This study examines audit expectation gap in Nigeria and how the gap can be narrowed. The objective of this study is to determine how far the improvement of technical capabilities of auditors through continuous academic education, professional education and acquisition of special skills will go in bridging the audit expectation gapThree hypotheses were formulated and tested using the analysis of variance. The research methodology employed is the survey design in which a sample size of 187 was gotten from a population of 362 using the Cochran sampling technique. 187 questionnaires were administered on the five respondent groups (external auditors, internal auditors/managers, bankers, investment analysts and institutional investors. 176 questionnaires were validly filed and returned representing a 94% response rate. We conducted pair wise comparisons results using the Tukey post hoc test. The findings of the study are: that audit expectation gap exists significantly in Nigeria. Another finding of this study shows overwhelming evidence that attainment of fellowship status and acquisition of experience improve the audit quality and therefore assist in bridging the audit expectation gap. Finally the study also finds that special training in forensic accounting and acquisition of post-graduate academic qualification in accounting and auditing do improve the performance of the auditors. This study is expected to contribute to current global debate on the possible ways of bridging the audit expectation gap, and also have practical implication for the Nigerian Accountant and the Audit practice in general as it will contribute to the body of knowledge on issues surrounding the Auditing profession in Nigeria.
1.1 Background of the Study
The general development of modern accounting and auditing is credited to the expansion and increase in the number of industries and corporate organizations which began during the industrial revolution. Prior to this increase in nature and size of business operations, and at a time when businesses and industries were more on a small scale, business owners were actively involved in the day to day running and monitoring of the operations of their business, but with the changing time and business nature, they could no longer continue actively and this made the hiring of business managers inevitable.
These managers are employed to manage and run the business on behalf of the owner(s) of the business with the powers to make decisions in their capacity, thus creating an agency relationship between the owners of the business and the managers. According to (Jensen & Meckling, 1976) agency relationship is defined as:
A contract under which one person (principal) engages another person (agent) to perform some service on their behalf, which involves delegating some decision-making authority to the agent.
As agents of their principal, managers are expected to render account of their stewardship to their principal usually periodically through the financial statements. The financial reports should provide information that is useful in making rational business and economic decisions (International Accounting Standards Board, 2010)
Agency theorists posit that agency relationship is characterized by information asymmetry and goal conflict between the manager and the principal (Jensen & Meckling, 1976). The result is that managers do not disclose all material events and information in their account of stewardship. As noted by Matsumoto (2002) managers deliberately manage earnings upward to avoid negative surprises. (Kothari, Shu, & Wysocki, 2009) Presents evidence to show that managers delay disclosure of bad news relative to good news. They argue that greater information asymmetry provides opportunitiesfor managers to withhold bad news. Therefore the manager is not trust worthy and must be monitored and controlled (Bushman & Smith , 2002).
One acclaimed mechanism for monitoring and controlling managers is the audit of financial reports prepared by the managers. (Cohen, Krishnamoorthy, & Wright, 2002) They noted that the audit serves as a monitoring device and is thus part of the corporate governance mosaic. (Millichamp & Taylor, 2012) Indeed provides six main reasons why the financial statements should be subjected to external audit. According to them, the report may Contain errors, not disclose fraud, be inadvertently misleading, be deliberately misleading, fail to disclose relevant information and conform to set regulations.
During the early development, the auditor was engaged according to (Epstein & Geiger, 1994) to provide almost “absolute” assurance against fraud and intentional mismanagement. In discharging this task, the auditor verified all transactions and amounts contained in the financial statements. However, the expansion of business and complex nature and huge volume of transactions present serious challenges to the capacity of the auditor to undertake complete verification of all documents and transactions. The audit profession therefore transitioned from complete verification geared to attestation of accuracy of the information in the financial statements and detection of fraud to performing procedures based on samples to obtain audit evidence so as to express opinion on whether the financial statement shows a true and fair view of the affairs of the firm. Thus the auditor no longer accepts the detection of fraud as his primary responsibility but as a residual responsibility.