing firms at large. In this similar context, Ruhnke & Schmidt (2014) identified that the issue concerning expectation gap to auditors merely increased in the recent auditing and accounting profession. Idris & Ojemen (2004) claimed in this context that the public and audit professionals hold multiple beliefs regarding the audit profession and responsibilities. In this regard, the existence of expectation gap in the statements represented by the audit reports often causes the end users to eventually lose their trust and reliability on the firms’ audit reports (Abbott & et. al., 2003). Hence, it radically lowers organisations’ capability to build long-term sustainability and strong relationship with their respective valuable shareholders at large (Ruhnke & Schmidt, 2014). With respect to the study conducted by Houghton & et. al. (2010), the existence of expectation gap in auditing practice can be duly considered as a detrimental aspect with numerous consequences not only hamper the works of the audit professionals, but also affects the overall auditing performance of the organisations. According to Ruhnke & Schmidt (2014), the expectation gap tends to reduce auditing values along with wellbeing of the profession that might not be recognised by the societies. The concern radically lowers credibility regarding the values of the audit functions and substantially impacts the organisations to remain competitive in a particular business industry or market. In relation to critical understanding of the researches conducted on the subject matter about the impact of expectation gap to auditors and the possibility to lessen such gap, numerous reasons can be traced leading towards this issue. The reasons have been elaborately discussed in the following section. 1.4.2 Causes of Expectation Gap to Auditors In the context of determining primary causes, Enofe & et. al. (2012) identified numerous influencing factors that lead towards rising expectation gap to auditors. These gaps are often characterised into two major perspectives including perceived performance of the auditors and expectation on the audit profession by the public and societal members. In the context of perceived performance of the audit professionals, Houghton & et. al. (2010), apparently noted that deficiency in individual performance and lack of compliance with the auditing standards are few of the major aspects that lead towards generating gap on the auditing functions. From the perspective of society’s expectations on the audit professionals, the unrealistic or unreasonable desires may also influence the audit profession to breach policies and raise expectation gap at large (Enofe & et. al., 2012). The following pictorial representation depicts the major components and causes of expectation gap in audit functions. Fig.1: Key Components and Causes leading to Audit Expectation Gap Source: (Enofe & et. al., 2012) According to an empirical study conducted by The Institute of Internal Auditors (2013), the auditing practices are highly influenced by the roles along with the responsibilities perform by the financial executives. Based on this study, it can be ascertained that significant lacunas in terms of meeting policy standards and less or insignificant measures in deterring financial report frauds are few major attributes leading towards forming gaps in auditing functions. The board and the audit committees of the firms must need to ensure that the audit functions are competent to meet the required policies and provisions while recording and representing financial reports. In addition, the research conducted by Best and et. al. (2001) in this regard clearly identified that firms are likely to monitor accounting practices through detecting frauds and ethical standards of each individual accounting professional. The process of lacking sufficient inspection as well as maintaining adequate control regarding the auditing functions often lead to create expectation gap of the auditors (Best and et. al., 2001). 1.4.3 Possible Remedies to Eliminate the Auditing Gap Strengthening Corporate Values According to Pierce and Kilcommins (1996), corporate values play an indispensable role for a firm to effectively deal with potential issue of auditing expectation gap. From the perspective of an auditing and assurance service based industry, the strategic focus on strengthening corporate values is one of the key measures for the firms to generate credibility within the range of auditing practices. Moreover, the policies associated with corporate values and culture often lead towards generating major influences on the auditing professionals through maintaining adequate transparency, reliability and accuracy while recording and reporting financial statements. Hence, the process of strengthening corporate values can enable audit professionals to meet the expected outcome of the society and minimise potential expectation gap by a certain level (Pierce & Kilcommins, 1996). Ensuring Continuous Improvement of the Communication Code of Conduct The report of Institute of Internal Auditors (2013) has provided a clear understanding about the communication code of conduct relating to the performance of internal audit professionals. The process of improving code of conduct associated with the internal communication process often lead towards building strong auditing environment and lessening potential expectation gap (Ahlawat, 2000). Moreover, the strategy of improving code of conduct can also increase credibility of the auditors in terms of maintaining adequate clarity of the financial records and apparently