Contributions of auditors’ disposition, skill and performance to the existence of audit expectation gap in the public sector in Nigeria

The study examined the extent to which auditors’ disposition, skill and performance contribute to audit expectation gap in Nigeria. The specific objective of the study was to examine the extent to which auditors’ disposition, skill and performance contribute to audit expectation gap in Nigeria. The methodology adopted for the study was sample survey.

ISSN Print: 0976-6340 and ISSN Online: 0976-6359

© IAEME Publication

CONTRIBUTIONS OF AUDITORS’

DISPOSITION, SKILL AND PERFORMANCE TO THE EXISTENCE OF AUDIT EXPECTATION GAP IN THE PUBLIC SECTOR IN NIGERIA Livinus Okoro, Obioma V Ugwoke and Robinson O Ugwoke Ph.D

Department of Accountancy, University of Nigeria Nsukka, Enugu Campus, Nigeria

ABSTRACT

The study examined the extent to which auditors’ disposition, skill and performance contribute to audit expectation gap in Nigeria The specific objective of the study was to examine the extent to which auditors’ disposition, skill and performance contribute to audit expectation gap in Nigeria The methodology adopted for the study was sample survey The population of the study consisted of Senior staff

of Enugu State Broadcasting Service (ESBS), Enugu State Waste Management Agency (ESWAMA) and Enugu State Water Corporation totaling one hundred (100) in number while the sample size was eighty (80) respondents The analytical techniques adopted for the study were descriptive statistics and ordinary least squares while unit root test was used to ascertain the stationary properties of the variables under study The study found out that auditors’ disposition, skill and performance significantly contribute to audit expectation gap in Nigeria The study recommended that the users

of audited accounts should familiarize themselves with the laws, statutes and standards that regulate and stipulate the duties of an auditor so as to better appreciate the scope of duties and responsibilities of the auditor as only such will help to bridge

the audit expectation gap

Keywords: Audit Expectation Gap, Bridging Audit Expectation Gap, Parastatals,

Financial Statements, Management, Users of Financial Report

Cite this Article: Livinus Okoro, Obioma V Ugwoke and Robinson O Ugwoke,

Contributions of Auditors‘ Disposition, Skill and Performance to the Existence of

Audit Expectation Gap in the Public Sector in Nigeria International Journal of Mechanical Engineering and Technology 10(12), 2020, pp 465-483

http://www.iaeme.com/IJMET/issues.asp?JType=IJMET&VType=10&IType=12

1 INTRODUCTION

Ojo (2006) defines audit expectation gap as the difference in beliefs between auditors and the public about the duties and responsibilities assumed by auditors and the messages conveyed

by audit reports Porter (2011) in his study on the use of audit decision to improve auditor adherence to a ―standard‖, is of the opinion that the audit expectation gap is the difference between what the public expects from the auditing profession and what the profession actually

provides This definition is also adopted by Bostick (2009) in his research on the expectation gap in the legal system The author did an empirical study of the audit expectation – performance gap and defined the expectation gap as the gap between society‘s expectations of auditors and actual auditors‘ performance Alani (2014) states that the audit profession may try to mitigate the audit expectation gap by placing clear controls for audit process required to

be adhered to strictly In the public sector in Nigeria, the level of corruption and poor accountability and transparency call to question the whole essence of audit whether by internal or external auditors There is the general believe that auditors simply robber stamp whatever the management or administrators of ministries and agencies might have reported The activities of anti graft agencies such as the Economic and Financial Crimes Commission (EFCC), and the Independent Corrupt Practices Commission (ICPC) in arresting and prosecuting government officials for various monumental financial frauds despite clean audit reports raised on their offices earlier tend to buttress the public opinion that these audits fall short of expectation in the public sector in Nigeria There is the fear that audit expectation gap

is huge in the Nigerian society especially with respect to public sector audit Despite the application of public sector audit standards by the office of the auditor general‘s staff and the other professional auditors recommended by the general‘s office to audit government parastatals, this gap is widening by the day Considering that auditors are expected to give an

opinion on the fairness of financial statements; give an opinion on the company's ability to continue as a going concern; on the company's internal control system; on the occurrence of fraud; and on the occurrence of illegal acts the question remains: to what extent do these

