Making shareholders literate in auditing

Recently, this writer attended an annual general meeting of a listed company. Among the six agenda that were on the to-do list of the meeting, the second was the adoption of the financial statements. Before adopting the financial statements, shareholders had detailed discussion on the financial statements. They expressed their dissatisfaction on the performance of the company due to a sharp reduction in the net profit after tax deduction in that particular year compared to the previous year.  Finally, however, they adopted the financial statements.
The fifth agenda was to appoint auditors and fix their remuneration. As per the Section 210 of the Companies Act 1994, the retiring auditor is eligible for a re-appointment. The Board of Directors of the company proposed to re-appoint the retiring auditor with a slight raise in his fee as an inflationary adjustment. But the shareholders did not accept this. They blamed the auditor for the poor financial performance of the company. Some of the shareholders even were demanding a reduction in the audit fee. They were saying that the auditor did not perform their duties  diligently and therefore, the company ended up with a lower net profit after tax.
This very event can be taken as evidence showing an obvious expectation gap between the general investors and the auditors. An expectation gap like this though common all over the world is perhaps wider in Bangladesh. Researches on the audit expectation gap have demonstrated that the role of the auditors is poorly and sometimes wrongly understood. Investors think that the auditors prepare financial statements, and therefore they are responsible for wrong financial information. They also expect that auditors will detect and report material fraud and irregularities, among other things. On the other hand, auditors say that they are not responsible for prevention and detection of fraud as per the Bangladesh Standard on Auditing (BSA) 240. These differences in understanding have created a gap between the auditors and the users of accounting information or stakeholders.
The role of an auditor is illustrated in the landmark case of Kingston Cotton Mill (No 2) [1896] in which Lindley LJ gave the following opinion on the auditor's duty:
"…….......the duty of an auditor is to convey information, not to arouse inquiry and although an auditor might infer from an unusual statement that something was seriously wrong, it by no means followed that ordinary people would have their suspicions aroused."
Lindley LJ also stated that it was not the auditor's duty to guarantee the books showing the true position of the company's affairs or to guarantee that the balance-sheet was accurate.
However, the general people cannot be blamed totally given that auditing is a difficult subject that is not easily understood by those who have limited knowledge and exposure in auditing. Furthermore, the objective of auditing and the role of the auditors have always been a dynamic rather than a static one. This is because they are highly influenced by contextual factors such as the socio-economic environment of a particular period, the critical historical events that have taken place, the verdict of the courts, and technological developments. Therefore, any major change in these contextual factors is likely to cause a change in the audit function and the role of the auditors. As a result, their role is seen to be evolving at all times.
Researchers are trying to find out reasons for the creation of the expectation gap. Porter analyses the total expectation gap into three distinct components:
l Sub-standard performance (contributing to 16 per cent of the total expectation gap),
l Deficient standards (50 per cent) and
l Unreasonable expectations (34 per cent).
Due to the fact that deficient standards can easily be revised, it is relatively easier to reduce this component of the expectation gap. The deficient standards component can also be considered the most objective, while unreasonable expectations and sub-standard performance are more subjective. Despite unreasonable expectations that are subjective, it still constitutes a significant portion of the expectation gap and cannot be ignored.
This expectation gap may have harmful implications to the audit profession as the public may not be able to recognise the contribution of the auditors to the society. Hence, this may undermine the value of the audit function. Considering the harmful effect of such gap, researchers and professional bodies have taken steps to look for solutions to this problem. Some studies found that formal education (e.g. auditing courses) can be used to correct the misperception of an individual with regard to the auditors' role.
However, the public can unlikely be educated as most of them may neither have attended universities nor done any auditing courses in colleges or universities. Besides, there exists a general lack of public interest in the work of auditors. Investors in our country usually do not take investment decisions based on the audited financial statements. However, the concerned authority can still think of the following suggestions to minimise this gap:
1. The IFAC (International Federation of Accountants) ... can revise auditing standards in a more simplified way.
As researchers found the deficient standards contribute most to the expectation gap, the IFAC should take initiative to revamp the auditing standards so that general people can understand the working methodology of the auditors.
2. Introduction of extended audit report
Currently, auditors issue the audit report in a gist form wherein the role of an auditor in auditing function cannot be clearly understood. An extended format of audit report can be introduced with the auditor's describing their work procedure and the result of audit elaborately.
3. Educating society about the audit function and the work of the auditor
Authorities like the Bangladesh Securities and Exchange Commission (BSEC), the Bangladesh Bank, Dhaka and Chittagong Stock Exchanges, and the Institute of Chartered Accountants of Bangladesh (ICAB) may arrange regular training, seminar and symposium, awareness campaign etc. to make the general public aware of
the auditing functions and the
auditor's role.
4. The ICAB should monitor work of the auditors more closely to reduce the sub-standard performance by some auditors.
Though sub-standard performance by auditors contributes only 16 per cent to the expectation gap, it should not be ignored anyway. The capacity of the Quality Assurance Board (QAB), and the Investigation and Disciplinary Committee (IDC) of the ICAB should be enhanced further so that they can monitor the work of the auditors more stringently and take disciplinary actions promptly against the accused auditors, if any.  
The writer is partner, ACNABIN, Chartered Accountants.
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