AUDIT EXPECTATION GAP

Audit Expectation Gap

Audit Expectation Gap

Introduction

The audit expectation gap has a long and persistent history. There is widespread concern with the existence of the “expectation gap” between the auditing profession and the public. The term “expectation gap” was first applied to auditing by Liggio (1974). Since then, cumulative evidence has increasingly indicated the presence of an expectation gap (Godsell, 1992). The expectation gap exists when auditors and the public hold different beliefs about the auditors' duties and responsibilities and the messages conveyed by audit reports. Apparently, there is a gap between what the public expects and what it actually gets.

In recent years, the auditing profession has been involuntarily placed in the spotlight, particularly because of some spectacular and well-publicised corporate collapses and the subsequent implication of the reporting auditors. As mentioned in Godsell (1992), there is a widespread belief that a person who has any interest in a company (shareholders, potential investors, take-over bidders, creditors etc.) should be able to rely on its audited accounts as a guarantee of its solvency, propriety and business viability. Hence, if it transpires, without any warning that the company is in serious financial difficulty, it is widely felt that somebody should be made accountable for these financial disasters, and this somebody is always perceived to be the auditors. These misperceptions by the public feed the legal liability crisis facing the accounting profession (Maccarrone, 1993). However, any “accountability vacuum” is not something that can be placed on the auditors' shoulders alone, for the nature and objectives of auditing are differently perceived by different parties (Lim, 1993).

Prior research on the expectations problem is substantial. This is not surprising given that the expectation gap between auditors and financial statement users has existed for the past 100 years although the term has been introduced to the auditing scene only during the last 20 years or so (Humphrey et al., 1992). This paper aims to review the literature on the audit expectation gap. The issues that have been discussed in the literature can be classified into three main categories:

of the expectation gap;

and structure of the expectation gap; and

to reduce the expectation gap.

It is hoped that this paper can provide insights into the audit expectation gap.

Definition of the expectation gap

The definition of the expectation gap varies among researchers. Liggio (1974) was the first to apply the phrase “expectation gap” to auditing. He defined the expectation gap as the difference between the levels of expected performance “as envisioned by the independent accountant and by the user of financial statements”. The Cohen Commission (Commission on Auditors' Responsibilities, 1978) extended this definition by considering whether a gap may exist between what the public expects or needs and what auditors can and should reasonably expect to accomplish.

Monroe and Woodliff (1993) defined the audit 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. Jennings et al. (1993), in their study on the use of audit decision ...