opinions when expressed certify the expectations of the financial statement users and if not, why? Specifically, do auditors‘ disposition, the complicated nature of the audit function, conflicting role of auditors, unawareness and unreasonable expectations, retrospective evaluation of auditors‘ performance, auditors not being independent, miscommunication of auditors, users‘ over expectation of standards contribute to audit expectation gap in Nigeria? Hence we examine these critical factors that could contribute to the continued existence of audit expectation gap in these government parastatals That is, this paper evaluates the challenges militating against closure of the audit expectation gap in government parastatals in Nigeria with particular reference to three government parastatals in Enugu State of Nigeria It works on the hypothesis that Auditors‘ disposition, the complicated nature of the audit function, conflicting role of auditors, ignorance and unreasonable expectations, retrospective evaluation of auditors‘ performance, lack of independence of auditors, poor auditor communication, significantly engender audit expectation gap in Nigeria The scope is focused

on three government parastatals; Enugu State Broadcasting Service (ESBS), Enugu State Waste Management Agency (ESWAMA) and Enugu State Water Corporation while the duration emanated from 2012 to 2016 The paper is organized in five parts: part one is the introduction, followed by part two which is the review of related literature while part three is the methodology adopted for the study Part four is the presentation of findings and analysis while part five concludes the work and shows the recommendations

2 REVIEW OF RELATED LITERATURE

2.1 Conceptual Review

2.1.1 Audit Expectation Gap

Monroe and Woodliff (1994) state that an audit expectation gap exists when there are differences in beliefs between auditors and the public about the duties and responsibilities assumed by auditors and the message(s) conveyed by audit report In recent years, the auditing profession has been involuntarily placed in the sport light particularly because of some spectacular and well-publicized corporate collapses and the subsequent implication of

the reporting auditors (Aljaaidi, 2009) Salehi (2011) is of the view that many users misunderstand the nature of the attest function of auditors, especially in the context of an unqualified opinion Some users believe that an unqualified opinion means that the entity has foolproof financial reporting Some feel that the auditor should not only provide an audit opinion, but also interpret the financial statements in such a manner that the user could evaluate whether to invest in the entity There are also users who expect auditors to perform some of the audit procedures while performing the attest function like penetrating into company affairs, engaging in management surveillance and detecting illegal acts and/or fraud

on the part of management (Salehi, 2011) It is these high expectations on the part of users of financial statements that create a gap between auditors‘ and users‘ expectations of the audit function In addition, the users also place the responsibility for narrowing the gap on auditors and others involved in preparing and presenting financial statements

2.1.2 Bridging the Audit Expectation Gap

The expectations gap is considered to be one of the major issues confronting the accountancy profession Some suggestions have been made to reduce the audit expectation gap These vary from issuing an expanded audit report that will inform users of what auditors actually do, carry out education of the public on the duties of an auditor, broaden the role of auditors in the area of fraud detection and strengthen the independence of auditors (Enyi, Ifurueze and Enyi, 2012) Lee and Ali (2008) suggested that attention should be given to the reasonable expectations of auditors which are not required by existing standards on auditing In addition, enforcement measures are required for regulators so that the audit standards are applied to improve the quality of audit Gloeck (1998) emphasized that these standards are considered crucial as they represent a formal, published record of how the work of an auditor should be conducted Alternative approaches exist for regulatory bodies such as the Securities and Exchange Commission (SEC), the Central Bank of Nigeria (CBN), the Nigerian Stock Exchange (NSE) and the Institute of Chartered Accountants of Nigeria (ICAN) in ensuring

that the integrity of the corporate world is maintained and that illegal acts are brought to book

2.1.3 Financial Statement

Financial statements are formal records of the financial activities and position of a business, person, or other entity Relevant financial information is presented in a structured manner and

in a form which is easy to understand They typically include four basic financial statements accompanied by a management discussion and analysis (Idowu and Oluwatoyin, 2014):

 A balance sheet or statement of financial position, reports on a company's assets, liabilities, and owners equity at a given point in time

 An income statement—or profit and loss report (P&L report), or statement of comprehensive income, or statement of revenue & expense—reports on a company's income, expenses, and profits over a stated period of time A profit and loss statement provides information on the operation of the enterprise These include sales and the various expenses incurred during the stated period

