2012 Saeid Jabbarzadeh Kangarlouei, Morteza Motavassel, Yaghoub Pourkarim, Asghar Emamdoost, Vali Pourkarim 83 Analysis of Audit Expectation Gap Between Users of Audit Reports and Independent About the Features of Independent Saeid Jabbarzadeh Kangarlouei Department of Accounting, Islamic AzadUniversity, Orumieh Branch,Orumieh Iran E-mail: Jabbarzadeh.s@gmail.com Morteza Motavassel M.A. in Accounting, Islamic Azad University, West Azarbyjan Science and Research Branch, Iran Yaghoub Pourkarim Islamic Azad University, Khosrovshahr Branch, Khosrovshahr Iran M.A in Accounting Asghar Emamdoost Islamic Azad University, Broujerd Branch, Broujerd Iran M.A in Accounting Vali Pourkarim Islamic Azad University, Heris Branch, Heris Iran M.A in Accounting Abstract IDifferences between what users expect from the auditor and what the auditor actually provides is often called the audit expectation gap. The study tries to identify the gaps between users of audit reports and independent auditors about the features of independent auditors and offer a solution to reduce it. For this purpose, intended features of independent auditors will play the role of component for developed hypotheses. This research was performed through distributing questionnaire among the independent auditors and users (stockholders and managers). In addition, Kruskal-Wallis test, Analysis of Variance (ANOVA) and Tukey post hoc test were used to test hypotheses. The results of the study indicate that there is a significant different between users of audit reports and independent auditors about the features of independent auditors. Key words: Expectations Gap, Features, Independent, Audit Reports Users. With respect to separation of management and ownership, corporate governance issue and related theories including agency theory, stakeholder theory, etc. auditing the financial statements is crucially necessary. Auditing adds the value to financial reporting because it shows the relevance and reliability of financial statements (HasasYeganeh, 2005). In summary, auditing mitigates the accreditation problem raised from interest conflict, so increases reliability of financial statements (NonahalNahr et al., 2010). using accepted auditing standards give their opinion about financial statements conformity with Generally Accepted Accounting Principle (GAAP)in the form of audit report (Lee& Azham, 2008). However, there is the possibility that auditors will not be able to satisfy all users' expectations and the gap rises between auditors versus financial statement users perceptions concerning independent auditors responsibility (Siddiqui et al., 2008(. The gap may stem from different factors such as auditor s features. The researches have proved that auditor s features may influence on audit report. A good auditor should be independent, knowledgeable and experienced, secretive, far from bias judgments and inherently suspicious. Although Iran Business Act and its amendment in1968 has not established scientific or practical conditions for accounting firms auditors, virtue, ethical and professional qualifications are the main features of auditors. Auditing will have no value adding and also will be ineffective when there is difference between auditors and financial Jabbarzadeh K.S., Motavassel M., Pourkarim Y., Emamdoost A., Pourkarim V. - Analysis of Audit Expectation Gap Between Users of Audit Reports and Independent About the Features of Independent
84 School of Doctoral Studies (European Union) Journal 2012 statement users perceptions concerning what auditors suppose to provide and or what they actually provide. In addition, if auditors do not understand their social role, how they can satisfy users' expectation and exist in long-term as an economic process (HasasYeganeh & Khalegi., 2005). Considering that the objective of the survey is to study the expectation gap between financial statement users and independent auditors about auditor s features and to serve resolutions to reduce it, the main question is: Is there a difference between financial statement users' and independent auditors' perception about auditor s features, which in turn influence on audit reports? Literature Review For the first time, the term of expectation gat was coined in the US. American Institute of Certified Public Accountant (AICPA) established Cohen Commission (1978) to set suitable code of auditor s responsibilities. The mission of the commission was to determine that whether there is a gap between public expectations from what auditors suppose to provide and or what they actually provide. In the fall of 1975 a sub-commission under supervision of the Senate was established to set procedures to improve auditors and public firms' responsibilities. This task continued by International Memoranda of Understanding (MOUs) in subsequent years. Moreover, Adam