Fotoh Lazarus Elad
The Impact of Audit Education on the Audit Expectation Gap
Evidence from Civilekonom Students in Sweden
Business Administration Master’s Thesis
30 ECTS
Term: Spring 2017
Acknowledgements
I would like to extend my profound gratitude to my supervisor, Ass. Prof. Dan Nordin for his immense guidance and commitment throughout this thesis writing process. Dan provided insightful and valuable feedback which had a positive effect on my critical thinking and analytical skills. I equally owe a debt of gratitude to Katharina Rahnert for her constructive comments and time spent in translating my questionnaire to Swedish.
Furthermore, I am thankful to all the survey participants of this thesis.
Without your willingness to participate in this study, this thesis will never have come to fruition.
I am immensely indebted to my family for all the encouragement and moral support throughout this thesis writing phase, and throughout the entire Master’s program in Accounting and Control. Your positive energy enabled me to assail all obstacles.
Above all, I am thankful to the Almighty God for the graces, strength, and perseverance bestowed on me throughout my studies.
Karlstad, June 2017.
Fotoh Lazarus Elad
Abstract
There is considerable evidence of the existence of audit expectation gap between auditors and the public in Sweden. However, conflicting views exist regarding the role of audit education in narrowing this gap. This thesis, therefore, aims to investigate if the teaching of audit courses for civilekonom students contributes in narrowing the expectation gap resulting from the misunderstanding of audit regulations as contained in ISA and ABL.
A survey questionnaire containing seventeen semantic differential belief statements measured using the five-point Likert scale was completed by four groups of students; first-year civilekonom students with/without an audit education background and, final-year civilekonom accounting students with/without an audit education background (n=137). The questionnaire covered topics on; auditors’ responsibilities, audit reliability, and decision usefulness.
The results of the study indicate audit education partially (at α 0.05) had an impact in reducing the AEG on the responsibilities of auditors especially on issues related to; auditors’ responsibility in maintaining accounting records, management’s responsibility for preparing the annual financial statements and auditors’ judgment in selecting audit procedures. However, audit education had no impact on auditors’ responsibilities in detecting fraud, audit reliability and reliability of financial statements, and decision usefulness. Furthermore, the limited sample size, low response rate and use of convenience sampling may affect the generalizability of the results. Additionally, the Cronbach Alpha would have been more reliable if more participants were involved.
This study concludes by calling on educational institutions in Sweden to update their accounting curriculum to encompass topics related to the nature, scope, and limitations of audits based on ISA and ABL. Moreover, this study recommends the audit profession and regulators to design and implement policies aimed at improving users understanding of the nature, scope, and limitations of an audit through audit education, refresher courses and other forms of audit-user communication. This study extends previous studies on the AEG by ascertaining the role of audit education in narrowing the AEG.
Keywords: Audit Education and Function, Users knowledge, Audit Expectation Gap, International Standards on Auditing, Swedish Company Act, Sweden.
Abbreviations
AEG: Audit Expectation Gap
AICPA: American Certified Public Accountants ABL: Swedish Company Act
AA: Auditors’ Act (Revisorslag 2001:883)
IESBA: International Ethics Standard Board for Accountants IAASB: International Auditing and Assurance Standards Board
CS1: First-year Civilekonom Students (Not enrolled for any audit course) CS2: Firs-year Civilekonom Students (Enrolled for at least one audit course) CS3: Final-year Civilekonom Student-Accounting (Enrolled for audit courses) CS4: Final-year Civilekonom Student-Accounting (Not enrolled for any audit course)
LLC: Limited Liability Company SRS: Swedish Association of Auditors
FAR: The Swedish Institute of Authorized Public Accountants GAAS: Generally Accepted Auditing Standards
SMEs: Small and Medium-Sized Enterprises
Table of Contents
1. Introduction ... 9
1.1. Background of the Study ... 9
1.2. Problem Statement ... 12
1.3. Research Aim and Objective ... 13
1.4. Research Questions ... 14
1.5. Significance and Motivation of Study ... 14
1.6. Delimitation of Study ... 15
1.7. Structure of Study ... 15
2. Theoretical Framework and Hypotheses Development... 16
2.1. Definition of the Audit Expectation Gap ... 16
2.2. Categorization of the Audit Expectation Gap... 17
2.3. Factors Affecting the Expectation Gap ... 18
2.3.1. The Complication of the Audit Function ... 19
2.3.2. The Audit Conflict of Interest ... 19
2.3.3. Hindsight Evaluation of Audit Performance ... 20
2.3.4. Time gap to responding to the changing Public’s Audit Expectation ... 20
2.3.5. The Self-Regulated Nature of the Audit Profession ... 21
2.3.6. The Unreasonable Expectation of the public ... 22
2.4. Remedies to the Audit Expectation Gap ... 22
2.4.1. The Defensive Approach (Education) ... 22
2.4.2. The Constructive Approach ... 24
2.4.2.1. Expanding the Scope of Audits ... 24
2.4.2.2. Restructuring Audit Methodologies ... 25
2.4.2.3 Expanding Auditors’ Responsibilities and Performance 25 2.5. Global Evidence of the Audit Expectation Gap ... 26
2.6. Hypotheses Development ... 28
3. Audit Practice and the Expectation Gap in Sweden ... 30
3.1. Audit Background and Practice in Sweden ... 30
3.2 Duties of Auditors based on the Swedish Company Act (ABL) of 2005 ... 33
3.3. Audit Report Format Based on ISA-700 ... 34
3.4. Audit Expectation Gap in Sweden ... 36
4. Methodology ... 38
4.1. Research Philosophy and Approach ... 38
4.2. Research Design and Strategy ... 40
4.3. Data Collection... 41
4.3.1. Questionnaire ... 41
4.3.2. Sample Population ... 42
4.4. Quality of Instruments ... 43
4.4.1. Validity ... 43
4.4.2. Reliability ... 44
4.5. Analysis ... 44
4.6. Ethical Considerations ... 45
4.7. Overview of questionnaire Statements for the Audit Expectation Gap ... 45
5. Results ... 54
5.1. Demographic Information of Usable Respondents ... 54
5.2. Results from Semantic Differential Belief Statements ... 56
5.2.1. Auditors’ Responsibilities ... 56
5.2.2. Reliability of Audits and Audited Financial Statements ... 60
5.2.3. Usefulness of Audited Financial Statements... 64
5.3. Hypotheses Testing ... 66
6. Discussion ... 69
7. Conclusion ... 75
7.1. Summary ... 75
7.2. Limitations ... 76
7.3. Recommendations ... 76
References ... 77
Appendices ... 87
Appendix 1. Spearman’s Rank Correlation Coefficient ... 87
Appendix 2. Cronbach’s Alpha ... 88
Appendix 3. Pilot Survey Instrument ... 89
Appendix 4. Survey Instrument ... 92
List of Figures
Figure 1: Categorization of the Audit Expectation-Performance Gap ... 18
List of Tables Table 1: Descriptive Statistics of Respondents ... 55
Table 2: Demographic Information of Respondents ... 55
Table 3: Auditors’ responsibility mean distribution (CS1 and CS3) ... 57
Table 4: Auditors’ responsibility mean distribution (CS1 and CS2) ... 58
Table 5: Auditors’ responsibility mean distribution (CS3 and CS4) ... 59
Table 6: Audit reliability mean distribution (CS1 and CS3) ... 61
Table 7: Audit reliability mean distribution (CS1 and CS2) ... 62
Table 8: Audit reliability mean distribution (CS3 and CS4) ... 63
Table 9: Decision Usefulness mean distribution (CS1 and CS3)... 64
Table 10: Decision Usefulness mean distribution (CS1 and CS2) ... 65
Table 11: Decision Usefulness mean distribution (CS3 and CS4) ... 65
1. Introduction
This chapter presents an overview of this research project which encompasses; the background of the study, problem statement, research aim and objective, research questions and concludes with a structure of the thesis.
