MP R A

Munich Personal RePEc Archive

Eliminating the Audit Expectations Gap : Myth or Reality?

Marianne Ojo

February 2006

Online at http:// mpra.ub.uni-muenchen.de/ 232/ MPRA Paper No. 232, posted October 9, 2006

ELIMINATING THE AUDIT EXPECTATIONS GAP : REALITY OR MYTH ?

Marianne Ojo ( marianneojo@hotmail.com ) Oxford Brookes University1 ABS !A" The audit expectations gap is of serious concern to the UK accounting profession with the Department of Trade and Industry proposing a new framework for independent regulation of the accounting profession. 2 However the new ccounting !oundation has had its role placed under review following the "nron collapse and introduction of the #ar$anes%&xley ct 2''2.( This resulted in responsi$ility for independent regulation of the accounting profession $eing transferred to the reconstituted !inancial )eporting *ouncil. + High profile failure of financial services firms, commencing with the secondary $anking crisis in the -./'s, followed $y collapses of $anks such as 0ohnson 1atthey 2ankers 3 0124, 2ank of *redit and *ommerce International 32**I4 and 2arings, $uilding societies such as 5rays and insurers such as the recent pro$lems at "6uita$le 7ife and Independent Insurance have given rise to further de$ate on the audit expectations gap. The de$ate surrounding the 8expectations gap9 often revolves around whether such a gap can $e eliminated. #ikka, :uxty, *ooper and ;ilmott argue that within a social context, the expectations gap will $e difficult to eliminate due to social conflict and the fact that the meaning of social practices is always su$<ect to challenges.= It will however, $e argued that even though the whole component definition of an audit may $e su$<ect to changes and challenges and therefore cannot $e o$<ective, elements within the definition of an audit and in particular, the fraud and error detection role of an audit can $e relatively o$<ective. A) #$ !O%U" #O$ he &x'ectations (a' #f a s)rvey *ere carried o)t *ithin the +eneral '),lic and mem,ers of the '),lic *ere asked to +ive a -tr)e. or -false. ans*er to the statement / - he role of the a)ditor is to detect fra)d and error in financial statements.0 most 'eo'le *o)ld say tr)e. #n )e Kingston *otton 1ills 3 >o 24 ?-@.ABA , 12 1o'es of the A''eal "o)rt stated that the a)ditor *as a *atchdo+ ,)t not a ,loodho)nd. that the a)ditor3s primary role is not the detection of fra)d. his remark )nderlines the fact he 'ro,a,le lack of clarity ,et*een )sers of

financial statements0 the +eneral '),lic and a)ditors as relatin+ to the 'ro'er definition of the role and
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School of Social Sciences and 1a*. Us)al disclaimers a''ly. 5 %e*in+ and 5 O !)ssell The )ole of uditors, )eporting ccountants and #killed :ersons in UK !inancial #ervices #upervision #nstit)te of "hartered Acco)ntants of Scotland (4667) 8 #,id '' 498 #,id ' 8 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 )e Kingston *otton 1ill *o 3>o 240 >1?@=A 4 "h 4B@ at 4??0 "A

definition of an a)dit is *hat contri,)tes to the -ex'ectations +a'.. he -ex'ectations +a'. is the difference ,et*een *hat )sers of financial statements0 the +eneral '),lic 'erceive an a)dit to ,e and *hat the a)dit 'rofession claim is ex'ected of them in cond)ctin+ an a)dit. #n this res'ect0 it is im'ortant to distin+)ish ,et*een the a)dit 'rofession3s ex'ectations of an a)dit on one hand0 and the a)ditor3s 'erce'tion of the a)dit on the other hand. A'art from )sers of financial statements and the +eneral '),lic0 an a)ditor may also 'erceive a some*hat different inter'retation or *orse still0 fail to com'ly *ith the standards set ,y the a)dit 'rofession. #f )sers of financial statements and the +eneral '),lic *ere ed)cated to think that the a)ditor3s role em,races the detection and 'revention of fra)d0 es'ecially in relation to material items0 the fra)d and error detection role of an a)dit co)ld ,e relatively o,jective. ;o*ever0 a,sol)te o,jectivity cannot ,e +)aranteed since -materiality. and -material si+nificance. are s),jective conce'ts *hich reC)ire f)rther clarification ,y the A)ditin+ 5ractices Board. A ret)rn to the 'rimary role of detection and 'revention *o)ld also ,e *elcomed since there are at 'resent0 not s)fficient meas)res to hold the a)ditor lia,le for ne+ative conseC)ences of his actions. Some so)rces of academic literat)re ass)me that the meanin+ of an a)dit is not o,jectiveDfixed
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*hilst other so)rces s)ch as contents of a)dit re'orts ass)me that the meanin+ of an a)dit is fixed.? #n relation to the latter ass)m'tion0 there is the ,elief that the ex'ectations +a' co)ld ,e si+nificantly red)ced E if not 'ossi,le to eliminate.@ he remainin+ sections of this article are or+anised as follo*s / he first section deals *ith different

meanin+s attri,)ted to the ex'ectations +a'. #t also considers *hy a sta,le meanin+ sho)ld ,e ado'ted. Section t*o then considers com'onents of the ex'ectations +a' and 'ossi,ilities of eliminatin+ these com'onents. Section three disc)sses the historical ,ack+ro)nd of the ex'ectations +a' E incl)din+ t*o very im'ortant cases *hich have ,een fo)ndations of certain a)ditin+ standards. .Section fo)r thro)+h an analysis and assessment of vario)s standards0 considers ho* clear 0)nam,i+)o)s standards co)ld hel' red)ce the ex'ectations +a'. he fifth section of this article then examines the social frame*ork of the a)dit ,efore a concl)sion is arrived at. B) %&F#$# #O$S OF ;& &G5&" A #O$S (A5

he iss)e revolvin+ ro)nd the ex'ectations +a' de,ate relates to the different and inconsistent meanin+s attri,)ted to the definition of an a)dit ,y )sers of financial statements0 the '),lic and the a)dit 'rofession. he -ex'ectations +a'. is the difference ,et*een *hat the '),lic and )sers of financial statements 'erceive the role of an a)dit to ,e and *hat the a)dit 'rofession claim is ex'ected of them d)rin+ the cond)ct of an a)dit. As mentioned in the introd)ction0 this definition is 'referred as it is im'ortant to distin+)ish ,et*een the a)dit 'rofession3s ex'ectations of an a)dit on the one hand0 and the a)ditor3s 'erce'tion of an a)dit on the other hand.
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hese incl)de C)estionnaires0 o'inion s)rveysH see 5.Sikka A 5)xty0 ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 at ' 1 i,id i,id

