Post on 29-Dec-2021
AUDITOR’S INDEPENDENCY AND RESPONSIBILITY:
EXPECTATION GAP BETWEEN AUDITOR AND USER’S
PERCEPTION (CASE STUDY IN RSM INDONESIA)
SKRIPSI
By
Nopita Aulia Siregar
008201200137
Presented to the
Faculty of Business, President University
In partial fulfillment of the requirements
for
Bachelor Degree in Business, Major in Accounting
PRESIDENT UNIVERSITY
Cikarang Baru – Bekasi
Indonesia
2016
ii | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
PANEL OF EXAMINERS APPROVAL SHEET
Herewith, the Panel of Examiners declares that the skripsi entitled
“AUDITOR’S INDEPENDENCY AND RESPONSIBILITY:
EXPECTATION GAP BETWEEN AUDITOR AND USER’S
PERCEPTION (CASE STUDY IN RSM INDONESIA)” submitted by
Nopita Aulia Siregar, Accounting Study Program, Faculty of Business, has
been assessed and proved to pass the Oral Examination on 2nd
March 2016.
Chair, Panel of Examiner,
Monika Kussetya Ciptani M.Ak
Examiner 1
Dr. Sumarno Zain, SE, Ak., MBA
Examiner 2
Misbahul Munir, Ak., MBA, CPMA, CA
iii | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
RECOMMENDATION LETTER OF SKRIPSI ADVISOR
The thesis prepared and submitted by
Name : Nopita Aulia Siregar
Student ID : 008201200137
Faculty : Business
Study Program : Accounting
Skripsi Title : Auditor’s Independency and Responsibility: Expectation
Gap between Auditor and User’s Perception (Case Study in RSM
Indonesia)
Has been reviewed and found to have satisfied the necessities for Oral Defense as partial
fulfillment of the requirements for Bachelor Degree in Economics – Major in Accounting.
Cikarang, Indonesia, 25th
January 2016
Acknowledge, Skripsi Advisor,
Misbahul Munir, Ak., MBA, CPMA, CA Dr.Sumarno Zain, SE, Ak., MBA
Head of Accounting Study Program Skripsi Advisor
iv | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
DECLARATION OF ORIGINALITY
I hereby declare that the skripsi entitled “AUDITOR’S INDEPENDENCY AND
RESPONSIBILITY: EXPECTATION GAP BETWEEN AUDITOR AND USER’S
PERCEPTION (CASE STUDY IN RSM INDONESIA)” is originally written by
myself based on my own research and has never been used for any other purpose before.
I, therefore, request for Oral Defense of the skripsi.
Cikarang, Indonesia, 25th
January 2016
Author,
Nopita Aulia Siregar
008201200137
v | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
AUDITOR’S INDEPENDENCY AND RESPONSIBILITY:
EXPECTATION GAP BETWEEN AUDITOR AND USER’S
PERCEPTION (CASE STUDY IN RSM INDONESIA)
ABSTRACT
The purpose of this study was to determine whether the audit expectation gap
between auditors and user in RSM Indonesia did exist. In some ways, public and other
users of the financial statements expect of the auditor is not necessarily the same as the
law requires of him, or that which is realistically possible. The independent and
responsibility factor is the foundation of the public accounting profession.
Author has performed a qualitative study consisting of interviews with
representatives from auditor and user. The conclusions are based on the interviewees’
personal opinion, observation and based on literature review. However author believe
author have discovered certain important negative tendencies
The author comes to the conclusion that this kind of gap did exist between auditor
and user. Their different perceptions about responsibility and independency of auditor are
the key element of expectation gap in this research. The result shows that the expectation
gap did exist because of different concept from auditor ad user’s perceptions. Other
causes of expectation gap are misunderstanding from client about independency and
responsibility and lack of implementation in independency from client. The expectation
gap should be reduced by the auditor by improving audit responsibilities, educating
various users, and mandating new standards and the user by reducing the expectation and
increasing knowledge about auditing. Due to these causes auditors are not able to produce
a fair report. Therefore the auditor and user should understand each other’s responsibility
and independency.
Keywords: Auditors’ Responsibility, Auditors’ Independence and Expectation Gap
vi | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
ACKNOWLEDGMENT
First and foremost, I would like to thank to Allah S.W.T, for blessing me and
guide me so that I am able to accomplish this thesis entitled “Auditor’s Independency and
Responsibility: Expectation Gap between Auditor and User’s Perception” appropriately. It
would not have been possible to write this thesis without the help and support of around
me. I would like to deliver and express my highly appreciation to these people whose
contribution in assorted ways and gave me the possibility to complete this thesis.
1. To my beloved parents, M. Ridwan Siregar and Nur Mega Afni Pohan. Thank you
for your love, encouragement, moral support and faith in me and their endless
supports that made me possible to finish this study. To my beloved brothers and
sister, Viky Hari Chandra Siregar, Riky Afrizal Siregar and Yosi Hadijah Siregar
thank you for the contribution, endless support, and happiness.
2. My sincere thanks to Mr. Febrial Pratama as my thesis advisor who has given his
valuable time, knowledge, patience, guidance, encouragement, and correction from
the beginning up to the end of this thesis. I’m blessed to have the opportunity to
have an inspiring advisor and it’s an honor to do the research under his supervision.
3. My sincere thanks to Mr. Joseph Ginting for the guidance and give me the
opportunity to do the research under Mr. Febrial Pratama supervision.
4. My sincere thanks also go to Mr. Misbahul Munir (Dean of Faculty of Business) and
my entire lecture in President University for the contribution and support.
5. To the auditors at RSM Indonesia, kak agung, mba icha and pradyana for giving me
information to commence this thesis, to do necessary research work. Thanks for
your help and support.
vii | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
6. To my beloved friends, Melisa Anggreni, Sapphira Julia S., Febby Pricilla, Raymon
Yutto T., Adam Maulana A., Risky Dwi Y., Christian Heriyando, Defri Kurniawan,
Chandra Sentosa. Thank you for your help, encouragement, support, laugh and
smile.
7. To my beloved friends from senior high school, Yubi Hartland and Agata
Akasyahanda. Thanks for the help, contribution, encouragement and endless
support.
8. To my beloved roommates, Ekky Charlen, Farah Chinta Arin Ruswanti and Louise
Johanna Gloria Sirait. Thank you for your support and love. I am blessed to have
friends like you.
9. To my senior and manager in RSM Indonesia during my internship. Thank you for
taught me about the audit, inspiring me, and also the encouragement.
Finally, I would like to thank every single person who has been a part of my college
life that I could not mention personally. I might not be able to write this thesis without
amazing people around me. Thanks for everything and I apologize for all the mistakes I
made.