s Commission issued its report in Canada. While the term of expectation gap was developing in North America, the same movements were growing in the UK. Then, auditing activities committee released its first audit standard set in 1980 (HasasYeganeh & Khalegi, 2005). Porter (1993) in a survey to mitigate the expectation gap found that the full elimination of the expectation gap is impossible and it can be successfully resolved by only combination of measurements. Pierce & Kilcommins (1996) conducted a survey among five different groups of students at the beginning and end of year and highlighted that there is a significant decline in the expectation gap among students who have studied and who have not. Dixon et al. (2006) studied some of auditors responsibility. Their results show that there is a difference between auditors and users' perception about the responsibilities and users regard the auditors committed to fulfill their responsibilities. Mahadevaswamy & Salehi (2008) in a survey titled "audit expectation gap in auditor responsibilities between India and Iran" found that, in this regard, there is not a significant gap in both countries. However, there are some differences in some cases such as providing financial statements, financial statements accreditation and fraud detection. Hasas Yeganeh & Khalegi (2005)studied the expectation gap between auditors and users of accreditation value of the audit service. They showed that there is a difference between auditor and users' perception concerning accreditation service. Salehi & Nagilo (2008) surveyed the expectation gap between auditors and bank employees as to the independent auditors' duties. They indicated that despite some agreements, there is a significant gap between auditors and bank employees concerning the independent auditors' duties. Salehi & Rostami (2009) studied the expectation gap between auditors and users of auditors' service. They disclosed that users' education and letting them know about auditing objectives result in reducing the expectation gap. On the whole, they argue that the expectation gap reduces the auditor independence. Salehi et al.(2009) surveyed the relationship between auditor independence and the expectation gap. They assert that auditor independence is dominant for financial statements users and there is a significant difference between auditors and financial statements users' perception about independence. Hypotheses Development Considering that the objective of the survey is to study as to whether there is a significant gap between financial statement users and independent auditors' perception about auditor's features, the following hypotheses are postulated: H1:there is a significant gap between financial statement users and independent auditor's perception about auditor's features. H1-1:there is a significant gap between managers and independent auditor's perception about auditors' features. H2-1:there is a significant gap between shareholders and independent auditor's perception about auditor's features. H2: there is a significant gap between shareholders and managers' perception about auditor's features. School of Doctoral Studies (European Union) Journal - 2012
2012 Saeid Jabbarzadeh Kangarlouei, Morteza Motavassel, Yaghoub Pourkarim, Asghar Emamdoost, Vali Pourkarim 85 Research Population and Sample The research population consists of chartered auditors and users of audit report. The number of chartered auditors in Iran was 1586 people until the end of April 2011. Since the users of audit report are various and extended, it is necessary to limit range of users group. Therefore, in this survey, users include manager and shareholders of firms listed in TSE. 451firms had been listed in TSE until the end of April 2011. The sample determined by Cochran`s formula include 267 people. 144 filled questionnaires received out of267 distributed ones and analyzed. The study period is the first six month of 2011. Methodology This study is the survey research. The Likert scale (very important, important, neither important nor unimportant, unimportant, very unimportant) is used to collect questionnaires data. After collecting the primary data, taking the answers into account, another questionnaire was provided and distributed among the population. Considering that the answers in this scale is qualitative, so for each alternatives the weights of 1,2,3,4 and 5 was dedicated to convert them into quantities. Then, the importance coefficient multiplied by their frequency for statistical analysis purpose. In this study, 35 items of auditor's features are presented in the questionnaire and their importance level is determined through very important to very unimportant by respondents. It should be mentioned that auditor's features was derived from interview with faculty members of accounting and