Accordin+ to 5ierce and Iilcommins16 0 the a)dit ex'ectations +a' is *hen external a)ditors3 )nderstandin+ of their role and d)ties is com'ared a+ainst the ex'ectations of )ser +ro)'s and the +eneral '),lic. 1i++io11 defined the a)dit ex'ectations +a' as the difference ,et*een the levels of ex'ected 'erformance as inter'reted ,y the inde'endent acco)ntant and the )ser of financial statements. hese definitions )se external a)ditors as their ,ench mark rather than the a)dit 'rofession. he )se of the a)dit 'rofession as ,ench mark *o)ld 'rovide a less s),jective element and hel' narro* the ex'ectations +a'. #n this sense it *o)ld ,e a 'referred definition and *o)ld also 'rovide a more sta,le element of the ex'ectations +a' E as the a)dit 'rofession3s ex'ectations are more *ell9defined than the individ)al a)ditor3s ex'ectations. !eference ,y 1i++io to -)sers of financial statements. as o''osed to mem,ers of the +eneral '),lic ho*ever0 *o)ld +ive res)lt to a narro*in+ of the ex'ectations +a' as it is o,vio)sly more feasi,le to ed)cate )sers of financial information (via ann)al +eneral meetin+s etc) than it is to ed)cate mem,ers of the +eneral '),lic. he "ohen "ommission in 1@B? considered *hether a +a' mi+ht exist ,et*een *hat the '),lic ex'ected and *hat a)ditors co)ld reasona,ly ex'ect to accom'lish. As ri+htly stated ,y 5orter140 many definitions have failed to mention the 'ossi,ility of s),9standard 'erformance ,y a)ditors. &ven tho)+h 5orter hi+hli+hts the im'ortance of considerin+ the f !! e"te#t of the a)dit ex'ectations +a' *hich can ,e done ,y com'arin+ society3s ex'ectations of a)ditors a+ainst the 'erceived 'erformance of a)ditors 0 ea$ier com'arison can ,e achieved thro)+h an analysis of the more o,jective com'onents of the ex'ectations +a'. he s),jective com'onents of the ex'ectations +a' co)ld ,e made -more o,jective. ,y considerin+ and analysin+ each com'onent and considerin+ meas)res *hich co)ld ,e taken to red)ce the ex'ectations +a' created ,y each of these com'onents. Unreasona,le ex'ectations from the '),lic co)ld ,e transformed to reasona,le ex'ectations of )sers of financial statements since it is more feasi,le to ed)cate )sers of financial information and since not all mem,ers of the '),lic )se financial information. After meas)res have ,een taken to red)ce com'onents of the ex'ectations +a'0 a com'arison of the reasona,le ex'ectations of )sers of financial statements a+ainst *hat the a)dit 'rofession ex'ect can then ,e made. his *o)ld 'rovide for a more o,jective and sta,le analysis of the ex'ectations +a'. ") "OM5O$&$ S OF ;& &G5&" A #O$S (A5

Some commentators have attri,)ted the ex'ectations +a' to )sers3 conf)sion0 *ides'read mis)nderstandin+0 i+norance and Dor lack of ed)cation.18 5orter analyses the total ex'ectations +a' into three se'arate com'onents1: namely s),9standard 'erformance (1=J) 0 deficient standards (76J) and )nreasona,le ex'ectations (8:J). %)e to the fact that deficient standards can easily ,e revised and it is therefore relatively easier to red)ce this com'onent of the ex'ectations +a'0 the deficient standards com'onent can ,e considered the most o,jective com'onent *hilst )nreasona,le ex'ectations and s),9standard 'erformance are the more s),jective com'onents. &ven tho)+h )nreasona,le ex'ectations are s),jective0 it still constit)tes a si+nificant 'ro'ortion of the ex'ectations +a' and cannot ,e i+nored. S), standard 'erformance sho)ld also not ,e i+nored even tho)+h it constit)tes j)st 1=J of the ex'ectations +a' . After all 'ossi,le meas)res have ,een taken to red)ce this com'onent it co)ld ,e i+nored. he s), standard 'erformance element is a 'ro,lem arisin+ from individ)al a)ditors0 deficient standards stemmin+ from the a)dit 'rofession *hilst )nreasona,le ex'ectations emanate from the '),lic. An analysis of the individ)al com'onents of the ex'ectations +a' this *ay hel's to kno* and )nderstand ,etter ho* to deal *ith and red)ce these 'ro,lems creatin+ the ex'ectations +a'. #n 'artic)lar0 it 'rovides kno*led+e as to *here more efforts sho)ld ,e concentrated namely0 the reforms of a)ditin+ standards (since this constit)tes
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B 5ierce and M Iilcommins 3 he A)dit &x'ectations (a' / he !ole of A)ditin+ &d)cation3 Du$lin *ity University 2usiness #chool )esearch :apers -..=%-..A $o 18 " % 1i++io 3 he &x'ectation (a' / he Acco)ntant3s <aterloo3 ( 1@B: ) 0ournal of *ontemporary 2usiness Kol)me 8 $o 8 at ' 4B B 5orter 3 An &m'irical St)dy of the A)dit &x'ectation E 5erformance (a'3 (1@@8) ccounting and 2usiness )esearch Kol 4: no @8 ' 76 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 at ' 4 B 5orter 3 An &m'irical St)dy of the A)dit &x'ectation E 5erformance (a'3 (1@@8) ccounting and 2usiness )esearch Kol 4: no @8 ' 76