1.1. Background of the Study
Over the past three decades, Anglo-Saxon nations have experienced an increasing rate of audit frauds, financial scandals and corporate failures which have kept the debate of the audit expectation gap active in the audit profession, regulatory bodies, financial statement users (Dewing & Russell 2002) and even boardrooms. The Accounting profession faced widespread criticism from the public between 1970 and 1980 following numerous corporate scandals, audit failures and lawsuits against many accounting firms (Ali et al. 2008). The debacles of Enron, WorldCom, Tyco International, Parmalat, Arthur Andersen, etc. and the financial crisis of 2008 further exacerbated the audit expectation gap debate bringing it to the global stage with new waves of questions regarding the duties and responsibilities of auditors. As such, the audit profession has paid considerable attention to the AEG considering that it decimates the legitimacy of the audit profession (Ruhnke & Schmidt 2014).
The audit expectation gap has been in existence for the past century (Humphrey et al. 1993). Johansson (2005) equates the existence of the AEG to the period auditing started even though, research in this area started only some forty-three years back with the work of Liggio (1974), who established the existence of an expectation gap. Humphrey and Turley (1992) further trace the audit expectation gap to the 19th century with the commencement of company auditing. During this period, auditors provided almost absolute assurance against fraud and intentional mismanagement (Epstein & Geiger 1994). Although the audit profession has evolved from detecting fraud and error and verifying all transaction, to the provision of reasonable assurance on the truth and fairness of financial statements, the unreasonable expectations from users have remained unchanged, thus aggravating the AEG (Fadzy &
Ahmad 2004).
The numerous corporate scandals, audit failures and lawsuits against accounting firms were the main catalysts precipitating research on the AEG as
the credibility of auditors were increasingly being questioned (Porter 1993).
The AEG is related directly to the purpose, nature, value and effects of audits (Humphrey et al. 1993). Studies conducted in Anglo-Saxon countries such as;
the US, UK, Ireland and Australia (Baron et al. 1977; Humphrey et al. 1993;
Robinson & Lyttle 1991; Monroe & Woodliff 1994) shows the extensive nature of the AEG. Nonetheless, the AEG is not typical only in Anglo-Saxon countries with greater audit scrutiny and where auditing is a market demand but across the globe (Enes et al. 2016).
Recent studies show the existence of an AEG in the Netherlands, Malta, Iran, Egypt, China, Singapore, Lebanon, Malaysia, Bangladesh (Hassink et al. 2009;
Desira & Baldacchino 2005; Salehi et al. 2009; Dixon et al. 2006; Lin & Chen 2004; Best et al. 2001; Sidani 2007; Fadzly & Ahmad 2004; Siddiqui et al.
2009). The commonality amongst these studies is the perception of the public about auditors’ independence and auditors’ fraud prevention and detection responsibilities. Furthermore, several studies (Gometz 1982; Brendahl &
Forsbery 2011; Kristoffersson et al. 2009; Jepsson & Jönsson 2007;
Magnusson & Olofsson 2007; Johnsson & Nilsson 2011; Magnusson &
Olofsson 2007; Lehman & Nordenson 2014; Madsen 2013; Forsberg &
Dellby 2016) have established the existence of an AEG in Sweden between auditors and financial statement users broadly on issues related to auditors’
responsibilities, reliability of audits and the usefulness of audited financial statements.
While Humphrey et al. (1993) underscore auditors’ independence to be at the heart of the expectation gap, Hassink et al. (2009) on the other hand highlight auditors’ involvement in fraud cases as being detrimental to the reputation and image of the profession. In establishing the existence of the AEG in Portugal, Almeida (2012) underscores users’ dissatisfaction with auditors’ performance as the underlying reason for the gap. In general, the AEG is particularly far- reaching on issues related to; auditors’ fraud prevention responsibility, maintenance of accounting records and auditors’ judgment in selecting audit procedures (Dixon et al. 2006). Schelluch and Gay (2006) equally note that often the AEG is centered on auditors’ duties and responsibilities, audit quality function, the nature and meaning of audit report content, the regulation and structure of the audit profession and the ability of auditors to communicate various levels of assurance.
From the audit profession's perspective, the prevalence of the AEG is because
“the investing public expects too much and remains largely ignorant as to the
precise nature, purpose, and capabilities of the audit functions” (Humphrey et al. 1993, p.395). As a result, the audit profession focused on correcting users’
expectation as a means of narrowing the AEG (Sweeney 1997). Consequently, the audit profession faced a backlash from some researchers for taking self- protective steps rather than proactive measures to close the AEG (Sweeney 1997). It is against this backdrop that, Porter et al. (2005) recommended determining society’s expectation of auditors, determining reasonable duties auditors can perform and determining the extent to which such reasonable expectations can be satisfied as important considerations to narrowing the expectation gap. Prior exploratory studies on the AEG equally championed the notion that, the AEG resulted from the “unreasonable expectations” of the public (De Martinis & Burrowes 1996) prompting Sikka et al. (1998) to highlight this bias in research on the AEG which advocated that, the surest means to eliminate the AEG is by transferring auditors’ understanding of their duties and responsibilities to the public. However, De Martinis and Burrowes (1996) noted that this bias has been reducing with the emphasis on current research focusing on issues related to the performance gap of auditors as a contributing factor to the AEG.
