Proposal Action Plan
As mentioned by Humphrey et al. (1993), the public expect too much from the
audit profession and remains largely ignorant at its nature and objective. The issue of
audit expectation gap is detrimental to the industry since the emergence of this gap
and its prominence will lower the credibility of the work of professionals, thus, it can
affect the overall integrity of firms and practitioners and can affect the public at large.
With the attempt to reduce the expectation gap between the general public and the
audit profession itself, different approaches were examined and suggested by
researchers. In order to incorporate these improvements on the auditing profession
there are primarily two main approaches namely, Defensive and Constructive
approaches. According to Lee,et. al (2009), under defensive response it includes (1)
Authorizing the higher authorities to educate the public and enlighten them about the
exaggerated expectations and litigations against auditors and audit failures (2)
Classify and legitimize existing practices. For the constructive approach , on the other
hand, it composes of: (1) Spreading and stressing the awareness regarding the
objective of audit (2) Extending the scope of an audit. To narrow these approaches
down it is still highly favorable to have the appropriate public education. A study
conducted by Bailey et. Al (1983), those users who have a background knowledge
about audit tends to place lesser burden and pressure towards auditors . Basically, the
defensive approach focuses more on education and processing the nature of
profession to public while the other approach seeks to change activities to meet pulic
concerns. In this case if investors or clients are educated then they are likely to
demand less from auditors to provide close to absolute assurance.
Increasing the public awareness regarding nature, objective, scope and exixsting
practices in audit will narrow the audit expectation gap. The necessary actions to take
includes the following:
 Regular interface between general public, management and auditors
 Mandatory audit firm rotation
 Elimination of risky clients
 Expanded audit report
 Audit failure permits
The first proposed action is to have regulators conduct research regularly as to the
society’s expectation and this would be helpful for them to revise existing policies to
match them with these expectations. According to the Institute of Chartered
Accountants of Nigeria (ICAN), incorporating the improvement of educational training
and obligatory constant expert training will limit the gap by having regulators conduct
free seminars, regular meeting or gathering annualy and formation of awareness will
address the gap properly. The public needs to be more proficient regarding the duties
and responsibilities of auditors to enhance their understanding of the work of auditors
Mandatory audit firm rotation is basically requiring companies to rotate their
independent auditor periodically this is to prevent them from getting excessively lined
up with directors, affecting on their independence (Hoyle, 1978). It is recommended to
be implemented as to the possibility that auditors perform engagements with collusion
with clients who they favor as important. Through rotation of auditors it will lessen the
likeliness of biases and auditor independence is less threatened.
The third tactic is to eliminate risky clients, apparently KPMG also practiced this by
dropping 50 to 100 audit clients in an annual basis, five years ago it was from zero up
to twenty, this is according to Berton (1994). It was also noted that big six firms had
repulse 30 large publicly-traded clients for only the first quarter of 1997 alone. Many of
them are brushing off auditing services for most firms who are seeking initial public
offerings. The reason for this is that there’s a greater chance that less experienced
auditors will handle the engagement with the riskiest audits which yields to an increase
in audit failures
Expanded audit report is one of the recommendation as it aims to help the users
understand it in a way that they can fully comprehend its results or assurance given by
the auditor. Miller et al. (1990) announced that brokers discovered extended review
reports to be more helpful and reasonable than the short structure reports. An
extended review report gives a more full comprehension of the extension, nature and
essentialness of the review and impacts the peruser's discernments concerning the
review and the examiner's job. Moreover it was discovered that an elaborated report
will convey what an audit really implies. A study conducted by Monroe and Woodliff
(1994) additionally examined the effect of the wording changes, in any case, the
altered wording in the report significantly affects the convictions about the idea of a
review and the inspectors' and the board's duties. The specialists proposed that
wording changes in the review report to be considered in shutting the hole. For an
example, the biggest issue on the auditing failure in the accounting profession, Enron,
used a complicated audit reports that cause shareholders and analysts to have a hard
time interpreting the reports. It also misrepresented its earnings on the balance sheet
just to facade that its company is doing well.