auditing articles and then adjusted respecting to Iran environment through consulting with accounting scholars to increase the validity of questionnaire. These features are completely presented and analyzed in the findings section. In addition, Coronbach s coefficient alpha method was used to test the reliability of questionnaire which is acceptable (0.857). Excel software is applied to calculation purpose after collecting data. The results drawn from Excel software were analyzed in SPSS software. It should be also mentioned that the researcher was beside the sample population and answered their questions during distribution of the questionnaires. In this study 35 items of auditor s features are presented in the questionnaire and one time the first main hypothesis was analyzed among the groups of independent auditors, shareholders and managers respecting to each feature separately by Kruskal-Wallis test and the other time the first main hypothesis was analyzed among the groups of independent auditors, shareholders and managers for features by ANOVA test in whole. The Tukey post hoc test shows that which groups have differences with each other. Therefore, the result of first and the second sub-hypotheses and also the second main hypothesis is determined by Tukey post hoc test. Research Analysis Kruskal-Wallis test Kruskal-Wallis test is a non-parametric method used to find the differences between independent groups by rank and testing whether samples originate from the same distribution. Therefore, Kruskal-Wallis test is used in the groups with respect to each feature in the first main hypothesis. The results are presented in Table 1.Considering the significance level of each auditor's feature in Table 1, H0 (there is not a significant gap between users of audit report and independent auditors' perception about auditors' features.) is rejected in following features at the 5% level of significance: Providing a good situation for co-workers creativity, trying for precise pathology, complying justice in auditing, establishing cooperation feel among co-workers, giving advice to the auditee, explicitly in expressing professional opinion, having enough information about the rules of auditee, avoiding from the indifferences in reviews, applying the new technologies related to auditing, caring about tidiness of the work place, having bonding feel for profession, avoiding from suspicion facing financial employees, having enough knowledge of English language, creativity in doing duties, using the facilities optimally in doing duties accurately, trying to solve the profession problems, avoiding from bias in auditing, avoiding from expressing non-professional opinion, having intuitive in analyzing. Moreover, H0 is accepted for having good communication ability, commitment to auditing rule and principles, complying administrative hierarchy, using consultant advice, preferring collective over individual benefits, avoiding from struggle and conflicts, being polite in meetings, avoiding from hasty in decision making, avoiding from conspiracy, utilizing the religious statements in doing the duties, considering God contentment in doing the tasks, caring about public property, utilizing time management, having up to date information, avoiding from acquisitive people, being patient when occurring problems in reviews. Jabbarzadeh K.S., Motavassel M., Pourkarim Y., Emamdoost A., Pourkarim V. - Analysis of Audit Expectation Gap Between Users of Audit Reports and Independent About the Features of Independent
86 School of Doctoral Studies (European Union) Journal 2012 Table 1.Results of Kruskal-Wallis Test No Features Sig Kruskal-Wallis Test Independent s Shareholders 1 Providing a good situation for co-workers creativity 0.030 7.051 69.54 75.94 87.41 2 Trying forprecise pathology 0.002 11.997 99.84 52.06 74.92 3 Having good communication ability 0.952 0.047 89.87 73.09 70.40 4 Complying justice in auditing 0.005 10.372 91.02 63.17 75.95 5 Establishing cooperation feel among co-workers 0.007 10.314 68.07 98.12 79.21 6 Commitment to auditing rule and principles 0.254 2.684 87.88 75.89 76.39 7 Caring about public property 0.059 5.612 95.69 61.85 80.03 8 Complying administrative hierarchy 0.219 2.734 82.17 69.62 83.30 9 Using consultants advice 0.318 2.379 81.47 89.85 76.44 10 Giving adviceto the auditee 0.004 11.527 98.51 72.09 67.05 11 Explicitly in expressing professional opinion 0.001 14.551 94.43 57.80 99.86 12 Having enough information about the rules of auditee 0.037 6.958 85.99 53.85 86.55 13 Preferring collective benefits over individual benefits 0.146 3.473 83.25 64.93 84.30 14 Avoiding from the indifferences in reviews 0.004 11.631 88.51 59.62 82.86 15 Applying the new technologies related to auditing 0.018 7.911 79.51 81.32 80.78 16 Avoiding from struggle and conflicts 0.057 5.698 72.69 