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.


The recent accounting scandals, where companies prepared fraudulent financial statements and auditors issued clean opinions on the fraudulent statements, have called to question the oversight role of auditing in the financial reporting process and expose the auditor to series of costly litigations. Each accounting scandal and/or corporate collapse raises the question “Where were the auditors?”Financial statement users generally expect the auditors to uncover financial irregularities errors and frauds. This divergent view culminates into what is termed the audit expectation gap.

The term audit expectation gap was first introduced to the audit literature by Liggio in 1974 as cited by (Enofe, Mgbame, Aronmwan, & Ogbeide, 2013). He defines the audit expectation gap as the difference between the levels of expected performance as envisioned by users of financial statement and the independent accountant.

Since its introduction to audit literature, much has been said and written on the issue of audit expectation gap and how it can be bridged. Some researchers suggest extensive audit education for users of financial statement (Fadzly & Ahmad, 2004); (Adeyemi & Uadiale, 2011), others suggest expanding the roles and responsibility of auditors in fraud detection (Kasim & Hanafi, 2008). Other suggestions also include the introduction of forensic accounting to the audit process (Enofe, Okpako, & Atube, 2013). This dissertation therefore focuses on determining the extent to which improved performance of auditors proxied by professional experience and post graduate academic qualification can bridge the audit expectation gap.

1.2          Statement of Research Problem

Accounting scandals and corporate failure of firms just audited and issued unqualified report suggests auditors under performance and negligence. In the case of Enron it was discovered that the directors and executives fraudulently concealed large losses in Enron’s subsidiaries. The auditors – Arthur Anderson – the fifth largest auditing firm in the world with staff strength of 85,000 people in 84 countries shredded vital and significant documents and correspondence relating to the audit and ultimately could not survive as a public accounting firm effective August, 2002 (Chaney & Philipich, 2002).

In the case of WorldCom, a telecoms corporation,  it was discovered after the fall in share prices and a failed share buyback scheme that the directors had used fraudulent accounting methods to push up the stock price

In Bayou Hedge Fund Group, the chief executive, Samuel Israel III defrauded his investors into thinking there were higher returns, and orchestrated fake audits. The Commodity Futures Trading Commission filed a court complaint and the business was shut down after the directors were caught attempting to send $100m into overseas bank accounts.

After Refco had become a public company in August 2005, it was revealed that Phillip R. Bennett, the company CEO and chair, had concealed $430m of bad debts which was not discovered by their auditors

In Nigeria, however, there are also notable corporate misrepresentations and accounting scandals amongst which are the one involving beverage giants – Cadbury Nigeria Plc. In October 2006, the board of Cadbury Nigeria PLC notified the world, which would include its stockholders and regulatory bodies of the discovery of “Overstatements” in her accounts, which according to it, has spanned many years. It quickly appointed Price Water House Coopers, an independent accounting firm to investigate the “Overstatements”.

Every time accounting scandals and corporate misdemeanors resonate, users of financial reports and indeed the society raise the question ‘‘where is the auditor?’’ The users of the financial statements expect the auditor to raise the red flag on all frauds and irregularities contained in the financial statement during the audit. However, the auditors rise to defend themselves that it is not the primary responsibility of the auditor to detect frauds and irregularities, citing statutory provisions and auditing standards.

The difference between what the public believes is the function of the auditor and what the audit accepts as his function constitutes the audit expectation gap.

Porter (1993) outlined two major components of the audit expectation gap viz;

Performance gap and    Reasonableness gap

The performance gap is sub-divided into two: deficient performance and deficient standards. For the purpose of this research, emphasis was laid on the performance gap.

Though extant literature documents the existence of audit expectation gap and acknowledges its threat to the legitimacy of the auditing profession, the challenge remains how the audit expectation gap can be bridged.

(Adeyemi & Uadiale, 2011), Approached bridging the expectation gap through the expansion of the duty of Auditors to clearly include the detection of fraud and errors.  (Enofe, Mgbame, Aronmwan, & Ogbeide, 2013)took a different approach, they studied the effect which educating the users of financial statements will have in reducing the expectation gap. In Australia, (Monroe & Woodliff, 1994b) tried the use of expanded audit report to change the perception of users of financial statement.

All the above studies have focused on their different approaches in order to bridge the audit expectation gap, and according to (Porter, 1993), there could be room for auditors underperformance contributing to the expectation gap. Thus this study tends to examine how improved performance of auditors,proxies by professional experience and post graduate academic qualification can help in bridging the expectation gap.

