EXPECTATION GAP

Expectation Gap

Expectation Gap

Introduction

Audit plays a very important role in serving the interest of organizations and people in general. It strengthens the accountability and reinforces trust and confidence in financial reporting. It also maintains a check on the performance of managers, who can exploit the resources of the firm using their skill. Scandals like Enron and WorldCom in the U.S. or Parmalat in Europe have increased the significance of Auditing. It is now imperative for organizations and managers to comply with accounting principles and regulations in order to avoid such scandals in future. In this paper, we will discuss the problem of Expectation Gap in accounting and how this problem could be solved. We will also analyze the role of auditors in the issue of expectation gap.

Evolution of Expectation Gap

The gap arising in the expectation of public performance standard and auditors actual performance is known as Accounting Expectation Gap. The term expectancy gap (Expectation Gap) comes from the area of economic examination system. The theory came into existence, when investors and general public had superior expectation about the actual financial results of the company. Moreover, various accounting scandals further signified the problem. It is the role of auditors to deal with such issues.

Since, the aim of audit is to assess with reasonable certainty, whether the preparation of financial statements are in accordance with accounting standards or not. However, it is explicitly not for the auditor to express an opinion on the economic situation of a company. The conclusion of a less well-off company with an unqualified audit opinion is provided as long as its assets, liabilities, financial position and results in financial statements is shown correctly. Hence, the auditors must ensure that these measures are taken and the problem of expectation gap is removed.

The literature on expectation gap generally comes from professional associations of auditors and scientists. Gloeck and De Jaeger in 1993 found that problem of expectation gap arise due to reporting problems, and violation of government agencies and regulatory bodies.

The Limperg Institute (1987) and Dassen (1995) studied expectation gap in detail.

The Institute and Limperg found that the board of directors, shareholders, bankers and employees all were involved in developing the problem of Expectation Gap. They also stressed the role and importance of auditors in this regard. According to them they must identify loop holes in the system and eradicate problems if any. Ties in 1995 studied auditor's quality of work in this regard. He found out many problems and issues in auditors performance that led to Expectation gap. They ignored some problems on part of the company that led to expectation gap (Epstein, M.J. and Geiger, M.A, 1994, pp. 60-66). Porter in 1993 determined the existence and nature of expectation gap. Porter divided Expectation Gap into three components including the performance gap, the standards gap and the reasonable Gap. The performance gap is defined as the difference between the expectations of the unions about the performance in terms of task and the perception of effective actual ...