Nopita Aulia Siregar
viii | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
TABLE OF CONTENTS
PANEL OF EXAMINERS APPROVAL SHEET ........................................................ ii
RECOMMENDATION LETTER OF THESIS ADVISOR ........................................ iii
DECLARATION OF ORIGINALITY ........................................................................ iv
ABSTRACT .................................................................................................................. v
ACKNOWLEDMENT ................................................................................................ vi
TABLE OF CONTENTS ........................................................................................... viii
LIST OF TABLES ....................................................................................................... xi
LIST OF FIGURES ..................................................................................................... xi
CHAPTER
I. INTRODUCTION ........................................................................................... 1
1.1. Research Background ........................................................................... 1
1.2. Problem Identification and Statement ................................................... 4
1.3. Research Scope and Limitation ............................................................ 5
1.4. Research Objectives .............................................................................. 5
1.5. Research Benefit ................................................................................... 6
1.6. Research Method .................................................................................. 7
II. LITERATURE REVIEW .............................................................................. 8
2.1. Concept of Audit ................................................................................... 8
2.2. Auditor Responsibility and Independence Concept .............................. 9
2.3. Audit Quality ...................................................................................... 11
ix | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
2.4. Expectancy Theory ............................................................................. 12
2.5. Audit Expectation Gap ........................................................................ 14
2.6. Empirical Evidence on Expectation Gap ............................................ 17
III. METHOD OF DATA PROCESSING ...................................................... 19
3.1. Methodology Design ........................................................................... 19
3.2. Data Collecting and Processing .......................................................... 20
3.3. Data Collecting Category .................................................................... 20
3.3.1. Inquiry of Client ...................................................................... 20
3.3.2. Observation ............................................................................. 21
3.3.3. Documentation ........................................................................ 21
3.3.4. Literature Review .................................................................... 22
3.4. Company’s Existing Condition ........................................................... 22
3.4.1. RSM History ........................................................................... 22
3.4.2. Vision, Mission & Objective .................................................. 24
3.4.3. Governance of RSM Indonesia ............................................... 25
3.4.4. RSM Indonesia Business Fields .............................................. 26
IV. ANALYSIS AND EVALUATION ............................................................... 29
4.1. Interview Result .................................................................................. 29
4.1.1. Auditor's Perceptions Result ................................................... 30
4.1.2. User’s Perceptions Result ....................................................... 33
x | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
4.1. Research Findings ............................................................................... 35
4.2.1. Auditor's and User’s Perceptions about Concept of
Independency..... ..................................................................... 35
4.2.2. Users Misundertanding in Responsibility of Auditors Perceptions
Result ...................................................................................... 36
4.3. Research Analysis .............................................................................. 36
4.3.1. Is the Audit Indepedence Concept of User Different with
Auditors? ................................................................................ 36
4.3.2. Is the Audit Responsibility Concept of User Different with
Auditors ................................................................................... 38
4.3.3. What are the Causes of Expectation Gap between the Auditor and
User? ....................................................................................... 39
4.3.4. Is there Any Negative Impact of Audit Expectation Gap on User
and Auditor ............................................................................. 41
V. CONCLUSION AND RECOMMENDATION .......................................... 43
5.1. Conclusion .......................................................................................... 43
5.3. Recommendation ................................................................................ 44
REFERENCES ........................................................................................................... 46
APPENDICES ............................................................................................................ 49
xi | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
LIST OF TABLES
Table 3.1: Lines of Business and Its Services ............................................................. 27
Table 3.2: Divisons in RSM Indonesia ....................................................................... 28
LIST OF FIGURE
Figure 2.1: Expectation Gap Framework .................................................................... 16
Figure 3.1: STAR Value in RSM Indonesia ............................................................... 24
Figure 3.2: Governance of RSM Indonesia ................................................................ 26
Figure 3.3: RSM Indonesia Business Fields ............................................................... 26
1 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
CHAPTER I
INTRODUCTION
1.1. Research Background
The audit profession is one of the important professions for business in order to
make qualified corporation on market competition. Audit is concerned with the way an
organization performance has been reported. There are many elements in financial
society that play a part for business world, but only three elements that directly help
business world to keep sustaining. The three elements are external auditor, corporations
and user of audit report. The external auditor is a profession that makes a financial
report correctly and accurately for corporations in order to make user of audit report or
public trust to the corporation that being audited. Mautz and Sharaf (1986), define the
auditing in their study as being “…Concerned with the verification of accounting data,
with determining the accuracy and reliability of accounting statements and reports.”
Another definition of auditing by Arnes et al. (1997), they are including the “objectively
obtaining and evaluating evidence” and”competent independent person.” The meaning
is external auditor is a must to have an understanding in the criteria used and also
competent to know types and amounts of evidence to accumulate for examination to
reach proper conclusions on one hand and must possess an independent attitude to
objectively obtain and evaluate results without bias, or prejudice on the other. American
Accounting Association (AAA) (1973) also defined the auditing as a “systematic
process of objectively obtaining and evaluating evidence regarding assertions about
economic actions and events to ascertain the degree of correspondence between those
assertions, established criteria and communicating the results to related users
Therefore, external auditor should be professional, independence and reliable to
make the quality of audit report. Auditing is an independent function by means of an
ordered and structures series of steps, critically examining the assertions made by
2 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
individual or organization about economic activities and summarize the result in a
report to use by the public or users. For example, investors, management of a company,
creditors, analyst, or other individual or party that use the audit report in their activities,
they are main user of the audit report. They are requesting for the good quality of audit
report to make their decision confidently. They may rely upon audited financial
statement to obtain a view of the financial result as the guidance for their investment
decisions. Users of audit report or the management of a company will also need audited
financial statement, since the information in their audited financial statements is
important for the owner and/or board of directors to evaluate their performance. They
all should be able to rely on the information in audited reports in making their decisions.
To make a good quality of audit external auditors need to fulfill their responsibilities to
the public. There are also probabilities that an external auditor will report any
violations. For this reason, external auditors are perceived to be competent individuals
who play independence and objective role when auditing companies' financial
statements.
The responsibility of external auditor is impact to the quality of audit result, if
auditor couldn’t fulfill their responsibility or role, quality of audit will also decrease.
The external Auditor is obligate to give a high audit quality to public. It is auditor
responsible also to give the public high quality audit with reliable information. “Big
Four” accounting firms are in the high level of competency, they can manage to fulfill
all of their responsibilities to public with their competency. They have to perform
continuously in auditing process in terms of maintaining competence to public.
Auditor’s performance professionally will also create reliable opinion.
One of major responsibilities of external auditor is being independence. For all
profession independence is a critical issue, especially for auditor. This paper reviews
evidence related to the auditor independence and expectation gap between user and
external auditor. The expectation gap is occurring in concept independence of auditor.
Without independence the auditor report will not be reliable for the public.
“Independence is the main means by which the auditor demonstrates that he can
perform his task in an objective manner” (FEE, 1995). Independence is fundamental to
3 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
reliability of auditors’ report. The auditors will be called as a professional if they can
maintain their independences in order to create a good quality of audit. Perception from
public about the independence of auditor is important. There are several major causes
independence reduction of auditor. The causes are economic dependence of auditor on
the client; audit market competition; the provision of non-audit services.
However, external auditor and user or public hold different beliefs about the
auditors’ independence. Because of that phenomena the auditor is not always satisfied
the user’s demand of quality audit report. “Our findings indicate that expectation gap
exists; users have higher expectations for various facets and/or assurances of the audit
than do auditors in the following areas: disclosure, internal control, fraud, and illegal
operations” (John E. and Stanley C. 2001). Since there are some Scandals in national or
international, the reliable audit practice is decreasing. On the other hand, the expectation
from user or public is always increase, since the requirement of reliable audited
financial statement also increases daily. For example Arthur Anderson and Enron
Scandal, Arthur Andersen is an accounting and consulting service that operates
businesses throughout the US & world, on the other hand, Enron has been a client of
Andersen’s for 16 years up until Enron’s 2001 bankruptcy. Andersen hid millions of
dollars of debt from the public for Enron. In this scandal Arthur Andersen is not
independence with its work in auditing Enron Company. Since then, many of Arthur
Andersen’s auditing clients are choosing other accounting firms to perform auditing
work.
The term of “expectation gap” in auditing was first introduced to audit literature
by Liggio (1974). Since then, many researchers defined and analyze the expectation gap
of auditor. Liggio defined expectation gap as the differences between the levels of
expected performance “as envisioned by the independent accountant and by the user of
financial statements”. The expectation gap of independency of auditor exist when the
auditor and users hold different believe of concept of auditor’s independence. Koh and
woo extended this definition as “The existence of an audit expectation gap implies that
the role senders (auditees and audit beneficiaries) are dissatisfied with the performance
of auditors”(Koh and Woo, 1998). Monroe and woodliff (1993), defined the expectation
4 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
gap of auditing as the difference in beliefs between auditors and users or public about
the duties and responsibilities.
In general the auditor will be expected to give an accurate opinion that favorable
for a company. The opinion from auditor will affect the stakeholders in decision-making
related to the company performance. Therefore, the opinion from auditor is one of the
most important aspects to build a business. User of the audit report is expecting the
audit accounting firm to give the opinion with actual condition of the company in good
quality of audit. In other words the auditor should make an opinion independently,
accurately and professional.