 A statement of changes in equity or statement of equity, or statement of retained earnings, reports on the changes in equity of the company over a stated period of time

 A cash flow statement reports on a company's cash flow activities, particularly its operating, investing and financing activities over a stated period of time

2.1.4 Users of Financial Reports

There are many users of the financial statements produced by an organization The following list identifies the more common users of financial statements, and the reasons why they need this information (Salehi, 2011):

 Company Management The management team needs to understand the profitability, liquidity, and cash flows of the organization every month, so that it can make operational and financing decisions about the business

 Competitors Entities competing against a business will attempt to gain access to its financial statements, in order to evaluate its financial condition The knowledge they gain could alter their competitive strategies

 Customers When a customer is considering which supplier to select for a major contract,

it wants to review their financial statements first, in order to judge the financial ability of

a supplier to remain in business long enough to provide the goods or services mandated

in the contract

 Employees A company may elect to provide its financial statements to employees, along with a detailed explanation of what the documents contain This can be used to increase the level of employee involvement in and understanding of the business

 Governments A government in whose jurisdiction a company is located will request financial statements in order to determine whether the business paid the appropriate amount of taxes

 Investment analysts Outside analysts want to see financial statements in order to decide whether they should recommend the company's securities to their clients

 Investors Investors will likely require financial statements to be provided, since they are the owners of the business, and want to understand the performance of their investment

 Unions A union needs the financial statements in order to evaluate the ability of a business to pay compensation and benefits to the union members that it represents

2.2 Theoretical Framework

The theoretical framework of the study is anchored on the agency theory:

2.2.1 Agency Theory

According to the agency theory, a company consists of a nexus of contracts between the owners of economic resources (the principals) and managers (the agents) who are charged with using and controlling those resources (Jensen & Meckling, 1976) Agency theory posits that agents have more information than principals and that this information asymmetry adversely affects the principals‘ ability to monitor whether or not their interests are being properly served by agents Furthermore, an assumption of agency theory is that principals and agents act rationally and use contracting to maximize their wealth A consequence of this assumption may be the ‗moral hazard‘ problem (Jensen & Meckling, 1976), indicating that in

an effort to maximize their own wealth, agents may face the dilemma of acting against the interests of their principals Since principals do not have access to all available information at the time a decision is made by an agent, they are unable to determine whether the agent‘s actions are in the best interest of the firm Applying this agency theory to this study, auditors are the ‗agents‘ who are expected to act independently in the best interest of members of the public whose funds the federal parastatals are using They are expected to constantly audit and prepare an objective and critical audit report which would show the ‗true and fairness‘ of the books of the parastatals and in return, can aid improvement in the management of finances of the parastatals The expectation is that auditors owe the masses, regulatory agencies, tax authorities et cetera, the duty of care and perfect fiduciary relationship A specific concern is their failure to challenge or validate the assumptions that underlie significant accounting estimates of the management of the parastatals (NACD, 2010) It is frequently emphasized that management of some firms compromise external auditors at the detriment of the principal

in the audit engagement

2.3 Empirical Review

Chinwuba and Otalor (2013) studied narrowing the Expectation Gap in Auditing: The Role of the Auditing Profession The study sought to ascertain the role of the auditing profession in narrowing the audit expectation gap in the private sector in Nigeria Self administered questionnaire was used in the study The data generated from the responses of the subjects were analyzed using descriptive and statistical analysis through the computer (SPSS 16.0) It was found as a corollary, that the public is ignorant of the duties of the auditor and this lack of knowledge is responsible for unreasonable expectations of the public from auditors Based on the findings and conclusion, it was recommended that the public need more education on the duties and responsibilities of the auditor; the standard auditor‘s report should be expanded to include disclaimer clauses clearly showing that it is not a certificate or guarantee of the financial soundness of the Auditee; it should be clearly stated in the audit report that the auditor is not the Compliance Officer of the audited company; and that the auditor‘s report should add that the opinion expressed by the auditor should not be construed to mean a guarantee of accuracy of the financial statements