half the 'ro,lem). he ex'ectations +a' is an iss)e for a)ditors as a +reater -ex'ectations +a'. *o)ld lead to lo*er credi,ility0 earnin+ 'otential and 'resti+e associated *ith their *ork.17 #t is also an iss)e for the '),lic and investors in 'artic)lar since *ealth creation and 'olitical sta,ility in a ca'italist economy de'ends si+nificantly on confidence and acco)nta,ility and external a)dit is s)''osed to 'rovide s)ch confidence and acco)nta,ility.1= #s it 5ossi,le to &liminate the &x'ectations (a'L Accordin+ to Sikka et al0 the nat)re of the com'onents of the ex'ectations +a' make it diffic)lt to eliminate1B. 5erceived 'erformance of a)ditors is an element *hich is diffic)lt to meas)re and chan+es constantly. #t is ho*ever 'ossi,le to s),stantially red)ce ,)t not totally eliminate. A n)m,er of s)++estions have ,een ')t for*ard as a means of narro*in+ the ex'ectations +a'. hese incl)de an ex'anded a)dit re'ort *hich offers sco'e to inform )sers of *hat a)ditors act)ally doH ,roadenin+ the role and res'onsi,ility of a)ditors in the areas of fra)d0 ille+al acts and stren+thenin+ the 'erceived inde'endence of a)ditors.1? he im'lementation of a)ditin+ ed)cation has ,een s)++ested as a means of red)cin+ the ex'ectations +a'.1@ A)dit ed)cation *o)ld s)rely hel' red)ce the ex'ectations +a' ,)t *o)ld not on its o*n ,e s)fficient to solve the 'ro,lem of all com'onents of the ex'ectations +a' . A)dit ed)cation *o)ld 'artly solve the 'ro,lem of )nreasona,le ex'ectations ,)t not address deficient standards and s),9 standard 'erformance. 5orter adds that in order for a)dit ed)cation to ,e effective0 society sho)ld ,e ed)cated on d)ties *hich may reasona,ly ,e ex'ected of a)ditors.46 he Mac%onald "ommission ex'ressed their o'inion that a)dit ed)cation *as )nlikely to ,e effective in red)cin+ the +a' since it concl)ded that for the most 'art0 '),lic ex'ectations *ere reasona,le and achieva,le.41 Sikka et al also ar+)e that he ex'ectations +a' can ,e addressed ,y the a)dit 'rofession *idenin+ the res'onsi,ilities of a)ditors.44 &ven if ne* standards *ere im'lemented0 the iss)e of enforcement is another matter *hich needs to ,e addressed. As a res)lt0 enforcement and a)dit lia,ility meas)res are also reC)ired. &lements of the )ser mis)nderstandin+ +a' investi+ated in the st)dy ,y 5ierce and Iilcommins incl)de (i) %)ties H (ii) &thical and le+islative frame*ork (iii) 1ia,ility (iv) A)dit re'ort. he d)ties3 com'onent consists of fra)d and error and many commentators have fo)nd the ex'ectations +a' to ,e *idest in relation to detection and re'ortin+ of fra)d.48 he second element 0 the ethical and le+islative frame*ork incl)ded iss)es s)ch as a)ditor inde'endence0 a)ditor a''ointment and a)dit re+)lation.4: #n relation to a)ditor lia,ility0 (loeck and de 2a+er 47 ar+)e that the "a'aro case added a lia,ility +a' to the ex'ectations +a' since the '),lic does not kno* to *hom the a)ditor is lia,le. ;o*ever0 it co)ld also ,e ar+)ed that the s),standard 'erformance com'onent of the ex'ectations +a'
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5 Sikka0 A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 at '+ 1 i,id See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668. Sikka et al ar+)e that d)e to social conflict the meanin+ of social 'ractices contin)ally face challen+es and the +a' ,et*een com'etin+ meanin+s of a)dit cannot ,e eliminated. See B 5ierce and M Iilcommins 3 he A)dit &x'ectations (a' / he !ole of A)ditin+ &d)cation3 Du$lin *ity University 2usiness #chool )esearch :apers -..=%-..A $o 18 at ' 8 i,id i,id i,id 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 See B 5ierce and M Iilcommins 3 he A)dit &x'ectations (a' / he !ole of A)ditin+ &d)cation3 Du$lin *ity University 2usiness #chool )esearch :apers -..=%-..A $o 18 at ' 7 i,id ( 1@@8) H see B.5ierce and M. Iilcommins 3 he A)dit &x'ectations (a' / he !ole of A)ditin+ &d)cation3 Du$lin *ity University 2usiness #chool )esearch :apers -..=%-..A $o 18 at ' =

already em,races the lia,ility +a' as a)ditors are enco)ra+ed to )nder 'erform in the a,sence of any stat)tory d)ty of care to third 'arty stakeholders E es'ecially since no economic incentives exist for them to o*e a d)ty of care to s)ch stakeholders. %) ;#S O!#"A1 BA"I(!OU$% OF ;& &G5&" A #O$S (A5