represent financial reports to the major groups of stakeholders. In this regard, a strong policy relating to the communication code of conduct may provide adequate support to the investors in maintaining transparency and clarity o the financial records (Chartered Institute of Internal Auditors, 2014). The process in this regard, provides a major support to the auditors in eliminating expectation gaps and helps them to meet the intended objectives of the organisations and the societies as well (The Institute of Internal Auditors, 2013). Values and Ethics in Auditing Functions According to Berrone & et. al. (2005), providing values and practices of well-built ethical standards can be duly considered as a major set of strategies that significantly empowers organisations to establish a strong and sustainable position in any business industry or market wherein they operate (Berrone & et. al., 2005). In this regard, the study made by Adams and Evans (2004) provided a major understanding about the importance of values and ethics to eliminate audit expectation gap. According to the research findings, it has been ascertained that the continuous focus on improving quality, transparency and accountability are few of the major aspects of ethical norms that can enable firms to mitigate auditing expectation gap. The detailed disclosure of financial information along with the implementation of auditing tools that are widely accepted by the stakeholders can substantially reduce audit expectation gap at large (Adams & Evans, 2004). Chapter 2: Research Methodology 2.1 Choice of the Research Method and Rational of the Selection In order to accomplish the above stated research objectives, mixed approach of research methodology has been taken into concern considering qualitative as well as quantitative techniques. Specially mentioning, the perception of mixed research approach not only helps in defining various aspects, but also provides relevant information in respect to overall aims, objectives and key questions of a particular research area (Bergh & Ketchen, 2009). It has been previously mentioned that this research study will focus on critically studying the major impacts of expectation gap on the auditors by analysing number of valuable academic sources from different secondary sources (Kumar, 2010). The selected approach for the research can also be justified as a relevant technique, as the mixed research approach tends to provide a theoretical understanding with appropriate quantitative data. In the context of attaining the above framed research aims along with objectives, the approach will be effective in terms of collecting theoretical explanations and justifying those concerning the impacts of expectation gap to the auditors (Luton, 2010). 2.2 Description of the Method The application of mixed approach of research methodology can provide a better support to the research in gaining adequate credibility and reliability. It is worth mentioning that the conceptual framework of identifying the impacts of expectation gap to auditors are quite broad to be examined through an inductive or quantitative approach due to the non-measurability of the variables associated with its various dynamics. Hence, the integration of a systematic qualitative approach can help in developing significant insights in identifying the major impacts of expectation gap to auditors and the overall credibility of the organisations. It is often argued that qualitative research design, when applied in isolation, faces disruptions in respect to its effectiveness in absence of a defined structural format (Maxwell, 2012; Burney, 2008). However, the methodology i.e. qualitative technique can enable in explicitly identifying the major aspects leading towards the creation of expectation gap to the auditors. The mixed research approach incorporated in this study may provide a major support in gathering quality based information and evaluating them with regards to key research objectives as well as questions. It is worth mentioning in this similar concern that the application of qualitative study provides a broader understanding about the impact of expectation gap to the auditors. Subsequently, with the aid of a qualitative nature in the mixed research methodology, rudimental factors causing significant impacts of expectation gaps along with their possible consequences can be determined. Moreover, the mixed research may also enable in critically identifying the possible measures that can mitigate the risk of expectation gap to auditors. 2.3 Data Collection Technique The prime intent of data collection procedure is to obtain adequate and relevant information and manage those in accordance with the research objectives and goals. It can be apparently observed that an effective process of data collection tends to enable the research process to formulate and define various assumptions of the research topic for developing facts that can be essential to address the critical issues associated with the research (Axinn and Pearce, 2006). The integration of secondary sources in data collection process has also assisted in gathering adequate academic information about the key factors of corporate governance along with the roles and significance practiced by the modern business organisations. The data gathered from the secondary sources will be further implemented in conducting critical examinations and evaluating the primary information obtained. Additionally, data gathered through secondary sources in this study were both internal and external to the association and were accessible through internet medium (Sapsford & Jupp, 2006). Moreover, the collection process also enables in obtaining valid information from different scholarly sources including libraries, academic articles, peer-reviewed journals and web-based or online libraries (The Trustees of Princeton University, 2007). 