Furthermore, previous studies on the AEG focused on the causes of the expectation gap. Meanwhile, recent studies focus on areas where the gap is most intense (Sidani 2007). Such areas of the intensity of the AEG include; the nature of audit reports and the meaning of audit report messages, the quality of audit function, the structure and regulatory process of the audit profession, (Humphrey et al. 1993). Dixon et al. (2006) further note; auditors’ fraud detection responsibilities, auditors' responsibility for maintaining accounting books and selecting adequate audit procedures as those areas with an intensity of AEG. However, several authors (Monroe & Woodliff 1993; Best et al.
2001; Lin & Chen 2004; Fadzly & Ahmad 2004; Siddiqui et al. 2009; Dixon et al. 2006) have classified the AEG into three parts including; auditors’
responsibilities, reliability of audited financial statements and the usefulness of audited financial statements. Other vital areas with the expectation gap include; going concern, independence, and duty of care (Sweeney 1997).
1.2. Problem Statement
Current audit literature confirms the existence and the prevalence of the AEG resulting from society’s unreasonable expectations of auditors which most often exceeds regulatory and standard requirements (Hassink et al. 2009) and which are frequently unrealistic. The expectation gap between users and auditors results mainly from ideological differences between users and auditors regarding the duties of auditors and the objectives of financial statements (McEnroe & Martens 2001). Some users incorrectly perceive the unqualified audit opinion to mean the entity is completely free from material error. By the same token, Salehi (2011) underscores that some users mistakenly perceive the functions of the auditor to include; interpreting financial statements in a manner which aids users in investment decisions, digging into the company’s financial affairs, performing significant surveillance on management and detecting and preventing fraud. Eden et al. (2003) further emphasize that financial statement users often expect the auditor to detect fraud and error and evaluate management’s performance, whereas auditors contend their duties involves evaluating the truth and fairness of financial statements. Furthermore, many investors believe auditors should assess all documents and records of a company with the primary objective of detecting fraud and error (Messier et al.
2011). Sikka et al. (1998, P.299) note that such unreasonable expectations of the public are detrimental to the credibility and general reputation of auditors.
These misperceptions about the duties of auditors mainly account for the expectation gap.
So far, several studies have proposed measures which could significantly narrow down this gap. For example, Koh and Woo (1998) recommend the expanded audit report which gives users a complete understanding as to the scope, extent, timing and significance of the audit function. They further recommend the use of decision aids by auditors which further enhances the quality of audits. Meanwhile, Gay et al. (1998) suggest the improvement of the wordings of the audit report for it to be more understandable to users and to provide assurance to the task done by the auditor. Humphrey et al. (1993) equally recommended the constructive approach of narrowing the AEG which entails changing audit activities to suit users’ expectation. The authors further proposed the modification of phrases and the standardization of the audit report to reduce inconsistencies and complexities of the audit report to make it more understandable to stakeholders. Lastly, Humphrey et al. (1993) recommended the defensive approach which entails educating the public
whose expectations about the functions of the auditors are sometimes unreasonable due to unawareness of the real responsibilities of the auditor.
Prior and contemporary studies (for example, Humphrey et al.; 1992; Sikka et al., 1992; Porter & Gowthorpe 2004; Hassink et al. 2009; etc.) have highly recommended education as a means of narrowing the AEG. While some of these studies focus on educating the public (Hassink et al. 2009), others concentrate on educating auditors (Porter & Gowthorpe 2004) as a means of narrowing the AEG. Siddiqui et al. (2009) further underscore that previous studies recommended; the monitoring of auditors' performance, improving the audit quality control process, that audit reports should contain a disclosure of the materiality standard and creating an independent oversight agency. This recommendation is echoed in the work of Humphrey et al. (1993) in which they emphasize the setting up of an independent office which deals with auditors' independence and regulates the appointment of auditors in large firms.
Despite the aforementioned recommendations and efforts implemented by the audit profession, there are no signs of the AEG narrowing down (Sidani 2007, Ali et al. 2008). Consistent with Sidani’s (2007) assertion, Johansson (2005) highlights the existence of widespread evidence of the AEG widening all the more. In their thesis, conducted in Sweden, Abrahamsson et al. (2005) concluded that communication through a natural dialogue between auditors and clients is the most efficient method of narrowing the expectation gap in Sweden rather than the extent or level of education. Downplaying the significance of audit education is a serious claim as several studies have established the importance of audit education in narrowing the expectation gap.
1.3. Research Aim and Objective
The AEG has received significant attention from academics and organizations that have focused on its origin, nature, causes (Enes et al. 2016) and solutions.
So far few studies have empirically tested the effectiveness of the recommended solutions. In the same vein, Sidani (2007) further notes that the measures undertaken by professional and regulatory bodies have not received extensive consideration. Educating the public is the most recommended techniques to narrowing the AEG. Thus, this study is aimed at investigating
the impact audit education has in narrowing the AEG in Sweden. More specifically this study seeks to determine the level of knowledge, first-year and final-year civilekonom students possess about the responsibilities of auditors.
Furthermore, this study is aimed at determining if material differences exist between the knowledge first and final year civilekonom students with and without an audit education possess about the responsibilities of auditors.
1.4. Research Questions
Do final-year civilekonom students possess adequate knowledge on the roles of auditors?
Do first-year civilekonom students possess adequate knowledge on the roles of auditors?
Does education of students help breach the audit expectation gap?
1.5. Significance and Motivation of Study
This study is performed because of the significant importance currently attached to the AEG which has been persistent (Fadzly & Ahmad 2004) and because of its detrimental effects on the audit profession (Ali et al. 2008).
Furthermore, the AEG has been at the center of financial crises such as the financial crisis of 2007 and accounting scandals such as the scandals of the early millennium which saw the collapse of giant corporations such as Enron and WorldCom. Therefore, there is need to analyze the effectiveness of proposed solutions to narrow the expectation gap.
Audit education is the audit profession’s solution to closing the expectation gap as the audit profession accuses users of having unreasonable expectations about the responsibilities of auditors. Several researchers (Pierce &
Kilcommins 1996; Grambling & Schatzberg 1996, Fadzly & Ahmad 2004) have sided with the audit profession’s narrative by highlighting the significance of audit education in narrowing the AEG. Porter and Gowthorpe (2004) even recommended that recent accounting and corporate scandals be included in the curriculum of academic programs of schools. Siddiqui et al. (2009) further note such audit courses could play a pivotal role in narrowing the AEG.
However, no study has so far examined the role of audit education in closing
the AEG gap in Sweden. The results of this study establish the extent to which audit education is an effective means of narrowing the expectation gap.
1.6. Delimitation of Study
This thesis principally focuses on the impact of audit education on the AEG in Sweden. This study is delimited to Sweden since it is based on prior studies which established the existence of an expectation gap in Sweden. Thus, this thesis will empirically test the effectiveness of audit education in narrowing the expectation gap. The expectation gap in this thesis is limited to the reasonableness gap. Therefore, this study does not encompass the deficient performance gap and the deficient standard gap. Furthermore, all survey participants were civilekonom students studying in Swedish Universities, therefore; we expect their perception of the responsibilities of auditors to be limited to the practice of auditing in Sweden. Additionally, the theoretical framework has been delimited to reflect aspects relevant to this thesis.