1.3     Objectives of the Study

The main objective of this study is to determine the extent to which an improved performance of External Auditor will go in narrowing the audit expectation gap. From this main objective, other specific objectives are also set as follows to;

Determine the extent to which the audit expectation gap exists between auditors and users of audited financial statements in Nigeria.

Determine the extent to which the professional experience of external auditors will improve the auditor performance so as to bridge the audit expectation gap.

Ascertain to what extent academic educational level of external auditors will improve the auditor performance so as to bridge the audit expectation gap.

1.4          Research Questions

In order to achieve the above stated objectives, this research is designed to find possible answers to the following research questions.

To what extent does the perception of existence of audit expectation gap differ between auditors and users of financial statements in Nigeria?

To what extent will the professional experience of external auditors improve the auditor performance so as to bridge the audit expectation gap?

To what extent will academic educational level of external auditors improve the auditor performance so as to bridge the audit expectation gap?

1.5          Research Hypotheses

For the purpose of achieving the objectives and finding possible solutions to the research questions raised above, the following hypotheses have been formulated and stated in null form:

H1: There is no significant difference in the perception of auditors and users of audited financial statement in Nigeria as regard the existence of audit expectation gap in Nigeria.

H2: Professional experience of external auditors does not improve the auditor performance so as to bridge the audit expectation gap.

H3: Academic educational level of external auditors does not improve the auditor performance so as to bridge the audit expectation gap.

1.6          Significance of the Study

The overall significance of this study is that upon completion, it will contribute to the improvement of understanding of audit expectation gap.

By examining the possible solutions to the audit expectation gap which includes through continuous academic education, professional education and acquisition of special skills which are geared towards improving the capability and performance of external auditors, this study will assist in lifting confidence of the users of financial statements. This in turn will promote the efficiency of the capital market. The accounting standard setters and regulators will find this study valuable as they continue to search for ways and means to narrow the audit expectation gap. Equally the auditing profession which faces threat of legitimacy as a result of rising public dissatisfaction because of deviation from societal ascriptive role of the auditor (Lindblom, 1993) will find the findings very useful. The findings of this study will serve as a base and reference point for further academic research work relating to this study. The National Universities Commission (NUC), the National Board for Technical Education (NBTE) and the National Commission for Colleges of Education (NCCE) who are charged with developing the curricula of higher education in Nigeria will derive inputs from this study for their task.

1.7          Scope of the Study

Geographically, the scope of the study covers Rivers State. The choice of Rivers State is informed by the fact that the state has a high concentration of industrial and commercial business activities. In fact Rivers State is the hub of oil and gas business in Nigeria and has a branch of the Nigerian Stock Exchange and is the headquarters of the South -South geo political zone of Nigeria. The above provides fertile ground to seek response from stock brokers, investors, accountants and management executives on the subject in question, which is, the audit expectation gap.

1.8          Operational Definition of Terms

Accounting Fraud: Accounting fraud is an act of knowingly falsifying accounting records such as sales, or cost records in order to boost the income and create an untrue position

Audit: Audit in the context of this study refers to a periodic and statutory examination carried out by independent examiners (External Auditors) on the financial statement in order to express an opinion.

Error: This refers to the unintentional misrepresentation of accounting figures/items that are not intended to mislead or enrich any person but have an effect on the financial position of an organization.

Expectation: This refers to the belief by the users of financial statements on certain duties that the auditor is supposed to perform.

Financial Statement: Financial statement in this context refers to a set of accounts presented as a report to the owners of businesses by their management and directors.

Forensic Accounting: Forensic accounting is the application of financial skills and investigative mentality to resolve issues conducted within the context of rule of evidence.

Fraud: Fraud refers to the intentional misrepresentation of the truth intended to deceive an individual, group of individuals or organization.

Gap:  Gap in this study refers to the difference in view of the duties and responsibilities of the auditor existing between the standpoint of the auditor and users of financial statement

Unqualified Report: In this context, unqualified report refers to an audited set of account that has been adjudged free of bias and attested to by an auditor.

1.9          Organization of the Study

This study is organized into five chapters:

Chapter one: deals with the context of the problem, statement of the problem, purpose of the study, research questions, research hypotheses, significance of the study, definition of terms, and the limitations of the study.

Chapter two: deals with the review of related literature on the subject matter.

Chapter three: describes the Research design, sampling procedure/sample size determination, Data collection method, operational measures of variables, and the Data analysis techniques.

Chapter four: deals with the presentation and analysis of data.

Chapter five: presents the Discussion, Conclusion, Implications of the research findings, as well as the Recommendations. Finally, there are suggestions for further research.

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