he ori+ins of a)ditin+ date ,ack to (reek0 &+y'tian and earlier civilisations and *hilst there *as the emer+ence of lar+e man)fact)rin+ or+anisations in the ei+hteenth cent)ry0 the )s)al association ,et*een a)dits and fra)d detection remained. 4= o*ards the end of the nineteenth cent)ry0 a more 'rominent acco)ntancy 'rofession associated a)dits *ith fra)d detection even tho)+h there *as o''osition ,y those *ho ar+)ed that it *as )nreasona,le to ex'ect the a)ditor to ex'ose fra)d)lent acts.4B 1a*rence %icksee3s text9,ook is often considered to ,e the first major a)ditin+ text9,ook and his ori+inal ,ook *hich *as '),lished in 1?@404? stated clearly that the sco'e of an a)dit incl)ded namely / the detection of fra)d0 technical errors and errors of 'rinci'le.4@ ;e also stated that the detection of fra)d *as a most im'ortant 'ortion of the a)ditor3s d)ties and that the *hole d)ty of the a)ditor *as to ascertain the exact state of the client3s affairs on a certain date.86 ;o*ever 0 other a)thors s)ch as !o,ertson and Mont+omery ar+)ed on the contrary and considered the detection of fra)d to ,e a secondary a)dit o,jective.81 ;)m'hrey et al noted that the 'osition ado'ted ,y the 'rofession in Britain d)rin+ the t*entieth cent)ry 'layed do*n any s)++estion that a)ditors had res'onsi,ility linked to fra)d a'art from that *hich arose from the need to confirm the tr)th and fairness of financial statements.84 "handler et al88 revie*ed the develo'ment of a)dit o,jectives ,et*een 1?:6 and 1@:6 and concl)ded that the 'rimary o,jective in relation to '),lic com'anies ,et*een 1?86 and 1?=6 *as the verification of financial statements and that more em'hasis *as ')t on fra)d detection in the late nineteenth cent)ry.8: hey also added that the 'rimary a)dit o,jective reverted ,ack to financial statements verification in the early 'art of the t*entieth cent)ry.87 ;o*ever0 accordin+ to some0 in the early 'art of the t*entieth cent)ry0 fra)d detection contin)ed to ,e re+arded as a major a)dit o,jective.8= Accordin+ to Bro*n08B the conf)sion over a)dit o,jectives *as finally resolved after 1@:6 and fra)d detection *as +enerally acce'ted to ,e a secondary o,jective. ;o*ever0 the o,jectives of a)ditin+ have not ,een adj)sted to conform *ith o'erational 'rocesses of a)ditin+.8? For exam'le0 selective sam'lin+ *o)ld have corres'onded to a 'rimary o,jective of financial statements verification *hilst 166J testin+ *o)ld corres'ond *ith the detection of fra)d.8@ One im'ortant difference ,et*een mid9to9late Kictorian &n+land and more recent times is the 'resence or lack of 'resence of a)dit ex'ectations.:6 Kictorian &n+land is seen as a time of evol)tion and form)lation of
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See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 at ' @ See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 ' 11 1 %icksee 3A)ditin+ / A 5ractical Man)al for A)ditors3 (1?@4) 1 %icksee 3A)ditin+ / A 5ractical Man)al for A)ditors3 (1?@4) ' = #,id ' = See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 at ' 14 See " ;)m'hrey 5 MoiMer and S )rley 3 5rotection A+ainst %etection / he "ase of A)ditors and Fra)d3 Acco)ntin+0 A)ditin+ and Acco)nta,ility 2o)rnal0 Kol)me = $o 1 ' 77 ! A "handler 2 ! &d*ards and M Anderson 3"han+in+ 5erce'tions of the !ole of the "om'any A)ditor / 1?:6 E 1@:63 Acco)ntin+ and B)siness !esearch Kol 48 A)t)mn 1@@8 '' ::89:7@ i,id i,id See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 ' 18 See ! & Bro*n - "han+in+ A)dit O,jectives and echniC)es. 0 he Acco)ntin+ !evie* 8B '' =@= E B68 (1@=4) M 5o*er - he A)dit Society / !it)als of Kerification. ' 41 i,id &)92in and 5 "o,,in 3 A !e Kisitation of the 3A)dit &x'ectations (a'3 / 2)dicial and 5ractitioner Kie*s on the !ole of the A)ditor in late9 Kictorian &n+land3 4667

ex'ectations and *hilst +a's existed in the nineteenth cent)ry0 they *ere mainly to do *ith inconsistencies and not ex'ectations.:1 he differin+ inconsistent ex'ectations ,et*een the j)diciary and the a)ditin+ 'rofession is ill)strated in the landmark cases of 1ondon and (eneral Bank ($o 4) >1?@7A and Iin+ston "otton Mill ($o 4) >1?@=A in *hich the UI "o)rt of A''eal delivered t*o si+nificant j)d+ements. 1ondon and (eneral Bank ($o4)>1?@7A his case concerned the adeC)acy of sec)rity on ,ank loans 0 *hether shareholders had ,een deceived as to the condition of the com'any0 *hether dividends had ,een 'aid o)t of ca'ital and not availa,le 'rofits. he first instance decision had ,een a+ainst the defendants ( the a)ditor). ;o*ever in the A''eal "o)rt0 1indley 12 overt)rned the 'revio)s co)rt3s decision and his o'inion on the a)ditor3s d)ty is as follo*s / :4 3.......the d)ty of an a)ditor is to convey information0 not to aro)se inC)iry and altho)+h an a)ditor mi+ht infer from an )n)s)al statement that somethin+ *as serio)sly *ron+0 it ,y no means follo*ed that ordinary 'eo'le *o)ld have their s)s'icions aro)sed.3 1indley 12 also stated that it *as not the a)ditor3s d)ty to +)arantee the ,ooks sho*in+ the tr)e 'osition of the com'any3s affairs or to +)arantee that the ,alance9sheet *as acc)rate. Iin+ston "otton Mill ( $o 4) > 1?@7A he first instance decision *as one *hich involved the a)ditor relyin+ on mana+ers3 certificates *itho)t the a)ditor cond)ctin+ a 'hysical o,servation of the inventory or takin+ ste's to confirm val)ation. #n that decision0 Ka)+han <illiams 2 fo)nd that the a)ditors and directors *ere lia,le for dividends 'aid from non9 existent 'rofits. ;o*ever dama+es so)+ht a+ainst them in res'ect of conseC)ent insolvency on the ,asis of tort *as denied. here *as a lot of concern ,y the a)dit 'rofession follo*in+ this decision and the validity of mana+ers3 certificates *as also called into C)estion. ;o*ever 1o'es 12 in the A''eal "o)rt overt)rned the decision in his famo)s j)d+ement /

#t is the d)ty of an a)ditor to ,rin+ to ,ear on the *ork he has to 'erform that skill0 care and ca)tion *hich a reasona,ly com'etent0 caref)l and ca)tio)s a)ditor *o)ld )se. <hat is reasona,le skill0 care and ca)tion m)st de'end on the 'artic)lar circ)mstances of each case. An a)ditor is not ,o)nd to ,e a detective or as *as said to a''roach his *ork *ith s)s'icion or *ith a fore+one concl)sion that there is somethin+ *ron+. ;e is a *atchdo+ ,)t not a ,loodho)nd. ;e is j)stified in ,elievin+ tried servants of the com'any in *hom confidence is 'laced ,y the com'any 9:8

hese t*o cases *ere the fo)ndations of certain a)ditin+ standards *hich foc)ssed on the acce'ted fra)d and error o,jectives and 'laced the nat)re of the a)dit on centre sta+e.:: A'art from esta,lishin+ that the a)ditor *as not ex'ected to fish o)t every fra)d it esta,lished the )se reasona,le care and skill in his handlin+ of relevant ,ooks and records.:7 ;o*ever0 the fact that 1ondon and (eneral Bank ( $o 4) >1?@7A := and Iin+ston "otton Mill ($o 4) >1?@=A confirmed the -reasona,leness. test did not com'letely remove any concern created d)e to the s),jective nat)re of the reasona,leness test.:B %)rin+ the early years of the t*entieth cent)ry0 fra)d detection as an a)dit o,jective came to ,e re'laced ,y the o,jective of checkin+ that the a''ro'riate acco)ntin+ standards had ,een ado'ted and correctly )sed in constr)ctin+ financial statements.:? Bet*een 1@:6 and 1@B60 fra)d detection seemed to ,e re+arded as a secondary a)dit o,jective even tho)+h this move had not ,een a''roved ,y the "om'anies Acts of 1@:? and
:1 :4 :8 ::