2.4 Data Analysis Process The prime objective of data analysis is to determine the obligatory facts, results and final decisions. It is regarded as a ‘construction part’ of total research project. The process of data analysis includes selecting appropriate investigation procedure for the research, preparing data for examination and summarising the final results (Beck, 1995). The data analysis process includes various steps such as making a proper plan, collecting as well as cleaning collected data, determining the coding structure, tabulating the data, transferring the data and finally checking the facts and figures whether relevant or not. In accomplishing the primary objectives of the research, the data analysis section can be observed to be of great significance. To be noted, a maximum level of reliability assured in this section tends to contribute towards the overall comprehensiveness of the research findings. In order to precisely identify the impacts of expectation gap to the auditors, the study has incorporated an in-depth mixed approach by implementing qualitative information and evaluating them in a quantitative perspective. Therefore, the data analysis technique with the help of a quality based mixed approach provided major support to justify the impacts of expectation gap to the auditors. Moreover, the method has also helped in identifying possible measures and practices that can enable the modern firms to eliminate the impact of expectations gap at large. Chapter 3: Findings and Analysis The concern regarding the severe impact of expectation gap has long been witnessed to weaken the overall auditing functions of the firms irrespective of their size and capabilities. The issue of expectation gap to the auditors has been observed to create major obstacles that not only reduce the performances, but also restricts the auditing professionals to meet the organisational values along with visions. With reference to an in-depth analysis regarding the impact of expectation gap to auditors, it can be ascertained that the credibility of the organisations may get lowered through bringing major demolitions in the existence of the firms. This can be justified with reference to the fact that major firms including Enron and Anderson among others are few of those having major demolition in their overall performance as well as existence due to the prevalence of significant expectation gap amid the auditing professionals. The integration of mixed research approach through collecting primary data from different secondary sources may provide a major support to the research study in terms of identifying key causes and impacts of audit expectation gap. In this regard, the integration of different primary researches along with their valuable findings have recognised that the causes leading to audit expectation gap impose significant impact on the auditors to commit number of unethical practices while recording and reporting financial statements. Moreover, it is also ascertained that non-compliance with required policy standards along with involving different accounting related frauds can also be duly considered as a major set of attributes leading to audit expectation gap. It is worth mentioning in this regard that lack of individual credibility along with changing professional interests eventually impose adverse impact on the societal members in the form of conducting severe fraudulent acts that breach their expectations. The consequences relating to their expectation gap often lead towards imposing greater risks on the auditing profession that further causes major demolition of the overall firm. Nevertheless, the inadequate or less focus on deterring and detecting accounting frauds along with monitoring ethical understanding in financial statements often lead firms to face audit expectation gap. The empirical study of The Institute of Internal Auditors (2013) has provided a clear view relating to the expectation gap of the auditors. In this research, it can be apparently observed that the financial executives and internal along with external auditors are few of the major responsible professionals who got impacted from having significant gap in the auditing functions. According to the survey results, it was ascertained that 84% of auditing executives, 86% of internal auditors and 81% of the external auditors have higher level of confidence in terms of deterring fraud or any other reporting misstatement related issue (The Institute of Internal Auditors, 2013). In addition, the primary data and information retrieved from different secondary sources have also been identified to demonstrate different other impacts that can experience by an organisation for its auditing expectation gap. In this regard, lowering credibility, accountability and reliability in financial reporting practices can also be duly considered as a major concern derived from the audit expectation gap. In addition, lack of compliance with the auditing governance policies is ascertained to bring major risks for the firms to experience audit expectation gap. It is owing to the fact that governance practices impose massive impact on the organisational performances and frames an important mechanism for evaluating the underlying risks that result in raising the operational efficiency of the organisations. Disclosure within the corporate governance is a vital tool of reporting information about the companies in the respective business markets. However, any type of non-compliance with the governance policies may often lead firms to experience severe risk of audit expectation gap (Maingot & Zeghal, 2008). 