In this context, the audit profession seek to shift the preferred meanings about the
nature, practice and/or outcomes of auditor’s responsibility and independence, in other
words leading to the varying definition and perception of the function and independency
of the auditor thereby resulting to a gap between the services received versus the
expected services provided by the auditors, which is generally termed the audit
expectation gap in the literature. Further, the empirical evidences on audit expectation
gap have revealed that one of the major reasons for audit expectation gap in many
countries is that there are differences in perceptions about the independence of auditors
with regard to accounting frauds. Auditor independence is a key element of the audit
expectation gap. Based on the elaboration of background of this study, the author
decides to discuss an issue with a title: “Auditor’s independence and Responsibility:
Expectation Gap between Auditor and User’s Perception”. In other word this study
will revisit the concept of expectation gap, auditors’ independence and the different
perception of user and auditor of audit quality.
1.2. Problem Identification and Statement
Based on the background above author can define statements of problem to be
observed. Statement of problem will be the main problem to discuss in this study. The
statements of problem of this study are:
5 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
1) Is the auditor’s independence concept of user different with auditors?
2) Is the auditor’s responsibility concept of user different with auditors?
3) What are the causes of the expectation gap between the auditor and user?
4) Is there any negative impact of audit expectation gap on user and auditor?
1.3. Research Scope and Limitation
The discussion is only focused on perception of auditor and user about auditor’s
independence. This research has short observation period and it is not possible to
interview more than four respondents; three auditors and one user. The conclusions of
this research are based on the answers received in the interviews; these are
interviewees’ personal opinions and should not be general perceptions in Indonesia.
1.4. Research Objectives
Based on the statement problem and introduction the author defines the objective of
this study. As the author mention above, this study is revisiting the concept of auditor’s
independency and responsibility, expectation gap and the different perception of user
and auditor about independency and responsibility of auditor. The purposes of this study
are:
1) To define the concept of auditor’s independence that users and auditors hold.
2) To define the concept of auditor’s responsibility that users and auditors hold.
3) To analyze the causes of the expectation gap between the auditor and the public
or user of audit report.
4) To analyze the influence or impact of audit expectation gap on user and auditor.
6 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
1.5. Research Benefits
As reported earlier, the objective of this study is revisiting concept of audit
independence, expectation gap and different perception of users and auditor of auditor’s
independence. It is also investigate the effect and causes of different beliefs that auditor
and users held about auditor’s roles and responsibilities of being independence, and it
will also affect the different perception of auditor’s independence. The different beliefs
from auditor and users is create an expectation gap that might be arises during decision
making. The motivation for undertaking this study is because to analyze expectation gap
theory or different perspective of auditor and users about auditor’s independence. The
author beliefs this study will have several benefits. The benefit of the study can be
summarized as follows:
1. For the business:
This research can be use as tools to analyze the independence of external
auditor in order to make the users increase their confident in decision making.
In addition, it will help the auditor and users have same opinion about
auditors’ independence, so they can avoid the expectation gap problem.
2. For author and other researcher:
The first benefit of this research is that it provides knowledge for the author
and other researcher about auditor’s independence from auditor and user
perception. Furthermore, this research gives the benefit for author and all
researchers about the knowledge of how to conduct a research.
3. For literature:
This research is to define the different perceptions of auditor’s independence
from auditor and users and the user’s expectation of auditor’s independence in
real business.
7 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
1.6. Research Method
This research is a qualitative research with types of verification approach. In gathering
and processing the data, the author will do two methods as follows:
1. Literature review
In this research the author gather the secondary data from literature review to get
references or relevant theories related to the topic discussed in this research. The
author will collect data by gathering all information from books, articles, and
journal.
2. Field research
In this research the author will get primary data by collecting and evaluating data
through inquiry, observation, and documentation.
Inquiry
The author will gather the data by doing an interview and discussion with
two people within two group; auditors and users in order to get the
information about each perception about auditor’s independence.
Observation
The author obtains the information from a specific observation in one of a
public accountant firm in Jakarta, Indonesia. The author observes the work
from auditor and also observes the opinion from users about auditors’
independence.
Documentation
Documents for this research examined by the author are the records of
interview result. Documentation is used to clarify the evidence of
information which is obtained by the author to analyze the research.
8 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
CHAPTER II
LITERATURE REVIEW
2.1. Concept of Audit
Audit is a requirement for every company to be trusted by the other party or the
public. The word of ‘audit is from Latin word ‘audire’, which means ‘to hear’. The
meaning of audit is a systematic process to obtaining evidence of the misstatement,
error or fraud of financial condition of a company. This definition also explain by ISO
19011, “Audit is a systematic, independent and documented process for obtaining audit
evidence and evaluating it objectively to determine the extent to which the audit criteria
are fulfilled” (ISO 19011). The function of auditor is to provide professional opinion in
the financial statement, in order to support their opinion the auditors must obtain
evidence.
Auditing refers to a systematic and independent examination of books, accounts,
documents and vouchers of an organization to ascertain how far the financial statements
present a true and fair view of the concern. “Auditing has become such an ubiquitous
phenomenon in the corporate and the public sector that academics started identifying an
‘Audit Society’.” (Michael, 1999).
The audit report is a connector between a corporation and stakeholder or other
party that engage to that company. It means the audit process is a must for every
company. According to Chow (1982), controlling the conflict of interests among firm
managers, shareholders and bondholders is a major reason for engaging auditors.
9 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
2.2. Auditor Responsibility and Independence Concept
Generally, Auditor’s role is to perform audit and be able to find reasonable
assurance about material misstatement in financial statement of a corporation. The audit
result is shown the information accurately and correctly about a corporation in order to
help the public and user of audit report confidently making economic decision. “The
auditor has a responsibility to plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement, whether
caused by error or fraud” (Auditing Standards No. 82).
However, if the misstatements are not material the auditor is not obligate to
perform the audit procedure. After performing the audit procedures the auditor's
responsibility is to express an opinion on the financial statements. The auditors need to
make an opinion with professional and independent. The opinion from auditor will help
the user and also the corporation that being audit. The opinion are unqualified,
qualified, adverse and disclaimer. Unqualified opinion is the best possible opinion from
auditor, and this opinion is the most reported opinion by the auditor. The second
opinion is qualified opinion. “A qualified opinion means the auditor found the financial
reports essentially in conformance with Generally Accepted Accounting Principles,
except for one or a few areas where the auditor cannot, or does not want to, assert
conformance” (Marty Schmidt, 2004). Another opinion for audit report is adverse,
adverse opinion means that the auditor find some misstatement in client financial
statement, the auditor will give a suggestion to the client before the audit report is
publish. “An adverse opinion means the auditor has concluded that the audited financial
statements do not fairly represent the organization's financial position or financial
performance and that there are significant departures from GAAP” (Marty Schmidt,
2004). Another opinion that auditor can give to the client’s financial statement’s is
disclaimer, disclaimer means the auditor is not issue an opinion for a corporation.
“The auditor may issue a disclaimer of opinion, that is, publicly report that
the auditor has chosen not to issue an opinion. This may occur when
auditors decide they cannot be impartial or independent regarding the
10 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
company or organization audited, auditor's scope of coverage was
substantially limited and The auditor has significant uncertainties
regarding the appropriateness of parts or all of the financial reports”
(Marty Schmidt, 2004) .
In other word the auditor is responsible to perform audit and make an audit appropriate
report in circumstances when, in forming an opinion in accordance. The auditor is
obligate to perform the audit process in order to issue an opinion, in the process of audit
and issuing opinion to the public auditor should be professional and independence, the
independence is one of the responsibilities of auditor in performing audit.
Auditor independence is important to create good quality of audit. Users will
expect more from auditor to have independence in their performance. If the auditors
cannot fulfill their responsibility in being independence, it will impact to audit report,
the audit report will become a suspect and not reliable to use. In the research of
independence auditor by Gill and Cosserat (1996), they have emphasized that
“independence is the cornerstone of auditing profession, without independence the
auditor’s opinion is suspect.” Independence in generally is defined as freedom from
material conflicts of interest that threaten objectivity. According to ISB independence
can be defined as a “Freedom from those pressures and other factors that compromise,
or can reasonably be expected to compromise, an auditor ability to make unbiased audit
decisions” (ISB, 2000).
