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An Empirical Study of the Audit Expectation-

Performance Gap
a
Brenda Porter
a
Massey University , NZ
Published online: 28 Feb 2012.

To cite this article: Brenda Porter (1993) An Empirical Study of the Audit Expectation-Performance Gap,
Accounting and Business Research, 24:93, 49-68, DOI: 10.1080/00014788.1993.9729463

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 Arrounring and Business Research. Vol. 24. NO. 93. PP. 49-68. 1993 49

An Empirical Study of the Audit

Expectation-Performance Gap
Brenda Porter”
Abstract-The critical, litigious environment which characterises auditing today can be traced to the audit
expectation-performance gap. Defined as the gap between society’s expectations of auditors and auditors’ perceived
performance, it is seen to comprise ‘reasonableness’ and ‘performance’ components, the latter being subdivided into
‘deficient standards’ and ‘deficient performance’. Empirical research was conducted in New Zealand in 1989 to
investigate the audit expectation-performance gap. The study enables the duties which constitute the reasonableness,
deficient standards and deficient performance components of the gap to be identified. It also provides the means
to estimate the relative contribution of the duties to their respective components, and of the components to the overall
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gap between society’s expectations of auditors and auditors’ perceived performance. The research provides new
insights into the structure, composition and extent of the audit expectation-performance gap but, more importantly,
it signals a rational, comprehensive approach towards narrowing the gap. If adopted, this should bring society’s
expectations of auditors and auditors’ performance into closer accord and, as a consequence, reduce the criticism
and litigation which auditors face today.

Introduction investigate this gap. The research has produced a

A review of daily newspapers and of business and
financial journals over recent times leaves little
room for doubt that auditors throughout the
English-speaking world are facing ‘a liability crisis
and a credibility crisis’ (Russell, 1986, p. 58). Until
recently, criticism and litigation were character-
istics of the audit environment primarily in the
United States and Britain. However, as companies
have collapsed in New Zealand in the wake of the
October 1987 stockmarket crash, frequently with-
out warning and often amid allegations of fraud
or other disreputable acts by company directors,
the credibility of New Zealand auditors has been
called into question. At the present time, a signifi-
cant number of accountancy firms in New Zealand
are facing litigation based on claims of auditors’
negligence.
The widespread criticism of, and litigation
against, auditors indicates that there is a gap
between society’s expectations of auditors and
auditors’ performance, as perceived by society.
The present writer has conducted research to
*The author is professor of accountancy, Massey University,
NZ.She acknowledges the helpful comments received on earlier
drafts of this paper from Professor Philip Gendall of Massey
University, from participants at the Conference on Auditing,
Bristol, UK; the British Accounting Association Conference,
Salford, UK; and the 2nd Asian-Pacific Conference on Inter-
national Accounting Issues, Vancouver, Canada; and also from
the two anonymous referees.
“Society’ is defined to mean the population at large, inclusive
of auditees and users of financial statements, but exclusive of
auditors. It thus coincides with all non-auditors. This is consist-
ent with the meaning ascribed to the word in the Cohen
Commission Report (CAR, 1978). The Cohen Commission also
used the term ‘the public’ to mean the same thing.
AIR 24193-D
formal definition of the gap, identification of its
structure and composition, and measurement of
its component parts. In this paper the research
findings are reviewed. As the literature based por-
tion of the research has been reported elsewhere
(Porter, 1991), the definition and postulated
structure of the gap which resulted therefrom are
outlined only briefly. The paper focuses on the
empirical research designed to test the postulated
structure and to establish the composition and
extent of the gap and its constituent parts.
More specifically, the paper reports the findings
of a mail survey conducted in 1989 to ascertain the
opinions of auditors’ interest groups in New
Zealand regarding auditors’ existing duties, the
standard of performance of these duties, and the
duties that auditors should perform. It explains
how the duties which may reasonably be expected
of auditors4uties which form the linchpin in
narrowing the audit expectation-performance
’ gap-have been identified. It also provides details
of the duties constituting each of the gap’s com-
ponents and of the relative contribution of each
component to the overall gap. The paper concludes
by arguing that the research has provided new
insights into the audit expectation-performance
gap which enable attempts to narrow it to proceed
on a more rational and comprehensive basis than
has hitherto been the case.
The research reported here complements and
extends that conducted by Lee (1970) and Beck
(1974). These earlier researchers investigated, inter
alia, the duties which auditors were expected to
perform in the late 1960s and early 1970s, in
Britain and Australia, respectively.
 Deficient
Performance --
Auditors’
Deficient
Standards
Existing
Duties’
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‘Duties defined by the law and professional promulgations.
2Duties which are cost-beneficial for auditors to perform.
Definition and structure of the audit expec-
tation-performance gap
It appears that Liggio (1974) was the first to
apply the phrase ‘expectation gap’ to auditing. He
defined it as the difference between the levels of
expected performance ‘as envisioned by the inde-
pendent accountant and by the user of financial
statements’ (p. 27). This definition was extended a
little in the Cohen Commission’s (CAR, 1978)
terms of reference. The Commission was charged,
inter alia, to ‘consider whether a gap may exist
between what the public expects or needs and what
auditors can and should reasonably expect to
accomplish’ (p. xi). However, it is considered that
both of these definitions are too narrow in that
they do not recognise that auditors may not ac-
complish ‘expected performance’ (Liggio) or what
they ‘can and reasonably should’ (CAR). They do
not allow for sub-standard performance. It is
submitted that the gap which gives rise to criticism
of auditors is that between what society expects
from auditors and what it perceives it receives from
them. It is therefore proposed that the gap, more
appropriately entitled ‘the audit expectation-
performance gap’, be defined as the gap between
society’s expectations of auditors and auditors’
performance, as perceived by society.
Given this definition, analysis indicates that the
gap has two major components:
1. a gap between what society expects auditors
to achieve and what they can reasonably be
expected to accomplish (designated the
‘reasonableness gap’);
2. a gap between what society can reasonably
expect auditors to accomplish and what they
are perceived to achieve (designated the ‘per-
formance gap’). This may be subdivided into:
Duties
Unreasonable
Expectations -
Reasonably
Expected of
Auditors’
2.1 a gap between the duties which can
reasonably be expected of auditors and
auditors’ existing duties as defined by the
law and professional promulgations
(‘deficient standards’); and
2.2 a gap between the expected standard of
performance of auditors’ existing duties
and auditors’ perceived performance, as
expected and perceived by society (‘defi-
cient performance’).
This structure of the audit expectation-perform-
ance gap is represented in Figure 1.
Methodology of the empirical research
In order to test the postulated structure of the
audit expectation-performance gap, a mail survey
was conducted. Some 1,700 questionnaires were
sent to randomly selected members of groups in
New Zealand who are affected in some way by the
work of external auditors. (These groups are re-
ferred to as ‘interest groups’.) The questionnaires
were designed to ascertain the groups’ opinions
about auditors’ existing duties, the standard of
performance of these duties, and the duties that
auditors should perform.
Two versions of the questionnaire were pre-
pared:
1. a ‘financial community’ version, designed for
groups who could be expected to be fairly
familiar with the work of external auditors;
for example, auditors themselves, officers of
public companies, financial analysts, and
auditing academics; and
2. a ’general public’ version. This was designed
for groups such as lawyers, financial journal-
ists, and members of the general public, who
 WINTER 1993 51

could be expected to be less familiar with the performance, for the purposes of the study 1.9 was
audit function. adopted as the point of differentiation. This is
supported by an additional test used to identify
The format and substance of the two versions of duties considered by respondents to be performed
the questionnaire were the same: they differed only unsatisfactorily by auditors, namely, 20% or
in the detail of some questions asked. The groups more of an interest group signifying that a particu-
receiving each version of the questionnaire and lar duty is performed poorly. This is discussed
their respective response rates are presented in below.
Table 1. In order to ascertain whether generalised con-
The questionnaire provided a list of 30 suggested clusions could be drawn from the survey results
duties of auditors (15 in the general public ver- about the opinions of the interest groups, the
sion)* and respondents were asked to select appro- Wilcoxon signed-ranks test was applied to the
priate responses to three questions: interest group responses. Similarly, the Mann-
1. Is the duty an existing duty of auditors? Whitney test was used to establish whether differ-
2. If the duty is an existing duty of auditors, ences of opinion evident in the responses of
different interest groups were statistically signifi-
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how well is it performed?