1.7. Structure of Study
The remainder of this thesis is organized as follows; Section two presents an in-depth analysis of the theoretical framework with a focus on the causes and proposed solutions to narrowing the AEG with emphasis on audit education and ends with hypotheses development. Section three presents auditing practice in Sweden and establishes the AEG in Sweden; Section four further presents the research methodology used in this study. Meanwhile, Section five presents the results of the survey. Section six presents the discussion of the findings and Section seven ends with the conclusion, limitations, and recommendations for future research.
2. Theoretical Framework and Hypotheses Development
This chapter presents the conceptual framework of the AEG which includes; the definition of AEG, Categorization of AEG, factors affecting the expectation gap, remedies to the expectation gap, international evidence of the expectation gap and hypotheses development.
2.1. Definition of the Audit Expectation Gap
To understand the audit expectation gap concept, it is imperative that we define the AEG. The AEG was first defined by Liggio (1974) who defined the gap as, the difference in the performance expectation of the auditor, between financial statement users and independent accountants. The Cohen Commission (1978) further emphasizes that the gap involves the difference between the public’s beliefs and desires and what the auditor can and should reasonably accomplish. Porter (1993) disagrees with both definitions of the audit expectation gap by underscoring the shallow nature of both definitions as auditors may not be able to accomplish Liggio’s (1974) “expected performance” and the Cohen Commission’s (1978) “can and should reasonably accomplish” prescription. Porter (1993) thus refers to the AEG as
“audit expectation-performance gap.” Porter (1993) defines this gap as the expectations society hold of auditors and auditors perceived performance by society.
Similarly, Guy and Sullivan (1988) describe the AEG as the variation between the public’s beliefs of auditors’ responsibilities and auditors’ beliefs of their responsibilities. On the same note, Sikka et al. (1998) define the AEG as the differences between the public’s expectations of an audit and what the audit profession desires the audit objectives to encompass.
Two prominent and commonly used definitions of the expectation gap are;
AICPA's definition and Monroe and Woodliff's definition. The American Institute of Certified Public Accountants (AICPA) (1993) defines AEG as “the difference between what the public and financial statement users believe that auditors are responsible for and what the auditors themselves believe their responsibilities are” (AICPA 1993). Another frequently used definition is that of Monroe and Woodliff (1993) who define AEG as the variation in beliefs between the public and auditors concerning the duties and responsibilities of auditors and the audit report content. Dennis (2010) goes an extra mile by
incorporating the "desire" aspect into the AEG. Thus, he defines the AEG as the differences in beliefs and desires between users and auditors.
A contemporary definition of the AEG is provided by McEnroe and Martens (2001) who define the AEG as the variation between what users of financial statements recognize as auditors’ duties and what auditors consider their responsibilities. In a nutshell, we define the AEG as the differences in beliefs and desires between the auditor and the public regarding the duties and responsibilities of auditors. We will use this definition as the working definition of this thesis since it encompasses the key aspects of the definitions presented above.
2.2. Categorization of the Audit Expectation Gap
In an attempt to establish the causes of the expectation gap in New Zealand, Porter (1993) categorized the expectation gap into two major categories, the reasonableness gap, and the performance gap. Porter defined the reasonableness gap as the difference between society’s expectation of the auditor and what auditors can reasonably be expected to achieve. Therefore, this gap relates to society’s unreasonable expectations of auditors (Siddiqui et al. 2009). Porter (1993, p.50) further defined the performance gap as the
“difference between what the society expects the auditors to achieve and what they can reasonably be expected to accomplish.”
Porter (1993) categorized the performance gap into, the deficient standard gap and the deficient performance gap. Porter (1993) defined the deficient standard gap as the difference between the duties society reasonably expects of auditors, and the current responsibilities of auditors as defined by audit regulations, laws and other relevant statutes. This gap occurs when society reasonably expects auditors to perform a task, but there are no current audit regulations to fulfill these reasonable expectations. The deficient performance, on the other hand, is the difference between the expected standards of performance of auditors as required by the law and the perceived level of performance by society of the auditor. This gap could be narrowed by expanding and developing audit standards with responsibilities which society reasonably expects of the auditor. Figure 1 below presents porter’s categorization of the audit expectation-performance gap.
Figure 1: Categorization of the Audit Expectation- Performance Gap Source: Porter (1993), p.50
Johansson et al. (2005) underscores that, the expectation gap turns to be lower in owner-managed companies because of the high trust level existing between the owner and auditor. Such high trust level is cultivated from the owner developing an enhanced understanding about the audit process. Power (1999) however underscores that the AEG has benefited auditors by contributing to the economic success of auditors. Obradovic and Skopljakovic (2013) looks at the AEG from a positive vantage point by highlighting the positive perception some users had about the expectation gap. They further argue that small businesses which possess inadequate knowledge about the duties of the auditor are less likely to challenge the auditor, unlike large entities. We argue that this benefit is limited to the extent that a scandal does not occur which will only worsen the situation.
2.3. Factors Affecting the Expectation Gap
Prior studies have established factors that affect and contribute to the AEG.
An assessment of the causes of the expectation gap reveals that the gap results mainly from; the complication of the audit function, the conflicting duties of auditors, hindsight evaluation of audit performance, the time gap to responding to the audit expectations of the public, the self-regulated nature of the audit profession and the unreasonable expectations of the public. In this section, we establish these factors from different theoretical perspectives to gain an enhanced understanding of the concept.
2.3.1. The Complication of the Audit Function
The general misperception of the public about the responsibilities of auditors is often a major factor affecting the expectation gap (Ellis & Selley 1988). Lee and Azham (2008) further suggest that this complexity is as a result of auditors’ changing role and the changing objectives of auditing. The audit paradigm has experienced persistent changes over the centuries. For example, the focus of audit from 1800´s to 1900´s was on detecting fraud and error and ensuring the accuracy of accounts (Leung et al. 2004). Meanwhile, auditing in the last 30 years has focused more on enhancing the integrity and credibility of financial statements and financial information. Today, the audit function not only focuses on assuming an enhancing role but likewise providing value added services, reporting on internal controls, financial irregularities and business risks (Boynton et al. 2005). These changes in the audit function, results principally from changes in the socioeconomic environment, the impact of financial crises, corporate scandals leading to the collapse of big corporations and technological changes. Thus, the substantial changes in audit practice and the complicated nature of the audit function and objectives of auditing create confusion for users with limited knowledge and exposure on the audit function.