Mautz and Sharaf (1961) discuss independence and describe several meanings
of the concept. They note that Carey (1970) discusses two meanings of independence
for professional auditors. One he called “the self-reliance of any professional person”
and the other is described as the special kind of independence, an “honest
disinterestedness” in the results of his or her work that arises because of the public’s
reliance on an auditor’s work. Mautz and Sharaf note that they agree that a practitioner
should maintain an honest disinterestedness to promote unbiased judgments and
consideration of the facts as determinants of a final opinion. They also believe,
however, that in order for a practitioner to have this honest disinterestedness, he or she
must have a thorough understanding of the pressures and factors, “some of which may
11 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
be so subtle as to be scarcely recognizable,” that may color or influence that
disinterestedness. They suggest the recognition of programming independence (the
auditor has sole control over the nature of the audit program), investigative
independence (the auditor is free to collect and evaluate all the evidence deemed
necessary without interference), and reporting independence (the auditor is free to
report the results of the audit without interference) as concepts that will help a
practitioner achieve honest disinterestedness.
Another research by Geiger, Lowe, and Pany (2002), in their research they
examines about loan officers view and make decisions based on loan proposals within
the context of various relationships between the applicant, the auditor that performs the
external audit, and the auditor that performs the internal audit function, whether in-
house or outsourced to the applicant’s external auditor. The results support the position
that having outsourced internal audit services performed by the company’s external
auditor does not appear to negatively affect financial statement users’ perceptions of
auditor independence and other related decisions. The results also support the position
that if the external auditors are associated with internal audit activities, they should not
perform any management functions as part of the outsourced internal audit work. The
results also provide support for internal audit outsourcing if there is a requirement that
the engagement team for the external audit and internal audit activities remain separate.
More research is needed on issues related to independence and objectivity for internal
auditors and the internal audit function.
2.3. Audit Quality
Auditor independence is important because it has an impact on the audit quality.
The Audit Quality is the concept that already familiar, there are many definitions about
this concept. But the most commonly use in the research or study is the definition or the
concept of audit quality from De Angelo (1981), she stated that “the quality of audit
services is defined to be the market-assessed joint probability that a given auditor will
both (a) discover a breach in the client's accounting system, and (b) report the breach”,
as quite a number of other papers have cited that, or have similar implied definition
12 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
which would be discussed in the next section. Many researchers then used this double
approach to further define audit quality with details in competence and independence,
while others adopt it as a foundation to identify other audit quality attributes.
According to De Anglo’s (1981) definition, audit quality is an increasing function of
an auditor’s ability to detect accounting misstatements and auditor independence as
assessed by the market. De Angelo’s (1981) definition refers to “market assessed” or
perceived audit quality. When applying this definition to actual audit quality, there is an
underlying assumption that market perceived audit quality reflects actual audit quality.
However, many studies adopt this definition without addressing the distinction between
these two different concepts.
The quality of audit is depending on the auditor itself. If the auditor cannot fulfill
their responsibility, role and function, the business world cannot meet the high quality
of audit. Therefore, mostly the big companies use the auditor who already known as
their competency such as ‘Big Four’ accounting firms. The ‘Big Four’ accounting firm
is known as an accounting firms that have a high competency in doing audit procedure,
they already obtain the trust from the public and make the user confidently use their
audit report, for example investors will confidently make an economic decision-making.
2.4. Expectancy Theory
The Expectancy Theory of Motivation describes the behavioral process of
individuals including reasons why the individuals choose one behavioral option over
another. "The basic idea behind the theory is that people will be motivated because they
believe that their decision will lead to their desired outcome" (Redmond, 2009). The
theory explains that goals will impact to mental processes of individuals in choosing
behavioral option and they can be motivated towards goal if they believe in positive
aspect between efforts and performance. An individual is willing to work towards this
higher level of performance because of the perceived correlation between performance
and rewards. That is, that the level of performance is based on the strength of the
13 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
relationship between an employee's behaviors and the rewards that they can receive from
those actions. If working five extra hours a week will result in an eventual promotion, the
willingness to work those extra hours’ increases due to the employee's desire to be
awarded the promotion. Expectancy Theory of motivation first introduce by Victor
Vroom of the Yale School of Management in 1964. Victor Vroom’s study is one of the
most widely accepted theories of employee motivation.
"This theory emphasizes the needs for organizations to relate rewards directly
to performance and to ensure that the rewards provided are those rewards
deserved and wanted by the recipients." (Montana, Patrick J, Charnov & bruce
H, 2008)
According to his study, Victor H. Vroom (1964) defines motivation as a process
governing choices among alternative forms of voluntary activities, a process controlled
by the individual. The individual makes choices based on estimates of how well the
expected results of a given behavior are going to match up with or eventually lead to the
desired results. Motivation is a product of the individual’s expectancy that a certain
effort will lead to the intended performance, the instrumentality of this performance to
achieving a certain result, and the desirability of this result for the individual, known
as valence.
The Expectancy theory states that employee’s motivation is an outcome of how
much an individual wants a reward (Valence), the assessment that the likelihood that the
effort will lead to expected performance (Expectancy) and the belief that the
performance will lead to reward (Instrumentality). In short, Valence is the significance
associated by an individual about the expected outcome. It is an expected and not the
actual satisfaction that an employee expects to receive after achieving the
goals. Expectancy is the faith that better efforts will result in better performance.
Expectancy is influenced by factors such as possession of appropriate skills for
performing the job, availability of right resources, availability of crucial information
and getting the required support for completing the job.
14 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
Research of expectancy theory is also emphasized by Edward Tolman. He was a
cognitive behavioral psychologist who studied motivation and learning. The theory
from Edward Tolman describes learning with no obvious reward for the learner. Tolman
also began to develop the theory of behavior and motivation. He theorized that a motive
drives a person to behave a certain way until some intrinsic need is met. Until the need
is met the person will continue to behave in the same manner. This was the start of
motivation theories. Vroom would add to Tolman’s work with the Expectancy theory
later in history (VanderZwaag, 1998).
Another research of expectancy theory was emphasized by Miller and
Grush(1988). Their study in expectancy tested the hypotheses that the behavior of some
individuals is determined by personal expectancies while the behavior of other
individuals is determined by social norms. The author took two groups of people and
gave one group personal expectations about their behavior. The other group was given
information on what the social norms were for the time being. The author found that
strong expectancy behavior correspondence was given for those individuals who were
aware of personal expectancies but who were not knowledgeable about social norms.
For those individuals who were attuned to social norms, their behavior corresponded
with such (Miller & Grush, 1988).
2.5. Audit Expectation Gap Theory
The auditor’s responsibility is to provide ‘reasonable assurance’ that the
information in the financial statements accurately represents the financial position.
Auditor is required to reduce audit risk to an acceptably low level to attain reasonable
assurance. But what is reasonable? This can be different in the eyes of auditor and in the
eyes of users of financial statements and this creates expectation gap. Auditor is already
providing less than absolute assurance so he/she must not leave any effort undone to
maintain reasonable level of assurance by complying with the requirements of relevant
auditing standards. For example, proper planning, appropriate understanding of entity to
15 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
design further audit procedures, maintaining skeptic attitude, reducing sampling risk to
appropriate level etc.
However, that which the investor, public and other users of the financial
statements expect of the auditor is not necessarily the same as the law requires of him,
or that which is realistically possible. This difference of expectation is known as the
‘expectation gap’. There is concern that auditors and the public hold different beliefs
about the auditors’ duties and responsibilities, and the different beliefs that they have
create an expectation gap. When the users and the auditor hold different beliefs, the
expectation from the users will not match with the performance of the auditors and the
users will not really satisfied with the quality of the audit report that the auditors
performed. Expectation gap can also be explained as the difference between the
effectiveness of audit engagement what users believe and what auditor believes. It can
also refer to difference in understanding regarding nature of audit engagement i.e. what
users believe audit is and what audit actually is.