3. Should the duty be performed by auditors? cant. In each case a significance level of 0.05 was
adopted.
For the questions: ‘is the duty an existing duty of
auditors?’ and ‘should the duty be performed by
auditors?’, the options ‘yes’, ‘no’ and ‘not sure’ Knowledge of auditors’ existing duties
were provided. These were coded + 1, - 1, 0, From an examination of statute law, case law and
respectively. Consequently (referring to Tables 2 professional promulgations, ten of the suggested
and 5), where the mean of responses from an duties listed in the questionnaire were identified as
interest group is positive, this signifies that the existing duties of auditors in New Zealand (Porter,
group considered the particular duty is, or should 1990). These are shown in Table 2, together with
be (as applicable), a duty of auditors. The converse the means of the interest groups’ responses. (The
applies where the mean of a group’s responses is duty numbers used in the financial community
negati~e.~ The absolute value of the mean (ranging version of the questionnaire are shown at the left
from a possible 100 to 0) indicates how widely the of the table for reference purposes.)
opinion was shared by members of the group. Although it is interesting to study the opinions
In relation to how well auditors perform their of the interest groups and to speculate on reasons
duties, respondents were asked to select the appro- for differences, the significance of this portion of
priate response from ‘poorly’, ‘adequately’, ‘well’, the research lies in the apparent lack of knowledge
and ‘unable to judge’. These options were coded 1, about auditors’ duties which it re~ealed.~ This lack
2, 3 and 0, respectively. As a result (referring to of knowledge is reflected in the existing duties of
Tables 3 and 4), if the mean of responses from an auditors which the interest groups failed to identify
interest group for a particular duty is less than 2.0, correctly. As shown in Table 2, the interest groups
this suggests, prima facie, that members of the (overall) failed to recognise four of auditors’ exist-
group (excluding those who were ‘unable to judge’) ing duties (duties 2.8a, 2.11b, 2.13a and 2.14a).
considered that auditors’ performance of the duty (The means of responses to these duties are nega-
was inadequate or unsatisfactory. tive.) However, it should be noted that for duties
However, judging whether performance is ade- 2.8a and 2.13a the survey results are not statisti-
quate or otherwise tends to involve a range rather cally significant.
than a point measurement. Therefore, whilst recog- Analysis of Table 2 suggests that the knowledge
nising the arbitrary nature of any number selected of the individual interest groups about auditors’
to distinguish between adequate and inadequate existing duties is, in general, less accurate than that
of the interest groups (overall). Auditors failed to
*Someof the suggested duties presented in the general public recognise five of their existing duties (duties 2.8a,
version of the questionnaire were expressed in general terms and 2.8b, 2.11b, 2.13a and 2.14a). These all relate to
embraced more than one suggested duty in the financial com- detecting or reporting either theft of corporate
munity version. Each of the following groups of duties listed in assets by company employees or managers, or
the financial community version was broadly equated with one other illegal acts by company officials which
duty in the general public version: duties 2.8a and 2.8b; 2.10a,
2.10b,2.10cand 2.15; 2.11a, Z.llb, 2.11c,2.14a and 2.14b;2.13a
and 2.13b. Additionally, the following duties which were in- 41t is acknowledged that, given certain assumptions, duties
cluded in the financial community version had no equivalent in identified in Table 2 as existing duties of auditors could be
the general public version: duties 2Sa, 2.9,2.12 and 2.16 to 2.20. classified legitimately as not existing duties of auditors (and vice
(See Appendix for key.) versa), and that some respondents may have made such as-
’For convenience, the means of responses are expressed as sumptions. Nevertheless, it is submitted that the survey results
whole numbers (that is, the mean calculated as a decimal provide an indication of the extent of the relative ‘knowledge
multiplied by 100). gap’ of the identified interest groups.
 52 A C C O U N T I N G A N D B U S I N E S S RESEARCH

Table 1
Interest Groups included in the Mail Survey and their Response Rates

Replacements Analysis of Responses

No. in From Total Returned %

initial From blank number No blank Usable Usable
Interest Group survey RTS ’ returns surveyed response forms responses responses
Financial Community
Questionnaire

Auditors
Audit Partners 100 1 1 101 8 2 91 90
Non-partner Audit Staff 100 1 1 101 8 1 92 91
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Auditees
Company Executives’ 100 10 3 103 37 6 60 58
Non-executive Directors’ 100 12 4 104 23 5 76 73
Chief Accountants’ 100 7 5 105 33 7 65 62
Internal Auditors 100 9 4 104 10 5 89 86

Audit beneficiaries
-financial community
Financial Analysts 100 8 - 100 26 4 70 70
Stockbrokers’ 100 6 2 102 35 4 63 61
Institutional Investors4 27 - - 27 4 2 21 78
Corporate Division Bankers6 100 3 - 100 16 2 82 82
Bankers’ Association
Members 11 - - 11 - 2 9 82
Auditing Academics 13 - - 13 1 - 12 92

Total No. 95 1 57 20 971 201 40 730

YO 100 21 4 75 75

General Public
Questionnaire
Audit beneficiaries
-general public
General Public’ 500 36 - 500 138 103 259 52
Lawyers 100 7 - 100 29 1 70 70
Branch Bank Managers6 100 1 9 109 15 9 85 78
Financial Journalists 47 - - 47 7 - 40 85
Total No. 747 44 9 756 189 113 454
Yo 100 25 15 60 60
Combined Totals No. 1698 101 29 1727 390 153 1184
YO 100 22 9 69 69