2.3.2. The Audit Conflict of Interest
The provision of non-audit services frequently results in a conflict of interest which further exacerbates the already precarious expectation gap (Lee et al.
2009). Accounting firms today have extended their line of duty to include consulting services such as; risk assessment services, information reliability systems and performance measurement for businesses (Leung et al. 2007). By providing such non-audit services, auditors acts as advisers to management and an independent reviewer at the same time. The provision of such non- audit services may result in a conflict of interest as management expects the auditor to ignore financial irregularities, while shareholders and the public expect the auditor to report on such inconsistencies (Koo & Sim 1999). Such circumstances put the auditor in a multi-role dire situation as management can fire and replace the auditor with a more collaborative auditor. Due to the lucrative nature of consulting services, auditors may in some cases compromise their independence to continue benefiting from such consulting
services (Lee et al. 2009). The provision of such non-audit services confuses the public as to the actual duties of auditors.
2.3.3. Hindsight Evaluation of Audit Performance
In an early study, Shaked and Sulton (1982) highlighted that accusations against the audit profession might result from the inability of the public to evaluate the audit quality and performance of auditors. This results from the difficulty of the public in distinguishing between the audit quality of one audit and the audit quality of another. Audit quality and the performance of auditors are often associated with events such as financial crises or corporate scandals and failures. However, this method of evaluating auditors after knowledge of an event is biased and unfair (Humphrey et al. 1992) since it is based on information which surfaces after a financial crisis or corporate scandal.
Therefore, it becomes difficult to evaluate auditor´s performance or audit quality in periods without financial crises or corporate failures. On this same note, Lee et al. (2009) highlight the unsuitability of the hindsight method of evaluation by pointing out the current negative media publicity against the audit profession which is likely to influence public opinion that auditors do not diligently perform their duties. Lee et al. (2009) further note that, auditors are not completely to be blamed when corporate failures and bankruptcy occur because such corporate failures may result from factors external to the audit function such as; poor strategic decisions, mismanagement, inadequate oversight by the board of directors, fraud perpetuated by management, and competition and downturns in the industry. Hence, it is imperative for a distinction to be made between business failures and audit failure as business failure is often misconstrued for audit failure (Hourguebie 2004). Therefore, the misperception of the public regarding the evaluation of the quality of an audit and auditors’ performance further aggravates the AEG.
2.3.4.Time Gap to responding to the changing Public’s Audit Expectations
The expectation gap may emerge between the period when the audit profession identifies and responses to the expectation of the public (Humphrey et al. 1992). Tricker (1982) further notes that accounting standards mostly emerge after corporate scandals due to new expectations and
accountability requirements of the public regarding the audit function.
Humphrey et al. (1992) further note that this demonstrates the audit profession’s gradual approach in constructively meeting the public’s expectation. Humphrey (1997) equally highlights that even with the measures implemented by the audit profession to satisfy the public’s expectations, the profession is often criticized for failing to meet up with the pace of the rapidly changing business environment. The audit profession has frequently adopted a retrospective approach by taking actions mostly after a corporate scandal, or financial crisis occurs (Lee et al. 2009). Therefore, an expectation gap is bound to emerge from the period which the public develops an expectation and the time gap which the audit profession responses to such expectation.
2.3.5. The Self-Regulated Nature of the Audit Profession
The audit profession is self-regulated like most other professions (Humphrey et al. 1992). In their study, Shaked and Sulton (1982) note that the principal rationale for self-regulation is the desire of the audit profession to achieve service quality since the public is unable to measure and evaluate audit quality.
Humphrey et al. (1992) further highlight the downside of self-regulation by emphasizing that the audit profession is not a selfless, diligent and neutral body as purported. They further underscore that the audit profession is economically pro-active even though the profession tries to portray its members as independent and technically competent in order to achieve the profession’s self-interest (Lee et al. 2009). Shaked and Sulton (1982) equally note that when the profession is self-regulated, the service quality of the audit is usually beneath the public’s expectation. Porter and Gowthorpe (2004) re- echo this point by pointing to the existence of a deficient performance gap in the UK resulting from the self-regulated nature of the audit profession.
Consequently, the audit profession explores the loopholes in the self-regulated disciplinary process to deliver low service quality to the public which expects high service quality from the auditor (Lee et al. 2009). Therefore, the self- regulation nature of the audit profession and other factors may result in the widening of the AEG.
2.3.6. The Unreasonable expectation of the public
The problem of the expectation gap is often tied to the unreasonable expectation of the public (Humphrey et al. 1993). The public often misperceives the purpose and nature of auditing. These unreasonable expectations may be detrimental to the audit profession’s reputation as the public may fail to recognize the value of audits (Lee & Azham 2008). The public being the free rider of audited financial reports may require auditors to perform some duties which may be illogical or cost ineffective (Lee et al.
2009). This gap may thus be impossible to eliminate considering that, the public does not pay for such information. Therefore, it may be concluded that the existence of the expectation gap is as a result of the unreasonable expectations of the public (Lee et al. 2009).
2.4. Remedies to the Audit Expectation Gap
It is imperative that the AEG be narrowed down. As Gray and Stuart (2001) note, reducing the expectation gap is the only means through which auditors can regain independence and credibility from society. In this light, Humphrey et al. (1992) underscore two solutions which could be implemented by the audit profession to reduce the audit expectation gap which includes; the constructive, and the defensive approach. The constructive approach is aimed at changing audit activities to meet the public’s expectations. The constructive approach could be an important measure to reduce the AEG, but it is quite costly to implement and requires more audit effort (Sikka et al. 1998). Lee et al. (2009) note that the constructive approach encompasses; expanding of audit reports, restructuring audit methodologies, and expanding audit responsibilities. Meanwhile, the defensive approach involves changing the public's perception of auditors. The defensive approach is often referred to as education (Lee et al. 2009).
2.4.1. The Defensive Approach (Education)
The defensive approach entails educating the public whose expectations about the responsibilities of the auditor are sometimes unreasonable due to unawareness of the actual duties of auditors (Humphrey at al. 1992).
According to Humphrey et al. (1992), it is imperative to educate and reassure
the public through various means such as; changing the wordings of the audit report, publishing professional statements on the actual responsibilities of auditors, standardizing the audit report to reduce its complexity making it more understandable. Several studies (Epstein & Geiger 1994; Fadzly &
Ahmad 2004; Hussain 2003; McEnroe & Martens 2001) concur with the assertion that, education is an effective means of narrowing the AEG. Porter and Gowthorpe (2004) equally underscored the effectiveness of education in reducing the performance gap. They further recommended education for auditors and audit trainees to ensure they understood their responsibilities as required by the relevant statute.
