Expectation Gap (Essay Sample)

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Abstract
In the world of accountancy, the expectation gap is considered as one of the key issues facing this profession. Major stakeholders in the field of accountancy expect that auditors detect any irregularities or any other material fraud and report such occurrences once they arise. However, accounting professionals argue that the role of an auditor has always been misrepresented by the general public. This is argued under the assumption that "fraud detection and reporting is not necessarily a major auditing function" (Arrington et al, 1983). The divergent views and opinions regarding the role of the auditing process come at a time when the accounting profession seems to believe that the expectation gap can be eliminated.
This paper explores the different societal expectations form the auditing process based on the social, historical and political framework. In a society composed of diverse social divisions, it is expected that the role of social practice such as auditing is contested by the various social divisions. There is the ever existing problem of social conflict arising from the fact that one group is not willing to accept the meaning given to a social practice by a contesting group. This paper will analyze the expectation gap with regards to the accounting profession and the association between auditing and fraud reporting and detection.
Introduction
The expectation gap is defined as the "difference that exists between the auditing profession’s approaches with regards to the role of the auditing process and what the public expects from an audit" (Christopher, 1993). The reason why the expectation gap plays an important role in the accounting profession is because this gap determines the level of credibility on the audit process. This implies that the wider the expectation gap, the lower the credibility associated with the whole auditing process. It is important to note that the expectation gap has attracted the attention of major accounting institutions such as the American Institute of certified Public Accountants and the Chartered Association of Certified Accountants.
From the public’s point of view, auditors are solely responsible for the financial statement implying that the accuracy of financial statement is based on the auditor’s level of competence and performance. In addition, the public take it that audited financial reports are 100% accurate and without errors owing to the fact that they have already been audited. According to the Wisconsin Law Journal, auditors are always to blame whenever there are occurrences of fraud in financial statements and reports. According to the Auditing Practice Board (1991), it is such public expectations that maybe perceived to be way beyond the actual standard performance of an auditor. This is what really causes the expectation gap.
Is it Possible to Eliminate the Expectations Gap?
During modern times, auditing is increasingly becoming a difficult and challenging task with the inclusion of new rules and regulations in the accounting filed. This calls for auditors to enhance the techniques used to detect fraud. The problem is that the current rules and regulations have terms such as brainstorming and professional skepticism which have different meanings and are interpreted differently by different auditors. What is reflected by the expectation gap is the perceived difference between what an individual hopes to accomplish and what the same individual is expected by others to accomplish. A practical example of this is that in a real world application, an airline corporation may decide to delay flights during harsh weather or in the occurrence of a terrorist threat. However, this is not what the public expects from the airline and the expectation by the public is that the airline provides their services consistently at whatever cost. This brings out an expectation gap.
According to Asle, (2008), "auditors always face the challenge of uncovering fraud activities and sometimes are at a loss to identify their limits”. More importantly, auditors may fail to take the appropriate corrective measures when fraud is detected during an auditing process. This scenario is however contrary to what is expected by interested parties such as clients, judges, shareholders and the general public. These parties often question the auditing process in the occurrence that fraud goes undetected and are later detected by mere chance or accident. There are several reasons why auditors may fail to detect fraud during the auditing process. Such reasons include;
1 Relying too much on clients representations
2 Inability to recognize or observe a condition that indicates fraud during the auditing process.
3 Inexperience on the part of the auditors.
4 Inability to brainstorm potential fraud schemes and situations.
5 Auditor-client relationship
There are two major variables that drive the expectation gap that are; auditor’s ability in fraud detection and auditors efforts in fraud detection. In some occurrences, "auditors sometime possess the skills to detect fraud but end up disregarding obvious signs of potential fraud" (Shaikh & Talha, 2003). In other cases, some auditors choose to take shortcuts during the identification process and end up overlooking potential fraud schemes. In both of these scenarios, the expectation gap is broad.
In order to better understand what is required in an audit, an auditor is required to develop requisite skills to be able to understand the rules and regulations applicable during an audit process. Statement on Auditing Standards (SAS) 99, Consideration of Fraud in a Financial Statement Audit, puts auditors to task to come up with reasonable reassurance that there is no fraud. The Institute of Internal Auditors (IIA) further requires auditors to have the skills and knowledge required in fraud detection. The exact words used by the Institute of Internal Auditors (IIA) are that auditors must possess sufficient skills. Sufficient skills in this case might be interpreted differently by different auditors but their definitions are interpreted by the various stakeholders involved in the auditing process.
Developing Fraud Detection Skills
1. Auditors rely on the following tools to detect fraud;
2. Previous knowledge of different fraud schemes and scenarios
3. The ability to put various auditing rules and regulations into practice
4. Exemplary communication and interview skills.
While it is not expected for auditors to become completely develop the above skills all by themselves, it is highly recommended that they become more proficient in the above skills through; brainstorming potential fraud schemes, hand-on experience, applying fraud detection skills and reading relevant literature on fraud.
Training and awareness
"In order to better position themselves better in fraud detection, all auditors are expected to possess fraud detection skills" (Christopher, 1998). Such skills can be acquired through the development of basic understanding of fraud schemes and scenarios. There are several organizations such as the National Association of Certified Valuation Analysts (NACVA; ), and the Association of Certified Fraud Examiners (ACFE; )that train auditors on issues dealing with financial statements fraud, bribery and corruption and asset misappropriation. This implies that there are various certificates that auditors who choose to develop fraud detection skills can pursue. Such certificates include the ACFE’s Certified Fraud Examiner (CFE) and the NACVA’s Certified Forensic Financial Analyst (CFFA).
The world as it is today has various colleges and universities offering fraud detection courses while other institutions have incorporated fraud detection examinations in major courses such as business, accounting and finance. There are institutions which have gone to the lengths of offering advanced degrees in fraud related courses such as forensic studies. Liggio, (1973) states that a course involving forensic review includes a basic four hours overview of fraud detection and a maximum three days comprehensive overview of fraud identification techniques. In these sessions, auditors review cases, participate in group discussions and review empirical data on fraud related cases.
Brainstorming
Brainstorming potential fraud schemes is an important element of fraud identification process. This process is perhaps what helps auditors successfully identify red flags for fraud. Brainstorming is a technique whereby the auditor puts himself/herself in a fraudster’s shoes. This helps him/her to think like the fraudster hence supporting the adage that to catch a crook, learn to think like one’. It is estimated that 50% of all auditors always brainstorm before carrying out the actual auditing process. However, only half of this number makes brainstorming a formal process in fraud detection. There are some auditors who carry our brainstorming in a more informal basis and have in the previous past admitted to considering the risk of fraud without prior documentation of the brainstorming process.
The process of brainstorming requires a more formal approach so as to fully benefit the whole auditing process. Auditors for example can work as a group and use a spreadsheet. This is supposed to enhance the data evaluated and compare the results to ensure that the process is flawless. Such a group or a team can consist of an auditor, a fraud detector and a fraud examiner. Below are some of the guidelines that make brainstorming more effective’
1. The participation of every individual in brainstorming makes the process fun and interactive.
2. presenting a previous fraud case initiate response and stimulates brainstorming.
3. ...