The Audit
Expectation Gap
MASTER THESIS WITHIN: Business Administration NUMBER OF CREDITS: 30 ECTS
PROGRAMME OF STUDY: Civilekonom
AUTHOR: Anton Andersson Manglaris & Tor Brewitz TUTOR:Caroline Teh
JÖNKÖPING May 2020
Exploring the auditor’s roles and responsibilities
from knowledge, performance, and evolution gap
perspectives
Abstract
The audit expectation gap is an interesting and widely researched phenomenon. This study seeks to explore the roles and responsibilities of auditors from the views of auditors and users of financial information. In this study, semi-structured interviews with auditors and users of financial information are conducted. The interviews were mainly analyzed from the perspectives of knowledge, performance, and evolution gaps. Different expectations of the auditor’s roles and responsibilities can lead to the auditing profession being criticized despite auditor’s performing in accordance with existing auditing standards. When the auditing profession is criticized, it leads to reduced confidence in the work that auditors perform. The confidence of society is essential to the auditing profession. If there is little or no confidence in the auditing profession, then the audit itself is of little or no value, which can have severe consequences for financial markets and the global economy. The results of this study indicate that most auditors and users of financial information do not perceive that there is a need to communicate the auditor’s roles and responsibilities to the public, or that there is only a limited need to do so. Communicating about roles and responsibilities to the client is mentioned as being the most important. However, due to the limited sample in this study, there is an opportunity to pursue additional research about auditors’ and users’ perceptions of the importance of the audit expectation gap.
Acknowledgements
We would like to express our deepest gratitude to our supervisor Caroline Teh for all her valuable support, suggestions, and efforts during the writing of this thesis.
We would also like to thank all seminar participants for their suggestions and valuable discussions, that helped to improve this thesis.
We want to thank all interview participants that despite busy schedules and heavy workloads were willing to participate in this study. Without them, this study would not have been possible.
Jönköping International Business School May 2019
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Table of Contents
Abstract ... i
Acknowledgements ... ii
Abbreviations and terminology ... v
1. Introduction ... 1
1.1 What is auditing? ... 1
1.2 Problem Discussion ... 4
1.3 Research purpose and research question ... 8
1.4 Structure of the thesis ... 8
2. Literature Review ... 10
2.1 History of auditing and the audit profession ... 10
2.2 Definitions of the audit expectation gap ... 12
2.3 Knowledge gap ... 13
2.4 Performance gap ... 15
2.5 Evolution gap ... 16
2.6 Auditor’s main task and beneficiary of the audit ... 18
2.7 Roles and responsibilities of the auditor ... 19
2.8 Audit profession communication ... 23
2.9 Criticism of auditors ... 24 2.10 Theoretical framework ... 27
3. Method ... 30
3.1 Research design ... 30 3.2 Information gathering ... 31 3.3 Source criticism ... 31 3.4 Research method ... 323.5 Population and sample ... 34
3.6 Data collection ... 35
3.7 Interview guide and Interview questions ... 37
3.8 Data Analysis ... 38
3.9 Trustworthiness and research quality of the study ... 39
3.9.1 Trustworthiness ... 39 3.9.1.1 Credibility ... 39 3.9.1.2 Transferability ... 40 3.9.1.3 Dependability ... 41 3.9.1.4 Confirmability ... 41 3.10 Ethical Considerations ... 41
4. Empirical findings ... 43
4.1 Empirical findings Auditors ... 43
4.1.1 Knowledge gap ... 43
4.1.2 Performance gap ... 44
4.1.3 Evolution gap ... 45
4.1.4 Auditor’s main task ... 46
4.1.5 Beneficiary of the audit ... 47
4.1.7 The public’s attitude towards auditors ... 49
4.1.8 Audit profession communication ... 50
4.1.9 Auditors in the media and criticism ... 51
4.2 Empirical findings Users of financial information ... 52
4.2.1 Knowledge gap ... 52
4.2.2 Performance gap ... 52
4.2.3 Evolution gap ... 53
4.2.4 Scope of the audit ... 54
4.2.5 Roles and responsibilities of the auditor ... 55
4.2.6 Audit profession communication ... 56
4.2.7 Auditors in the media and criticism ... 56
5. Discussion & Analysis ... 58
5.1 Knowledge gap ... 58
5.2 Performance gap ... 60
5.3 Evolution gap ... 61
5.4 Roles and responsibilities of the auditor ... 63
5.5 Audit profession communication ... 65
5.6 Criticism of auditors ... 67
5.7 Summary of the analysis ... 68
5.8 Criticism of the findings ... 69
6. Conclusion ... 71
6.1 Limitations ... 73
6.2 Practical implications ... 74
6.3 Final remarks and future research suggestions ... 74
References ... 75
Appendices ... 82
Appendix 1 - Questions to Auditors ... 82
Abbreviations and terminology
ACCA - the Association of Chartered Certified Accountants AICPA - American Institute of Certified Public Accountants
Big 4 - The biggest international auditing firms, EY, KPMG, Deloitte, and PwC FAR - Föreningen Auktoriserade Revisorer (Association of Authorized Auditors) IFAC - International Federation of Accountants
ISA - International Standards on Auditing PIEs – Public Interest Entities
SAS - Statement on Auditing Standards
1. Introduction
In this chapter, a background of auditing and the audit expectation gap will be presented. Additionally, criticism of auditors and the auditor’s roles and
responsibilities will be highlighted. Finally, the study’s purpose and research question will be defined.
1.1 What is auditing?
Auditing is an assurance service that helps to enhance the quality of the information in financial statements. Financial statements that have been audited are more credible and more reliable because an auditor has examined the assertions that makes up the financial statements and recommended management to undertake actions that will enhance the accuracy of the financial statements. This enables the users of financial information to have more confidence in the information because it has been scrutinized by an auditor whose conclusions can be found in the audit report (Hay, Knechel & Willekens, 2014). The auditor is independent and conducts the audit for the benefit of society and not solely for the benefit of the company that hires the auditor.
According to the Swedish companies act (SFS 2005:551), a limited company must file an annual report every year. With a few exceptions for small companies, all limited companies must engage an auditor. The auditor should submit an audit report in the annual report for every fiscal year, that interested stakeholders can access. In the audit report, the auditor will give their statement whether the annual report has been executed in accordance with the applicable laws. Furthermore, the auditor should produce an audit opinion if the annual report provides a fair and representative view of a company’s financial position and result, and that it follows generally accepted accounting
principles. The auditor also must report on the CEO’s management of the company (Swedish Inspectorate of Auditors, n.d.).
The auditing profession has existed for a long time. In recent times, especially since 2000, the audit profession has often been in the limelight; not so much for its successes but rather for its failures. Several of these failures are explained next.