95.47 80.05 17 Being polite in meetings 0.091 4.713 84.99 66.67 86.04 18 Avoiding from hasty in decision making 0.068 5.576 87.08 65.55 79.64 19 Being patient when occurring problems in reviews 0.914 0.066 91.08 74.30 71.61 20 Avoiding from conspiracy 0.342 2.310 81.83 90.21 76.80 21 Having bonding feel for profession 0.027 7.709 99.94 55.08 67.80 22 Caring about tidiness of the work place 0.008 9.824 92.93 89.65 67.63 23 Utilizing the religious statements in doing the duties 0.198 3.005 88.10 76.11 76.61 24 Avoiding from suspicion facing financial employees 0.001 13.631 97.18 65.56 75.20 25 Avoiding from bias in auditing 0.038 6.571 97.85 72.41 72.36 26 Avoiding from expressing non-professional opinion 0.049 5.973 87.68 56.91 84.27 27 Considering Godcontentment in doing tasks 0.081 4.983 83.11 64.79 84.16 28 Having intuitive in analyzing 0.011 8.162 97.56 54.47 68.94 29 Having enough knowledge of Englishlanguage 0.041 6.391 84.25 93.42 79.67 30 Trying to solve the profession problems 0.002 11.984 86.07 53.93 86.65 31 Avoiding fromacquisitive people 0.075 5.017 87.15 65.62 79.71 32 Having up to date information 0.176 3.458 83.32 65.12 84.37 33 Using the facilities optimally in doing duties accurately 0.022 7.731 91.93 64.08 76.86 34 Creativity in doing duties 0.018 7.924 79.62 81.43 80.89 35 Utilizing time management 0.249 2.705 81.19 89.57 76.16 Analysis of Variance (ANOVA) In ANOVA test the observed variance in a particular variable is partitioned into components attributable to different sources of variation. In its simplest form ANOVA provides a statistical test of whether or not the means of several groups are all equal, and therefore generalizes t-test to more than two groups. Doing multiple two-sample t-tests would result in an increased chance of committing a type I error. For this reason, ANOVAs are useful in School of Doctoral Studies (European Union) Journal - 2012
2012 Saeid Jabbarzadeh Kangarlouei, Morteza Motavassel, Yaghoub Pourkarim, Asghar Emamdoost, Vali Pourkarim 87 comparing two, three or more means. Therefore, the first main hypothesis is tested by ANOVA among the groups of independent auditors, shareholders and managers for the auditor`s features in whole. The results of ANOVA test are illustrated in Table 2 which shows that H0 is rejected at the 5% level of significance, so the first hypothesis is accepted. Table 2. Results of ANOVA Test Squares Sum Df Squares Mean F-Statistic Sig. (I) (J) Stockholders Mean Difference (I-J) Std. Error Sig. 95% Confidence Interval Lower Upper -16.22341* 1.33211.000-19.3704-13.0764-18.13341* 1.17251.000-20.9034-15.3635 *. The mean difference is significant at the 0.05 level. Between s 0.004 8.164 0.928 2 1.856 Inter s 0.115 141 16.331 Total 143 18.187 Tukey Test Tukey test is an approach used in two-way ANOVA to assess whether the factor variables are additively related to the expected value of the response variable and it shows that which groups are different. Therefore, the result of the first and second sub-hypotheses and also the second main hypothesis are determined by Tukey post hoc test. The results of Tukey test are illustrated in Table 3. (I) Stockholders (J) Stockholders Table 3.Results of Tukey Test Mean Difference (I-J) Std. Error Sig. 95% Confidence Interval Lower Upper -1.91000 1.09511.182-4.4971.6771 16.22341* 1.33211.000 13.0764 19.3704 1.91000 1.09511.182 -.6771 4.4971 18.13341* 1.17251.000 15.3635 20.9034 The first and second sub-hypotheses are accepted considering significance level (0.000).Also, the second main hypothesis is rejected considering significance level (0.182). Discussion, Conclusion and Suggestion Remarks The results show that there is a difference between users of audit report and independent auditors' perception about auditor's features, which in turn influence on audit report. For example, many users of audit report donot understand auditing duties limitations because a great deal of ethical features is a personal issue and it is important only from users view which results in the gap between independent auditor, shareholder, and managers` perception.to sum up the first main hypothesis, it can be concluded that each group of independent auditors, managers and shareholders regard some of features of study to be necessary and useful in increasing the effectiveness of conducting auditing tasks.in this regard,the results of surveying the perception of independent auditors, managers and shareholders about auditor's features show that they emphasize on five features as their priority. Independent auditors emphasize on avoiding from bias in auditing, giving advice to the auditee,trying for precise pathology, having bonding feel for profession, andhaving intuitive in analyzingand shareholders on establishing cooperation feel among coworkers, avoiding from struggle and conflicts, having enough knowledge of English language, avoiding from conspiracy, and using consultant advice, and managers on explicitly in expressing professional opinion, providing a good situation for co-workers creativity, trying to solve the profession problems, having enough information about the rules of auditee, and being polite in meetings, respectively. Jabbarzadeh K.S., Motavassel M., Pourkarim Y., Emamdoost A., Pourkarim V. - Analysis of Audit Expectation Gap Between Users of Audit Reports and Independent About the Features of Independent