‘Return to sender. This includes all questionnaires which were returned without reaching the addressee.
(Reasons included death, incapacity, and ‘gone, no address’.)
’These groups comprise officers of public companies only.
’Members of the New Zealand Stock Exchange.
4Members of the Life Offices’ Association.
’Randomly selected from the Electoral Rolls.
% New Zealand commercial loan decisions are principally made by corporate division bankers, located in
the banks’ regional head offices. Branch bank managers have very limited lending authority. In general,
they rarely refer to audited financial statements and have little knowledge of the audit function. (This was
a finding of the pilot test of the questionnaire and resulted in recognition and classification of the two groups
of bankers as indicated.)
 WINTER 1993
directly affect the company’s account^.^ Auditees
failed to recognise the same five duties, but the
smaller absolute values of the means of their
responses indicates that they were less agreed in
their opinion than were the auditors. The auditees
also incorrectly identified as a duty of auditors,
duty 2.17 (examining and reporting in the audit
report on auditee companies’ internal controls).
(The mean of their responses to this duty is posi-
tive.) However, this result, like those for duties
2.8b and 2.13a, is not statistically significant. The
financial community audit beneficiaries similarly
failed to recognise as duties of auditors, duties
2.1 lb, 2.13a and 2.14a, but, as for auditees, the
result for duty 2.13a lacks statistical significance.
In contrast to the financial community interest
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groups which, in general, failed to recognise exist-
ing duties of auditors, general public audit benefi-
ciaries incorrectly identified as existing duties of
auditors, reporting fraud and other illegal acts by
company officials uncovered during an audit to
regulatory authorities (duties 2.10 and 2.15).6
An estimate of the ‘knowledge gap’ of each
interest group was derived from the group’s re-
sponses with respect to auditors’ existing duties.
This is shown in the Appendix. For each interest
group, the combined proportions of ‘not sure’ and
incorrect responses to each suggested duty listed in
the questionnaire were added, to provide a
measure of the group’s ‘total knowledge gap’. As
the number of duties listed in the financial commu-
nity and general public versions of the question-
naire differed, to obtain a relative measure of the
knowledge gap of each interest group, the group’s
‘total knowledge gap’ was divided by the relevant
number of duties. This provided a measure of the
average knowledge gap per duty.
From the Appendix it is seen that, as might be
expected, auditors appear to be relatively knowl-
edgeable about their duties, although just over
20% are, on average, in error or uncertain about
them. Auditees and financial community audit
beneficiaries, despite having dissimilar relation-
ships with auditors, appear to have a similar level
of knowledge about auditors’ duties. Their knowl-
edge is less good than that of auditors but is
significantly better than that of general public
audit beneficiaries, who seem to have a large
knowledge gap. The survey results suggest that
some 60% of general public audit beneficiaries
have very limited, if any, knowledge about
jAs will be seen in the next section of this paper, auditors’
lack of knowledge about their existing duties is considered to
be a major factor contributing to the deficient performance gap.
6See footnote 2 regarding the suggested duties of auditors in
the general public version of the questionnaire. Auditors in New
Zealand have no duty to report to a regulatory authority
matters uncovered during an audit, except in special circum-
stances defined by legislation such as the Reserve Bank of New
Zealand Act 1989.
53
auditors’ duties. It is submitted that this has
serious implications for the reasonableness gap
component of the audit expectation-performance
gap.
Assessment of auditors’ performance of
their existing duties
Two measures were used to identify perceived
sub-standard performance by auditors: the mean
of interest group responses with respect to audi-
tors’ performance of their duties; and 20% or more
of an interest group signifying that a particular
duty is poorly performed. The mean of responses
from an interest group provides a useful indicator
of their overall assessment of auditors’ perform-
ance of duties. However, for purposes of deciding
whether and what action is required to remedy
perceived sub-standard performance, a pertinent
measure is the proportion of respondents signify-
ing that, in their opinion, auditors perform their
duties poorly. An interest group, taken as a whole,
may consider that auditors perform a particular
duty satisfactorily, yet a significant proportion of
the group may hold the contrary view and this may
signal that corrective action is needed. Whilst
acknowledging the arbitrariness of any point
measurement used to define ‘a significant pro-
portion’, for the purposes of the research 20% was
adopted. It was considered that if 20% or more of
an interest group adjudged auditors’ performance
of a duty to be poor, then dissatisfaction is suffi-
ciently widespread to warrant the profession ini-
tiating remedial action. It is interesting to observe
that the duties identified from the means of interest
group responses as being performed inadequately
by auditors, and those identified by 20% or more
of an interest group as poorly performed, generally
coincide. This is reflected in Table 3.
From Table 3 it may be seen that, based on the
means of their responses, the interest groups (over-
all) considered that auditors do not perform satis-
factorily six of their duties (the mean of responses
to these duties is less than 1.9). These duties relate
to:
detecting, and disclosing in the audit report,
theft of corporate assets by company direc-
tors/senior management (duties 2.8b and
2.1 1b), and illegal acts by company officials
which directly affect the company’s accounts
(duties 2.13a and 2.14a);
disclosing in the audit report deliberate distor-
tion of financial information (duty 2.1 lc) and
doubts about the continued existence of an
auditee company (duty 2.5b).
It is significant that four of these six duties (duties
2.8b, 2.1 1b, 2.13a and 2.14a) were not recognised
by auditors as their existing duties (see Table 2
above). For five of the same six duties, 20% or
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Table 2
The Means of Interest Group Responses with Respect to Auditors’ Existing Duties
Audit Beneficiaries

Interest Financial General

Interest Group: Groups Auditors Auditees Community Public
Total no. of respondents in group: (Overall) 196 342 243 454’
Duty Suggested duties of auditors’ mean mean mean mean mean
No. Actual existing duties of auditors3
2.3 State whether financial statements fairly reflect the
company’s affairs 94 98 95 97 86
2.9 Detect deliberate distortion of financial information 85 79 87 88 -

2.1 lc Disclose in the audit report deliberate distortion of

financial information 48 59 65 60 9*
2.5b Express doubts in the audit report about the company’s
continued existence 40 78 39 31 12
2.6 Ensure compliance with companies’ legislation 25 20 32 14* 32
2.8b Detect theft of corporate assets by company directors/senior
management 4* - 59 - 2* 19 57
2.13a Detect illegal acts by company officials which directly >
affect the company’s accounts - 2* - 22 - 2* - 2* 17
n
n
2.8a Detect theft of corporate assets by non-managerial 0
employees -4* - 63 - 14 4* 57 C
z
2.11b Disclose in the audit report misappropriation of company 2
assets by company directors/senior management - 13 - 33 - 12 - 17 9* z
2.14a Disclose in the audit report illegal acts which 0
directly affect the company’s accounts - 19 -44 - 12 - 27 9*

Not existing duties of auditors

2.17 Examine and report on the company’s internal controls - 17 -44 5* - 13* -

2.1 oc Report to a regulatory authority deliberate distortion of

financial information - 20 - 59 - 18 - 12* 10 z
m
2.1 Ob Report to a regulatory authority misappropriation of cn
cn
company assets by company directors/senior management - 27 - 60 - 28 - 30 10
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c
W
2.15 Report to a regulatory authority illegal acts uncovered W
W
in the company - 38 - 72 - 52 - 39 10
2.11a Disclose in the audit report theft of corporate assets
by non-managerial employees -45 - 80 - 55 - 54 9*
2.10a Report to a regulatory authority theft of corporate
assets by non-managerial employees - 50 - 90 - 66 - 54 10
2.5a Report to a regulatory authority doubts about the company’s
continued existence - 58 - 67 -46 -61 -
2.2 Guarantee audited financial statements are accurate - 59 -96 - 68 - 72 -I*
2.20 Examine and report on the fairness of financial forecasts - 59 - 77 - 38 - 62 -

2.13b Detect illegal acts by company officials which do not

directly impact on the company’s accounts - 60 -96 - 77 - 82 17
2.19 Audit published half-yearly company reports -61 - 72 -47 -64 -
2.14b Disclose in the audit report illegal acts which do not
directly affect the company’s accounts - 62 -97 - 80 - 79 9*
2.4 Guarantee the auditee company is solvent - 63 - 79 -61 - 75 - 38
2.12 Report to a regulatory authority suspicions of fraud -64 - 87 - 56 -49 -
2.7 Report breaches of tax laws to the IRD - 68 - 89 - 79 - 72 - 33
2.22 Verify every transaction of the auditee company - 76 - 99 - 90 - 85 - 29
2.16 Examine and report on the fairness of non-financial
information -81 -91 - 68 - 83 -
2.18 Examine and report on the efficiency and effectiveness of
the company’s management - 84 - 94 - 69 - 88 -
2.21 Consider and report on the company’s impact on its local
community - 89 - 100 - 90 -98 - 67
2.1 Prepare the auditee company’s financial statements -90 - 98 - 96 -95 - 69

