Did the International Financial Reporting Standards Increase the Audit Expectation Gap? An Exploratory Study

Abstract

I examine the role of IFRS on the Audit Expectation Gap (AEG). Past research, mostly based on Porter [(1993). An empirical study of the audit expectation-performance gap. Accounting and Business Research, 24(93), 49–68. https://doi.org/10.1080/00014788.1993.9729463]’s work, does not identify the contribution of accounting standards to the AEG. Yet, IFRS may play a crucial role in an auditor’s mission, because accounting standards now result in more complex and more subjective rules and financial statements. I examine whether IFRS are a factor explaining the perception of the AEG and its components by auditors and preparers of financial information. And, if so, what does this impact, more specifically, result from? Using survey data of 158 auditors and preparers of financial information working in an IFRS environment, I find that the contribution of IFRS to the AEG is underestimated while it is, in fact, at least as important as auditing standards. In addition, respondents think that IFRS generated more complexity (especially regarding issues raised by IFRS 9, IAS 36/IFRS 3 or IFRS 2) and more subjectivity, which contributed to the AEG, and led users of financial statements to be more demanding towards auditors. Auditors are perceived as supposed to be able to offset difficulties suffered by investors regarding the complexity and subjectivity of IFRS. However, the capacity of auditors themselves to fully understand the complexities resulting from IFRS may be overestimated. Furthermore, the results show that auditors’ skills and training seem to be insufficient regarding the increasing complexity of IFRS. Lastly, I find that less experienced respondents underestimate the contribution of accounting standards to the AEG.

Keywords:

• audit expectation gap
• IFRS
• accounting standards
• complexity
• subjectivity

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Notes

1 Emphasis added.

2 See Financial Times website: https://www.ft.com/content/ae73160b-fd9a-4313-89f9-8fd70183158e.

3 https://home.kpmg/nl/en/home/services/audit.html.

4 ICAEW: Institute of Chartered Accountants in England and Wales.

5 See, e.g., https://www.bdo.nz/en-nz/ifrs-16-creates-complexity-in-subleasing-arrangements.

6 Emphasis added.

7 Emphasis added.

8 See Pocket Guide to IFRS Standards, May 2016: the global financial reporting language; 93% (133/143 jurisdictions) have made a public commitment to IFRS Standards as the single set of global accounting standards and 83% (119/143 jurisdictions) already require the use of IFRS Standards by all or most domestic public companies, with most of the remaining jurisdictions permitting their use.

9 IASB, Conceptual framework 2010, introduction.

10 Pocket Guide to IFRS Standards: the global financial reporting language, p. 1.