Audit failure permits would be similar to discharge or emission permits of most
manufacturing companies who are liable for their environmental discharge. As to
audit, failures must also be recognized in the profession because this are possible
circumstance that could happen in an audit process. However, that is why the reason
for audit is to mitigate this risk of mistake but there are chances that this can be
improved. The SEC will relegate a “permissible” number of audit failures based on
quantities of reviews and the incomes produced. Examining firms acting in a way that
surpass desires are remunerated by the market.
Projected impact of the proposal to the profession
The proposal would suffice the lacking area of the profession which is the
expectation gap between auditors and users. If properly executed, the harm it can
cause to public will be lessen and this is to restore the public confidence in the
auditing functions and processes of the profession. Since due to corporate failures,
the accounting profession regarding its audits are being greatly criticized when
everything goes downhill for the entities even though the auditors performed in
accordance with the proper standards. According to Sikka et. al (1998), reducing the
gap would remove the negative perception of the public to the profession. The
existence of this gap undermines the credibility and integrity of audit, as it can also
impact regulators, investors and government. Through the proposed plans of action,
the trust will be brought back to the profession and will change the perception that
corporate failures constitutes as equal to audit failures. For the short term, by
implementing these actions it will somehow enhance the knowledge of users
regarding the process of auditing and the contents of a report. It will allow them to
lessen the misconceptions, ignorance and unreasonable expectations. As for the
longer term, if all things held constant as to auditors performing all the best ways to
give reasonable assurance, thus it will guide regulators to meet societal expectations
towards their changing unlimited needs. Also, as for the legislative bodies who
implements such policies will be able to condemn those who are held responsible and
enhance auditor’s independece and the audit process itself.
Despite the proposed actions with the sole objective to lessen the limelight of
criticisms toward auditing profession, there are setbacks as to the plans of actions
needed to carry out the said proposal. One of this is that it seems impossible to
thougroughly eradicate expectation gap. According to Jedidi and Richard (2009)
eliminating the gap means there’s a need to first establish a fixed meaning of audit.
However, it is still recommended to lessen the gap as close to none. Another setback
is on the case of rotation of auditors in a frim which was said to be a possible cause of
loss of information of the client when an auditor is asked to rotate or forced to resign.
Also, audit costs might be slightly higher as to the additional work that would be
implemented by the firm. As stated by GAO (2003) companies are estimated to use
up costs about 17% of their first year fees from audits.
References:
Bailey, K.E., Bylinski, J.H. and Shields, M.D. (1983), “Effects of audit report
wording changes on the perceived message”, Journal of Accounting Research,
Vol. 21, Spring, pp. 355-70
Berton, L. (1998), ``Are auditing firms getting away with murder?'', Accounting
Today, Vol. 12 No. 13, pp. 7, 40
GAO (2003), “Required study on the potential effects of mandatory audit firm rotation”,
Report to the Senate Committee on Banking, Housing, and Urban Affairs and the
House Committee on Financial Services, Government Accountability Office,
available at: www.gao.gov/new. itms/d04216.pdf
Hoyle, J. (1978), “Mandatory auditor rotation: the arguments and an alternative”,
Journal of Accountancy, Vol. 145 No. 5, pp. 69-78
Humphrey C, Moizer P, Turley S (1993) The audit expectations gap in Britain: An
empirical investigation. Accounting and Business Research 23(91A): 395–411.
https://doi.org/10.1080/00014788.1993.9729907
Jedidi, I. and Richard, C. (2009). The Social Construction of the Audit Expectation
Gap: The Market of Excuses. La place de la dimension europeenne dans la
Comptabillite controle Audit, Strasbourg, France
Lee T. H., Ali A. Md. and Gloeck J. D. (2009). The Audit Expectation Gap in Malaysia:
An Investigation into its Causes and Remedies. South African Journal
of
Accountability and Auditing Research, 9, 57-88
Miller, J., Reed, S. and Strawser, R. (1990), “The new auditor’s report: will it close the
expectations gap in communications?”, The CPA Journal, Vol. 60, May, pp.
68-72.
Sikka P, Puxty A, Willmott H, Cooper C (1998) The impossibility of eliminating the
expectation gap: some theory and evidence. Crit Persp Account 9(3):299–330