‘Includes 75 respondents who signified that they had no knowledge of auditing and therefore could not respond to the part of the
questionnaire relating to auditors’ duties.
*The suggested duties as shown here are abbreviated from their expression in the questionnaires.
’Identified by reference to statute law, case law and professional promulgations.
4The average of the means of the identified interest groups.
’Means of interest group responses expressed as whole numbers (i.e. mean calculated as a decimal multiplied by 100).
*The results of the Wilcoxon signed-ranks test indicate that no valid generalised conclusion can be drawn about the opinion of the interest
group regarding this duty (at a significance level of 0.05).
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Table 3
Assessment of Auditors’ Performance Based on Means of Interest Group Responses and the Proportion of Interest Groups Signifying Auditors’ Duties
are Poorly Performed
Audit Benejiciaries
Interest
Groups Financial General
Interest Group: (Overall) Auditors A uditees Community Public
mean2 Poor mean Poor mean Poor mean4 Poor mean4 Poor
Duty Suggested duties of auditors’ Perf: Perf: Perf: Perf: Perf:
No. Performance-satisfactory Av%’ %5 %J %5 %J
2.6 Ensure compliance with companies’
legislation 2.3 7 2.4 7 2.3 6 2.2 7 2.1 8
2.3 State whether financial statements
fairly reflect the company’s affairs 2.1 13 2.4 2 2.1 12 1.9 23 2.0 15
2.9 Detect deliberate distortion of
financial information 2.0 15 2.2 5 2.0 16 1.8 24 - -
Performance-borderline
2.8a Detect theft of corporate assets by
non-managerial employees 1.9 16 2.0 12 1.8 18 2.0
2.8b Detect theft of corporate assets by 1.8 22
company directors/senior management 1.8 19 2.0 16 1.7 21 1.8 16
Performance-unsatisfactory
2.1 lc Disclose in the audit report
deliberate distortion of financial
information 1.8 23 2.1 13 1.8 27 1.7
2.11b Disclose in the audit report mis- 21
1.9
appropriation of company assets by
company directors/senior management 1.8 25 1.8 22 1.7 28 1.7 27
2.13a Detect illegal acts by company officials
which directly affect the company’s
accounts 1.8 22 1.8 23 1.7 22 1.7 20 1.8 22
2.5b Express doubts in the audit report
about the company’s continued existence 1.8 33 2.0 22 1.6 39 1.6 41 1.8 30
2.14a Disclose in the audit report illegal
acts which directly affect the
company’s accounts 1.7 24 1.8 19 1.6 29 1.6 28 1.9 21
’The duties as shown here are abbreviated from their expression in the questionnaires.
’Average of the means of the identified interest group’s responses.
’Average of proportions of identified interest groups signifying that auditors perform the duty poorly.
4 l .9 has been adopted as the point of differentiation between satisfactory and unsatisfactory performance.
5Proportion of interest group signifying that auditors perform the duty poorly.
%ee footnote 2 regarding duties listed in the general public version of the questionnaire.
 WINTER 1993
more of the interest groups (overall) indicated that
auditors perform the duties poorly. The exception
is duty 2.8b (detecting theft of corporate assets by
company officials): in this case, 19% of the interest
groups (overall) signified that the duty is poorly
performed.
Analysis of the opinions expressed by the ident-
ified interest groups reveals, not surprisingly, that
auditors rate the standard of their performance
more highly than do the other groups. The means
of responses from the auditor group are generally
higher than the corresponding means of responses
from the other interest groups. Further, while
auditors as a group acknowledged sub-standard
performance with respect to just three of their
duties (duties 2.1 1b, 2.13a and 2.14a), auditees and
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financial community audit beneficiaries identified
such performance in relation to seven duties. These
groups concurred with auditors in relation to
duties 2.1 1b, 2.13a and 2.14a, but they considered
that auditors also do not perform satisfactorily
duties 2Sb, 2.8b and 2.1 lc. Additionally, auditees
signified that auditors’ performance of duty 2.8a is
unsatisfactory (detecting theft of corporate assets
by employees), and financial community audit
beneficiaries conveyed the same opinion about
duty 2.9 (detecting deliberate distortion of financial
information) (see Table 3).
General public audit beneficiaries appear to be
rather more satisfied with the performance of
auditors’ duties than auditees and financial com-
munity audit beneficiaries. The mean of their re-
sponses to duties 2.11b, 2 . 1 1 ~and 2.14a is 1.9,
indicating that they consider auditors perform
these duties adequately oust!). However, it needs to
be remembered that in the general public version
of the questionnaire these three duties, together
with duties 2.11a and 2.14b, were presented as a
single composite duty.’ Thus, the apparent differ-
ence of opinion between general public audit
beneficiaries and the other two non-auditor
interest groups about auditors’ performance of
these duties may reflect a difference in the
questionnaires used rather than a difference of
opinion.
Analysis of the duties which 20% or more of the
identified interest groups adjudged to be poorly
performed by auditors reveals a picture similar to
that provided by analysis of the means of
the interest groups’ responses. From Table 3 it
may be seen that, while 20% or more of auditors
signified that just three of their duties were
poorly performed, six duties were so identified
by 20% or more of auditees, and seven duties
by 20% or more of both groups of audit benefi-
ciaries.
’See footnote 2.
51
More than 20% of all of the interest groups
(including auditors) indicated that auditors per-
form poorly the duties:
0 to disclose in the audit report doubts about
the auditee company’s continued existence,
and misappropriation of company assets by
senior company officials (duties 2.5b and
2.1 1b);
0 to detect illegal acts by company officials
which directly affect the company’s accounts
(duty 2.13a).
More than 20% of all of the non-auditor groups
considered that auditors also perform poorly their
duties to disclose in the audit report deliberate
distortion of financial information and illegal acts
by company officials which directly affect the
company’s accounts (duties 2.1 l c and 2.14a). Ad-
ditionally, more than 20% of auditees and general
public audit beneficiaries expressed a similar view
about auditors’ performance of their duty to detect
theft of corporate assets by senior company
officials (duty 2.8b), and more than 20% of finan-
cial community audit beneficiaries conveyed a
similar opinion with respect to the performance of
auditors’ duties:
0 to state whether financial statements fairly
reflect the company’s affairs (duty 2.3); and
0 to detect deliberate distortion of financial
information (duty 2.9) (see Table 3).
The generally high rating of auditors’ performance
by auditors was expected. However, an unexpected
finding of the survey was the high level of agree-
ment amongst the non-auditor interest groups
about the standard of performance of auditors’
duties. Nevertheless, as indicated above, the opinions
of these groups do vary. Based on the means of
their responses, the opinions of the non-auditor
interest groups differed in relation to five duties
(duties 2.8a, 2.9,2.1 lb, 2.1 Ic and 2.14a) and, based
on 20% or more of an interest group identifying a
duty as poorly performed, their opinions varied
with respect to four duties (duties 2.3, 2.8a, 2.8b
and 2.9). However, notwithstanding that these
differences of opinion are reflected in the survey
results, the Mann-Whitney test indicates that none
of the differences is statistically significant.
Deficient performance gap
The deficient performance component of the audit
expectation-performance gap is defined as the gap
between the expected and perceived standard of
performance of auditors’ existing duties, as ex-
pected and perceived by society’ (see Figure 1).
8See footnote I .
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Table 4
Assessment by the Society Group’ of Auditors’ Performance of their Duties
Contribution
to Deficient
Mean of Unable to Performance
Responses3 Poorly OK4 Well Judge Gap
Duty Suggested duties of auditors YO % YO % YO
No. Deficient performance gap duties
2.5b Express doubts in the audit report about the
company’s continued existence 1.7 37 37 9 18 21
2.1 Ic Disclose in the audit report deliberate
distortion of financial information 1.8 27 35 10 27 16
2.14a Disclose in the audit report illegal acts which
directly affect the company’s accounts* 1.7 25 33 8 34 14
2.1 Ib Disclose in the audit report misappropriation
of company assets by company directors/senior
management* 1.8 25 31 9 35 14
2.8b Detect theft of corporate assets by company
directors/senior management* 1.8 21 37 7 35 12
2.13a Detect illegal acts by company officials which
directly affect the company’s accounts* 1.8 21 36 6 37 12
2.8a Detect theft of corporate assets by non-
managerial employees* 1.8 19 39 9 33 11
Non-deficient performance gap duties
2.9 Detect deliberate distortion of financial
information 1.9 19 45 14 22 -
2.3 State whether financial statements fairly
reflect the company’s affairs 2.0 16 53 17 14 - >
2.6 Ensure compliance with companies’ legislation 2.2 7 48 24 21 - Z
U
‘All non-auditor respondents.
’The duties as shown here are abbreviated from their expression in the questionnaires.
’1.9 has been adopted as the point of differentiation between satisfactory and unsatisfactory performance (calculated from responses
to options other than ‘unable to judge’.)
4Represents the response option ‘adequately’.
’Based on the proportion of the society group who signified that auditors perform the duty poorly.
*Not recognised by auditors as an existing duty (see Table 2).
 WINTER 1993
Consistent with this, the duties contributing to the
deficient performance gap have been identified on
the basis of opinions expressed by non-auditor
respondents taken as a whole. The means of re-
sponses from this group (designated ‘the society
group’) and the group’s assessment of auditors’
performance of their duties are presented in
Table 4.
From an analysis of Table 4, it is submitted
that seven duties contribute to the deficient per-
formance component of the audit expectation-per-
formance gap. For six of these duties (duties 2.5b,
2.8b, 2.11b, 2.11c, 2.13a and 2.14a), perceived
sub-standard performance is reflected in both the
means of society group responses (the means of
responses are less than 1.9) and by more than
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20% of the group signifying that auditors per-
form the duties poorly. For the seventh duty, that
of detecting theft of corporate assets by non-
managerial employees (duty 2.8a), although only
19% of the society group indicated that this duty
is poorly performed, the mean of the group’s
responses is 1.8. This suggests that the group as
a whole considered that auditors’ performance of
the duty is unsatisfactory. Therefore, this duty is
also recognised as an element of the deficient
performance gap. The contribution of each of the
seven duties to the deficient performance gap,
shown on the right of Table 4, has been estimated
by reference to the level of unfulfilled expectations
attaching to the duty. This is reflected in the
proportion of the society group who signified that
auditors perform the duty poorly and whose expec-
tations with respect to the duty are, therefore, not
being fulfilled.
As observed earlier, five of the seven duties
contributing to the deficient performance gap were
not recognised as existing duties by auditors. This
may account for their poor performance, as per-
ceived by society. It also suggests that improved
education is required for auditors so that they are
cognisant of their duties under the law and pro-
fessional promulgations. Nonetheless, it is also
observed that the two duties causing greatest dis-
satisfaction with auditors’ performance (duties
2.5b and 2.1 lc) were identified as existing duties by
auditors.
It is pertinent to note that the four duties
making the greatest contribution to the deficient
performance gap (duties 2Sb, 2.1 lb, 2.1 lc
and 2.14a) all relate to (non)-disclosures in the
audit report. This suggests that non-auditors
consider that they are inadequately informed by
auditors about adverse conditions or events
occurring in auditee companies. It implies
that non-auditors believe that auditors have
information which they fail to disclose. It appears
that this perceived deficiency in auditors’ perform-
ance could be remedied fairly easily, at little extra
cost.
59
Ascertaining duties which auditors should
perform
As noted earlier, for each suggested duty of audi-
tors listed in the questionnaire, respondents were
asked to indicate whether the duty should or
should not be performed by auditors, or whether
they were not sure. Reference to Table 5 shows
that the interest groups (overall) identified 18 of
the 30 suggested duties as duties auditors should
perform. (The means of responses to these duties
are positive.) Not surprisingly, these include the
ten duties identified by reference to the law and
professional promulgations as existing duties of
auditors.
Table 5 also reveals that the four identified
interest groups displayed similar opinions about
the duties auditors should (and should not) per-
form. Indeed, although the absolute values of the
means of responses from financial community au-
dit beneficiaries tend to be larger than the corre-
sponding means of responses from auditees,
indicating greater agreement amongst members of
the former group, the two groups identified the
same duties as duties auditors should perform.
However, it should be noted that for two of these
duties (duties 2.15 and 2.8a), the means of auditees’
responses are not statistically significant.
Although, in general, auditors and general pub-
lic audit beneficiaries agreed with auditees and
financial community audit beneficiaries about the
duties auditors should and should not perform,
differences between their opinions and those of the
other two groups are evident. Specifically, as Table
5 shows, compared with the other groups, auditors
recognised fewer, and general public audit benefi-
ciaries more, duties as duties auditors should per-
form. In view of the potential liability attaching to
duties auditors are required to perform, their ap-
parent reluctance to recognise additional duties is
understandable. However, it is pertinent to observe
that auditors failed to identify as duties they
should perform, their existing duties of detecting
theft of corporate assets by both non-managerial
employees and company officials (duties 2.8a and
2.8b).
As the general public and financial community
versions of the questionnaire differed, comparison
of responses from general public audit beneficiaries
and those of the other interest groups requires
caution. Nevertheless, the means of responses from
general public audit beneficiaries shown in Table 5
suggest that this group adopts a broader perspec-
tive towards the duties auditors should perform
than do the other interest groups. This may result
from the greater distance of this group from the
audit function and their greater ‘knowledge gap’,
but it may also reflect a genuine desire by the group
to see the audit function extended to fulfil a
perceived social need.
 ACCOUNTING A N D BUSINESS RESEARCH