3.1 Major Causes Leading to Audit Expectation Gap By taking into concern different empirical researches, non-compliance with required policy standards along with involving different accounting related frauds are regarded as a major set of attributes leading to cause audit expectation gap. According to the critical understanding of the research, it has been ascertained that lack of individual credibility along with changing professional interests eventually raises the conduct of different fraudulent acts that breach the expectations of the societal members. The consequences relating to expectation gap of auditors often lead to impose greater risk on the auditing professionals that further causes major demolition of the overall firm. Nevertheless, the inadequate or less focus on deterring and detecting accounting frauds along with monitoring ethical understandings in financial statements often lead firms to face audit expectation gap. 3.2 Possible Measures to Eliminate Audit Expectation Gap In relation to the emerging risk of audit expectation gap, the literatures undertaken in this study have also provided a key set of effective measures for the firms to eliminate the negative impact of the concern. In this regard, the studies that have analysed in this research demonstrated a few of the major remedies to eradicate the possibilities of audit expectation gap. In this context, reinforcing corporate values regarding the policy guidelines of the auditing practices and ensuring adequate compliance with the governance codes can enable auditors to eliminate audit expectation gap by a certain level. In this context, the firms must need to ensure that the financial statements prepared are competent to meet each ethical standard by maintaining reliability, transparency and accountability. Moreover, the analysis of major academic literatures has also been witnessed to critically explore the importance of credibility in terms of eliminating the negative impact of expectation gap to the auditing professionals. In this regard, it has been critically observed that credibility in record keeping and using appropriate auditing framework enables firms to eradicate future auditing gap and achieve trust as well as believe of the societal members at large. In addition, the academic studies retrieved in this research also demonstrated that a strategy of building strong relationship with the communities and different other groups of stakeholders may eradicate the potential risk of audit expectation gap. In this context, the process of maintaining adequate clarity of financial information and delivering appropriate data about the auditing framework can also mitigate the risk of expectation gap. Chapter 4: Limitations of the Research One of the major limitations for the research study can be the availability of pertinent information regarding the corporate governance policies and practices. This may further raise complexities in segregating the data on the basis of relevancy. As the data collection process of the research is completely based on secondary sources, procurement of appropriate data from relevant sources proved to be a challenging task in justifying the impacts of auditing expectation gap. Moreover, the limitation of the research can also be recognised in this research during the presentation of different academic and organisational reports that clearly identify key measures to eliminate the risks of audit expectation gap. The research may also involve certain limitations in identifying major findings due to the adoption of qualitative approach. In this regard, the financial performance of the companies can only be interpreted rather than measuring the level of possible remedies that can effectively support them to mitigate future risk of audit expectation gap. Chapter 5: Conclusion The global auditing standards and reporting language are regarded as the major constituents in the growth of global industrialisation. In the context of modern auditing and accounting standards, the framework can be stated to render an effective set of guidelines that are significantly structured to provide appropriate auditing report and assurance services. According to the overall discussion of the study, it has been critically identified that the existence of audit expectation gap is one of the major detrimental factor for the firms to attain long-term sustainability. The study incorporates an in-depth understanding about the key causes leading to generate the risk of audit expectation gap. Throughout the analysis of the study, the use of mixed research approach and gathering data from different secondary sources have provided a major support to ascertain the foremost factors leading to create audit expectation gap. Moreover, the study has also detailed the major impacts of audit expectation gap that can severely reduce credibility of the organisations. However, the study deciphered a set of effective measures that can enable firms to avoid the risk of audit expectation gap. With reference to the key findings of the study, the incorporation of an effective corporate governance framework tends to play a major role for the organisational success in eliminating expectation gap to auditors. 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