Idowu and Oluwatoyin (2014) studied impact of auditing education on audit expectation gap in Nigeria Survey design was also adopted for this study Copies of the questionnaire were administered to 100 sample respondents Analysis of variance (ANOVA) was used to analyze data collected statistically at 5% or 0.05 level of significance to find out the effect of knowledge and exposure of accounting students in Nigeria Universities on bridging the audit expectation gap Regression analysis was used, with the aid of statistical package for social sciences (SPSS 20.0) soft ware The test showed that Knowledge and exposure of accounting students made a positive impact on reducing existing audit expectation gap However, the researcher noted that education alone is not an adequate response to bridging the audit expectations gap In the same vein, Nikkhah-Azad and Mojtahedzadeh (1999) through a survey study about auditor‘s responsibilities in Iran, surmised that auditors should show greater responsibility in carrying out their work in order to narrow the audit expectation gap Another questionnaire survey also carried out in Iran by Hassas-Yeganeh and Khaleghi (2004) regarding in this regard showed that there is expectation gap between auditors and users on the attestation role of independent auditors The result again showed that auditors and investors significantly differ with regards to reliability and comparability of audited financial statements Investors believe that if the audited financial statements are re-audited by other auditors, a different picture would be presented

Idris and Ojemen (2012) studied the existence and nature of audit expectation gap in the Nigerian private sector The data for the study were obtained through questionnaire One hundred and sixty (160) copies of the instrument were distributed using purposive sampling technique In that study, a cross-sectional survey was conducted to capture the perceptions of users of financial statements in Nigeria Tests of hypotheses were done using Microsoft Excel

2010 version Tests were carried out at a significant level of 5% and three degree of freedom The findings of the study indicated that: there is a wide expectation gap in the areas of auditors‘ responsibility for fraud prevention and detection; and Audit expectation gap has negative impact on auditor‘s credibility They argued that users of financial statements should

be enlightened more on the responsibilities of auditors with regards to the financial statements and that the role of the auditor should be clarified while quality control measures should be observed in audit firms

Agyei, Kusi-Aye and Owusu-Yeboah (2013) assessed the existence of audit expectation gap in Ghana Non probability sampling method was used in carrying out the study while the instrument used for data collection was the questionnaire The study found that there exists

expectation gap in Ghana, particularly concerning auditor responsibility relating to fraud detection and prevention, and soundness of internal control structure of the audited entity The researchers recommended that the audit profession and regulators should formulate such standards, rules and regulations that shall adequately guide the auditors to fulfill the reasonable expectations of various user groups

Again, Semiu and Olayinka (2011) did an empirical investigation of the audit expectation gap in the Nigerian private sector Survey research involving sampling was used and it revealed that an audit expectation gap exists in the Nigeria, particularly on issues concerning auditor‘s responsibility It was also observed that there are significant differences in the perception of respondent groups on the existence of the audit expectation gap in Nigeria Therefore, the study suggested educating the public about the objects of an audit, auditors‘ role and responsibilities to narrow the audit expectation gap

It is instructive that majority of works done in the field of audit expectation gap are mainly with regards to private sector entities and little is ever done with regards to government parastatals especially in Nigeria Therefore a lacuna appears to exist in this respect and this paper stands to provide literature to fill this gap

3 METHODOLOGY

3.1 The Area of the Study, Design and Population

The area of study is Enugu State of Nigeria The study adopted survey research design to evaluate the critical factors that inhibit the bridging of audit expectation gap in government parastatals in Enugu State of Nigeria The population of the study is the management and senior staff in the three selected government parastatals under study as well as selected auditors These are the Enugu State Broadcasting Service (ESBS), Enugu State Waste Management Agency (ESWAMA) and Enugu State Water Corporation (ESWC) These organizations were selected due to their prominence in the state as major/critical social infrastructures The ESBS is a major mass communication facility in the state and it serves as

a veritable agent of political mobilization, socialization and information dissemination The ESWAMA is concerned with waste (especially solid waste) disposal and management in both the urban and rural communities in the state In view of the population explosion in the urban cities and the concomitant housing deficit, waste management has become a major factor in assessing and evaluating the performance of any government in power in the state Again, due

to rising unemployment and clamour for small and medium scale enterprises, entrepreneurship and diversification of the economy and the health and environmental implications of poor waste management, the government has placed premium on waste management, control and disposal while the populace now largely evaluates the government