One of the largest auditing failures involved the American energy company Enron, which used complicated financial statements that were difficult for shareholders and analysts to interpret. Enron also misrepresented their earnings and altered its balance sheet to signal that the company was performing well. The collapse of Enron disrupted the accounting profession more than any other corporate failure in U.S. history. It resulted in the closure of one of the largest accounting firms in the world, Arthur Andersen. Since then the Congress, the media, and other stakeholders have questioned the integrity of the independent audit process and the adequacy of U.S. disclosure standards. The public questioned how CPA firms can maintain their independence while at the same time performing consulting work where the fees exceed those of the audit. The Enron scandal thwarted confidence in financial markets in the U.S. and around the world (Thomas, 2002). It also made stakeholders from all over the world scrutinize the auditing industry.
In 2004, the Italian food and dairy company Parmalat sued their two former auditors Grant Thornton and Deloitte for an estimated $10 billion. Grant Thornton was sued for the reason that they were involved in fraud when they were the principal auditor of the company. Grant Thornton was accused to be assisting the management of Parmalat to set up fictitious companies and structuring fake transactions that had the single purpose of transferring billions of dollars’ worth of assets from the Italian company. Deloitte failed to detect these frauds, even though according to the lawsuit, there were multiple red flags. Furthermore, Deloitte chose not to execute the required auditing procedures. According to the lawsuit, “no matter how their responsibilities are carved up, under accepted auditing standards and principles, both Deloitte and Grant Thornton, in their international as well as local domestic capacities, are legally responsible for Parmalat’s enormous losses, currently estimated at over $10 billion.” (Norris, 2004).
In another example, after KPMG failed in its audit of the Co-operative Bank in the UK, during the height of the financial crisis in the late 2010s, KPMG received a “severe reprimand” and a fine of £5 million by the Financial Reporting Council (FRC). The perceived conflict of interest of the big four audit firms led to the business select committee calling for their breakup. The British Labour MP Rachel Reeves who chairs the committee stated that KPMG was only the latest example of auditors failing to show professional skepticism which investors and the public need. She also stated that there was a need for a clearer separation between audits and cash-cow consultancy (Kollewe & Jolly, 2019).
Corporate failures in the 21st century, such as Enron and the subsequent downfall of Enron’s auditor Arthur Andersen or the recent allegations of money laundering in Swedish banks have raised questions about how auditors fail to detect cases of corporate fraud (Mothander, 2019). The case of Swedbank has been discussed in the media in Sweden. The scandal in Swedbank resulted in the company’s capital stock shrinking with 70 billion Swedish crowns, and meanwhile, payments to the auditor have
amounted to 41 million Swedish crowns. Swedbank was accused of money laundering and the auditor was portrayed badly towards the public, and discussions have arisen whether the auditor should have detected this when conducting the audit (Mothander, 2019). There are also other Swedish banks that have been accused of money laundering, for example, SEB, that has been connected with a money-laundering scandal in Russia. Investigative journalists have identified 200 suspected clients and around 2000
transactions in SEB that display warning signals of money laundering. It was found that companies that have a history of fraudulent behavior took part in some of the
transactions with SEB (Johansson, 2019).
In an article in The Guardian dated April 18th 2019, Prem Sikka a professor of accounting at the University of Sheffield criticize the Big Four accounting firms and serious corporate failures in the UK. “What do BHS, Carillion, Conviviality, Quindell,
Aero Inventory, the Co-op Bank, and London and Capital Finance have in common? They were all audited by the big four accountancy firms – PwC, KPMG, EY and Deloitte – which audit 97% of FTSE 350 companies and collect 99% of audit fees. In each case, these [audit] firms collected huge fees and delivered little of any public value. Their failure to spot the fragility of those businesses resulted in the loss of jobs, savings, pensions and tax revenues” (Sikka, 2019).
1.2 Problem Discussion
According to Guénin‐Paracini and Gendron (2010), auditors are regularly, but not always, used as sacrificial victims in the aftermath of a corporate failure. As a former vice president of the American Institute of Certified Public Accountants expressed; “As long as investors suffer losses from a sudden and drastic drop in earnings or the
bankruptcy of a corporation which was widely regarded as a good investment, our profession is going to be criticized in the news media” (Humphrey, Moizer & Turley, 1992, p. 138). There is a widespread belief that stakeholders should be able to trust audited financial statements as a guarantee that the business is viable. Hence, if a company without warning starts to face severe financial difficulties, it is believed that someone should be held accountable for these difficulties, and this someone is always perceived to be the auditors (Chye Koh & Woo, 1998). Rezaee (2004) states that when auditors fail to reveal fraud, their trustworthiness is diminished. This contributes to reduced public confidence in the quality of the financial statement, and as a
consequence, all actors involved will suffer.
Auditors have a responsibility to make sure that society does not have unrealistic expectations of the audit profession. The auditors also need to make sure that they achieve societal expectations that are realistic. When criticism and lawsuits appear, it indicates that auditors fail to achieve both of these responsibilities. As a result, there is a gap between societal expectations and what auditors think that they deliver (Porter, 2014). This is generally known as the audit expectation gap.
After reviewing the history of the last 100 years of the audit expectation gap, Humphrey et al. (1992) state that the gap is a continuing problem, and questions arise when fraud is publicly revealed and the auditor had failed to detect it. Despite numerous committees and inquiries examining and issuing recommendations about the audit expectation gap, it has proven difficult to close the gap. When the public has a different view of what they believe the auditor is supposed to do and what the auditors do in compliance with current audit rules and regulations, an audit expectation gap exists (Ruhnke & Schmidt, 2014). Responding to the debate of the expectation gap, the professional accounting body, the ACCA, issued a report in 2019 to demystify the audit expectation gap.
According to the ACCA, an audit expectation gap is made up of three different types of gaps: (1) Knowledge gap, (2) Performance gap and (3) Evolution gap. Briefly, a
knowledge gap is the difference between what the public thinks auditors do and what auditors actually do. While a performance gap is when auditors do not perform as auditing standards or regulations require. An evolution gap exists in areas of auditing where there is a need for evolution. It takes into consideration the public’s demand, technological advances how the audit process could be improved to increase the value-added (ACCA, 2019). Despite this effort of clarifying the audit expectation gap, it is still unclear what the roles and responsibilities of the auditor are with respect to these different gaps. The question about the roles and responsibilities of the auditor still remains.