:7 := :B

:?

i,id See '' =?4 9=?7 See ''4?? 9 4?@ &)92in and 5 "o,,in 3 A !e Kisitation of the 3A)dit &x'ectations (a'3 / 2)dicial and 5ractitioner Kie*s on the !ole of the A)ditor in late9 Kictorian &n+land3 4667 #,id 5' =?4 9 =?8 &)92in and 5 "o,,in 3 A !e Kisitation of the 3A)dit &x'ectations (a'3 / 2)dicial and 5ractitioner Kie*s on the !ole of the A)ditor in late9 Kictorian &n+land3 4667 See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668' 18

1@=B. he re9emer+ence of fra)d detection as an a)dit o,jective occ)rred d)rin+ the hatcher administration and *as also stron+ly hi+hli+hted d)rin+ the mid9 1@B6s 'ro'erty and secondary ,ankin+ crisis.:@ #n 1@?70 a *orkin+ 'arty of the #nstit)te of "hartered Acco)ntants in &n+land and <ales (#"A&<) *as esta,lished to consider the matter relatin+ to a)ditors3 res'onsi,ilities in relation to fra)d. 76 his *as 'rom'ted as a res)lt of criticisms a,o)t the a)dit f)nction follo*in+ the colla'se of 2ohnson Matthey Bankers.71 he colla'se of 2ohnson Matthey Bankers in 1@?: also ,ro)+ht a,o)t C)estions on re+)lation of financial markets and the +overnment ,ein+ )nha''y *ith the role of a)ditors0 *anted to im'ose )'on a)ditors a d)ty to re'ort fra)d to the Bank of &n+land even *itho)t the kno*led+e of the client or+anisation. 74 #n res'onse to this0 the #nstit)te of "hartered Acco)ntants in &n+land and <ales ar+)ed a+ainst 1ord 2)stice Bin+ham3s recommendations for an im'osition of stat)tory d)ty. he *orkin+ 'arty of the #nstit)te of "hartered Acco)ntants in &n+land and <ales s)++ested instead that com'anies sho)ld ,e reC)ired ,y stat)te to maintain adeC)ate systems of internal control.78 5ro,lems *hich co)ld threaten the a)ditor client relationshi'0 d)ty of confidentiality *ere mentioned and these iss)es tho)+h a''arent seemed more im'ortant than the 'rotection of the '),lic3s interests. #t took another three years for the #nstit)te of "hartered Acco)ntants in &n+land and <ales to iss)e draft +)idance on the a)ditor3s res'onsi,ility for detectin+ fra)d and other irre+)larities. 7: his doc)ment *as amended f)rther and '),lished as a f)ll o'erational +)ideline in Fe,r)ary 1@@6.77 Mana+ement res'onsi,ility for settin+9)' adeC)ate systems of internal controls is hi+hli+hted ,)t a)ditors are reminded to 'lan the a)dit to 'rovide a -reasona,le ex'ectation. of detectin+ material misstatements.7= -Materiality. has ,een inter'reted in 'rofessional +)idance as the de+ree of tolera,le or acce'ta,le error in financial statements ,)t like the term -reasona,le ex'ectation. it is not s'ecified ,eyond this.7B #t is im'ortant that f)rther clarification in relation to these terms are 'rovided as the C)estion to *hether a)ditors have a res'onsi,ility to detect fra)d de'ends on the inter'retation of these terms.7? he +)idance doc)ment does not deny the a)ditor3s d)ty to detect fra)d E ho*ever0 it C)alifies this d)ty ,y the -reasona,le ex'ectation. term.7@ &) ;& !O1& OF AU%# #$( S A$%A!%S #$ !&%U"#$( "once't of Materiality ;& &G5&" A #O$S (A5

he #nternational Standard on A)ditin+ ( #SA UI and #reland ) 846 esta,lishes standards and 'rovides +)idance on the conce't of materiality and ho* this relates to a)dit risk. =6 he conce't of -materiality. is defined in the #nternational Acco)ntin+ Standards Board3s -Frame*ork for the 5re'aration and 5resentation of Financial Statements. as follo*s / 9 #nformation is material if its omission or misstatement co)ld infl)ence the economic decisions of )sers taken on the ,asis of the financial statements. Materiality de'ends on the siMe of the item or error j)d+ed in the 'artic)lar circ)mstances of its omission or misstatement. h)s0 materiality 'rovides a threshold or c)t9off 'oint rather than ,ein+ a 'rimary C)alitative characteristic *hich information m)st have if it is to ,e )sef)l 9 he 'ro,lem *ith this definition revolves ro)nd the *ord -j)d+ed.. he assessment of materiality is ,ased on 'rofessional j)d+ement.=1
:@

76 71 74

78 7: 77 7= 7B 7? 7@ =6 =1

See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 ' 1: M .5o*er 3 he A)dit Society / !it)als of Kerification3 at ' 48 M 5o*er 3 he A)dit Society / !it)als of Kerification3 at ' 48 See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 1= M 5o*er 3 he A)dit Society / !it)als of Kerification3 at ' 48 M 5o*er 3 he A)dit Society / !it)als of Kerification3 at ' 48 i,id i,id i,id M 5o*er 3 he A)dit Society / !it)als of Kerification3 at ' 48 i,id See Nhtt'/DD***.as,.co.)kDa',D'),licationsDindex.cfmO #SA (UI and #reland) 846 . :