on the basis of its efficiency and effectiveness in this regard The same emphasis is placed on the provision of water especially pure water for the citizenry This informed the choice of the third parastatal for this paper – the Enugu State Water Corporation (ESWC) Effective provision of potable water in Enugu and its environs is a herculean task due to the presence of large deposits of coal in the area Hardly can individuals provide bore holes within Enugu city and that means that boreholes must be sunk very far away (sometimes 20 to 50 kilometers) and water piped down to major reservoirs before reticulation to houses The cost is enormous forcing the state government to solicit for financial aid from international donor agencies like

the USAID, DFID, World Bank et cetera Due diligence must be followed in administering

such financial aids and grants and effective audit both internal and external are critical in this

respect In fact, objective and independent audit is a sin qua non to efficient management of

resources in the public sector especially in Nigeria where the level of corruption is so high that the Transparency International consistently ranks Nigeria among the most corrupt

countries of the world Hence these three parastatals constitute the scope of this paper Auditors on the other hand were selected as they are closely affected by audit expectation gap The population is effectively made up one hundred (100) management and senior staff of these three parastatals and 20 selected auditors using probability sampling

The distribution of the population is shown below:

Table 1 Population Distribution Corporations/Parastatals Population (Respondents/No of

management and senior staff)

Source: Field Survey, 2019

3.2 Sample Size

In order to get a representation of the entire population, the Taro Yamani statistical formula was employed According to Taro Yamene (1964) the formula is stated as follows

n = N

1+N(e)2

Where n = represents the sample size

N = represents the population

e = represents the margin of error

I = constant Here, N = 120; e = 5% while n = sample size

Therefore the sample size

1+120(0.05)2

= 120

1+ 120(0.0025)

The sample size for this study is 92

3.3 Model Specification

The model of the study was adopted from the classical linear regression model of Brooks (2014)

The model is shown as follows;

Where;

Y = dependent variable

X1, X2, -Xn = Explanatory or independent variable

β1, β2, βn = the slope of coefficient of the parameter estimate

μ = Error or disturbance term

t = time

In relating this to the study

ADt = β0 + β1AIt + β2tCNAFt + β3CRAt + β4UUEt + β5REAPt + β6MAt + β7UOSt + μt (3.2) Where:

ADt = Auditors‘ Disposition at time

CANt = Complicated Nature of the Audit Function at time

CFAt = Conflicting Role of Auditors at time

UUEt = Unawareness and Unreasonable Expectations at time

REAPt = Retrospective Evaluation of Auditors‘ Performance at time

AIt = Auditors not being Independent enough at time

MAt = Miscommunication of Auditors at time

UOSt = Users‘ over expectation of standards at time

βO = Constant

β1 – β7 = Coefficient of the Variables in the regression equation

μ = Error or disturbance associated with the model

t = time

3.4 Method of Data Analysis

Data was analysed using descriptive statistics The analysis of data relating to the extent to which auditors‘ disposition, skill and performance contribute to audit expectation gap in Nigeria was summarised using descriptive statistics while hypotheses was analysed using Ordinal Linear-by –Linear Association model (Log-Linear Regression Model)

3.5 Apriori Expectation

It is expected that β1, β2, β3, β4, >0

Where:

β1, β2, β3 and β4, represents the coefficients of Audit Expectation Gap at different stages of the equation on model specification

4 DATA PRESENTATION AND ANALYSIS

Data analysis depicts how the data collected for each of the variables are analyzed with diverse analytical tools From the analysis and results generated, deductions and logical conclusions were obtained A total of 92 copies of questionnaire were distributed while 12 copies were unreturned and 80 copies were returned

Table 1 Response on the challenges militating against the closure of audit expectation gap

