Audit Expectation-Performance Gap Theory

The audit expectation-performance gap theory is fundamental to this research as it aims to to explore the existence of an expectation-performance gap for participants regarding the assurance process of GRI sustainability reports, identifies reasons for those gaps and proposes recommendations to reduce those gaps.

According to Porter (1993), the phrase “expectation gap” in auditing was first used by Liggio (1974) to define the difference between the levels of expected performance “as envisioned by the independent accountant and the user of financial statements”. However the term expectation gap was further explored and it was revised with a more appropriated definition “the audit expectation-performance gap”, which is the gap between society‟s expectations of auditors and auditors‟ performance, as perceived by society (Porter 1993).

Wolf, Tackett and Claypool (1999) state that the audit expectation-performance gap can be defined as the difference between expectations held by stakeholders regarding the external audit or assurance process, and the service actually provided by auditors or assurers. This gap may arise because of differences between what stakeholders desire from audit and assurance services and what the auditor or assurer understand is the role of audit or assurance.

According to Porter (1993, p. 50), the “audit expectation-performance gap” has two components, the reasonableness gap and the performance gap (This is illustrated in the Figure 5 below):

 The „reasonableness gap‟ consists of the difference between society‟s expectations of what auditors should achieve and what auditors can reasonably be expected to achieve;

 The „performance gap‟ is the difference between the responsibilities society reasonably expects of auditors and auditors‟ perceived performance. This performance gap is subdivided into:

o „Deficient standards‟: the gap between “what can reasonably be expected of auditors and auditors‟ existing duties as defined by the law and professional promulgation”;

o „Deficient performance‟: the gap between “auditors‟ existing responsibilities and auditors‟ perceived performance”.

26

Figure 5: Structure of the audit expectation-performance gap (Porter 1993).

Although the audit expectation-performance gap term has been widely used, some authors also employed the term expectation gap. Expectation gap is the common term used to describe the situation where a difference in expectations exists between a group with a certain expertise and a group that relies upon that expertise (Deegan & Rankin 1999).

The expectation gap or audit expectation-performance gap has been used not only in the accounting literature (Best, Buckby & Tan 2001; Fadzly & Ahmad 2004; Frank, Lowe & Smith 2001; McEnroe & Martens 2001) but also in other fields. For instance, Houston and Taylor (1999) identified the existence of an expectation gap between the assurances that a Webtrust program is intended to provided and what consumers perceive that the Webtrust program provides. This study also mentioned that the expectation gap could result in costs for companies as their clients may not be satisfied. Douglas and Connor (2003) identified a gap between managers‟ perceptions of consumers‟ expectations and actual consumers‟ expectations in the hospitality industry. Hornik et al. (2003) assessed the expectation gap in information system projects. Adams and Evans (2004) identified evidence of an environmental reporting expectation gap and Green and Li (2011) identified an expectation gap in greenhouse gas emissions assurance.

Prior research on the audit expectation-performance gap has examined the potential for reducing this gap by enhancing the independence of auditors, improving standards, quality control of audit practices, educating stakeholders, and improving communication with stakeholders in the form of the audit report (Adams & Evans 2004; Ariff, Rosmaini & Hanafi 2008; Best, Buckby & Tan 2001; Lee & Ali 2008; Lee, Ali & Gloeck 2008; Ojo 2006; Porter, Ó hÓgartaigh & Baskerville 2009; Salehi & Azary 2009; Schelluch 1996). For example, Schelluch (1996) found that the expectation gap detected in earlier studies focused on auditor responsibilities appeared to be reduced with the introduction of the „long form‟ audit report. Differences in beliefs between auditors and users appeared to be reduced in areas specifically addressed in the wording of the expanded report.

Best, Buckby and Tan (2001) detected in their study an expectation gap in relation to the level and nature of auditor‟s responsibilities, particularly on the issues of the auditor‟s responsibilities for fraud prevention and detection, and the auditor‟s responsibilities for maintenance of accounting records and exercise of judgment in the selection of audit procedures. They suggest that much of the expectation gap is likely to be significantly reduced with a change in wording and form of the audit report.

Shaikh and Talha (2003, p. 517) describes some causes for the expectation gap, such as: the probabilistic nature of auditing; misunderstanding and ignorance of non-

27

auditors about the audit function; the evaluation of audit performance based on data or information not available to the auditor during the time the audit was performed; and corporate crises which result in new expectations and accountability requirements. The public lack of knowledge of the duties of the auditors may also be responsible for the expectation gap (Okafor & Otalor 2013).

According to Adams and Evans (2004), the audit expectation gap in ethical, social and environmental reports arises from an over-emphasis on the validity of performance data at the expense of addressing completeness and credibility. They listed factors that are contributing to the expectations gap in assurance of sustainability reports. Some of the factors identified are:

 Unlike the financial audit, assurance of a sustainability report is not a legal requirement;

 There are no guidelines specifying what type of audit opinion should be issued in what circumstances;

 Assurance of a sustainability report is performed for different stakeholders with different interests and concerns while a financial audit report is addressed primarily to shareholders;

 Auditors should have special skills as much of the information published in sustainability reports is qualitative.

This research also mentions that to reduce the audit expectation gap, it is necessary to develop an assurance guideline determining the key principles by which assurance processes for ethical, social and environmental reports and processes should be conducted.

Although previous studies have considered the expectation-performance gap and the expectation gap in other fields than accounting literature such as in information technology (Houston & Taylor 1999), the hospitality industry (Douglas & Connor 2003), in system projects (Hornik et al. 2003), in environmental reporting (Adams & Evans 2004; Deegan & Rankin 1999; Okafor & Otalor 2013) and greenhouse gas emissions assurance (Green & Li 2011), this research aims to assess and explore the expectation-performance gap in the assurance of GRI sustainability.