Audit Expectation gap is the term used to signify the difference in expectations of
users of financial statements and auditor’s expectation concerning audited financial
statements. Although it’s about expectations but still its scope and meanings have been
defined in number of ways. Difference in expectation can arise on the performance i.e.
the level of performance what users expect from auditor and how auditor actually
performed. An Expectation Gap also exists between the users of financial statements
and the auditors. No matter how many times the investing public is told that audits are
not designed to detect fraud, shareholders often believe that financial statement auditors
can and will find fraud in companies. Even those who should be savvy in financial
matters investing professionals, executives, and auditors themselves often do not
understand that traditional financial statements audits do not regularly detect fraud.
The term of “audit expectation gap” was first introduced to audit literature by
Liggio (1974). Liggio defines the Audit Expectation Gap as the difference between the
levels of expected performance as envisioned by users of a financial statement and the
independent accountant. After Liggio, there are also many opinions that arise from the
16 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
term of “expectation gap”. The Cohen Commission (1978) on auditor’s responsibility
extended this definition by considering whether a gap may exist between what the
public expects or needs and what auditors can and should reasonably expect to
accomplish.
Figure 2.1 Expectation Gap Frameworks
According to Guy and Sullivan (1988), there is a difference between what the
public and financial statement users believe accountants and auditors are responsible for
and what the accountants and auditors themselves believe they are responsible for.
Godsell (1992) described the expectation gap as “which is said to exist, when auditors
and the public hold different.” Monroe and Woodcliff (1993) define the audit
expectation gap as the difference in beliefs between auditors and the public about the
Auditor’s
Independence
and
Responsibility
Auditor’s Perception
1) Is the auditor’s
independence concept
of user different with
auditors?
2) Is the auditor’s
responsibility concept
of user different with
auditors?
3) What are the causes of
the expectation gap
between the auditor
and user?
4) Is there any negative
impact of audit
expectation gap on
user trust of the
auditor?
1)
User’s Perception
1) Is the auditor’s
independence concept
of user different with
auditors?
2) Is the auditor’s
responsibility concept
of user different with
auditors?
3) What are the causes of
the expectation gap
between the auditor
and user?
4) Is there any negative
impact of audit
expectation gap on
user trust of the
auditor?
Audit Expectation Gap
17 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
duties and responsibilities assumed by auditors and the messages conveyed by audit
reports. Porter (1993) did an empirical study of the audit expectation-performance gap.
In his study he defines the expectation gap as the gap between society’s expectations of
auditors and auditors’ performance, as perceived by society. In his study there are 2
components: a) reasonableness gap (that is, the gap between what society expects
auditors to achieve and what the auditors can reasonably be expected to accomplish);
and b) performance gap (that is, the gap between what society can reasonably expect
auditors to accomplish and what auditors are perceived to achieve).
2.6. Empirical Evidence on Expectation Gap
One of the previous research’s is from John E. McEnroe and Stanley C. they
extend their research by directly comparing audit partners’ and investors’ perceptions of
auditors’ responsibilities involving various dimensions of the attest function. They
conducted the study to determine if an expectation gap currently exists and they find
that it does; investors have higher expectations for various faces and/or assurances of
the audit than auditors. Their findings serve as evidence that the accounting profession
should engage in appropriate measures to reduce this expectation gap.
Rohalla G., Ali M. El Zolh, and Rasol M. Moghadam, in their study they use
statistical sample of their research included auditors and user, which were 2023, and
then final sample study was estimated by Cocaran formula at 260 people. However,
number of collected questionnaire was 217. Methodology of the research was
descriptive. Result of research indicated that there was no conflict about acceptable
report, report no comment, internal control, and ensure concept, importance concept
between producers and users, however, there was conflict between rejected and
conditional report and auditor independence. Furthermore producer had positive
perspective about acceptable and conditional report current research showed that
auditors do not have sufficient independence. Finally, 30% perspectives were different
and 70% were equal.
18 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
Humphrey (1991) investigated the expectation gap with reference to England is an
extension of first studies. The man conclusions on Humphrey’s study include
expectation gap in auditors’ role in fraud detection; the extent of auditor’s responsibility
to this party; the nature of balance sheet valuation; threats to auditors’ independence;
and auditors’ ability to cope up with risk and uncertainty. According to his study “If any
topic can be classified as going to the of the audit expectations debate, it is the issue of
auditor independence”. In his study Humphrey stated that the auditor independent is the
key elements in audit expectation gap. In 1992 the empirical study of expectation gap
by Humphrey and Garcia-Benau in both UK and Spain. They investigated the
expectation gap and asking the auditors, users, and finance directors whether audit firms
should not provide NAS to their audit clients. The result in both countries was close to
neutral. Their average response was close to neutral except for UK auditors who
expressed strong disagreement.
19 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
CHAPTER III
METHOD OF DATA PROCESSING AND
COMPANY’S EXISTING CONDITION
3.1. Methodology Design
This research is qualitative research since this research is defining a condition of
expectation gap between users and auditors. The qualitative research has its roots in
social science and is more concerned with understanding why people behave as they do,
this method will need more review concept and science for the research. The focus of
qualitative research tends to be on understanding the meaning imbedded in participant
experiences through an open-ended, unstructured and subjective approach (Lincoln &
Guba, 1985). The research is most often conducted in a naturalistic setting with a
purposive sample (Patton, 2002). The research tends to be holistic, descriptive and
focuses on the depth and details of experiences (Denzin & Lincoln, 1998). Data
collection methods include interviews, observations, field notes, and documents to name
a few (Wolcott, 1994). Data tend to be analyzed through an inductive, ongoing and
evolving process of identifying themes within a particular context (Miles & Huberman,
1994).
“Qualitative research is an inquiry process of understanding based on
distinct methodological traditions of inquiry that explore a social or human
problem. The researcher builds a complex, holistic picture, analyzes words,
reports detailed views of informants and conducts the study in a natural
setting.” (As Creswell, 1998)
The main reason to use this method in writing this research is because this
research tends to be on understanding the meaning imbedded in participant experiences.
20 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
The participants of respondent in this research need to give the details of their
perceptions related to the topic of this research. Since the topic of the research is about
perceptions of external auditors and users about auditor’s independence which is related
to ethic and behave of an auditor. To answer the statement problem of this research the
author needs auditors and users who have a lot of experience and competence.
3.2. Data Collecting and Processing
The author chooses qualitative method as the method in collecting data. The
most common sources of data collection in qualitative research are interviews,
observations, and review of documents. Author places the data-collecting procedures
into three categories: observations, interviews, documents and the data obtained in
this research are from:
1. First is primary data, advantages of using the primary data is that author are
collecting information directly and for the specific purposes of research. For this
reason, the data that collected by the author is reliable by directly collecting by
the author from the result of interviewed with the auditor at public accounting
firm, RSM Indonesia.
2. In this research the secondary data will obtain from the history of company,
related theories, relevant books, and internet sources.
3.3. Data Collection Category
3.3.1. Inquiry of client
Inquiry is to obtain information or data from knowledgeable persons in order to
obtain explanation efficiently. The author uses interview method because interview is
undoubtedly the most common source of data in qualitative research. The data is more
relevant and acceptable because interview will need to directly questioning the
respondent. Interviews range from the highly structured style, in which questions are
determined before the interview, to the open-ended, conversational format. In qualitative
research, the highly structured format is used primarily to gather information. These
21 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
interviews will be used as qualitative input. The following techniques of interview that is
used are:
1. Structured technique is approach to gather all information by the
structured/listed questions interview. Structured interviews can be conducted
efficiently by interviewers trained only to follow the instructions on the
interview guide. Structured interviews can produce consistent data.
2. Another technique of interview is semi structured technique. A semi-structured
interview will involve many open-ended questions, although they may also
contain some closed questions. The author will take the representative from
external auditor at RSM Indonesia and user. These technique will conducted
by the author to get perception from each representative. By using both
techniques the author will obtain some perceptions from each representative
and it will show the gap and problem arising in different perceptions of
auditor’s independence from each representative.