S/N Options SA A U DS SD N Total Mean

score

a Auditors‘ disposition contribute to audit

expectation gap in government parastatals in

Nigeria

b Complicated nature of the audit function

contribute to audit expectation gap in

government parastatals in Nigeria

c Conflicting role of auditors lead to audit

expectation gap in government parastatals in

Nigeria

d Unawareness and unreasonable expectations

lead to audit expectation gap in government

parastatals in Nigeria

e Retrospective evaluation of auditors‘

performance contribute to audit expectation

gap in government parastatals in Nigeria

f Auditors not being independent enough

contribute to audit expectation gap in

government parastatals in Nigeria

g Miscommunication of auditors contribute to

audit expectation gap in government

parastatals in Nigeria

h Users‘ over expectation of standards

contribute to audit expectation gap in

government parastatals in Nigeria

i Widespread criticisms and high levels of

litigations of auditors affect audit expectation

gap in government parastatals in Nigeria

j Ignorance, naivety and misconception of the

public in terms of the nature, purpose and

capacities of an audit lead to increasing audit

expectation gap in government parastatals in

Nigeria

k The probabilistic nature of auditing lead to

audit expectation gap in government

parastatals in Nigeria

l Evaluation of audit performance upon

information or data not available to the auditor

at the time the audit was completed lead to

audit expectation gap in government

parastatals in Nigeria

m Evolutionary development of audit

responsibilities which create time lags in

responding to changing expectations and

corporate crises lead to audit expectation gap

in government parastatals in Nigeria

n The provision of non-audit services for audit

clients result conflict of interest which leads to

the expectation gap in government parastatals

in Nigeria

o Auditors‗ role conflicts have negative

implications on auditors‗ independence and

their ability to perform a just audit in

government parastatals in Nigeria

p Self interest and economical benefits of

auditors lead to audit expectation gap in

government parastatals in Nigeria

q Existing insufficient standard regarding

auditor responsibilities for detection of fraud

and illegal acts lead to audit expectation gap

in government parastatals in Nigeria

Source: Researcher‘s Computation, 2019

Table 1 depicted the respondents‘ responses on the various factors militating against the closure of audit expectation gap

Table 2: Compilation of mean of the responses

a Auditors‘ disposition contribute to audit expectation gap in government parastatals in Nigeria

b Complicated nature of the audit function contribute to audit expectation gap in government parastatals in Nigeria

c Conflicting role of auditors lead to audit expectation gap in government parastatals in Nigeria

d Unawareness and unreasonable expectations lead to audit expectation gap in government parastatals in Nigeria

e Retrospective evaluation of auditors‘ performance contribute to audit expectation gap in government

parastatals in Nigeria

f Auditors not being independent enough contribute to audit expectation gap in government parastatals in Nigeria

g Miscommunication of auditors contribute to audit expectation gap in government parastatals in Nigeria

h Users‘ over expectation of standards contribute to audit expectation gap in government parastatals in Nigeria

i Widespread criticisms and high levels of litigations of auditors affect audit expectation gap in government parastatals in Nigeria

j Ignorance, naivety and misconception of the public in terms of the nature, purpose and capacities of an audit lead to increasing audit expectation gap in government parastatals in Nigeria

k The probabilistic nature of auditing lead to audit expectation gap in government parastatals in Nigeria

l Evaluation of audit performance upon information or data not available to the auditor at the time the audit was completed lead to audit expectation gap in government parastatals in Nigeria

m Evolutionary development of audit responsibilities which create time lags in responding to

changing expectations and corporate crises lead to audit expectation gap in government

parastatals in Nigeria

3.59

n The provision of non-audit services for audit clients result conflict of interest which leads to the

expectation gap in government parastatals in Nigeria

3.23

o Auditors‗ role conflicts have negative implications on auditors‗ independence and their ability to

perform a just audit in government parastatals in Nigeria

2.71

p Self interest and economical benefits of auditors lead to audit expectation gap in government

parastatals in Nigeria

3.44

q Existing insufficient standard regarding auditor responsibilities for detection of fraud and illegal

acts lead to audit expectation gap in government parastatals in Nigeria

2.77 Source: Researcher‘s Computation, 2019

Table 2 showed a compilation of the mean of the responses

Table 3 One-Sample Statistics (first output)

N Mean Std Deviation Std Error Mean Mean Responses 17 3.1724 39444 09567 Source: SPSS Version 23.0

Table 3 showed the first output of one – sample test carried out using the mean values of the responses It indicated that there were seventeen (17) responses as to challenges militating against the closure of audit expectation gap and the cumulative mean of these responses is 3.1724 while the standard deviation is 0.39444 and the standard error mean is 0.09567

The standard deviation measures how widely values are dispersed from the average value (mean value) This implies that the values of the responses are not widely dispersed from the

mean as the standard deviation is 39% On the other hand standard error mean function as a

way to determine the accuracy of the sample or the accuracy of multiple samples by analyzing