In Sweden, according to 5§ in the Swedish auditing law (SFS 1999:1079), the auditor shall inspect the company’s annual report, bookkeeping and the management's
stewardship of the company. The inspection should be as thorough and comprehensive as good audit practice requires. If the auditor is an authorized or approved auditor or a registered audit firm, the audit should be conducted with professional skepticism. In Sweden, International Standards on Auditing (ISA) are used. According to ISA 240, the auditor has the responsibility to validate that the financial reports as a whole does not include any material misstatements. However, even though the audit is planned
correctly according to ISA, there is an unavoidable risk that material misstatements are not detected (IFAC, 2009)
According to the Swedish Inspectorate of Auditors, the auditor has a responsibility to examine a company’s annual report, accounts, and the management’s stewardship of the company. The auditor then has a responsibility to provide an audit opinion on the annual report and the management’s stewardship of the company. Furthermore, the auditor has a responsibility to report to various stakeholders under certain
circumstances; this is known as event-driven reporting. This responsibility exists in some situations such as if the auditor suspects criminal activity (e.g. embezzlement, tax fraud or bribes) within the client’s business, the auditor has a responsibility to report it to a prosecutor. However, the event-driven reporting obligations do not mean that the auditor should actively pursue offenses that could trigger event-driven reporting, meaning that the purpose of event-driven reporting is not to alter the scope of the audit. When conducting the audit, if the auditor finds evidence that someone within the
framework of the client’s operations has been guilty of certain crimes, the auditor has an obligation to act. However, the auditor does not have a general responsibility to adapt the scope of the audit to suit the needs of any government agency or external analyst (Swedish Inspectorate of Auditors, n.d.).
There is guidance for auditors on their responsibilities in the Statement on Auditing Standards (SAS) No. 99, AU Section 316, Consideration of Fraud in a Financial
Statement Audit. The auditor has a “responsibility to plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud” (AICPA, 2002).
Often when the audit profession is mentioned in the media, it is in a negative context after a corporate failure. Because of the hidden nature of the audit process, it is very difficult for a member of the public to gain an insight into how the audit of a specific entity is performed. This contributes to why the audit profession is not mentioned in the media when they perform well and detect material errors before they can lead to serious implications. Because of the phenomenon of the audit expectation gap, after a corporate
failure, the audit profession risks being criticized despite the auditors performing in accordance with existing standards and regulations during the audit.
Audits are important to a wide range of stakeholders that makes decisions that are based on the financial statements of a company. The audit report is used to verify the
truthfulness of the financial statements. When a company failure happens in close proximity to having received an unmodified audit opinion, criticism is often aimed at the auditors. This criticism arises because the audit of companies that are of public interest is important. Companies that are of public interest play an important role in society at large and if such a company fails it can have negative implications on society (Ruhnke & Schmidt, 2014).
After a corporate failure, the stakeholders who suffered a loss, often ask the question; what were the auditors doing? When questions such as these arise, it mirrors the inability of the auditors to meet the expectations that society has placed upon them. Such failures often lead to lawsuits against the auditors and criticism towards the audit profession. Consequently, there is a loss of confidence in the audit profession (Porter 2014). When the audit profession is criticized, it leads to reduced confidence in the job that auditors perform. The confidence of society is essential to the audit profession. The profession is deeply connected to the confidence society places on the audit and the capabilities of the auditor. Limperg (1932) stated that the audit function is rooted in the confidence society places in the opinion of the accountant (i.e. the auditor). If that confidence is betrayed, the function is destroyed since it becomes useless. If society has little or no confidence in the audit profession and the audits they produce, then the audit itself is of little or no value. If the audit is of little or no value, then the audit profession could disappear, and investors will be less probable to trust the truthfulness of issued financial reports. If there were no auditors to examine the financial statements, then it is difficult for investors to know if the financial statements give a fair and representative view of the company. Hence, they will be more reluctant to invest and therefore decrease the liquidity of financial markets, which would have severe consequences for the global economy.
According to Ruhnke and Schmidt (2014), the public’s expectations are constantly changing. Since the audit process is hidden from the public, it is important for the auditors to convey what responsibilities they have, i.e. what they are required and not required to examine. There is uncertainty in society about the auditor’s roles. If society has a good understanding of the roles an auditor has, there would only be limited uncertainty.
Furthermore, the audit expectation gap is important because if the public has unrealistic expectations of the audit, it can lead to regulations that might force auditors to do more but not necessarily increase audit quality. Dowling, Knechel & Moroney (2018) argue that when regulations are enforced in a more coercive way, audit firms alter their audit process with the aim of reducing inspection risk and not necessarily with the aim of improving audit quality.
1.3 Research purpose and research question
In this study, we examine the audit expectation gap between auditors and users of financial information. The purpose of this study is to explore auditor roles and responsibilities from the views of auditors, and users of financial information (In this study, the Swedish Inspectorate of Auditors’ definition of auditor responsibilities will be used).
Our research question is formulated as follows: How do auditors and users of financial information perceive the auditor’s roles and responsibilities from the knowledge, performance, and evolution gap perspectives?
1.4 Structure of the thesis
This thesis is structured as follows; In the next chapter, a literature review is presented. It is followed up by a methodology chapter, in which the collection of data and the chosen method is discussed. In chapter four, the empirical findings of our study are presented. Chapter four is divided into two parts, one containing the findings from the
auditors, the other containing findings from users of financial information. This is followed by an analysis and discussion. Chapter six presents a conclusion of this thesis. The last part of the thesis contains appendices and references.
2. Literature Review
At the beginning of this chapter, the history of auditing and the audit profession will be presented. This is followed by several definitions of the audit expectation gap and then the knowledge gap, performance gap and evolution gap will be presented. The rest of this chapter covers the auditor’s main task, roles and responsibilities of the auditor, audit profession communication and finally criticism of auditors. In the end of the chapter the theoretical framework used in this study is presented.
2.1 History of auditing and the audit profession
Auditing is an assurance service that improves the quality of information. Auditing reduces the risks that a financial report is being materially misstated (Hay et al., 2014). The auditor is the link between the client and the client’s stakeholders, such as potential investors, suppliers, and lenders. These stakeholders can use the client’s financial reports and the auditor’s report to base decisions upon. The audit is a quality seal towards third parties (FAR, n.d.).
Modern auditing has its roots in the United Kingdom during the industrial revolution. The development of business and the separation of ownership from control eventually led to the introduction of the Joint Stock Companies Act in 1844. This law required companies to provide balance sheet accounts to their shareholders and having an auditor verify these accounts. Subsequent failures during the end of the 19th century led to the introduction of new laws, requiring the auditor to be independent. This helped
strengthen the idea, that the primary goal of auditing was the detection of fraud and errors by an independent auditor and it can be considered as the beginning of modern auditing (Meuwissen, 2014).
In the early 20th century, audits mainly focused on detecting frauds and examining if the financial accounts were correct or not. As the number of transactions increased and as clients became more internationalized it was no longer feasible for the auditor to verify every transaction. Instead, the concept of materiality and sampling techniques were introduced. During the mid-20th century, the audit approach changed as businesses continued to grow in size and complexity and auditors changed from
verifying transactions to checking the client’s internal control systems and accounting (Meuwissen 2014).