The author will obtain the data based on perceptions of auditor and user about the
auditor’s independency and responsibility. The data is related to non-financial data. The
interview will be conducted with author in public accounting firms in Indonesia especially
in Jakarta at RSM Indonesia. Other respondents are internal user of audit report this
research has been done the interview session on:
Date 14th
January 2016 (Auditors) and 16th
January 2016 (Internal User)
Time 7.00 PM
Duration 45 minutes
Place RSM Indonesia (south Jakarta) and Grand Indonesia (Central Jakarta)
Interviewee Auditors in RSM Indonesia and internal user of audit report
Topics Independency, Responsibility & Expectation Gap Experience
3.3.2. Observation
The author will obtain the primary data by conducting direct observation to the
public accounting firm, which is being object of the research in order to see the practice
and perception of auditor’s independence. By doing observation the author will able to
22 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
detect the findings and factors that caused the findings. This research did observation
starting 5th
January 2016 until 5th
April 2016.
3.3.3. Documentation
Documentation is used to clarify the evidence of information which is
obtained by the author to analyze the research. Documents for this research examined by
the author are the records of interview result. Other documentation took from list of
interview questions and letter of interview statement from RSM Indonesia. The function
of the records is to tracking down evidences either internal or external evidences of
activities being researched.
3.3.4. Literature review
The secondary data that used in this research is literature review. The data is
collected and observe by the author from the theory based on literatures, articles, journal,
and previous research. The literatures are not only focused on the book, the author also
collects the literatures data from the internet. The author uses library research to more
understand with the literature related to this study. The purpose of library research is to
support this study and make the author and reader more understand the literature of this
study or research.
3.4. Company’s Existing Condition
3.4.1. RSM History
a) RSM International
RSM International is one of the world’s leading audit, tax, and advisory networks
of independently owned and managed professional services firms. RSM and its
member firm are full members of the forum of firms. The forum of firms is an
association of international networks of accounting networks of accounting firms
that perform audits of financial statements that are may be used across national
borders. RSM established in 1964 and until now it has presence in 106 countries
in 700 offices throughout the world. The executive office is located in London,
and it is supported with regional office in Australia for Asia Pacific countries,
23 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
United Kingdom for Europeann countries, and Yemen for Middle East and North
African countries, and South Africa for African countries, and United States for
North American and Latin American countries.
RSM is a global network of independently owned and managed professional
services firms, united by a common desire to provide the highest quality of
services to their clients. The vison of RSM is to create member to be the provider
of choice to internationally active growing organizations who are looking for
accounting tax, consulting and specialist advisory services that will create lasting
success and help them reach their goals. Member firms of RSM International are
all independent operate in their home countries under their home countries under
their own firm names such as RSM AAJ Associates in Indonesia, RSM Nelson
Wheeler in Hong Kong, and RSM Chio Lim Stoner Forrest in Singapore. RSM
International was the initial of three original member firms of the organization
which are Robson Rhodes (England), Salustri Reydel (France), and McGladrey &
Pullen (America).
b) RSM AAJ Associates
RSM AAJ is a member firm RSM, a global organization of independent
professional services firms. RSM AAJ Associates is an international firm with
strong local presence in Indonesia that offers world-class services. The offices are
located in Jakarta and Surabaya. RSM AAJ is offers a group of auditing and
consulting services that provided excellent services with aim to add value for
clients. RSM AAJ Associates Established in 1985 by Amir Abadi Jusuf, with a
Registered Public Accountants as the flagship firm. It began to provide reliable
auditing and assurance services. At present, it have managed to develop and grew
into a large, reputable and integrated accounting and consulting professional
services, involves in wide array of services, from accounting services, to
consulting services in areas of risk management, taxation, finance, and
information technology. RSM AAJ Associates is become the 5th
largest accounting
and auditing practice in Indonesia. RSM AAJ consists of KAP Aryanto, Amir
Jusuf, Mawar & Saptoto; PT AAJ Bismatamma; PT AAJ Kapital; PT AAJ Mitra
24 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
Daya; PT AAJ MitraDana and other business units under which all under the RSM
AAJ Group and RSM AAJ Brand.
3.4.2.Vision, Mission& Objective
a) Vision
To be the right partner to its stakeholders
b) Mission
1. Support achievement of clients' excellence by rendering world class
professional services
2. Give contribution to the profession and to the Indonesian economy
3. Provide a rewarding and enjoyable professional working and learning
environment1
c) Objective
We are committed to provide services that will add value to our clients and will
aid to our clients' excellence. Values delivered to our clients will bring sustainable
growth for both RSM AAJ Associates and moreover to our valuable clients. For
that reason, we believe in implementing "STAR" value in each aspects of our
everyday activity.
d) STAR Value
RSM AAJ also has STAR value to guide the employees how to behave when they
doing their job. Below is the STAR value of RSM AAJ Associates that every
employee needs to understand:
Figure 3.1 STAR Value of RSM Indonesia
1 RSM AAJ Associates Employee Handbook Version 14.01
25 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
SMART – Work Smarter, not just harder
Do what human do, Think!, Not just do, but do the right thing, Know what you do, Learn
from others, Maintain professionalism skepticism, Initiate ideas, Think Outside of the
box, Master your emotion.
TRUST - Build Trust, and maintain
Practice what you preach, Earn your trust, maintain integrity, Confidentiality is a must,
always keep your promise, Live out unconditional responsibility, be a player not a victim,
Deficiency shows when you blame others.
ACTION - Commit, and make things happen
Committed and dedicated to your work, Consciously act and response to provide
solutions, Never satisfy with minimum effort and quality, Always be prudent and
meticulous, Eager to develop and increase competency, Communicate authentically and
constructively, Always consider budget in executing tasks, Contributes value to all,
Coordinate impeccably, and support your team and peers, Enjoy work, bring out the best.
RESPECT - Respect yourself, respect others
Have sense of ownership, Maintain positive attitude, be nice, hostility, won’t take you
anywhere, Appreciate differences, people take different roads seeking fulfillment,
Congratulate achievements, and don’t be selfish and envious.
3.4.3.Governance of RSM Indonesia
RSM AAJ’s management is oversight by the ‘Board of Partners’. The management
or executive role is performed by Chief Executive Partner that is assisted by Managing
Partners, Division Chief Operating Officers, Partners, Directors and other officers, which
collectively called ‘Board of Management’. Below is the organization structure of RSM
AAJ Associates:
26 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
Figure 3.2 Governance of RSM Indonesia
Sources: Employee Handbook RSM AAJ Associates version 14.01
3.4.4.RSM Indonesia Business Fields
RSM AAJ Services are managed under Line of Business (LOB). LOBs are services
that this firm performs for clients. It generally includes a concept, a set of offerings, a
methodology, a process, standard work plans and standard skill and standard resources.
Figure 3.3 RSM Indonesia Business Fields
Audit Asurance Outsourcing Tax
Transaction Support Governance,
Risk & Control
Sources: Employee Handbook RSM AAJ Associates version 14.01
1
2 3
4
5
27 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
Table 3.1 Lines of Business and its Services
No Line of Business Services Covered
1 Audit Assurance General Audit on Financial Statements
Financial Information review ( Review on
Historical Financial Information, Examination of
Prospective Financial Information, Agreed-Upon
Procedures on Financial Information)
IFRS
2 Tax and Outsourcing
Tax
Tax Litigation and tax Disputes, Transfer Pricing
Reviews & Documentation, International Tax
Structuring, Tax Compliance, Tax Audits, Tax
Consulting.
Outsourcing
Company Incorporation & Representative Office
Establishment, Corporate Secretarial, Executive
Research & recruitment, Accounting & Payroll.
3 Corporate Finance
and Transaction
Support
Financial forecast & Working Capital Review,
Due Diligence, Transaction Analyst, Post-Merger
Integration
Pre-IPO Preparation & Grooming, IPO Support,
Post-Ipo Advisory Services
Mergers & Acquisitions, Disposals
Deal Structuring & Origination, Business Planning
Governance Advisory & Assurance
Internal Audit (Co-sourced & Outsourced Internal
Audit, Audit Compliance, Performance Audit,
Internal Control testing, Quality Assurance
Review on Audit Activity).
