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ASSESSMENT
OF AUDIT EXPECTATION GAP IN NIGERIA
CHAPTER ONE
INTRODUCTION
1.0
BACKGROUND TO THE STUDY
As the
stakeholders become dissatisfied with the work of the audit profession, their
confidence in audited financial statements will erode with time if nothing is
done to remedy the situation. Best, Buckby and Tan (2001) claim that society’s
trust is the ‘heart-beat of a profession’. Hence, if such trust disappears or
is eroded in any way, the outcome is likely to involve skepticism and the
depletion of value attributed to such profession. Although fraud detection has been taking out
of the primary objectives of the auditing profession, the 5th Global Economic
Crime Survey by PricewaterhouseCoopers (2009) reports that fraud remains a
pervasive business risk and almost every firm is subjected to occupational
fraud in their daily businesses, leading to huge losses for businesses and
society.
There is no
gainsaying that the audit profession is a social functions which provides
services to associated parties and is based on confidence between the
professional auditor and those parties.the importance and responsibilities of
auditing has increased in recent years due in part to reliance of other parties
on the data included in the financial statement and audit reports produced by
the auditor. Despite the importance of the audit profession, it has been subjected
to increased criticisms in the performance of its role and function, as a
result of the challenges the accounting profession has faced a long time, the
issue of Audit Expectation Gap (AEG) :which is the “difference between what the
public and users of financial statements perceive the role of an audit to be
and what the audit profession claim is expected of them during the conduct of
an audit (Ojo, 2006).
The AEG has
become a serious issue because of the damage it could potentially bring to the
essence of auditing profession, this is why it has been increasing in its
significance since it was identified in the mid 1970s.
Pierce and
Kilcommins (1996) also defined the audit expectations gap as when external
auditors' understanding of their role and duties is compared against the
expectations of user groups and the general public. Moreover, Audit as we all know refers to the
formal examination, correction, and official endorsing of financial accounts,
especially those of a business, undertaken annually by an Accountant., yet the
accounting profession in Nigeria has been under intense pressure due to rising
public expectations which is as a result of series of financial failures that
occurred during the recessionary years of the late 80's and the early 90's
(Ekwueme, 2013:14). These financial failures happened too quickly after an
'unqualified' audit report was issued by the external auditors. Koh and Woo
(1998), noted that in recent years, some spectacular and well-publicized
corporate collapses and the subsequent implication of the reporting auditors
have highlighted the audit expectation gap. In reality, the unqualified opinion
is wrongly seen as a certification that the firm or enterprise is solvent,
liquid and has the capacity to adapt to the dynamics of the environment. Any
subsequent failure of business resulting from management misjudgment,
fraudulent practice, economic instability, inconsistency in micro and
macroeconomic policies etc are viewed as failures of auditors (Adeniji,
2004:510).
Furthermore,
Stakeholders too often see the audit as a relatively discrete event when, in
fact, the processes and controls that ensure the broader integrity of the audit
comprise much more than the audit opinion itself. These processes and controls
range from the company’s collection and recording of financial information to
the actual audit, through to the issuance of the financial report. As a result,
the quality of financial reporting – so critical to investor confidence and
transparency – is directly dependent on the quality of the audit. The value of
an expert, independent opinion on a company’s financial statements simply can’t
be underestimated. And the simple knowledge that the audit is coming, combined
with the requirements and internal controls that exist around it, exerts a
preventative, quality-control pressure on financial statement preparation –
even before the audit takes place, yet These perceptions draw a line that needs
to define the role of the auditor in protecting the interest of shareholders
and ensuring that there is good corporate governance. Owners of business need
auditors, more than ever, to detect and prevent fraud. Perhaps, this is due to
the expanding nature of modern day businesses. Clients need value added and not
an auditor that will vouch and does the normal trade test (Nwokolo, 1998:25).
Additionally, auditors have been known for high integrity and objectivity as
well as their commitment to public interest. In relation to this view, Hillier
(2000) stated that diverse clients now expect them to provide more services
than just performing statutory audit and attesting to the credibility of
financial statements.
1.2.
STATEMENT OF PROBLEM
The global
search for a solution to the audit expectation gap by auditor has become
strident, the credibility of the auditing profession appears to be at it lowest
ebb. In the United State of America, the profession has lost its self
regulatory status, in these circumstances, the profession is bestirring itself
and the result is a welter of fresh suggestion and initiatives aimed at solving
the expectation gap problem. Some of the suggestion appears mundane while some
appears controversial. However, like a
sore thumb, the gap appears to have remained as wide as ever, at the local
level, the recent scandal in Cadbury Nigeria Plc whereby profit were overstated
by a large sum with the knowledge of auditors, and the subsequent indictment of
the accounting firm of Akintola William Deloite for audit failure, has further
aggravated the expectation gap conundrum.
The
criticism of auditors in Nigeria by users of audited financial statements has
stirred many a response both from the profession and statutes. It seems the
users have a different idea of what auditing should be. This is what has led to
the audit expectation gap. The existence of this gap has been caused by many
factors [communication factors and audit failures]. In this changing world,
business environment requires that auditor's responsibilities be increased to
include fraud detection/prevention. Also, users want to be able to rely on
audited financial statements for investment decision making. They also desire
the absolute independence of the auditor because absence of it may reduce
performance. Users also may have a different interpretation of the nature and
meaning of audit report.
The crucial
nature of auditing in ensuring the integrity and reliability of financial information
cannot be overemphasized. It is for this reason that the canons of many
countries require the attestation of financial statements by external auditors.
Unfortunately,
there are criticisms of the auditor from which opinions have emerged over the
years as a result of companies that have failed. This criticism of auditors in
Nigeria by users of audited financial statements has stirred many a response
both from the profession and statutes. It seems the users have a different idea
of what auditing should be. This is what has led to the audit expectation gap.
The existence of this gap has been caused by many factors. Moreover, the
business environment is changing and this requires that the auditor’s
responsibilities be increased to include fraud detection/prevention. Also,
users want to be able to rely on audited financial statements for investment
decision making. They also desire the absolute independence of the auditor
because absence of it may reduce performance. Users also may have a different
interpretation of the nature and meaning of audit report messages. These are
some of the factors that contribute to the audit expectation gap.
Finally, the
accounting profession in Nigeria and other climes has been under intense
pressure due to rising public expectations, this expectation has been fuelled
largely by demise of some financial institution as a result of widespread of
financial scandals and false reporting rifle in this collapsed institution
which in turn has cast the organizational controls and the professional
auditors in very poor light.
It has also
tended to undermine the confidence of the public in the profession to detect
and prevent corporate abuses, yet audit failures are always blamed partly, on
greed of the auditors, this lack of confidence on the auditing profession would
in time destroy the fundamental nature of auditing, which is ensuring the
integrity and reliability of financial information.
1.3.
OBJECTIVES OF THE STUDY
The general
objective of this study is to elicit and assess the role of auditor’s in audit
expectation gap in Nigeria.
From this
general objective, the following specific objectives are drawn:
Ascertain
the responsibility and reliability factors which contribute to the audit
expectation gap problem in Nigeria.
Ascertain
the perception of auditors who are ICAN MEMBERS in Nigeria as to the
suggestions for bridging the expectation gap.
Identify the
opinion of auditors and audit beneficiaries on the statutory role of external
auditors in Nigeria.
Investigate
the nature of Audit Expectation Gap and users of financial statement in
Nigeria.
Understand
the perceptions of auditor and users regarding the auditing roles and functions
in Nigeria.
Determine
the role played by Auditor with respect to audit profession.
Suggest and
provides recommendation to improve and enhances auditing professions.
1.4.
RESEARCH QUESTION
In order to
achieve these objectives, an ethnographic research approach has been used to
answer the question of this research. The general research question includes:
What are the
responsibility and reliability factors which contribute to the audit
expectation gap problem in Nigeria?
Perception
of auditors who are ICAN MEMBERS in Nigeria as to the suggestions for bridging
the expectation gap?
What are the
opinion of auditors and audit beneficiaries on the statutory role of external
auditors in Nigeria?
Investigate
the nature of Audit Expectation Gap and users of financial statement in
Nigeria?
What are the
perceptions of auditor and users regarding the auditing roles and functions in
Nigeria?
What are the
roles played by Auditor with respect to audit profession?
Are there
any possible recommendations to improve and enhances auditing professions?
1.5.
STATEMENT OF HYPOTHESIS
To achieve
the above objectives, the following hypotheses are formulated for the research
study, the hypothesis were stated in null forms.