In a related study, Monroe and Woodliff (1993) examined the impact of education on students’ perception on the duties of auditors and the meaning of the audit report. Their findings confirmed that students’ perception considerably changed after taking an audit course. Students who had completed an audit course, perceived the auditor to assume lesser responsibilities and viewed the financial statements to be more reliable compared to students who did not enroll for any auditing course. Pierce and Kilcommins (1996) conducted two surveys on undergraduate students, divided into five groups as an extension of the work of Monroe and Woodliff (1993).
Their findings were consistent with the results of Monroe and Woodliff (1993) as students who enrolled either in a module or course in auditing had lesser expectations of auditors.
In a related study, Grambling et al. (1996) observed a similar trend with the expectation gap reducing after students enrolled for an audit course which covered topics on auditors’ responsibilities. Similarly, Siddiqui et al. (2009) observed that traditional audit education plays a vital role in narrowing the AEG. In a more recent study, Enes at al. (2016) concluded that even though education does not wholly eliminate the expectation gap, it has the impact of altering students’ perception about auditors’ fraud prevention and detection responsibilities. Boyle and Canning (2005) further suggest that teaching and disseminating information related to financial statement audit may be an effective means of narrowing the expectation gap. Similarly, Fadzly and Ahmad (2004) highlighted the importance of using reading materials as an effective means of correcting some of the misconceptions users have about auditors’ duties. All these studies raise the fundamental question of whether audit education plays a significant role in narrowing the AEG through the
enhancement of users’ understanding of the duties and responsibilities of auditors as defined by the relevant regulatory framework.
Lee et al. (2009) note that education may be an impracticable method of reducing the expectation gap because of the difficulties of education the public through formal education since some might not have attended formal education. Similarly, Darnill (1991) highlights the complex nature of auditing and the disinterest the public may have about auditing. However, more studies seem to underline the significance of education as a useful tool in narrowing the expectation gap.
2.4.2. The Constructive Approach
The constructive approach focuses on enhancing auditors’ performance and expanding auditors’ responsibilities to meet society’s needs. In a report, the Association of Chartered Certified Accountants (ACCA) (2011) pushed forward the constructive approach by recommending that audits should encompass areas such as; corporate governance and risk management. In 2012 this call was extended to Sweden with the Swedish Minister of Financial Markets recommending internal controls evaluation as a priority area for auditors (Erhart 2012). As previously mentioned, the constructive approach encompasses; expanding the scope of audits, restructuring audit methodologies and expanding auditors’ responsibilities.
2.4.2.1. Expanding the Scope of Audits
There is empirical evidence supporting the effectiveness of the expanded audit report in narrowing the expectation gap. In studies conducted in the US, the UK, and Australia (Nair & Rittenberg 1987; Humphrey et al. 1993; and Monroe & Woodliff 1994) it was observed that the expanded audit report significantly influenced users’ perception about the responsibilities of auditors mainly; the purpose of audits, audit procedures, and the responsibilities of management in preparing financial statements. These studies provide evidence of the significance of the expanded audit report which aid users in obtaining a better understanding of the scope, nature, and extent of the audit (Lee et al.
2009). However, Lee et al. (2009) highlight that auditors are reluctant to provide additional information on issues related to the purpose of audits and
audit procedures because ISA-700 does not currently oblige additional requirements of auditors. Thus, users’ understanding may not increase significantly except ISA mandates auditors to provide additional information on the purpose and procedures of audits.
2.4.2.2. Restructuring Audit Methodologies
It is believed that the AEG narrows down when the public is satisfied with the auditors’ performance. In this light, Koh and Woo (1998) recommend audit firms to apply structured methodologies to improve auditors’ performance. In an earlier study, Purvis (1987) concluded that the use of semi-structured and structured audit procedures might be cost ineffective and not beneficial to the audit profession. Lee et al. (2009) concurred with this conclusion emphasizing that due to the functional and dysfunctional effects of the audit assignment, there is non-consensus on the effectiveness of this method in narrowing the expectation gap. However, the effectiveness of this approach in reducing the expectation gap is still subject to debate, and its effectiveness largely depends on a case by case basis (Lee et al. 2009).
2.4.2.3. Expanding Auditors’ Responsibilities and Performance
Humphrey et al. (1993) equally recommend expanding the existing duties of auditors as a means of narrowing the expectation gap. Similarly, the Institute of Chartered Accountants of Australia (ICAA) (2003) recommended the expansion of the scope of audits to meet the public’s expectation. Regarding the numerous litigations against the audit profession, ICAA (2003) recommends the development and evolution of audit services to include core and expanded audit services. Core audit services mainly include; internal control services, fraud prevention and detection, and going concern issues.
The expanded audit services, on the other hand, include; “business risk, management discussion and analysis, quality of accounting policies, corporate governance, continuous disclosure, performance audits and continuous audits." (ICAA 2003 p. 6).
Regarding audit quality, Humphrey et al. (1993) recommended the establishment of an independent office which oversees the appointment of
auditors and regulates audit fees and the expansion of statutory audit duties as two measures to improve audit quality. Lee et al. (2009) further note that, while taking into consideration the expansion of auditors’ responsibilities, the cost of implementing such audit duties should be given due consideration given that, most of the public are free riders of such services.
2.5. Global Evidence of the Audit Expectation Gap
Several studies conducted in the Anglo-Saxon and Western nations reveal the existence of the AEG. For example, Humphrey et al. (1993) noted the existence of the expectation gap in the UK between auditors and
“sophisticated users” (investment analysts, financial journalists, financial directors and bankers) on the nature of auditing, auditors’ fraud detection responsibilities, auditors’ responsibilities to third parties, the nature of the balance sheet evaluation and the perception of auditors’ performance. In an earlier survey conducted in Australia and Singapore, Low (1984) uncovered an expectation gap between auditors and analysts in the areas of, fraud detection and the reliability of financial statements. Furthermore, Monroe and Woodliff (1994) observed the existence of the AEG in Australia between Auditors and accountants, shareholders, directors, creditors and undergraduate students based on the wordings of the old report form before AUP 3. They, however, noted that the modified wordings in AUP 3 significantly affected users’ beliefs regarding the responsibilities of auditors and management and the nature of audits, thus eliminating some of the unreasonable expectations.