28 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
4 Risk and Internal
Audit Advisory
Information Systems Advisory & Assurance ( IT
Audit, penetration testing, System Readiness, IT
Planning)
Risk management & Internal Control Advisory
(Risk Assessment, Fraud prevention,
Whistleblowing, Framework & Procedures
Development).
Sources: Employee Handbook RSM AAJ Associates version 14.01
With those services Line RSM AAJ make several divisions for their employee. These are
the division in RSM AAJ Associates:
Table 3.2 Divisions in RSM Indonesia
Division Service Line
Blue Audit & Assurance, IFRS
Green Audit & Assurance, IFRS
Red Audit & Assurance, IFRS
Tosca Audit & Assurance, IFRS
White Risk & Internal Audit
Orange Transaction Support & Capital Market
Purple Tax Corporate Services
Brown All Services Lines
Sources: Employee Handbook RSM AAJ Associates version 14.01
29 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
CHAPTER IV
ANALYSIS AND EVALUATION
4.1. Interview Result
In this chapter, after author did the interview process with all respondents the
author will discuss the perceptions from auditors and users about auditor’s
independence and connecting perceptions from each interviewee to seek the gap and
findings arising in this topic by using interview result. The author also will compare the
perceptions of auditor’s independence from each interviewee with the theory literature
and condition that has been implemented by the auditor in RSM Indonesia.
First, the author will discuss the interview result from auditor, in order to know
the perceptions from auditor and observe the implementation of interview result in RSM
Indonesia. The author has worked as an external auditor RSM Indonesia to observe the
implementation. Second, the discussion continued with interview result from user. The
author will discuss perceptions from user of audit result about auditor independency.
Third, author will compare each perception and analyze the gap between user and
auditor about the independence external auditor.
This chapter will contain the result of interview with several interviewees which
author has done on January 14th
and January 16th
. From the interview result the author
can obtain perceptions from auditors and users about auditor’s independence, auditor’s
responsibility and their expectation to each other. Their explanation will be used as the
30 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
data for this chapter in order to analyze the expectation gap between auditor’s
independence and responsibility. The information from interview result as follows:
4.1.1. Auditor’s perceptions result
The first interviewees are auditors from RSM Indonesia. Based on the interview
result, the auditors explained briefly about the concept of auditor’s independence and
auditor’s responsibility and their implementation in their work. The result of interview
with auditors can be described as follow:
a) Auditor’s Independence
There is a possibility that auditor will face the client who wants him/her
to cover some materials amount from public. One of the interviewee had this
experience in one of the public accounting firms in Indonesia before he worked
in RSM Indonesia. In RSM Indonesia the independence of external auditor is
important because RSM Indonesia is also big accounting firm even if not
included in big 4 accounting firms. They explained that the probability to have
un-independence auditor in small accounting firms is higher than the big
accounting firms.
When the auditors get some benefit from client which outside from the
engagement letter in order to ask him to cover some weaknesses in client’s
company it will not really impact to all external auditor, it will only impact to
partner or manager that has authority to make opinion for audit results. In here
the author can conclude that the auditor’s perception of auditor’s independence
31 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
will only be needed for partner or manager because it will only impact to them
not all the external auditors.
From the result of interview, one of interviewee from auditor does not
really understand about auditor’s independence because the explanation is too
general. He explained that auditor’s independence is code of ethic. It means the
auditor need to holding on the code of ethic. Another interviewee explained that
auditor’s independence refers to an action that will not be affected by other
opinion and independence in auditors is the most important thing because
independence is something that will restrict the auditors and client’s company.
One of the auditor described independence is impartial action and not affected
by others in providing an opinion.
During the interview one of interviewee is the staff auditor in RSM
Indonesia. She described experience in un-independence action from client
when detected some findings which are really material around 1 billion. Her
client’s was mistaken in recording process. This client’s company is job-costing
industry and it is a small company if we compare to others client. The client asks
her to hide those findings from auditor’s manager, partner, and public to avoid
material losses in exchange she get some benefit from client. All of the
interviewees in RSM Indonesia are independence enough to their job.
b) Auditor’s Responsibility
From the result of interview with auditor, they believe that they have three main
responsibilities. The first responsibility is to reorganized financial statement of
client. Second, provide opinion for client’s financial statement in order to make
32 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
their financial statement reliable to use by public or users. The third responsibility
is to check the internal control of a company, is there any accounting policy of a
company that is not relevant with PSAK. The responsibility of auditor is not to
find a mistake of a client, even if sometimes clients are miss-understanding with
auditor’s responsibility. The auditors stated that the clients sometimes not really
understand with auditor’s responsibility, clients believe that auditor’s
responsibility is to find a mistake of their company. On interview section, one of
the interviewee explained that he also has an experience in facing a conflict when
he tries to communicate with clients because they both have different perceptions
in several aspects and the communication with client is not always a good
conversation.
c) Expectations Gap Experience
The interviewees from auditor group have experience in facing the client
who has high expectation from the auditors. The result of interview can be
concluded that the client who has higher expectation is client who has been
audited by big 4 accounting firms. One of the interviewee has a client who expects
she/he will not be independent and cover their findings.
There are several clients who have high expectation from auditor. Their
client expects all of them to have equal experience even if the auditor is a junior
auditor. Client will expect junior auditor will have same experience with senior
auditor and manager in implementing their responsibility. They expect the auditor
will immediately understand their company and industry. In fact the auditor will
33 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
also need guidance from their client because not all of the company has same
system even if those company in the same industry.
d) Auditor’s expectation
The auditor expect to have client or users who understand their
responsibility or client who has experience as an external auditor because it will
make easier for the auditors to doing audit process if clients understand their real
responsibility and auditor’s independence, in order to avoid some un-
independence action and miss-understanding.
4.1.2. User’s Perceptions Result
The author chooses internal user as another respondent or interviewee beside the
auditors to know the gap between users and auditors. The author choose internal user
because the one who faces the auditor directly during the audit process is internal users
and they will directly see the work of auditor. On the other hand external users are only
using the results for economic decision. External users do not included in process of
audit.
a) Auditor’s independence
The interviewee described that auditor’s independence is not affected by
anything in providing opinion. He thinks the most important competency that
needed by the auditor is understanding all of the client’s business industry and
he assumed the independence is not really matter if it will be compared to
understanding client’s business industry because he believes that all of the
auditor has professional ethic guideline, so he doesn’t need to push the auditor to
be independent.
34 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
The interviewee has a relation with his external auditor which make his
external auditor hesitate or unwilling to independence. The interviewee has a
relation with his auditor because he was an auditor in one of a public accounting
firm which is now having responsibility to audit his company. He has more
experience in doing audit compare to his external auditors. The interviewee
sometimes gives benefit which is not in agreement or engagement letter to
auditors. The benefit was only to appreciate the auditors, usually client will give
those benefit when the auditor almost finish their work in their company.
Interviewee thinks that the level independence of external auditor is higher in
big 4 accounting firms rather than others accounting firms.
b) Auditor’s Responsibility
Based on the interview result, interviewee sometimes faces the external
auditor who has misunderstanding with his own responsibilities. In user’s
perceptions the responsibilities of auditor are only providing opinion for their
financial statement and understand client’s business industry. In his opinion, in
fact the auditors sometimes not really focus on their own responsibility, but also
do the works of internal audit which is not his responsibilities and give a
management comment which client believe that it doesn’t fit on external
auditor’s responsibilities.
c) Expectation Gap Experience
The expectation gap that can be found in interview from client is the
demand from a client for auditor to have equal understanding about client’s
industry. Junior auditor, senior auditor, manager and partner should have same
35 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
understanding and experience in client’s business industry. Interviewee
explained his experience in facing the auditor who doesn’t really understand
their industry. He said when the auditor doesn’t understand their industry the
auditor will ask several questions that he doesn’t want to answer. Sometimes he
tends to ignore his auditors when his auditors ask many questions.
d) User’s Expectation
Users expect that all of the auditors from junior to senior should
understand client’s business industry even if the auditor doesn’t have experience
before in client’s business industry. The users also expect the entire auditor to
have integrity and independency in doing audit process.