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2.8a Detect theft of corporate assets by non-

managerial employees? 18 -51 23 6* 49 34 60 81 87 68
2.5a Report to a regulatory authority doubts about
10 - 19 35 13 50 35 62 - - 55
the company’s continued existence
2.12 Report to a regulatory authority suspicions of
fraud 9 -31 29 15 53 42 67 - - 60
Duties auditors should not perform ’
2.10a Report to a regulatory authority theft of
corporate assets by non-managerial employees - 10 - 67 13 -31 30 - 7* 42 67 77 51
2.1 la Disclose in the audit report theft of corporate
assets by non-managerial employees - 17 -71 12 - 30 29 - 24 33 58 73 47
2.4 Guarantee the auditee company is solvent -23 -64 16 - 25 34 -21 36 17 52 41
2.13b Detect illegal acts by company officials which
do not directly affect the company’s
accounts - 34 - 78 8 - 56 17 -57 18 57 72 40
2.14b Disclose in the audit report illegal acts which
do not directly affect the company’s
accounts - 34 - 80 8 - 59 16 - 53 19 58 73 40
2.2 Guarantee audited financial statements are
accurate -40 -92 3 - 53 22 -44 26 29 61 39
2.7 Report breaches of tax laws to the IRD - 37 - 72 9 -49 20 - 36 28 10* 47 33
2.16 Examine and report on the fairness of
non-financial information - 37 -49 22 - 24 34 - 37 28 - - 32
2.18 Examine and report on the efficiency and
effectiveness of the company’s management -51 -64 15 - 37 28 - 53 20 - - 25
2.22 Verify every transaction of the auditee
company -71 - 97 1 - 88 5 - 79 9 -21 31 16
2.21 Consider and report on the company’s impact
on its local community - 76 -88 4 - 77 9 - 90 3 -47 18 12
2.1 Prepare the auditee company’s financial
statements - 83 - 94 3 - 94 2 - 87 5 - 57 18 9
‘Includes 75 respondents who signified that they had no knowledge of auditing and therefore could not respond to the part of the questionnaire relating
to auditors’ duties.
*The suggested duties as shown here are abbreviated from their expression in the questionnaires.
’Duties identified as those auditors should/should not perform based on the means of the interest groups’ responses.
T h e average of the means of the identified interest groups.
’Means of interest group responses expressed as whole numbers (i.e. mean calculated as a decimal multiplied by 100).
6Proportion of interest group signifying that auditors should perform the duty.
’All non-auditor respondents.
?Existing duties of auditors identified by reference to statute law, case law and professional promulgations.
*The results of the Wilcoxon signed-ranks test indicate that no valid generalised conclusion can be drawn about the opinion of the interest group regarding
this duty.
 62
Although the opinions of the interest groups
regarding the duties auditors should (and should
not) perform are interesting, this part of the re-
search is particularly important for the assistance
it provides in identifying the duties which are
reasonable to expect of auditors.
Duties reasonably expected of auditors
As may be seen from Figure 1, identifying the
duties which may reasonably be expected of audi-
tors forms the linchpin in narrowing the audit
expectation-performance gap. It is these duties
about which society must be educated (to eliminate
unreasonable expectations) and it is these duties
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which must be embodied in auditing standards and
performed by practitioners (to remove the per-
formance gap).
In order for duties to be reasonably expected of
auditors they must be cost-beneficial for auditors
to perform. In the absence of formal cost-benefit
analysis, it is submitted that, for the purposes of
the research, the duties identified by both auditees
and financial community audit beneficiaries as
duties auditors should perform provide an accept-
able surrogate for cost-benefit analysis. These in-
terest groups may be assumed to be reasonably
well-informed about the audit function but their
perspectives are from opposing directions. Audi-
tees are subject to the auditor’s examination and
are likely to be particularly cognisant of the costs
involved. As a consequence, this interest group
may be expected to tend towards limiting the
duties ascribed to auditors. Financial community
audit beneficiaries, on the other hand, rely on the
auditor’s work and are, therefore, likely to be
particularly conscious of the benefits which may
flow therefrom. Thus, in contrast to auditees,
this interest group may be expected to lean to-
wards extending auditors’ duties. An interesting
(and unexpected) finding of the survey is that,
notwithstanding the differing perspectives of audi-
tees and financial community audit beneficiaries,
and their potential bias in opposite directions,
these two interest groups identified the same 18
duties as duties auditors should perform (see
Table 5).
In identifying an acceptable surrogate for cost-
benefit analysis, it was considered appropriate to
ignore the opinions of auditors and general public
audit beneficiaries on the grounds that auditors are
too closely (and personally) involved in the audit
function and general public audit beneficiaries are
too remote from it. However, it is pertinent to
observe that, when the opinions of these interest
groups are included in the analysis (reflected in the
means of responses from the interest groups (over-
all)), the outcome is unchanged. The same 18
duties identified by auditees and financial commu-
ACCOUNTING A N D BUSINESS RESEARCH
nity audit beneficiaries are identified as duties
auditors should perform.
On the basis of the above reasoning, 18 of the 30
duties listed in the questionnaire are identified as
duties which are reasonable to expect of auditors.
These coincide with the duties shown in Table 5 as
‘duties auditors should perform’.
Society’s expectations of auditors
The mean of responses from an interest group
reflects the overall opinion of the group as to
whether a duty should or should not be performed
by auditors. However, it does not provide a useful
indicator of the group’s expectations of auditors in
the context of the audit expectation-performance
gap. An interest group taken as a whole may
consider that a particular duty should not be
performed by auditors, yet some members of the
group may hold the contrary view. If even one
member of a non-auditor interest group expects
auditors to perform a duty and they fail to do so,
this leaves unfulfilled expectations which contrib-
ute to the audit expectation-performance gap.
Nonetheless, if only one individual expects audi-
tors to perform the duty in question, the potential
consequences of it not being performed are un-
likely to be sufficiently serious to concern the
auditing profession. However, if a significant pro-
portion of an interest group expects auditors to
perform the duty, their failure to do so may result
in widespread criticism which could be very dam-
aging to the profession’s reputation. Whilst ac-
knowledging the arbitrary nature of any point
measurement used to define ‘a significant pro-
portion’, it is considered that if 20% or more of an
identified interest group signify that a duty should
be performed by auditors, it warrants further
examination to ascertain whether it is (or is not) a
duty which is reasonable to expect of auditors.
From Table 5 it may be seen that 28 of the 30
duties listed in the questionnaire were identified by
20% or more of at least one interest group as
duties auditors should perform. (Only duties 2.1
and 2.21 were not so identified.) Table 5 also shows
that, if allowance is made for some duties not
appearing in the general public version of the
questionnaire, the duties so identified by 20% or
more of the three non-auditor interest groups are
very similar. Indeed, more than 20% of all three
interest groups recognised the same 25 duties as
duties auditors should perform. However, more
than 20% of general public audit beneficiaries
considered that, in addition to these 25 duties,
auditors should perform the duty of examining
evidence to verify every transaction of the auditee
company (duty 2.22). Further, whilst acknowledg-
ing that the general public version of the question-
naire did not distinguish between illegal acts
by company officials which directly affect the
 WINTER 1993
company’s accounts and those which do not, it
appears that more than 20% of this interest group
believed that auditors should also perform the
duties of detecting, and disclosing in the audit
report, illegal acts by company officials which do
not directly affect the company’s accounts (duties
2.13b and 2.14b).9
As observed above, duties identified by at least
20% of an interest group as duties auditors should
perform are considered to warrant further examin-
ation to ascertain whether they are duties which it
is reasonable to expect of auditors. Of the 28 duties
qualifying for further examination, ten are found
not to be duties reasonably expected of auditors, as
they do not meet the cost-benefit criterion ex-
plained above. As Table 5 shows, these are the
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duties to:
0 guarantee that audited financial statements
are completely accurate, and that the auditee
company is solvent (duties 2.2 and 2.4);
0 report breaches of tax laws to the Inland
Revenue Department (IRD) (duty 2.7);
0 disclose in the audit report, and to report to
a regulatory authority, theft of corporate as-
sets by non-managerial employees (duties
2.10a and 2.11a);
0 detect, and to disclose in the audit report,
illegal acts by company officials which do not
directly affect the company’s accounts (duties
2.13b and 2.14b);
0 examine and report (in the audit report) on
the fairness of non-financial information and
the efficiency and effectiveness of the auditee