In the 1980s when costs related to examining internal control systems started to increase, auditors started to put an increased emphasis on analytical procedures and risk-based auditing. Consequently, more auditing effort was put into the riskier areas of the client and less effort was put into less risky areas. As businesses started using data systems to monitor and process their financial information, auditors started to examine their client’s data processing systems through an Electronic Data Processing audit (EDP-audit). With the entry of computer systems into the business world, auditors also started using computerized auditing tools to enhance the auditing process (Meuwissen, 2014)
Since the auditing profession’s inception and the present day, the profession has been subjected to changes. These changes have often come in the wake of large-scale corporate failures, or because of increased demand for auditing services, such as increased growth or the globalization of clients. As a result, Meuwissen (2014) concludes that the approach, regulatory environment, and objectives of the audit are constantly evolving.
Previous research on auditing has shown that the auditing profession has a distinct impact on the evolution of the auditor’s report in its attempt to implement reporting standards that are consistent (Carmichael & Winters, 1982; King & Case, 2003). In the US in the 1930s, the audit profession advocated a standardized auditor’s report because it would fulfill two objectives that Carmichael and Winters (1982) explain to be: “(1) institute uniform report language across firms, thus making reports more readily
comparable and consequently reduce deficient report quality and misunderstandings due to ambiguous or vague wordings, and (2) make qualifications in audit reports more easily recognizable” (Carmichael & Winters, 1982, p. 6).
Humphrey, Loft and Woods (2009) stated that “the history of auditing is to replete with expressions of desire to know more about what auditors do or exasperated auditors [...] complaining that people do not understand exactly what they do. However, such wishes and frustrations seldom seem to be met by any enhanced visibility and/or understanding of audit practice, lending credence to the view that of primary significance to the audit
profession is to maintain a sense of professional mystique as this is commercially valuable” (Humphrey et al., 2009, p. 820). Different researchers have criticized that although the main focus of reforms in the audit profession has been to strengthen the reputation of auditors, it has not been to attain greater clarity and informative value for the people that use financial statements (Smieliauskas, Craig & Amernic, 2008).
2.2 Definitions of the audit expectation gap
The term expectation gap was first used by the American Institute of Certified Public Accountants (AICPA) in 1974 (AICPA, 1978). However, Humphrey et al. (1992) argue that the concept of an audit expectation gap has existed long before the phrase first appeared. In the United States in the 1930s, there were cases that revealed flaws on the part of auditors. The auditors received criticism since they were unable to detect falsified entries in the bookkeeping and for not clearly expressing the scope of their investigation.
The definition of the audit expectation gap differs between researchers, Liggio (1975) defined the audit expectation gap as the difference between levels of predicted
performance “as envisioned by the independent accountant and by the user of financial information” (p. 23). The commission on Auditors’ responsibilities (Cohen
Commission) (1978) further expanded upon this definition as “a gap [that] exists between the performance of auditors and the expectations of the users of financial statements” (p. xi). Monroe and Woodliff (1993) defined the expectation gap as the difference in beliefs between auditors and the public about the duties and
responsibilities assumed by auditors and the messages conveyed by audit reports. Quite similarly, Jennings, Kneer, and Reckers (1993) defined the concept as the difference between what the public expects from the auditors and what the auditors actually deliver.
In an empirical study of the audit expectation-performance gap, Porter (1993) argued that Liggio and the Cohen Commission definitions of the audit expectation gap were too narrow and that they did not consider that auditors might not accomplish “expected performance” or what they “can and reasonably should”. Instead, Porter (1993) defined
the audit expectation gap as the gap between society’s expectations of auditors and auditor’s performance, as perceived by society. The gap consists of two components:
1. reasonableness gap: what society expects the auditors to achieve and what they can reasonably be expected to accomplish.
2. performance gap: the gap between what society can reasonably expect auditors to accomplish and what they are perceived to achieve. The performance gap can then be further divided into:
• deficient standards: the gap between the duties which can reasonably be expected of auditors and auditors’ existing duties as defined by the law and professional promulgations
• deficient performance: the gap between the expected standard of performance of auditors’ existing duties and auditors’ perceived performance as expected and perceived by society.
In a report from 2019, the Association of Chartered Certified Accountants (ACCA) defined the audit expectation gap as “the difference between what the public thinks auditors do and what the public wants auditors to do” (ACCA, 2019, p.7). The ACCA categorized the audit expectation gap into three components, knowledge gap,
performance gap, evolution gap. These three components will be explained in sections 2.3 to 2.5. A visual model of the three components of the ACCA definition of the audit expectation gap can be seen in section 2.10 Theoretical framework.
2.3 Knowledge gap
The knowledge gap, which is a component of the theoretical framework used in this study, is the difference between what the public thinks auditors do and what auditors actually do. The knowledge gap takes into consideration that the public can
misunderstand the audit. For example, the degree to which auditors are responsible for preventing company failure or the restrictions on auditors providing non-audit services to clients. The knowledge gap has been used by some in the audit profession to resist change by dismissing the gap as something arising from the public’s lack of knowledge, rather than being a legitimate issue, ACCA does not agree with that reasoning. ACCA
claims that the existence of a knowledge gap does not discredit calls for auditors to do more, and neither does it explain or excuse the performance gap. However, ACCA claims that a wide knowledge gap can make it difficult to understand the evolution gap since some parts of the knowledge gap may be because of ignorance of policies that are already in place. For example, incorrect views about audit firms’ ability to sell non-audit services may fuel cries for more restrictions on providing such services. Even though in most countries, audit firms are already prohibited from providing non-audit services to entities they audit (ACCA, 2019).
Bailey, Bylinski and Shields (1983) conducted research on how the audit report is formulated, what message it conveys and the knowledge of the reader. The results from the study indicated that users with more knowledge of audit reports held the auditors less responsible for the information in the financial statements than users with less knowledge. Likewise, Epstein and Geiger (1994) presented evidence that investors that are educated in accounting, finance, investment analysis and the use of the auditor’s report are less inclined to require absolute auditor assurance (i.e. that there are no misstatements in the financial reports). Therefore, Epstein and Geiger (1994) suggested increased awareness and education as a way to decrease the expectation gap. By
increased awareness, the authors suggest explaining the nature of the audit and its inherent limitations to the public as well as explaining the auditor’s roles. The authors also suggest communicating the audit’s benefits and limitations at every available opportunity, for example at shareholder meetings. An additional way to educate the public is by having the audit report explicitly indicating reasonable assurance (i.e. that there are no material misstatements in the financial reports). Finally, Epstein and Geiger (1994) state that in order to close the gap further, both the audit profession and the financial community need to re-evaluate the fundamental role of the audit and make sure that preparers of financial statements, users and auditors are in agreement.