88 School of Doctoral Studies (European Union) Journal 2012 Therefore, there is a significant difference between these groups concerning the independent auditor's features. Some features of independent auditors in this study are similar to those of HasasYeganeh & Khalegi (2005), Salehi& Nagilo (2008), Salehi et al. (2009) and Dixon et al. (2006) and the results are the same too. The only difference between this study and previous studies is that previous studies used the other variables such as the auditors and users perceptions aboutsignaling content of audit report, the regulation conformity by independent auditors, the education role of auditing in the expectation gap between independent auditors and users, etc.the results of those studies show the existence of significant gap between independent auditors and users. Considering the results of the study the following suggestions are presented: Auditor quality is defined as auditor`s reputation and his or her professionalcare. Auditor`s reputation increases the reliability of financial statements and auditor professional care increases the quality of financial statements (DeAngelo, 1981). However, considering that the users (managers and shareholders) have expectations from independent auditors and based on that they judge about auditor`s reputation, independent auditors should consider the users expectations and try to cater thembecause their reputation increases with satisfying the users expectations in tandem. Moreover, considering that the level of users knowledge and study about auditing, auditor and his or her features may influence on users expectations concerning independent auditors, however, users should have more knowledge about independent auditors duties and adjust their expectations based on it. Although users acquaintance about the nature and importance of auditing, auditor and his or her features is time and money consuming, it is possible though holding seminars and motivating them to acquire more information in this regard. References AICPA, 2002, Commission of Responsibilities: Report, conclusions and Recommendations (Cohen Commission), New York. P: 78. Dixon, R. & Woodhead M. & Sohliman M., 2006, An Investigation of the Expectation Gap in Egypt, Managerial Auditing Journal, Vol. 21, No. 3, pp: 293-302. DeAngelo, L. E., 1981, Auditor size and audit quality, Journal of Accounting & Economics, 3 (3), pp: 183-199. HasasYeganeh, Y., 2005, Auditing philosophy, first impression, Tehran, Scientific and cultural publication. HasasYeganeh, Y.& Khalegi, A., 2004,Expectation gap between auditors and users of verification role of independent auditors, journal of accounting and auditing review, No. 35, pp: 29-31. Lee Teck-Heang, Azham Md. Ali, 2008, The audit expectation gap: A review of the contributing factors, Journal of Modern Accounting and Auditing, No.39, pp 161-168. Mahadevaswamy, G. &Salehi, M., 2008. Audit Expectation Gap in Auditor Responsibilities: Comparison between India and Iran, International Journal of Business and Management, Vol. 3, No. 11, pp: 134-146. Nonahal Nahr, A., Jabbarzadeh, S. & Pourkarim, Y., 2010, the survey on the relationships between auditor quality and accrual items reliability, journal of accounting and auditing review, No. 61, pp: 55-70. Pierce, B. & Kilcommins, M., 1996, The Audit Expectation Gap, The Role of Auditing Education, No. 13, pp: 54-59. Porter, B., 1993,An Empirical Study ofthe Audit Expectation-Performance Gap: Accounting and Business Research, Vol.24, No. 93, pp: 49-68. Salehi, M. & Nagilo, A., 2008,Fraud Detection and Expectation Gap: Empirical Evidence from Iranian Bankers, International Journal of Business and Management, Vol. 3, No.10, pp: 65-77. Salehi, M. &Nagilo, A. & Mansoury, A. &Azary, Z., 2009, Audit Independence and Expectation Gap: Empirical Evidence from Iran, International Journal of Business and Management, Vol. 1, No. 1, pp:156-174. Salehi, M. & Rostami, V., 2009,Audit Expectation Gap: International Evidences, International Journal of Academic Research, Vol. 1, No. 1, pp: 140-146. Siddiqui, J. & Nasreen, T. & Choudhury, A., 2008. The audit expectations gap and the role of audit education, the case of an emerging economy, University of Manchester, UK, pp: 57-65. School of Doctoral Studies (European Union) Journal - 2012