company’s management (duties 2.16 and
2.18);
0 verify every transaction of the auditee com-
pany (duty 2.22).
A review of these duties shows that their failure to
meet the cost-benefit test is not difficult to explain.
If auditors were to guarantee that audited financial
statements are accurate, or that an auditee com-
pany is solvent (duties 2.2 and 2.4), they would
almost certainly have to examine every transaction
of the auditee company (duty 2.22). Such an
undertaking, even in moderately sized economic
organisations, would greatly increase audit costs
without, apparently, generating a commensurate
increment in benefit.
With respect to auditors reporting theft of cor-
porate assets by non-managerial employees (duties
2.10a and 2.11a), it is generally accepted that
corporate managements establish systems of in-
ternal control, inter alia, to prevent and detect such
theft. Auditors have an existing duty to detect
material theft of corporate assets by non-manage-
~
9Comments made by general public audit beneficiaries in
response to open-ended questions included in the questionnaire
provide strong support for this conclusion.
63
rial employees which escapes the internal control
net, but, providing they report such theft to the
company’s management, that is generally where
their responsibility ends (Porter, 1990, Chapter 7).
To require auditors to report theft of this nature in
the audit report, or to a regulatory authority,
would involve additional audit costs and might
also have an adverse affect auditor-client relations.
These added costs seem likely to outweigh any
benefits which would ensue from auditors perform-
ing the additional reporting duties.
The duties of detecting and disclosing illegal acts
by company officials which do not directly affect
the company’s accounts (duties 2.13b and 2.14b)
seem rather remote from auditors’ traditional
specialist field of accountancy. The same is true of
examining and reporting on the fairness of non-
financial information and on the efficiency and
effectiveness of the auditee company’s manage-
ment (duties 2.16 and 2.18). Although the compe-
tence of auditors (or audit teams) could, no doubt,
be extended to accommodate these duties, it seems
that it would not be cost-effective at the present
time to require auditors to perform these duties.”
The duty most difficult to explain, in terms of its
rejection on cost-benefit grounds as a duty which
is reasonable to expect of auditors, is that of
reporting breaches of tax laws to the IRD (duty
2.7). This duty falls within auditors’ expertise in
accounting and its performance would seem to
involve little additional audit cost. Further, some
benefit could be anticipated in terms of increased
government revenues for social spending. How-
ever, in New Zealand there appears to be wide-
spread antagonism towards the IRD and a sense
that tax avoidance is ‘fair game’. It is therefore
considered that the main costs attaching to audi-
tors performing this duty lie in the negative atti-
tudes towards auditors which would be likely to
result. Where such attitudes caused auditor-client
relations to deteriorate, other auditing tasks could
become more difficult to perform, causing an in-
crease in audit time and cost. On balance, it seems
that the social and economic costs resulting from
auditors performing this duty may well outweigh
the social and economic benefits gained.
The reasonableness gap and the deficient
standards gap
As noted above, of the 28 duties identified by
20% or more of a non-auditor interest group as
duties auditors should perform, ten fail the cost-
benefit test. It is clearly not reasonable to expect
auditors to perform these duties and each contrib-
utes to the reasonableness gap component of the
“It should be noted that auditors of public sector organis-
ations in New Zealand are required to evaluate the efficiency
and effectiveness of the organisation’s management.
 64
audit expectation-performance gap. An estimate of
the relative contribution of each duty to the
reasonableness gap may be derived from the pro-
portion of the society group” who signified that the
duty in question should be performed by auditors
(see Table 5). The greater the proportion of the
group who (unreasonably) expect auditors to per-
form the duty, the greater the level of unfulfilled
expectations attaching to the duty and, thus, con-
tribution to the reasonableness gap. The ten duties
constituting the reasonableness gap, and the
relative contribution of each, are shown in
Figure 2.
Of the 18 duties which meet the cost-benefit
criterion, and thus qualify as duties which are
reasonable to expect of auditors, ten are existing
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duties of auditors (see Table 5). The other eight
duties, which are reasonably expected but not
currently required of auditors, contribute to the
deficient standards component of the audit expec-
tation-performance gap. Auditing standards need
to be extended to encompass these duties, namely:
to report to a regulatory authority doubts
about an auditee company’s continued exist-
ence (duty 2.5a), misappropriation of corpor-
ate assets by company officials (duty 2. lob),
deliberate distortion of financial information
(duty 2.10c), suspicions of fraud (duty 2.12),
and illegal acts uncovered in an auditee com-
pany (2.15);
to examine and report (in the audit report) on
the company’s internal controls, and the fair-
ness of its financial forecasts’’ (duties 2.17 and
2.20);
to audit half-yearly company reports (duty
2.19).
Reviewing these duties it is pertinent to observe
that:
1. Five of the eight duties involve reporting to
a regulatory authority matters of concern
uncovered during an audit. It appears that
auditors’ duties could be extended fairly eas-
ily, at little additional audit cost, to embrace
these duties. However, before this is done, the
“All non-auditors, see page 61 above.
‘*InSeptember 1990 the New Zealand Society of Accountants
issued Auditing Guideline 20: The Examination of Prospective
Financial Information. This guideline (which is based on Inter-
national Standard on Auditing 27 with the same title) does not
impose on auditors a general duty to examine and report on
prospective financial information: rather, it provides ‘guidance
on general procedures to be performed in an engagement to
examine prospective financial information and . . . reporting the
results of such an engagement’ (para 7). This is undoubtedly a
step towards meeting society’s expectations of auditors per-
forming a general duty of examining and reporting on financial
forecasts, but it seems to fall well short of those expectations.
Indeed, for auditors to meet society’s expectations in this
regard, auditee companies need to accept a duty to provide
financial forecasts in their annual reports.
A C C O U N T I N G A N D B U S I N E S S RESEARCH
appropriate authority to which auditors
should report needs to be identified, and legal
protection provided for auditors against
possible claims of breach of client confiden-
tiality and, in some cases, defamation of
character, where matters of concern are re-
ported to the authorities in good faith and on
reasonable grounds.
2. Six of the eight duties relate to auditors acting
as society’s corporate ~atchd0gs.l~It is
suggested that this finding may indicate
that society is becoming more aware of
the importance of auditors fulfilling this func-
tion and that further extensions of their du-
ties in this area may be expected in the
future.I4
As for the reasonableness gap, an estimate of the
relative contribution of each duty to the deficient
standards gap may be derived from the proportion
of the society group who signified that they expect
the duty in question to be performed by auditors
(see Table 5). The greater the proportion of
the group who considered that the duty should
be performed by auditors, the greater the level
of unfulfilled expectations attaching to the duty
and contributing to the deficient standards gap,
as a result of its non-performance. The duties
constituting the deficient standards gap, and
the relative contribution of each, are presented in
Figure 2.
Conclusion
The audit expectation-performance gap has been
defined as the gap between society’s expectations
of auditors and auditors’ performance, as per-
ceived by society. It has been postulated that this
gap has two major components: a reasonableness
gap and a performance gap, the latter being
subdivided into deficient standards and deficient
performance. Empirical research, outlined in this
paper, has provided strong support for this postu-
lated structure.
All but five of the 30 suggested duties of auditors
listed in the questionnaire were found to contribute
to the audit expectation-performance gap. Two
duties, namely, preparing the auditee company’s
financial statements (duty 2. l), and considering
and reporting on the impact of an auditee com-
pany on its local community (duty 2.21), were
found to be neither existing nor expected duties of
auditors. The other three exceptions are existing
”Of the ten existing duties of auditors (see Table 5), five relate
to the corporate watchdog aspect of their function and five to
the monitoring of accountability reports (see Porter, 1990).
I4It is noted that the auditing profession, particularly in
Britain, has taken steps recently to acknowledge greater respon-
sibility for corporate watchdog duties, especially in relation to
corporate fraud (see Porter, 1992).
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Figure 2
The Relative Contribution of Duties to Components and of Components to the Audit Expectation-Performance Gap
The key to duties identified by number is presented in Table 5