#n 'lannin+ the a)dit0 the a)ditor esta,lishes an acce'ta,le level of materiality in order to detect C)antitatively material misstatements.=4 #n addition0 ,oth the amo)nt ( C)antity ) and nat)re (C)ality ) of misstatements need to ,e considered.=8 he a)ditor also needs to consider the 'ossi,ility of misstatements of relatively small amo)nts *hich co)ld c)mm)latively have a material effect on the financial statements.=: An error co)ld ,e 'otentially material if it is re'eated each month for a 'artic)lar month end 'roced)re. =7 Materiality at ,oth the entire financial statement level and in relation to classes of transactions0 acco)nt ,alances and disclos)res also need to ,e considered.== 1e+al and re+)latory reC)irements may also affect materiality.=B From the a,ove definition and standard0 it can ,e seen that a lot of s),jective iss)es affect the conce't of materiality. 1e+al and re+)latory iss)es *hich may affect materiality need to ,e more clearly defined and an error estimate +iven ,y the A)ditin+ 5ractices Board0 the A5B. A lot of matters left to ,e j)d+ed ,y the individ)al a)ditor sho)ld ,e also ,e determined ,y the A5B and clearly set o)t in the standards. -Material si+nificance. is defined ,y #SA (UI and #reland) 476 Section B / 3A matter or +ro)' of matters is normally of material si+nificance to a re+)lator3s f)nction *hen0 d)e either to its nat)re or its 'otential financial im'act0 it is likely of itself to reC)ire investi+ation ,y the re+)lator.3=? <hilst j)d+ement is also reC)ired ,y the a)ditor in determinin+ *hether a matter is or likely to ,e of material si+nificance0 material si+nificance does not have the same meanin+ as materiality in the context of financial a)dit.=@ A 'artic)lar event *hich may have little im'act on the financial statements of an entity may ,e of a nat)re or ty'e that is likely to chan+e the 'erce'tion of the re+)lator.B6 #SA ( UI and #reland ) 4:6 / he A)ditor3s !es'onsi,ility to "onsider Fra)d in an A)dit of Financial Statements #n carryin+ o)t the a,ove f)nction0 the a)ditor is ex'ected to maintain a sce'tic attit)de thro)+ho)t the a)dit des'ite his 'ast ex'erience *ith the entity a,o)t the honesty and inte+rity of mana+ement.B1 he a)ditor also considers re'orts from the de'osit taker3s com'liance de'artment0 le+al de'artment and money la)nderin+ re'ortin+ officer *ith revie*s )ndertaken ,y third 'arties s)ch as re'orts 're'ared )nder section 1== of the Financial Services and Markets Act 4666.B4 F) &GAM#$#$( ;& SO"#A1 F!AM&<O!I OF ;& AU%#

Sikka et al have ar+)ed that meanin+s of the a)dit are determined ,y 'artic)lar social arran+ements *hich are al*ays s),ject to chan+e and as a res)lt it is diffic)lt for the a)dit to have a fixed meanin+. B8 &ven tho)+h social and +lo,al chan+es have sha'ed the role of the a)ditor and hence the role of an a)dit0 some com'onents *ithin the definition of an a)dit can ,e fixed. he advent of technolo+y0 internal control systems have definitely transformed the environment *ithin *hich an a)dit o'erates. 5eriodical s)rveys sho)ld ,e carried o)t in the +eneral '),lic to ascertain *hat many 'erceive to ,e the role of an a)ditor. hese s)rveys sho)ld ,e carried o)t only after the '),lic has ,een s)fficiently ed)cated a,o)t the role of the a)dit.
=4 =8 =: =7 == =B =? =@ B6 B1 B4 B8

#SA (UI and #reland ) 846 . 7 i,id #SA (UI and #reland) 846.= i,id #SA ( UI and #reland) 846 . B i,id See Nhtt'/DD***.as,.co.)kDa',D'),licationsDindex.cfmO #SA ( UI and #reland ) 476 'ara+ra'h =4 i,id #SA (UI and #reland) 4:6 'ara+ra'h 4: #SA (UI and #reland) 'ara+ra'h :4 See 5 Sikka A 5)xty ; <illmott and " "oo'er 3 he #m'ossi,ility of &liminatin+ the &x'ectations (a' / Some heory and &vidence. %ecem,er 4668 at ' 7

After this0 draft 'ro'osals sho)ld ,e made *here,y '),lic is still involved and is invited to s),mit their ideas or challen+e any 'ro'osals. he draft 'ro'osals on the definition of an a)dit sho)ld ,e a more acce'ta,le definition ,y 'o')lar consens)s E as realised thro)+h the o'inions received from s)rveys carried o)t on the '),lic. here sho)ld ,e a relatively o,jective com'onent *ithin the definition of an a)dit *hich *o)ld ,e the '),lic3s reasona,le ex'ectations. hese ex'ectations co)ld ,e deemed reasona,le as '),lic *o)ld already have ,een ed)cated a,o)t the role of a)ditors0 nat)re of a)dits ,efore a s)rvey is carried o)t to find o)t *hat the '),lic *ant from an a)dit. he s),jective com'onent definition of an a)dit *o)ld ,e revised from time to time E de'endin+ in the social 0 environmental chan+es. he o,jective com'onent *o)ld also ,e revised from time to time ,ased on 'eriodical s)rveys. #n the a,sence of an im'osition of stat)tory d)ty on a)ditors0 the fra)d and error detection role of an a)ditor seems to ,e a role *hich sho)ld ,ecome a 'rimary a)dit o,jective E as this *o)ld hel' ,rin+ a,o)t some form of acco)nta,ility. Of co)rse0 the a)ditor cannot ,e ex'ected to sniff o)t every form of fra)d E only material ones. he cases of &nron and 5armalat certainly involved h)+e amo)nts of money *hich are deemed si+nificant and material from a s),jective or an o,jective 'oint of vie*. <hy *ere the a)ditors involved not a,le to detect s)ch material amo)ntsL he re instatement of fra)d detection (and also error detection) as a 'rimary a)dit o,jective *hich constit)tes a relatively fixed com'onent definition of an a)dit (as the '),lic has every ri+ht to ex'ect this d)ty from the a)ditor E 'rovided iss)es relate to material fra)d) *o)ld certainly hel' ,rin+ some form of acco)nta,ility *ithin the a)dit 'rofession. "O$"1US#O$ he Fra)d and &rror %etection !ole of an A)dit he meanin+ attri,)ted ,y )sers of financial statements as re+ardin+ the definition of an a)dit cannot ,e fixed ,)t elements *ithin the definition of *hat constit)tes an a)dit can E to a relative extent. S)ch com'onents *ithin the definition of an a)dit incl)de the fra)d and error role. #n the a,sence of a stat)tory d)ty of care o*ed ,y a)ditors to third 'arty stakeholders0 this role of fra)d and error detection is one *hich is enco)ra+ed and if the '),lic (and more s'ecifically0 )sers of financial statements) *ere ed)cated a,o)t this role0 it *o)ld ,e deemed to ,e a reasona,le ex'ectation. P)estionnaires sho)ld ,e +iven o)t and s)rveys cond)cted freC)ently to ens)re that this role is one *hich is 'erceived ,y the +reater 'art of )sers of financial information as that *hich constit)tes the role of the a)ditor. Users of financial information sho)ld also ,e made a*are that the fra)d and error role is a''lica,le to materia! misstatements. he role of the a)ditor in verifyin+ financial statements and 'rovidin+ an o'inion in relation to those statements is one *hich relies on too m)ch j)d+ment0 is too s),jective and creates +reater 'ossi,ilities of *idenin+ the ex'ectations +a'. #n concl)din+ this cha'ter0 vario)s *ays thro)+h *hich the individ)al com'onents of the ex'ectations +a' co)ld ,e red)ced are addressed / he S), Standard 5erformance "om'onent Brin+in+ ,ack the fra)d and detection role sho)ld hel' red)ce this com'onent. 5rem Sikka adds that the threat of a ')nitive action ,y the % # co)ld create e%&#&mi% incentives for acco)ntin+ firms to reflect on the conseC)ences of their actions E as a red)ction in their reven)e0 d)e to fines inc)rred0 *o)ld make them think t*ice ,efore ind)l+in+ in acts *ith ne+ative conseC)ences. #n contrast0 ;)e'kes B: ar+)es that the threat of liti+ation co)ld lead to f)rther concentration in the a)ditin+ ind)stry and also increase the trend to*ards defensive a)ditin+ E *here,y a)dit 'artners tend to inter'rete r)les 'rescri'tively rather than exercisin+ s),jective j)d+ment. %eficient Standards "om'onent
B:

See &;( ;)e'kes - he &xternal A)ditor and the ,ank S)'ervisor / - Sherlock ;olmes and %octor <atsonL. 0ournal of 2anking )egulation, Colume / >o - D 2 4667 at ' 16

Unam,i+)o)s *ordin+s *ithin acco)ntin+ standards sho)ld ,e avoided and clearer definitions 'rovided to +ive the a)ditor a ,etter )nderstandin+ a,o)t his d)ties.5ost9 &nron reforms *hich led to the A)ditin+ 5ractices Board ,ein+ res'onsi,le for settin+ standards on o,jectivity0 inte+rity and inde'endence sho)ld im'rove the standard settin+ 'rocess and 'rovide more consistency to the *ay standards are inter'reted. he year 4667 *as a year of major chan+e for many com'anies *ith the introd)ction of international acco)ntin+ standards and ne* a)ditin+ standards.B7 5),lic concerns a,o)t the contin)in+ relevance of the -tr)e and fair vie*. have ,een hi+hli+hted es'ecially *ith the advent of the introd)ction of international standards on acco)ntin+ and a)ditin+ in the UI.B= !es'ondin+ to this0 the F!" '),lished a re'ort in A)+)st 4667 in *hich it concl)ded that the -tr)e and fair vie*. contin)es to remain a cornerstone in the UI system of financial re'ortin+.BB Unreasona,le &x'ectations !easona,le ex'ectations of the '),lic co)ld ,e ascertained thro)+h ed)cation of the '),lic a,o)t the role of the a)ditor and the a)ditin+ standards relatin+ to his role. 5),lic ed)cation a,o)t the a)ditor3s role co)ld ,e facilitated thro)+h ann)al shareholders3 meetin+s and other events *hich are or+anised for the ')r'oses of ed)catin+ )sers of financial information. As mentioned n)mero)s times in this cha'ter0 it *o)ld ,e more feasi,le to ed)cate )sers of financial information as o''osed to mem,ers of the +eneral '),lic E es'ecially since not all mem,ers of the '),lic )se financial information. ;)m'hreyB? descri,es the iss)e of a)ditor inde'endence as -+oin+ to the heart of the a)dit ex'ectations de,ate..B@
?6

he reality and notion of a)ditor inde'endence is vital to '),lic confidence in financial

re'ortin+. 5),lic confidence in financial markets and the cond)ct of '),lic interest entities relies 'artly on the credi,ility of the o'inions and re'orts +iven ,y a)ditors in relation *ith financial a)dits.?1 #t co)ld ,e inferred that this iss)e of a)ditor inde'endence relates to the role of the a)ditor and that factors *hich co)ld 'revent the a)ditor from 'erformin+ his ex'ected role E hence com'romisin+ his inde'endence0 co)ld definitely increase the ex'ectations +a'. his is not s)r'risin+ as any misconce'tion of ( ,y the '),lic or )sers of financial information) or diversion from the a)ditor3s ex'ected role ( ,y the a)ditor) contri,)tes to increasin+ the ex'ectations +a'. As a res)lt of the additional role of a)ditors and re'ortin+ acco)ntantsDskilled 'ersons of financial services firms in re'ortin+ to s)'ervisors )nder the Financial Services and Markets Act 4666 and )nder 'rior le+islation0 there is +reater 'ossi,ility for f)rther mis)nderstandin+s E th)s increasin+ the ex'ectations +a' f)rther.?4 ;o*ever0 ar+)ments have ,een made in favo)r of the d)al nat)re of the a)ditor. #ntervie*ees from firms have seen little conflict ,et*een the d)al role of a)ditors and re'ortin+ acco)ntantsDskilled 'ersons vie*in+ the iss)e from a cost ,enefit analysis.?8
B7 B= BB B?

