The Audit Report: A "Misunderstanding Gap" Between Users and Preparers.

Author:Boyd, David T.


The critical, litigious environment which characterizes auditing today can he traced to the audit expectation-performance gap. Defined as the gap between society's expectations of auditors and auditor's perceived performance, it appears to comprise "reasonableness" and "performance" components; the latter being subdivided into "deficient standards" and "deficient performance." Differences in perception--especially regarding assurances provided among users, preparers and auditors--have been termed the "expectation gap."


In the early years of the U.S. auditing profession--from 1850 to the early 1900s--auditors primarily were engaged to provide almost absolute assurance against fraud and intentional mismanagement. As corporate America grew and the auditing profession developed, the early 1900s saw a shift away from verifying all transactions and amounts for purposes of fraud detection to determining fairness in financial statement reporting. This shift was partly a response to the burgeoning volume of business activity (making fraud detection less feasible) and the appearance and increased importance of a new business player--the shareholder. Corporate shareholders and other outside parties increasingly relied on auditors to attest to management-provided information and to provide assurance on externally reported financial information.

Consumers are affected by the service auditors provide, notably as shareholders or investors, but also in other capacities such as pension fund beneficiaries. They are becoming more concerned about this service as a result of the growth in share ownership and pension funds. Given the range of areas of consumer interest, interpreting the implications of some proposals is by no means straight-forward. The root of this may be traced to the lack of clarity about the groups of people to whom auditors ought to owe a duty of care.

Current practice has not strayed far from that of early corporate America, with the primary audit focus on financial statement reasonableness. Current standards still reflect the material misstatement focus and increasingly have relied on the concept of "reasonable assurance" in depicting the level of reliance to be placed on audited information. One need only skim current auditing standards to find pervasive evidence of use of the reasonable assurance concept as the foundation for reliance on audited financial statements.

Regardless of professional standards, however, an important question for the profession is, "What assurance does the public currently expect auditors to provide?" As a profession, accountants must continually assess public reaction to their stated role in financial reporting, as well as determine the public perception of the type and level of assurance believed or desired to be provided by auditors.

There is a concern over the auditors' current lack of legal responsibility for detecting fraud or irregularity. We believe that many owners' faith in the audit process could be justifiably strengthened if the auditors took responsibility for these areas. There also is concern about how small investors perceive and rely on the independence of auditors. In the light of recent cases it is clear that all these issues must be disclosed in the public arena.


A review of daily newspapers and of recent business and financial journals leaves little room for doubt that auditors throughout the English-speaking world are facing "a liability crisis and a credibility crisis." [1]

It appears that Liggio [2] was the first to apply the phrase "expectation gap" to auditing. He defined it as the difference between the levels of expected performance as envisioned by the independent accountant and by the user of financial statements." This definition was extended in the Cohen Commission's [3] terms of reference. The commission was charged to "consider whether a gap may exist between what the public expects or needs and what auditors can and should reasonably expect to accomplish." However, both of these definitions do not recognize that auditors may not accomplish "expected performance" [2] or what they "can or reasonably should." [3] They do not allow sub-standard performance. It is submitted that the gap which gives rise to criticism of auditors is between what society expects from auditors and what it perceives it receives from them. It is therefore proposed that the gap, more appropriately entitled "the audit expectation-performance gap," be defined as the gap between society's expectat ions of auditors and auditors' performance, as perceived by society. Given this definition, analysis indicates that the gap has two major components:

  1. A gap between what society expects auditors to achieve and what they can reasonably be expected to accomplish (designated the "reasonableness gap").

  2. A gap between what society can reasonably expect auditors to accomplish and what they are perceived to achieve (designated the "performance gap"). This may be subdivided into:

  1. A gap between the duties which can reasonably be expected of auditors and auditors' existing duties as defined by the law and professional promulgation's ("deficient standards"); and

  2. A gap between the expected standard of performance of auditors' existing duties and auditors' perceived performance, as expected and perceived by society ("deficient performance").

  3. ...

To continue reading