Perceived 4 Audit Expectation -Performance Gap Society's

ub-standard) Expectations
='erformance of Auditors'
py Auditors'

Auditors' Duties
Existing Reasonably
Duties Expected of
Auditors

Deficient Dejcient Unreasonable

* )
Performance Standartis Expectations

16% + 50% ) 34 % *
Duty Response Contrib. Duty Response Contrib. Duty Response Contrib. Duty Response Contrib.
%5 %6 %5 %6 %5 %6 %5 %6

2.5b 37 21 2.10c 16 15 2.10a 51 14 2.2 39 11

2.1 Ic 27 16 2.11 I5 14 2.1 l a 41 13 2.7 33 9
2.11b 25 14 2.10b 14 14 2.4 41 11 2.16 32 9
2.14a 25 14 2.15 64 12 2.13b 40 11 2.18 25 I
2.8b 21 12 2.20 63 12 2.14b 40 11 2.22 16 4
2.13a 21 12 2.19 62 12
2.8a 19 11 2.12 60 11
2.5a 55 10
- - - -
1I5
- 100
- -
529 -
100
- - - -
'Duties perceived by the society group to be performed deficiently by auditors.
'Duties expected of auditors by 20% or more of a non-auditor interest group.
'Existing duties defined by reference to the law and professional promulgations.
4Duties which are cost-beneficial for auditors to perform.
'Proportion of the society group whose expectations with respect to the duty are not being fulfilled.
6Relative contribution of duties to the component.
 66 A C C O U N T I N G A N D B U S I N E S S RESEARCH