HYPOTHESIS ONE (1):
Ho: There is
no significant relationship between audit expectation gap and auditor
responsibility relating to fraud detection and prevention, and soundness of
internal control structure of the audited entity.
HYPOTHESIS ONE (2):
Ho: Ho:
There is no difference between the opinion of auditors and audit beneficiaries
on the statutory role of external auditors in Nigeria.
1.6 SIGNIFICANCE
OF STUDY
The problem
of audit failures globally had tended to exacerbate the problem of audit
expectation gap. As a result the search
for a solution has become frenetic. ICAN
MEMBERS,
especially as auditors, stand at the centre of this effort at a panacea. The
motivation for carrying out this study in Nigeria is that auditors are blamed
for business failure, perhaps as a result of misunderstanding of the nature of
auditing. This study will be beneficial to the following:
1. Audit
clients: who form part of the audit beneficiaries will benefit from the results
of this study. i.e. the various organization who needs auditing services. They
will have a better understanding of the statutory objectives of external audit
in order to reduce any unreasonable expectations of the auditor.
2. Auditors:
who help to maintain public confidence in financial statements will understand
the expectation of the society in view of protecting their interests and
remaining relevant.
3. The
Accounting Profession: may need to redefine the role of auditors with regards
to AEG because of the changing nature of the business environment in Nigeria.
4. Scholars
in Auditing, Forensic Accounting and Related Areas: who push the frontiers of
knowledge will benefit from this study by developing research interests from
the findings of this study. Also, they will have a broader understanding of the
audit expectation gap in the Nigerian context.
Academics
will also have a field day as this work will open a floodgate for further
researches on other aspects of this all important subject matter as it affects
Nigeria. Finally, the International
community will have the benefit of Nigeria’s experience as the global search
for solution to the audit expectation gap cankerworm gathers momentum.
1.7. SCOPE AND LIMITATION OF STUDY
The main
focus of this study is to assess the role of auditor’s in audit expectation gap
in Nigeria. Since the determinants of the audit expectation gap are numerous.
For the purpose of carrying out a detailed analysis of research study, the
research was restricted to the auditors who are mostly ICAN Members selected
from the Central Business District of Lagos metropolis, including few stockbrokers
selected through list of brokerage companies that trade on the Nigeria Stock
Exchange.
In a
research work of this nature difficulties are bound to be encountered. The
researcher in the course of carrying out the research was faced with the
following problems and constraints.
There was
paucity of local literature as the researcher was threading on an area that has
not been over flogged. Finance constituted another problem limiting the ability
of the researcher to travel more extensively in search of relevant data and
opinion. Some of the professional auditors and stockbrokers filled the
questionnaires in a hurry, because of their busy schedules, thus affecting the
quality of their answers. Time was of the essence in this research and this
also affected the researcher.
On the
whole, however, the researcher was still able to use his wealth of experience
to navigate successfully through the
difficulties and produce a work that will stand the test of time.
1.8
DEFINITION OF TERMS
1. Audit
Expectation Gap: The “expectations gap” is the difference between what the
public and users of financial statements perceive the role of an audit to be
and what the audit profession claim is expected of them during the conduct of
an audit (Ojo, 2006).
2.
Auditor: Auditor is a qualified
accountant who also passed a professional examination. Such a person must be of
good conduct and have a vast knowledge and able to understand a practical
business, endeavor always to grasp the technicalities and business, methods of any
concern whose account he undertakes to audit.
3. External
Audit: This is an audit carried out by an independent person who is not an
employee of the enterprise.
5. Quality
audit is the process of systematic examination of a quality system carried out
by an internal or external quality auditor or an audit team.
6. ICAN
MEMBERS: These are members of the Institute of Chartered Accountants of
Nigeria.
7.
Expectation: This word refers to the purpose of audit as perceived by the users
of financial statements.
8. Gap: This
is the inability of auditors to meet the expectation of the users. In this
study, the gap is a result of misunderstanding of the auditor's role and responsibilities,
inadequate understanding of the message passed by the audit report and
expectations about auditor's independence.
9.
Reliability factor: it elicits the extent to which Auditors’ work or audited
statements can be relied on.
10. Independence factor: this shows the extent to
which independence of auditors affect the Audit Expectation Gap.
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