Monroe and Woodliff (1993) studied the effects of education on students’ perception of the messages conveyed through audit reports. Utilizing a research instrument that was administered to auditors and to two groups of undergraduate students: final year marketing students and final year auditing students at the beginning and at the end of a semester. The results of the study showed that the auditing students’ beliefs about auditor responsibilities, reliability of financial statements and future prospect of the
company changed substantially during the course of the semester. At the end of the semester, the auditing students believed that auditors had fewer responsibilities and that financial information is more reliable. Also, the belief that the audit report conveyed future prospects for the reporting entity had decreased. Monroe and Woodliff (1993) suggest that education can be an effective measure to reduce the expectation gap. They also conclude that more research is needed to determine the degree, quantity and content of public education needed to further user’s knowledge about auditing.
In 1994, Monroe and Woodliff conducted another study about the expectation gap. In this study, they found evidence of differences in perceptions of the nature of the audit and auditor and management responsibilities. They found that the differences in perceptions were significantly smaller for sophisticated users (e.g. people with
education and experience) than for unsophisticated users (e.g. shareholders or students). The authors proposed education as a tool to narrow the expectation gap by increasing the sophistication level of user groups. Monroe and Woodliff (1994) recommended professional bodies to implement an active education program in order to provide users with increased insight into the auditor’s roles and responsibilities and what the audit report means and does not mean.
To narrow the knowledge gap part of the audit expectation gap, ACCA suggested that audit firms and professional audit organizations should develop strategies to
communicate changes to existing audit requirements to the public through new regulations and standards. These new regulations and standards should also be made easy to access for the general public, for example by using far-reaching platforms, such as social media. Standard setters and regulators should also notify the public about changes to audit regulations or standards and explain the reasoning behind the changes. By doing this, the public will have a greater understanding of audit requirements and any changes that happen. The media also have a responsibility to inform the public and to describe audit obligations accurately when reporting about auditing (ACCA, 2019).
2.4 Performance gap
The performance gap, which is a component of the theoretical framework used in this study, is when auditors do not perform as auditing standards or regulations require. This
gap can occur because of an inadequate focus on audit quality; the complexity of certain auditing standards; or variation in the interpretation of auditing standards or the
regulatory requirements between regulators and practitioners. In order for audit firms to ensure quality in their consultation, they are required to set up specific systems and processes. In the processes, regulators will inspect the files of completed audits to monitor that quality is being fulfilled (ACCA, 2019).
In a study comparing differences in perceptions between auditors and juridical litigants with regards to audit expectations, Lowe (1994) found evidence of a large expectation gap. It was found that the judges in the study systematically expected more from the auditors than the auditors themselves believed that they provided. Lowe concluded that the implications of the judges’ high expectations could potentially prove to be costly for the auditing profession.
To narrow the performance gap of the audit expectation gap, ACCA states that audit firms have an obligation to make sure that audit quality is present and maintained by having knowledge and reacting to areas of consistent low performance. Audit regulators should push for innovation of audit firms, to increase audit quality and to avoid
instilling a “box-ticking” mentality. Audit standard setters should be reactive to audit quality problems by updating audit standards and providing assistance during the implementation phase (ACCA, 2019).
2.5 Evolution gap
The evolution gap, which is a component of the theoretical framework used in this study, exists in areas of auditing where there is a need for evolution. It takes into
consideration the public’s demand and technological advances on how the audit process could be improved to increase the value-added. By addressing the knowledge and performance gap it is possible to determine what needs to evolve in the audit. Since this will help to avoid overregulation and the inappropriate development of auditing
standards when the underlying issues could be poor knowledge or unsatisfactory performance (ACCA, 2019).
Kelly and Mohrweis (1989) conducted a study where they investigated if altering the wording in the auditor’s report would increase the user’s understandability of the audit
and have no effect on the level of responsibility assumed by the auditors. Using a sample of 50 investors and 50 bankers, the results indicated that the understandability of the purpose of the audit and the responsibility of management for the financial
statements was significantly increased by altering the wording in the auditor’s report. The wording changes, however, did not alter the investors’ perceptions of the level of responsibility assumed by auditors but bankers perceived the auditors as assuming less responsibility.
By reducing the knowledge gap and performance gap it will help the public to focus more clearly on how they want the audit to evolve. ACCA states that there is a need for a broad discussion between stakeholders on the development of the audit profession, so it meets the public's expectations and remains relevant. These stakeholders could include auditing standard setters, professional accountancy bodies, audit firms, investors, governments, and the general public (ACCA, 2019).
When the CEO of Arthur Andersen, Joseph Berardino testified before Congress, (after the bankruptcy of their client Enron), he stated that there are needs for reforms in accounting. He stated that there is no distinction between companies that do the bare minimum to comply with accounting regulations and companies that are more thorough when it comes to complying with the regulations. He pointed out that when the public looks at an audit report, they only see the same unqualified opinion on a company’s financial statement which is essentially a binary pass or fail grading system (Forbes, 2002).
Ruhnke and Schmidt (2014) argued that three types of failures can be associated with the audit expectation gap:
1. Failure of the public: a difference between auditors’ responsibilities under contemporary standards and public expectations. This failure can be caused by the public not understanding the requirements of the audit standards and developing expectations based on personal preferences. Furthermore, it is also probable that there is a difference between auditors’ actual performance and how the public perceives the auditors’ performance since the audit process is
2. Failure of the auditor: when there is a difference between the auditors’ own views of their responsibilities and contemporary standards. In addition, auditor failure also exists when auditors fail to apply audit standards in a proper manner. 3. Failure of the standard-setter: this failure exists when the standard-setter is
unable to create standards that are consistent and clearly express the responsibilities of the auditor.
2.6 Auditor’s main task and beneficiary of the audit
Humphrey et al. (1993) proposed alternative approaches to narrow the audit expectation gap. They claimed that it is not beneficial to expect the public to desert their beliefs of auditors as fraud investors through various means such as altering the length of the audit report or through education. The authors proposed three measures to narrow the gap. The creation of an independent office for auditing, that overlooks the appointment of auditors of large companies and that monitor audit fees. Secondly, increasing auditor’s responsibilities to include shareholders, creditors, and shareholders. Finally, making it clear that is the auditor’s responsibility to detect fraud. However, due to the extent of the expectation gap and the complexity of the proposed measures, they need to be rigorously evaluated before any of them are implemented. O’Malley (1993) concurred with the idea of increased auditor responsibilities, particularly when it comes to fraud detection. He suggested four new responsibilities the audit profession should evaluate; management and auditor evaluations of internal control systems; compliance reporting; direct reporting by auditors to regulators; and auditor association with interim financial information.