duties of auditors which were perceived to be
performed satisfactorily. These are the duties:
0 to state whether the financial statements fairly
reflect the company’s financial affairs (duty
2.3);
0 to ensure that auditee companies comply with
companies’ legislation (duty 2.6);
0 to detect deliberate distortion of financial
information (duty 2.9).
Of the remaining 25 duties listed in the question-
naire, seven were found to contribute to the defi-
cient performance gap, eight to the deficient
standards gap and ten to the reasonableness gap
(see Figure 2).
As explained earlier, an estimate of the relative
contribution of each duty to its respective com-
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some positive steps to narrow the gap, but gener-
ally these have been fire-fighting in nature, targeted
to quell the most vociferous and scathing criticism
of auditors, or they have been enforced by legis-
lation (primarily relating to the financial services
sector) designed to serve specific objectives (Porter,
1991). It is argued that this is not a satisfactory way
to proceed.
The research reported here has provided new
insights into the structure, composition and extent
of the audit expectation-performance gap but,
more importantly, it has signalled a more rational
and comprehensive approach towards narrowing
the gap. The research has indicated that once a
discrepancy between society’s expectations of audi-
tors and auditors’ perceived performance is de-
tected (that is, once auditors’ performance of, or

ponent of the audit expectation-performance gap failure to perform, a duty is criticised by a signifi-
may be derived from the proportion of the society cant proportion of society, or of an interest group),
group whose expectations with respect to the duty the duty in question should be analysed to identify
are not being fulfilled. This process may be taken which component of the gap it represents. Once a
a step further. If the measure of unfulfilled expec- duty is associated with a specific component of the
tations associated with the duties contributing to a gap, appropriate corrective action is almost self-
particular component of the audit expectation- evident.” It is submitted that, if the profession
performance gap are added, a measure of society’s adopts this approach towards narrowing the audit
unfulfilled expectations attaching to the com- expectation-performance gap, rapid progress will
ponent is obtained. From this, the relative contri- be made towards bringing society’s expectations of
bution of each component of the overall gap auditors and auditors’ performance into closer
between society’s expectations of auditors and accord and, thus, in reducing the criticism and
auditors’ perceived performance may be calcu- litigation which auditors face today.
lated. From Figure 2 it may seem that, calculated
in this way, half of the gap (50%) is attributable to
deficient standards, 34% results from society hold- References
ing unreasonable expectations of auditors, and Beck, G. W. (1974), Public Accountants in Australia-Their
16% derives from perceived sub-standard perform- Social Role, Melbourne: Australian Accounting Research
Foundation.
ance by auditors. Commission on Auditors’ Responsibilities (1978). Report, Con-
It is submitted that the current widespread clusions and Recommendations, AICPA, New York.
criticism of, and litigation against, auditors is a (Cohen Commission).
ramification of auditors failing to met society’s Lee, T. A. (1970), ‘The nature of auditing and its objectives’,
Accountancy, 81 (920), 292-296.
expectations of them and, further, that such failure Liggio, C. D . (1974), ‘The expectation gap: The accountant’s
is serving to undermine confidence in auditors and Waterloo’, Journal of Contemporary Business, 3(3),
the work they do. If irreparable damage to the 274.
profession’s standing in society is to be prevented, Porter, B. A. (1990), The Audit Expectation-Performance Gap
urgent and effective action to narrow the audit and the Role of External Auditors in Society, unpublished
PhD thesis, Massey University, New Zealand.
expectation-performance gap is needed. Porter, B. A. (1991), ‘The audit expectation-performance gap-
In recent years, the auditing profession, particu- A contemporary approach’, Pacific Accounting Review, 3( I),
larly in Britain and the United States, has taken 1-36.
Porter, B. A. (1992), Do External Auditors Have the Role of
Society’s Corporate Watchdogs? An Empirical Investigation,
paper
. - . presented at the British Accounting Association Con-
”Narrowing each component of the gap is discussed, and ference, Warwick, England, April 1992.
detailed recommendations are provided, in Porter 1990, Russell, G. (1986), ‘All eyes on accountants’, Time, 21 April
Chapter 9. p. 58.
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Appendix
Ascertaining the ‘KnowledgeGap’ of Auditors’ Interest Groups
Audit Beneficiaries

Financial General
Interest Group: Auditors Auditees Community Public
Total no. of respondents in group: 196 342 243 454’
Duty Suggested duties of auditors3 %* %2 %2 %2
No.
2.1 Prepare the auditee company’s financial statements 1 3 3 34
2.2 Guarantee audited financial statements are accurate 2 16 14 69
2.3 State whether financial statements fairly reflect the company’s affairs 1 3 2 27
2.4 Guarantee the auditee company is solvent 12 22 15 55
2.5a Report to a regulatory authority doubts about the company’s continued
existence 20 38 28 -
2.5b Express doubts in the audit report about the company’s continued existence 13 36 39 73
2.6 Ensure compliance with companies’ legislation 41 38 47 62
2.7 Report breaches of tax laws to the IRD 8 16 21 65
2.8a Detect theft of corporate assets by non-managerial employees 83 61 54
2.8b Detect theft of corporate assets by company directors/senior management 81 55 47 l- 45
2.9 Detect deliberate distortion of financial information 11 8 9 -
2.10a Report to a regulatory authority theft of corporate assets by non-
managerial employees 8 23 33
2.10b Report to a regulatory authority misappropriation of company assets by company
directors/senior management 24 42 45
2.10c Report to a regulatory authority deliberate distortion of financial
information 24 47 52
2.11a Disclose in the audit report theft of corporate assets by non-

2.1 Ib
managerial employees
Disclose in the audit report misappropriation of company assets by company
directors/senior management
12 30 31
1
70 64 67
2.1 Ic Disclose in the audit report deliberate distortion of financial
information 22 22 25 -
76
2.12 Report to a regulatory authority suspicions of fraud 9 31 37
1
continued overleaf
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Appendix (continued)
Ascertaining the ‘Knowledge Gap’ of Auditors’ Interest Groups
Audit Beneficiaries

Financial General
Interest Group: Auditors Auditees Community Public
Total no. of respondents in xroup: 196 342 243 4541
Duty Suggested duties of auditors’ %2 %2 %2 %*
No.
2.13a Detect illegal acts by company officials which directly affect the company’s
accounts 63 57
2.13b Detect illegal acts by company officials which do not directly affect 6o } 69
the company’s accounts 3 16 16
2.14a Disclose in the audit report illegal acts which directly affect the
company’s accounts 75 62 71
2.14b Disclose in the audit report illegal acts which do not directly affect
the company’s accounts 3 15 16 } 76
2.15 Report to a regulatory authority illegal acts uncovered in the company 17 32 41 90
2.16 Examine and report on the fairness of non-financial information 5 20 13 -
2.17 Examine and report on the company’s internal controls 29 55 47 - >
2.18 Examine and report on the efficiency and effectiveness of the company’s cl
- cl
management 4 19 9 0
2.19 Audit published half-yearly company reports 15 32 23 - C
-
2.20 Examine and report on the fairness of financial forecasts 14 37 24 - z
2.21 Consider and report on the company’s impact on its local community 1 8 2 42 2
2.22 Verify every transaction of the auditee company 1 7 11 60
z
Q
Measure of total ‘knowledge gap’: 672 915 902 933 >
z
U
Measure of average ‘knowledge gap’ per duty: 22 31 30 62 W
‘The proportions shown for general public audit beneficiaries include 75 respondents who signified they had no knowledge of auditing and therefore 5-
could not respond to the part of the questionnaire relating to auditors’ duties. They have been included, in each case, as ‘not sure’ responses. zm
2Proportion of respondents selecting either the ‘not sure’ or the incorrect option (‘yes’ for duties which are not duties of auditors, and ‘no’ for those
01
which are). 01
’The suggested duties as shown here are abbreviated from their expression in the questionnaire. P
m
01
m
>
P
cl
1: