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NARROWING AUDIT EXPECTATION GAP THROUGH CORPORATE GOVERNANCES,

CHAPTER ONE

GENERAL INTRODUCTION

1.1 BACKGROUND OF STUDY 

Business transactions are recorded as the basis for financial reporting to stakeholders. Owing to separation of ownership from management, auditing of entities’ financial statements is a crucial necessity (Okafor and Otalor, 2013). The audit function is entrusted with the task of expressing an opinion on the reality of the reported economic activities of enterprises. However, Salehi, Mansoury and Azary (2009) posit that auditors may not check out the reality and this reality may fall short of users’ expectations; this shortfall in audit effectiveness is broadly labelled as Audit Expectation Gap (AEG). AEG is the difference between the actual nature and objective of an audit and that perceived by users of audited financial statements.

1.2 STATEMENT OF THE PROBLEM

AEG became prominent in the accounting profession since mid-1970s and it is continuously debated till date. According to UK Essays, in the 1970s and 1980s, massive corporate failures have caused the profession to be criticized by the public. These failures ranged from Equity Funding (an insurance firmbased in Los Angeles) in 1973, Drysdale Government Securities and Penn SquareBank in 1982 to ESM Government Securities, which was the first to appear before a US federal court as a result of a 340 million dollar fraud in 1985. Auditors were then compelled to battle with legal suits taken against them. The increasing number of corporate failures and abuses, alleged audit failures and lawsuits against renowned accounting and audit firms generated concern beyond the profession. These called for investigations and in defence, the profession defined AEG, focusing on public criticism, to be the gap between the public’s expectations of auditors and auditors’ perceived performance.

Corporate failures, financial scandals and audit shortcomings in advanced countries subsequently impacted on the audit profession in developing countries. In Nigeria, for instance, Adeyemi and Uadiale (2011) identified the major corporate financial irregularities and related fraud to include Wema Bank, Finbank, Cadbury, Spring Bank and others. These scandals captured the attention of both investors and regulators, thus affecting their investing and divesting decisions.

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