When conducting the statutory audit, the auditor plays an important part when confirming the validity of the financial statements. The expectation gap can become problematic for the audit profession because a difference in expectations can lead to changes in the statutory audit through increased regulation (Ruhnke & Schmidt, 2014). A change through increased regulation may not necessarily lead to an increase in the quality and effectiveness of the audit. Audit partners perceive that the enforcement mentality of regulators has changed from a collaborative style to a more coercive style. Consequently, audit partners perceive that the trust between auditors and regulators has deteriorated and that a climate of forced compliance has materialized. As a result, firms
have changed their compliance strategies to increase the visibility of compliance. Partners in audit firms have voiced concerns that the monitoring of the audit profession has led to audit firms altering their audit process. However, these changes in the
auditing process were made with the intention of reducing the inspection risk and not necessarily enhancing the audit quality (Dowling et al., 2018).
2.7 Roles and responsibilities of the auditor
In Sweden, according to 5§ in the Swedish auditing law (SFS 1999:1079), the auditor shall inspect the company’s annual report, bookkeeping, and the stewardship by the entity’s management. The inspection should be as thorough and comprehensive as good audit practice requires. If the auditor is an authorized or approved auditor or a registered audit firm, the audit should be conducted with professional skepticism. In Sweden, International Standards on Auditing (ISA) are used. According to ISA 240, the auditor has the responsibility to validate that the financial report as a whole does not include any material misstatements. However, even though the audit is planned correctly according to ISA, there is an unavoidable risk that material misstatements are not detected (IFAC, 2009). There is guidance for auditors on their responsibilities in the Statement on Auditing Standards (SAS) No. 99, AU Section 316, Consideration of
Fraud in a Financial Statement Audit. The auditor has a “responsibility to plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud” (AICPA, 2002). According to the Swedish Inspectorate of Auditors, the auditor has a responsibility to examine a company’s annual report, accounts, and the management’s stewardship of the company. The auditor then has a responsibility to provide an audit opinion on the
annual report and the management’s stewardship of the company. Furthermore, the auditor has a responsibility to report to various stakeholders under certain
circumstances; this is known as event-driven reporting. This responsibility exists in some situations such as if the auditor suspects criminal activity (e.g. embezzlement, tax fraud or bribes) within the client’s business, the auditor has a responsibility to report it to a prosecutor. However, the event-driven reporting obligations do not mean that the auditor should actively pursue offenses that could trigger event-driven reporting, meaning that the purpose of event-driven reporting is not to alter the scope of the audit.
But if the auditor during the audit finds evidence that someone within the framework of the client’s operations has been guilty of certain crimes, the auditor has an obligation to act. However, the auditor does not have a general responsibility to adapt the scope of the audit to suit the needs of any government agency or external analyst (Swedish Inspectorate of Auditors, n.d.).
When conducting the audit, the auditor should thoroughly choose transactions based on materiality (FAR, 2006). Information can be considered as material in those cases where a misstatement can affect the economic decisions users of financial information makes. The problem with materiality is that it builds upon the auditor's professional assessment. (McKee & Eilifsen, 2000). De Martinis, Michael, Burrowes and Ashley (1996)
examines the materiality and risk assessment as an important part of the financial reporting and auditing. It was found that the non-disclosure of risk and materiality assessments in the financial reports is a significant factor that widens or at least reinforces the audit expectation gap. Hence, materiality criteria should, therefore, be revealed in financial reports to make the reports more useful for the external stakeholder when making decisions
Empirical studies have been conducted, examining the nature and the structure of the audit expectation gap. The goal of these studies was to highlight the perceived roles and responsibilities of the auditor and to investigate contributing components of the
expectation gap. Many of these studies determined the views of the auditors and the public on auditor responsibilities by utilizing survey questionnaires (Baron, Johnson, Searfoss & Smith, 1977; Humphrey et al., 1993; Epstein & Geiger, 1994; Chye Koh & Woo, 1998).
Baron et al. (1977) investigated the degree of auditor detection responsibilities
regarding material irregularities and faults. The authors used a survey questionnaire to try and determine if there are discrepancies between the perceptions of auditor’s detection and disclosure commitments between auditors and users of financial reports. The results of the study showed that there was a significant difference in the perceptions of auditor responsibilities between auditors and users of financial reports. The users of financial reports e.g. bank loan officers were found to consider the auditors more
accountable for detecting and reporting irregularities and errors than the auditors considered themselves to be.
Epstein and Geiger (1994) conducted a study on investor views of audit assurance. When the study was conducted, the then-current SASs no. 53 & no. 58 communicated to readers that the audit provides reasonable assurance (i.e. that there are no material misstatements) of the financial statements’ accuracy. In conjunction, the SASs had the aim to both internally and externally reinforce the concept of reasonable assurance and that the audit provides such a level of assurance. In the study, Epstein and Geiger (1994) interviewed investors in the United States about what level assurance they thought auditors should provide. The authors expected that investors wanted auditors to provide reasonable assurance. However, for the detection of material errors, 47% of the
investors wanted auditors to provide absolute assurance (i.e. no misstatements at all). When it came to detecting fraud, over 70% of the investors desired that auditors should provide absolute assurance to detect material misstatements due to fraud. The results of the study by Epstein and Geiger (1994) showed that a majority of the investors wanted absolute audit assurance and the financial statements to be free from all kinds of material misstatements. This shows that there was a clear contrast between the level of assurance the audit profession thinks they should provide and what investors want auditors to provide.
In a widely cited paper about the expectation gap, Humphrey et al. (1993) used a questionnaire survey containing a series of mini cases to ascertain the perceptions of individuals about audit expectation issues in the United Kingdom. The issues included: what the role of an auditor should be; what prohibitions and regulations should be placed on the audit; and what decisions auditors could be expected to make. The survey included answers from chartered accountants in public practice, corporate finance directors, investment analysts, bank lending officers, and financial journalists. The results from the survey showed that there was a significant discrepancy between auditors and the participant’s views on the nature of auditing. The study showed the existence of an expectation gap particularly in the nature of the audit and perceived auditor performance. Humphrey et al. (1993) found that the key parts of the expectation gap constituted of auditors’ fraud detection role, auditors’ responsibilities towards other third parties, the nature of balance sheet valuations, the strength of, and continuing
threats to auditors’ independence and aspects of the conduct of audit work (for example auditors’ ability to deal with risk and uncertainty).
Exploring the history of auditing, Chandler, Edwards and Anderson (1993) sought to investigate two themes that had proven to be problematic for the auditing profession in the United Kingdom: the nature of the auditor's responsibility and the public’s
perception of the auditor’s role. The traditional view had been that auditors were mainly focusing on fraud detection and it was not until the 1930s that more focus was put on the verification of financial statements. Analyzing the perceptions of the role of the company auditor from 1840 to 1940, they found that statement verification was the primary audit objective as early as the 1830s. Chandler et al. (1993) acknowledged that more emphasis was placed upon fraud detection during the latter part of the 19th century. In the early 20th century the focus of the audit shifted back to statement verification. The results of the study suggested that the primary objectives of the audit tend to change after external events. The study also showed that the audit profession has had difficulty in appeasing public expectations with the practicalities of auditing.