Furthermore, Baron et al. (1977) observed the existence of the expectation gap in the US between auditors and financial statement users pertaining to auditors’ responsibility for detecting illegal acts. Similarly, Lowe (1994) uncovered an expectation gap in the US between auditors and judges, with judges having more expectations of auditors. Epstein and Geiger (1994) equally observed the existence of the expectation gap in the US between auditors and investors, with more than half of the investors surveyed expecting absolute assurance that financial statements were free from material misstatements. Consistent with the study of Epstein and Geiger (1994), McEnroe and Martens (2001) observed the existence of an expectation gap between auditors and investors pertaining to auditors’ fraud detection and reporting responsibilities. Low et al. (1988) observed the existence of the expectation gap in Singapore between auditors and financial analysts regarding
the perception of the objectives of an audit particularly; auditors’ fraud prevention responsibility, assuring the accuracy of financial statements, the effectiveness of government grants and the effectiveness of management. In a more recent study, Best et al. (2001) similarly observed the existence of a very wide expectation gap between auditor, bankers and investors in Singapore particularly on issues related to auditors’ fraud prevention and detection responsibilities, auditors’ responsibility for maintaining accounting records and auditors’ judgment in selecting audit procedures.
Salehi et al. (2009) likewise established the existence of the expectation gap between auditors and investors in Iran on auditors’ independence. Similarly, Pourheydari and Abousaiedi (2011) highlighted the existence of the AEG in Iran between auditors and investors, bankers and brokers particularly on issues related to auditors’ fraud detection responsibilities, the preparation of financial statements and the soundness of internal controls. To a lesser extent, the expectation gap was found to exist on auditors’ fraud prevention responsibility. Dixon et al. (2006) equally observed the existence of a wide expectation gap between auditors and financial statement users related to auditors’ fraud prevention responsibilities, auditors’ role in maintaining accounting records and auditors’ judgment in selecting audit procedures. To a lesser extent, the gap was observed on issues related to the reliability of audited financial statements and the usefulness of financial statements.
Likewise, Lin and Chen (2004) underscored the existence of an expectation gap between auditors and management, educators, investors and the government on issues related to; the role of auditors, the objectives of audits and auditors’ fraud detection role. The reasonableness gap was equally observed to exist in Lebanon between auditors and financial statement users (Sidani 2007). A gap between auditors’ understanding of their duties and financial statement users’ perception was established in Lebanon particularly regarding auditors’ fraud detection responsibilities.
Desira and Baldacchino (2005) equally underscore the existence of the AEG in Malta between auditors and jurors related to auditor’s actual duties and auditors’ responsibilities regarding fraud detection, internal control structure and maintaining accounting records. Hassink et al. (2009) similarly underscored the existence of the expectation gap between auditors and financial managers in the Netherlands about the general fraud responsibilities of auditors and auditors’ fraud detection responsibility.
Consistent with most findings on the expectation gap, Fadzly and Ahmad (2004) observed the existence of an expectation gap between auditors, brokers, bankers, investors and investor in Malaysia. This gap was found to be wide on issues related to auditors’ fraud detection and prevention responsibilities, maintenance of accounting records, internal control and the preparation of financial statements. Siddiqui et al. (2009) equally observed the existence of the expectation gap between auditors, bankers and university students regarding auditors’ responsibilities in Bangladesh.
2.6. Hypotheses Development
In this section, we develop our research hypotheses to enable us to answer the research questions developed for this study. The hypotheses developed are based on the above-presented literature and guides the data collection method used in this study. In total six hypotheses are developed for this study.
H1: First-year students (CS1 and CS2) and final-year students who have not enrolled for any audit course (CS4) have unreasonable expectations about the duties and responsibilities of Auditors.
We develop (H1) based on the idea that, first-year students and final-year students who have not enrolled for audit courses will have expectations which fall out of the scope of duties required of auditors by ISA and ABL.
H2: Final-year civilekonom students specializing in accounting who have enrolled for audit courses do not have unreasonable expectations about the duties and responsibilities of Auditors.
This hypothesis is developed based on the premise that, final-year civilekonom students who have enrolled for audit courses which include the nature, scope, and limitations of audits possess adequate knowledge of the duties of auditors as required by ISA and ABL. Thus, they are less likely to have unreasonable expectations of the auditor.
H3: There is a significant difference in perception between first-year students with no audit education (CS1) and final-year students with audit education (CS3) regarding the responsibilities of auditors.
This hypothesis is premised on the assumption that final-year students who have enrolled for audit courses possess adequate knowledge of the nature,
scope, and limitations of audits compared to first-year students with an inadequate background on auditors’ duties. Thus, the difference in perception stems from the variation in audit knowledge among first-year students with no audit education background and final-year students with an audit education background.
H4: There is no significant difference in perception between first-year students with no audit education (CS1) and first-year students with audit education (CS2).
This hypothesis is grounded on the assumption that, the scope of audit courses at the first-year is introductory in nature and does not cover topics on auditors’ responsibilities as required by ISA and ABL. Thus, there is bound to be an insignificant variation in perception between both student categories.
H5: There is a significant difference in perception between final-year students who have enrolled for audit courses (CS3) and final-year students who have not enrolled for any audit course (CS4).
This hypothesis is premised on the same notion as H3. Final-year students who have not enrolled for audit courses are most likely to misunderstand the duties of auditors, unlike final-year students who have enrolled for audit courses. Thus, we hypothesize there is a gap between both student categories regarding the responsibilities of auditors.
H6: Advanced audit education is the primary factor which results in the differences in perceptions between First and Final year student.
We consider audit education to be the central factor which accounts for the expectation gap as only 10% of the respondents had audit related work experience. Therefore, we assume that any differences in perception of students resulted from audit education.
It is worth mentioning that, audit experience was taken into consideration for students who had enrolled for audit courses only. Therefore, there was no category of students who had not enrolled for audit courses but had the necessary audit work experience.
3. Audit Practice and the Expectation Gap in Sweden
This chapter presents an overview of the practice of auditing in Sweden, the duties of auditors in Sweden based on the Swedish Company Act of 2005, the audit report format based on ISA-700, and the audit expectation gap in Sweden.
3.1. Audit Background and Practice in Sweden
Due to the separation of ownership and control in LLCs, it is imperative for a third party to certify that the financial statements presented by management give a true and fair view of the financial situation of the entity (Agevall &
Jonnergård 2013). Audits were first mandated in Sweden in 1895 following the proliferation of LLCs after the ABL of 1848 which provided alternative avenues for raising capital with much reliance on external funding. Thus there was a separation between ownership and control. Three principal reasons precipitated the issuance of the 1895 ABL; (1) to protect the public from bad investments, (2) to protect shareholders from abusive, self-interested and bad management, (3) to grant minority shareholders more rights (Jönsson 1991).
The auditor was mandated to do an annual review of the entity's financial statements and issue an opinion thereof (Öhman & Wallerstedt 2012).
Furthermore, auditors had a maximum term limit of two years. The primary objective of audit at the time was to protect shareholders’ holdings (Morberg et al. 2014). Today such protection is extended to include a wide range of stakeholder groups such as; investors, creditors, other interested parties, and the audited entity. In Sweden, the size of the company is the main determining factor as to whether an audit is mandatory or optional (Carrington 2010).
