Existence of the Audit Expectation Gap and Its Impact on Stakeholders’ Confidence: The Moderating Role of the Financial Reporting Council

Abstract

This paper empirically emphasizes the existence of the audit expectation gap and its impact on stakeholders’ confidence, moderated by the active role of the financial reporting council. As a maiden attempt to portray the relationship, a higher-order model has been constituted and assessed with the pragmatic exploration, smearing the partial least squares structural equation model (PLS-SEM). The data contains 174 respondents as auditors, investors, investment and credit analysts, and regulatory agencies in Bangladesh. The study explores audit expectation gap from diverse aspects, such as auditors responsibility for fraud detection, meaning, and usefulness of the audit report, auditors providing the non-audit services, auditors’ responsibility for going concern reporting, and also an unmet expectation for the other assurance services, such as assurance on the other parts of the annual report beyond the financial statements, like management discussion and analysis and corporate social and environmental disclosure. The findings suggest that the audit expectation gap is negatively related to stakeholders’ confidence and the greater the audit expectation gap is, the lower stakeholders’ confidence is in the audit. Auditors maintaining perceived independence and improving the level of communication with users will diminish the audit expectation gap and induce stakeholders’ confidence simultaneously. Moreover, the active role of the financial reporting council acts as a moderator to ensure the auditors’ perceived independence. The result of the study motivates the policymakers to concentrate on the users’ audit-related expectations and also intends the importance of independent audit oversight.

Auditing Concepts and Stakeholders’ Expectations

“…An attempt had been made in carrying out a detailed review of auditing concepts and stakeholders' expectation from the perspective of the fundamental and indispensable economic roles of auditing in providing expert service to the generality of stakeholders, instilling confidence of block-building of reinstating and reinforcing eroded trust and confidence in audit reports and financial reporting (Akther & Xu, 2020). The auditing concepts have lost their focus and relevance due to some reported carefree and unprofessional reckless disposition by some auditors involving some cases of financial scandals in the likes of Enron and Arthur Andersen.…”

“…The study results suggested the relative significance of more robust investor protection and legal framework and enforcement in establishing higher audit and earnings quality. Akther and Xu (2020) investigated the existence of the audit expectation gap and effect of expectation gap on stakeholders' confidence and dully moderated by the economic council's dynamic role. The study employed a pragmatic exploratory method, structured questionnaire to source data from selected respondents.…”

“…However, with the growing and expanding nature and volume of business transactions and the significance of information for investment decisions, the paradigm shifted from the earlier objective of ascertaining correctness arithmetical accuracy alone to the expression of a true and fair view opinion independent auditors. Hence, an independent external professional person called the auditor is strictly guided by auditing standards to present a regulated measure of opinion to guarantee a reasonable extent of the audit quality to be presented to the accounting information users (Akther & Xu, 2020).…”

The Effect of Auditor's Technical Abilities on the Quality of Financial Statement Information

“…Audited financial reports can increase the confidence of users of financial statements in all financial information displayed in the financial statements and increase confidence in the services provided by company management. This Credibility Theory emphasizes the explanatory ability of information in financial statements to provide explanations that users of financial information can understand in order to make economic decisions (Eid, 2014;Akther & Xu, 2020).…”

Income Smoothing, Earnings Management and the Credibility of Accounting Information

“…According to the positions of Akpanuko and Umoren (2018); Linck, Netter, and Shu (2013), earnings management activities are illegal and deceitful in all forms, and investment decision using discretionary earnings may not add value to investment decision relying on them and could have litigation tendencies. Managers and corporate bodies who indulge in earnings management to increase earnings may not be too smart for too long and investors, shareholders, and the general the public cannot be fooled forever (Akther & Xu, 2020).…”