B@

?6

?1

?4

?8

See !)* nnual )eport 2''=D 2''A See !)* nnual )eport 2''=D2''A at ' = i,id " ;)m'hrey De$ating udit "xpectations cha'ter 4 in M Sherer and S )rley (eds) *urrent Issues in uditing ( hird &dition) 1@@B0 5a)l "ha'man 0 1ondon 5 %e*in+ and 5 O !)ssell The )ole of uditors, )eporting ccountants and #killed :ersons in UK !inancial #ervices #upervision #nstit)te of "hartered Acco)ntants of Scotland (4667) 8 % Sin+h 3 he !ole of hird 5arties in Bankin+ !e+)lation and S)'ervision3 0ournal of International 2anking )egulation Kol)me : $o 8 0 46680 at '+ 1? &thical Statement 1 #nte+rity0 o,jectivity and inde'endence 'ara+ra'h : Nhtt'/DD***.as,.co.)kDa',D'),licationsDindex.cfmO 5 %e*in+ and 5 O !)ssell The )ole of uditors, )eporting ccountants and #killed :ersons in UK !inancial #ervices #upervision #nstit)te of "hartered Acco)ntants of Scotland (4667) 8 #,id ' 166

Meas)res have ,een ado'ted ,y the FSA to safe+)ard a+ainst 'ossi,ilities of a conflict of interest. "ha'ter 7 of the FSA S)'ervision Man)al 'rovides exam'les of circ)mstances *here the FSA may )se skilled 'ersons. he FSA may nominate or a''rove the a''ointment of the a)ditor of a ,ank as a skilled 'erson if it is cost effective to do so ,)t also takes into acco)nt any conflicts the a)ditor may have in relation to the matter to ,e re'orted on. here are also defined and limited circ)mstances in *hich a firm can )se skilled 'ersons.?: S)fficient meas)res are in 'lace to 'rotect the a)ditor3s inde'endence?7 E hence no threat of *idenin+ the ex'ectations +a'. ;o*ever more *ork is needed to ens)re that the role of the a)ditor is ,etter defined and that the 'ossi,ility of )n*arranted lia,ilites and risks are avoided. RE'ERENCES Bro*n !& Cha#(i#( A )it O*+e%ti,e$ a#) Te%h#i- e$ 0 he Acco)ntin+ !evie* 8B

"handler !A &d*ards 2! and Anderson M (1@@8) Cha#(i#( Per%epti&#$ &f the R&!e &f the C&mpa#y A )it&r / 1?:6 E 1@:63 Acco)ntin+ and B)siness !esearch Kol 48 A)t)mn %e*in+ 5 and !)ssell 5O (4667) The R&!e &f A )it&r$. Rep&rti#( A%%& #ta#t$ a#) S/i!!e) Per$&#$ i# U0 'i#a#%ia! Ser,i%e$ S per,i$i&# #nstit)te of "hartered Acco)ntants of Scotland %icksee 1 A )iti#( : A Pra%ti%a! Ma# a! f&r A )it&r$ &) 2in and "o,,in 5 (4667) A Re 1i$itati&# &f the 2A )it E"pe%tati&#$ Gap2 : 3 )i%ia! a#) Pra%titi&#er 1ie4$ &# the R&!e &f the A )it&r i# !ate5 1i%t&ria# E#(!a#) &thical Statement 1 #nte+rity0 O,jectivity and #nde'endence Financial Services and Markets Act 4666 Financial !e'ortin+ "o)ncil Ann)al !e'ort 4667D466= ;)e'kes &;( (4667) The E"ter#a! A )it&r a#) the *a#/ S per,i$&r : 6 Sher!&%/ H&!me$ a#) D&%t&r 7at$&#? 2o)rnal of Bankin+ !e+)lation0 Kol)me B ;)m'hrey " (1@@B) De*ati#( A )it E"pe%tati&#$ M Sherer and S )rley (eds) ")rrent #ss)es in A)ditin+ ( hird &dition) 5a)l "ha'man 0 1ondon ;)m'hrey " 5 MoiMer and S )rley Pr&te%ti&# A(ai#$t Dete%ti&# : The Ca$e &f A )it&r$ a#) 'ra )2 A%%& #ti#(0 A)ditin+ and Acco)nta,ility 2o)rnal0 Kol)me = $o 1 #SA (UI and #reland) 4:6 Statements #SA (UI and #reland) 476 Section B / Material si+nificance #SA (UI and #reland) 846 1ondon and (eneral Bank ($o 4) >1?@7A
?:

he A)ditor3s !es'onsi,ility to "onsider Fra)d in an A)dit of Financial

?7

Accordin+ to cha'ter 7 of the S)'ervision Man)al0 the FSA stated that firms are to a''oint skilled 'ersons only for s'ecific ')r'osesH not to )se them as a matter of ro)tineHto )se skilled 'ersons only after havin+ considered alternativesH to )se skilled 'ersons ,eca)se of the added val)e to ,e +ained d)e to their ex'ertise or kno*led+ea and not ,eca)se of reso)rce restraintsH to take into acco)nt cost im'lications and to )se the tool in a foc)sed and 'ro'ortionate *ay. See M Ojo 3A)dit #nde'endence / #ts #m'ortance to the &xternal A)ditor3s !ole in Bank !e+)lation and S)'ervision.

1i++io "% (1@B:) The E"pe%tati&# Gap : The A%%& #ta#t2$ 7ater!&& 2o)rnal of "ontem'orary B)siness Kol)me 8 $o 8 Ojo M (466=) A )it&r I#)epe#)e#%e 8 It$ Imp&rta#%e t& the E"ter#a! A )it&r2$ R&!e i# 9a#/i#( Re( !ati&# a#) S per,i$i&# (5a'er 'resented at the 466= (lo,al "onference on B)siness and Finance0 San 2ose0 "osta !ica 2)ne 40 466=) 5ierce B and Iilcommins M (1@@7D1@@=) The A )it E"pe%tati&#$ Gap : The R&!e &f A )iti#( E) %ati&#2 Du$lin *ity University B)siness School !esearch 5a'ers 5orter B (1@@8) A# Empiri%a! St )y &f the A )it E"pe%tati&# 8 Perf&rma#%e Gap Acco)ntin+ and B)siness !esearch Kol 4: no @8 5o*er M (1@@@) The A )it S&%iety : Rit a!$ &f 1erifi%ati&# Oxford University 5ress !e Iin+ston "otton Mill >1?@=A 4 "h 4B@ at 4??0 "A Sikka 5 5)xty A <illmott ; and "oo'er " (4668) The Imp&$$i*i!ity &f E!imi#ati#( the E"pe%tati&#$ Gap : S&me The&ry a#) E,i)e#%e Sin+h % (466=) The R&!e &f Thir) Partie$ i# 9a#/i#( Re( !ati&# a#) S per,i$i&# 2o)rnal of #nternational Bankin+ !e+)lation Kol)me : $o 8