Furthermore, the study showed that there has been a general confusion about the role of the auditor to such an extent that even the audit profession has struggled to come to an agreement of the main purpose of auditing and that this message has been conveyed to the investing public.
In an empirical study with the objective to test the structure of the audit expectation gap and to investigate the components that make up the gap, Porter (1993) used a mail survey to determine the opinions of auditors and auditor interest groups. The auditor interest groups in the survey included officers of public companies, financial analysts, auditing academics, lawyers, financial journalists, and members of the general public. The objective of the survey was to determine their opinions on auditor’s existing obligations, the standard of performance of the obligations and the role that auditors should perform. The study showed that deficient standards make up 50 % the
expectation gap, society holding unreasonable expectations of auditors makes up 34 % and finally perceived substandard performance makes up 16 % of the expectation gap.
There are many different regulators and standards that detail the auditor’s roles and responsibilities. There are also many earlier studies that have tried to determine how the
public and auditors perceive the auditor’s roles and responsibilities. The earlier studies indicate that there are differences between how auditors and non-auditors perceive the roles and responsibilities an auditor has. In the analysis, the part of this thesis, the answers from our interviews will be compared to the results from previous studies, standards and regulations about auditor roles and responsibilities.
2.8 Audit profession communication
Studying the use of apologies after conducting deficient audits that indirectly led to audit failure, Rasso (2014) states that: higher costs related to litigation can threaten the sustainability of the audit profession. Audit firms that have delivered a deficient audit that led to an audit failure, are more susceptible to litigation. Audit firms that issue an apology containing a combination of components such as an expression of sympathy, an acceptance of responsibility and a promise to refrain from the harmful behavior have mixed success in reducing assessments of punishment. However, when issuing an apology to the public, there is a significantly positive relationship between the number of components the apology contains and the perceptions of the accounting firm’s reputation. A firm’s reputation is very important in order to maintain its current customer base and to attract new customers. Thus, a well-formulated apology containing many components has a significantly positive effect on improving the perceptions of reputation. However, Rasso (2014) states that it is possible that the strategies used in his study are one-time strategies that might even lower the public’s perception of a company’s reputation if they are used very frequently.
When Joseph Berardino, the CEO of Arthur Andersen had to testify before Congress after the bankruptcy of Enron, he replied to the allegations by stating that there were few or if not any errors that were made in the audit of Enron. Additionally, he said that the auditors at Arthur Andersen were deceived by Enron, who intentionally withheld information (Hartgraves, 2004). Furthermore, Berardino pointed out that Andersen tried to provide information about Enron’s issues, but the special committee of Enron’s board turned them down and did not want to listen. Berardino contended that Arthur Andersen had a limited responsibility since they were the accountant but that it was Enron that did wrong (Forbes, 2002).
The cause of the collapse of Lehman Brothers in 2008, can be briefly be summarized as failings by both company executives and the auditors. The collapse of Lehman Brothers helped to trigger the global financial crisis that started in that year and is the largest corporate scandal that has ever occurred. The auditors replied to the issues in the financial statements of Lehman Brothers by stating that “Lehman’s audited financial statements clearly portrayed Lehman as what it was - a highly leveraged entity
operating in a risky and volatile industry; and Lehman’s bankruptcy was not caused by any accounting issues” (Freifeld, 2015).
In 2019 when KPMG was sentenced to pay a fine of 5£ million for the misconduct of their audit of the Co-Operative bank during the financial crisis of 2008. Both the responsible partner and the audit firm stated that the audit performance fell
“significantly short” of auditing standards. KPMG replied that their value adjustments of the bank did not meet appropriate standards and that they have significantly
improved their procedures in the decade that has passed (Kollewe & Jolly, 2019)
2.9 Criticism of auditors
That auditors are being used as scapegoats for directors is nothing new, as early as 1927, A.P. Richardson, the editor of The Journal of Accountancy, describes the meeting of the shareholders of Marconi’s Wireless Telegraph Co., Ltd. The company had faced serious capital losses and it had been virtually impossible for the auditors to present an opinion on the company’s assets. The present directors denied responsibility for investments that had not been profitable and placed the blame on their predecessors. Despite it being clear that the auditors had not been responsible for the current situation but had in fact done everything they could in order to bring attention to the issues. On this occasion, the shareholders were looking for a whipping boy and the accountants were chosen for this purpose. “Their actions seems to have been dictated by something approaching an unreasoning desire to hit someone who would not hit back”
(Richardson, p.445, 1927).
Studying how the audit profession is continued to be seen as legitimate despite audit failures, Guénin-Paracini and Gendron (2010) argue that auditors are often used as scapegoats after a corporate failure. They argue that auditors are morally and or legally
convicted in a way that maintains or enhances the legitimacy of the financial audit function. The authors contend that financial auditors can be seen as a ready supply of victims to be sacrificed when fraudulent financial statements appear that threaten to disrupt the credibility and smooth operation of capital markets. When auditors are used as scapegoats, they are first demonized. After their punishment has brought back order, they then become revered. The auditors are then quickly de-demonized at the expense of secondary scapegoats (often corrupted managers). In the end, the auditors are viewed as legitimate (Guénin-Paracini & Gendron, 2010).
Guénin-Paracini and Gendron (2010) argue that public accountants are not continuously seen as legitimate despite a continuous flow of audit failures but thanks to this very flow. The authors argue that the auditors are not revered although being demonized but on the contrary, they are revered because they are vilified. In the public’s eyes, they are both the cause of the crisis and the return of order. Guénin-Paracini and Gendron (2010) claim that with the risk of oversimplifying: liberalism generates financial scandals, which can result in the persecution of public accountants. The accountants’ punishment restores order and saves liberalism from implosion, which grants the auditors with professional status because of their supposed saving powers. In a report about audit purification and blame, Skærbæk and Christensen (2015) also come to the conclusion that the audit takes part in the creation of a strategy to turn a single person into a scapegoat. The audit plays a part in the cultural rituals of cleansing, where a person is sacrificed in order to assist others in coping with a crisis. The key insight from the study by Skærbæk and Christensen (2015) is that in addition to purifying financial statements, the audit can also be used to purify a scapegoating strategy that enables for blame evasion.
In a study from 2018, Hoos, Saad and Lesage studied why auditors get blamed when something goes wrong. Conducting an experiment, the authors found that auditing firms that actively convey the message that they are an assurance provider receive more blame from nonprofessional investors than audit firms that do not actively convey the assurance provider message. The authors also found significant evidence in their experiment that investors are more likely to blame big audit firms than small firms because the big firms are perceived to have deep pockets and are able to pay the damages resulting from accounting failures.
After further analysis of their results, the authors found that knowledgeable
nonprofessional investors will only blame the audit firm under the condition that the audit firm does not use an active assurance provider communication strategy. Because the auditing profession communicates that investors should trust them, nonprofessional investors will put the blame on the auditors when something goes wrong. Due to the potential risks related to communicating the “trust us” message, Hoos et al. (2018) suggest that auditors should place more emphasis on communicating what they actually do (i.e. applying auditing standards and stating opinions on financial statements), instead of communicating the utopian picture of how they would like to be seen.
Hoos et al. (2018) also note that educating nonprofessional investors about what auditors does, is only a viable strategy if the investors are not confronted with communication that focuses on one particular aspect of auditing (e.g. the assurance provider aspect) or overstates what the auditor does. Actively using a “trust us” communication strategy has the potential of backfiring if something goes wrong, and the effect will be more powerful if the nonprofessional investors have good auditing knowledge than if they have poor auditing knowledge (Hoos et al., 2018).
Investors that are knowledgeable about auditing understands that the assurance provider communication causes other aspects of auditing to be omitted. This might cause
blaming behavior due to the unbalanced focus on the assurance role communicated by the audit firm. Investors with lower knowledge of auditing matters are more likely to have exaggerated expectations on auditors regarding trust and confidence, those
expectations are increased in conjunction with the professions “trust us” communication strategy. Hoos et al. (2018) conclude that the auditor’s communication strategy about their assurance provider role contributes to the blame auditors receive when something goes wrong. Additionally, Hoos et al. (2018) claim that their findings shed doubt on the “trust us” communication strategy frequently employed by the auditing profession.
2.10 Theoretical framework
Figure 1. The audit expectation gap (ACCA, p.9, 2019)
The ACCA definition of the audit expectation gap as illustrated in figure 1, will be used as the base to develop our theoretical framework (see figure 2 on page 29) used in this thesis. The audit expectation gap can be divided into three different components, knowledge gap, performance gap and evolution gap, as seen in figure 1.
The knowledge gap is the difference between what the public thinks auditors do and what auditors actually do. The knowledge gap takes into consideration that the public can misunderstand the audit. For example, the degree to which auditors are responsible for preventing company failure or the restrictions on auditors providing non-audit services to clients (ACCA, 2019).
The performance gap is when auditors do not perform as auditing standards or regulations require. This gap can occur because of an inadequate focus on audit quality; the complexity of certain auditing standards; or variation in the interpretation of auditing standards or the regulatory requirements between regulators and practitioners (ACCA, 2019).
The evolution gap exists in areas of auditing where there is a need for evolution. It takes into consideration the public’s demand and technological advances on how the audit process could be improved to increase the value-added. By addressing the knowledge and performance gap it is possible to determine what needs to evolve in the audit. Since this will help to avoid overregulation and the inappropriate development of auditing standards
when the underlying issues could be poor knowledge or unsatisfactory performance (ACCA, 2019). These three gaps are explained in greater detail in sections 2.3 to 2.5.
Using the ACCA definition of the audit expectation gap as illustrated in figure 1 as a base, a theoretical framework, as seen in figure 2, is created by extending figure 1. Four common themes that affect the audit expectation gap and that appeared during the literature review have been added to the framework. These are, the auditors main task and beneficiary of the audit (as explained in 2.6), roles and responsibilities of the auditor (as explained in 2.7), audit profession communication (as explained in 2.8) and criticism of auditors (as explained in 2.9).
Auditors and users of financial information have different perceptions of the four commonly occurring themes that can be seen in figure 2. Because of this, figure 2 will be used as the theoretical framework for which the data collection and the analysis of this thesis will be based upon. To achieve the purpose of this study, auditors and users of financial information (e.g. shareholder representatives, bankers and investors) are added at the bottom of the framework.
Figure 2 – Theoretical Framework (Andersson Manglaris & Brewitz, 2020)
Now that we have illustrated the theoretical framework that will be used in this study. In the next chapter, we will explain and describe how we have carried out the study according to the method.
3. Method
At the start of this chapter, the theoretical starting point, how the information was gathered, source criticism and the method chosen is covered. Additionally, how the data was collected, the sample used and a table of the people in the sample. Lastly, in this chapter, the design of the interview guide, data analysis and ethical considerations are discussed.
By studying the audit expectation gap between auditors and users of financial information and the perception of auditor roles and responsibilities, we seek to
contribute to the existing empirical research by illustrating concepts relating to the audit expectation gap and auditor roles and responsibilities.
3.1 Research design
There are many options to choose from when conducting a study of this sort. The qualitative approach is mainly expressed in words while the quantitative approach, on the other hand, is expressed in numbers. The choice of the method used is decided based on what is going to be studied (Olsson & Sörensen, 2011).
According to Jacobsen (2002), the qualitative method has an advantage since it is very open and transparent. The method works in the sense that the researcher in beforehand has decided what to research, which will contribute to a high internal validity. This will help to produce a real understanding of a situation or phenomenon. On the other hand, the benefits of a quantitative method are that the study has very high accuracy when for example studying the extent and scope of a phenomenon.
This thesis leans towards an abductive approach. Since previous knowledge about the audit expectation gap will be further developed through observations and conclusions of real-life conditions. This thesis takes an interpretive stance since we seek to grasp the subjective meaning of social action (Bryman, 2012). We want to provide insight into how auditors and users of financial information perceive the phenomenon of the audit expectation gap and therefore, interpretivism is suitable.
3.2 Information gathering
To achieve the purpose of this thesis, previous research has been taken into
consideration. The previous research touches upon the audit expectation gap, auditing and roles and responsibilities of auditors. It is in the form of academic articles, books, sources from auditing organizations, government authorities as well as newspapers. In connection with the gathering of previous theoretical contributions, the databases Primo and Scopus were used.
3.3 Source criticism
The objective of a source critic is to evaluate the reliability of sources. According to Thurén and Werner (2019), there are four source-critical principles: authenticity, time, independence, and tendency freedom. During the writing of this thesis, we have had these four principles in mind, and we have strived to be critical towards the sources used. We have been careful when selecting our sources and have paid attention to where the information comes from and how reliable the information is, which is an indication of authenticity (Thurén & Werner, 2019). Primary sources have been used whenever possible, which is an indication of independence (Thurén & Werner, 2019). Up to date sources have been used in order to satisfy the time principle. The sources used in this thesis has not been used to create a false depiction of reality. We assess that the risk that audit industry organizations such as ACCA would depict false information on their websites and in reports is low, which is an indication of tendency freedom (Thurén & Werner, 2019).
This thesis has primarily been based on academic articles published in peer-reviewed journals. These articles have a high quality since they have been reviewed by experts in the subject. A number of the articles used in this thesis, such as Humphrey et al. (1992) and Humphrey et al. (1993) have been cited numerous times within the subject of the thesis, which enhances their reliability. The books used in this thesis make up a small part of the theoretical framework, the books have primarily been used in the
methodology part and to give a summary of the history of the audit profession. We have tried to limit our use of books in other parts of the thesis due to many books only