Public Limited Companies are obliged to have their financial statements audited (ABL 9:13).
Öhman and Wallerstedt (2012) present a background history of audit practice and regulation in Sweden in which they highlight the creation of SRS in 1899 which was primarily made up of individuals with no formal audit experience and who performed audits as a secondary duty. Later, in 1909, the Stockholm School of Economics was established and started training auditors with the first audit graduates in 1911. The creation of the Stockholm School of Economics subsequently led to the Swedish Chamber of Commerce authorizing the first auditors in 1912. In the same year, the Federation of Swedish Industries equally created an audit committee tasked with crafting audit guidelines. Prior to this, the ABL was updated in 1910 which extended the duties of auditors to protect shareholders rather than board members. The
ABL of 1910 prohibited company employees or anyone employed by a board member to become a company’s auditor. The act further clarified and highlighted the rights and obligations of auditors such as; having access to inventory and cash records which some general meetings had previously withheld auditors from access to such information.
Furthermore, in 1923, FAR was created and was comprised of academically trained auditors who performed auditing on a full-time basis, unlike SRS auditors whose members were not very qualified and worked on a part-time basis. Disputes between SRS and FAR over the legality of which body could authorize auditors resulted in the creation of a new audit title called “registered accountant” in 1931. The main differences between the authorized public accountant (FAR) and the registered accountant (SRS) were that there were less theoretical and practical requirements for registered accountants compared to authorized public accountants. Also, authorized public accountants mostly worked for companies listed on the Swedish Stock Exchange Market whereas registered accountants mostly worked for LLCs.
Subsequently, FAR began pushing the Stock Exchange market to mandate all listed companies to have an authorized auditor. This request only came to fruition with the ABL of 1944 after the 1932 Kruger crash which Larsson (2005) notes as the most remarkable incident which revolutionized audit practice in Sweden. FAR tried to distant itself and its members from the scandal and subsequently drafted a 15-point code of conduct which encompassed aspects such as; auditors’ independence, professional ethics of auditors and equally incorporated issue related to price competition.
In 1944, a new ABL was established which mandated listed companies to have at least one authorized auditor. The act further detailed the duties of auditors to include auditors' independence. Additionally, financial statements became clearer and understandable. Moreover, auditors were expected to sign the balance sheet and the profit and loss statements certifying that they were in accordance with the company’s books. At the time of the Kruger crash, FAR through its “Någraord om siffer-granskning” translated as “A few words about checking figures” limited the duties of auditors to detecting and preventing misappropriation within a business entity by reviewing financial statements in a detailed manner. Ensuring adequate internal controls remained a function of companies. The aim of the 1944 ABL was to prevent a similar Kruger Scandal from reoccurring by toughening the audit regulatory framework (Johansson et al. 2005).
Auditing before the 1960’s was focused on checking figures, but from the 1960’s onwards the focus changed to internal controls. The advent of the 1970’s was met with the globalization of markets in which audit standards became international. To catch up with such international audit practice, FAR abandoned its item-by-item checking system for a more complex and technical audit process. From 1971 FAR started issuing professional recommendations which were subsequently approved by the ABL of 1975. The 1975 ABL further made it mandatory for auditors to comply with GAAS with the audit profession interpreting such standards. A proposal was equally made in 1975 for all companies to have a certified auditor but the scarcity of auditors at the time prevented it from being implemented. Nevertheless, from 1983 onwards, statutory audits became mandatory with all limited companies required to have an approved or certified auditor (Wallerstedt 2001). From 1985 auditors in Sweden were expected to issue a qualified opinion (Öhman & Wallerstedt 2012.) and report to the authority investigating economic crimes (Widhagen &
Damberg 1985) in cases where companies failed to comply with the tax legislation and other legislations (Larsson 2005). Additionally, auditors were empowered to report crimes committed by board members and CEOs (SFS, 1998:760).
Johansson et al. (2005) note that in 1995 after Sweden became a member of the EU, it had to adhere and comply with EU directives especially the 8th directive which regulates audit practice. Thus, in 1995 and 1999 respectively, an Annual Accounts Acts and new laws governing auditors and auditing were enacted. The 1995 ABL mandated an independent authority (National Board of Trade) to deal with issues related to auditing. Meanwhile, the Supervisory Board of Public Accountants was charged with approving auditors, issuing auditing guidelines and resolving resulting complaints. In 2001, Sweden became the first European nation to implement a tool called “the analysis model” which provided auditors the opportunity to monitor their independence. In addition to complying with EU rules, auditors were equally required to perform management audits, a provision which is applicable only in Sweden and Finland.
3.2. Duties of Auditors based on the Swedish Company Act (ABL) of 2005.
The practice of audit in Sweden is mainly in line with the European Commission’s 8th Directive on Company Law (2006/43/EC). Other statutes which are binding in Sweden include; Accountants Act (2001:883) - Auditors Act, Auditor ordinance (1995: 665) and Auditor Board Regulation (RNFS 1996:1, 2001:1, 2001:2). These statutes deal with the duties and responsibilities of approved auditors and authorized auditors. The ABL of 2005 further elucidates on the duties and responsibilities of a company elected auditor.
Auditors are usually appointed by the shareholders during the Annual General Meeting (AGM) for a period of four years. In appointing the auditor, the shareholders take into consideration the perspective of other stakeholders (FAR 2004). Before accepting the audit engagement, auditors are expected to perform a review under the analysis model to ensure that, there are no pre- existing situations which could undermine auditors’ independence and confidence. There are no rules regarding the number of times an auditor can be elected as a company auditor. Likewise, no provisions exist regulating the dismissal of the auditor before the term limit expiration (FAR 2004). In performing the audit function, auditors are required to comply with the Auditor Act section 19, which requires the auditor to maintain high professional standards in discharging their duties by adhering to the GAAS provisions. FAR mostly deals with ethical issues on related to how auditors are to conduct themselves in an audit (FAR 2004).
As previously mentioned ABL Chapter 9, section 1 (9:1) requires all companies to have at least one auditor with ABL (3:1) requiring the company through its Article of Association to state the maximum and the minimum number of auditors. Companies may equally appoint alternate auditors if they wish (ABL, 9:2). ABL (9:3) requires the auditor to conduct a detailed and extensive examination of the entity’s annual financial reports likewise the management of both the board of directors and managing director. Such examination must be based on GAAS. The provision further requires the auditor to examine the group reports, when a parent company is involved.
When such group reports are prepared, the auditor is expected to review the relationship between companies in the group.
The auditor is equally supposed to comply with the provisions of the articles of association, GAAS, instructions of the general meeting and any relevant statute in pursuant of the audit (ABL; 9:4). Furthermore, the auditor is