4.2. Research Findings
4.2.1. Auditors and users understanding about concept of independency
During the research author obtained information which can be concluded
that auditor’s and user’s perceptions about auditor’s independency is too
general. Auditors and client believe independency will only impact to managers
or partner. It doesn’t really affect the staff of auditor or junior auditor. The
concept of auditor’s independence that interviewee held is not too specific. They
think the independency is needed only for those who have authority in making
opinion. In fact, junior auditor or associate will also have experience in facing a
client who will offering some benefit in order to cover client’s mistake from
auditor’s manager, partner and public. There are several clients tend to ignore
36 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
the implementation of this concept. Those clients usually come from small-scale
corporation which is lack of experience.
4.2.2. Users misunderstanding in responsibilities of auditors.
Primary responsibility of an auditor is to verify whether the financial
statements exhibit a true and fair view of state of affair of the business. Another
responsibility of auditor is the prevention and detection of errors and frauds.
There are negative relationship between responsibilities of auditors and audit
expectation gap in the sense that higher responsibilities assumed by the client.
From the interview result, client assumed auditor should have higher
responsibility in understanding client’s business industry. They expect the entire
auditor to have equal experience and understanding in many industries for junior
auditor, senior auditor or manager.
Client perceptions are too high, they don’t want to explain more about
their industry and system that they used to auditor and think that auditor should
already understand about it, even if the auditor only junior or associate. Client
also misunderstanding that auditor’s responsibility is only to find a mistake in
their company.
4.3. Research Analysis
4.3.1. Is the audit independence concept of user different with auditors?
Gill and Casseral (1996), they have emphasized that “independence is
the cornerstone of auditing profession, without independence the auditor’s
37 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
opinion is suspect.” The concept of external auditor’s independence that held by
some of the users and client is actually the same, but their perceptions and
understanding are too general and they put auditor’s independence not in their
priority. Their understanding of this concept is to general, but not all users
understand the concept of auditor’s independence.
A user (client) with lacks of experience in small-scale corporation tends
to ignoring auditor’s independence even if they actually understand the real
concept of auditor’s independence in order to hide their weaknesses. If we
compare with clients in big-scale Corporation, they usually don’t really care
about auditor’s independence because they have more experience and they don’t
have anything to hide from public. For example the experience from one of
interviewee in RSM Indonesia, some clients might be ignoring the
implementation of this concept of auditor’s independence to make their mistake
covered by associate auditors from their manager, partner or public. The reason
of this problem is because they don’t really concern about auditor’s
independence. They think the one who need to implement this concept is partner
or manager and they don’t think that associate auditor really need the
implementation of this concept.
In author’s analysis, the concept of audit is really needed by all auditors
even if she/he only associates or manager which is not having an authority to
create an opinion because associates or manager will directly face their clients
during their work. Since they directly face clients, there is high possibility for
38 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
benefit offered by their client. User expects auditors to act in ways which are
different from what auditor act in a real work.
4.3.2. Is the auditor’s responsibility concept of user different with auditors?
The Auditor has important part in every business. All corporations are
obligated to be audited by auditor to run its business. “Auditor has a
responsibility to plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether
caused by error or fraud” (Auditing Standards No. 82). In this research, the
author analyzes that user and auditor have different perceptions in concept of
auditor’s responsibility. Users have perceived responsibilities of auditor are only
providing opinion for their financial statement and understand client’s business
industry. In fact, the auditor sometimes doesn’t focus on their own
responsibility, but also do the works of internal audit which is not his
responsibilities. The auditors also give a management comment which clients
believe that it doesn’t fit on external auditor’s responsibilities. According to Guy
and Sullivan (1988), there is a difference between what the public and financial
statement users believe accountants and auditors are responsible for and what
the accountants and auditors themselves believe they are responsible for.
Another perception is from auditor, they believe that they have three
main responsibilities. The first responsibility is to reorganize financial statement
of client. Second, provide opinion for client’s financial statement in order to
make their financial statement reliable to use by public or users. The third
39 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
responsibility is to check the internal control of a company, whether there is any
accounting policy of a company that is not relevant with PSAK. There are many
users or client misunderstanding with auditor’s responsibility. They have
mistaken that auditor’s responsibility is to find a mistake of a client.
4.3.3. What are the causes of the expectation gap between the auditor and user?
When the author detects expectation gap between client and auditor, it
will show the causes. There are a lot of aspect that have different understanding
from client and auditors. There are several causes of expectation gap arising
between auditors and client.
First is the expectation from client for auditor is too high. Client who has
been audited by big 4 accounting firms will tend to have higher expectation for
all auditors even if the work of audit not always be measured by their public
accounting firms. They believe big 4 accounting firms are more independent
because they have higher income compared to others. Clients and public
perceive if the auditors have higher income it will make them immediately reject
others benefit outside the engagement letter from client. Client believe that big 4
accounting firms is the most reliable auditors. In facts, at the first meeting clients
tend to compare RSM Indonesia with big 4 accounting firms, but after the result
is out and all of the procedure of audit has been made clients will understand and
realize that quality of audit from big 4 and RSM Indonesia is actually the same.
Along with this expectation from client there is also expectation from
auditors in the same aspect. Auditors perceive to have a client that has an
40 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
experience as an auditor and understanding their responsibilities in order to
make them easier doing the audit process and collecting data or document
needed for audit process on time. In fact, not all client or accountant have
experience as an auditor and auditor’s expectation cannot always be fulfilled
because not all of them have experience as an auditor.
Client believes that auditors have expertise on every client’s business
industry even if the auditors are only associates or junior auditor that only has
several experiences. Clients also believe that auditors are a person who knows
everything in their company. In fact the auditors still need to learn client’s
industry. Since there are a lot of industries, it will take a lot of experience and
time for auditors to understand all clients’ business industry. In RSM Indonesia
there are several divisions that will be divided their employee and each division
will have their own expertise in client’s industry. From the observation, the
author understands line service and each division that RSM Indonesia have. For
example green division in RSM Indonesia will take over all clients in
manufacturing industry. Auditors assume that every client actually needs to
describe their industry at the first meeting. Auditors believe that client will also
need to contribute with procedure of audit. They need to contribute in answering
every question that auditors ask because not all industries have same system, for
example not all industries or company have same way in recording a transaction.
Another expectation from auditor to client is to respect and understand
the independency which is auditor need in process of audit. Auditors expect the
client will not ask auditors to cover their mistake that material enough and
41 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
exchange it with some benefit. Auditors want the client to respect their work and
by accepting all the result of audit even if it makes their company losses. In
interview with client, they also expect that auditors to have integrity and
independency even if they are not an auditors from big 4 accounting firms. In
author’s analysis there are several clients who do not respect and understand the
auditor’s independence come from small-scale company.
In contrast, client in a big-scale company demanded all auditors to have
integrity and independency because they believe that their company good
enough and they also don’t have anything to hide from public. The expectation
will differentiate from every person and the expectation will base on what they
need.
4.3.4. Is there any negative impact of audit expectation gap on user and auditor?
Along with a problem there will always a negative impact. In this study
the author will analyze the negative impact arising from audit expectation gap.
The gap in here means different perceptions or opinion held by the auditor and
users. If they never have the same perspective and the expectation from both of
them cannot be fulfil, it might be created several problem between users and
auditors.
The first problem that might be arising is lack of communication
between users and auditors because users tend to ignoring all auditors who has
so many questions for their industry. This conflict is because of the expectation
gap from user who expects the auditor to understand their business industry
42 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
immediately even if the auditor is only associate auditor. Client and auditors
should respect and understand each other in order to avoid this problem.
The second problem that will be arising is decreasing in quality of audit.
The quality of audit will be decreasing when they held different perceptions
during audit process. The quality work of auditor will be decreasing if the users
misunderstanding with their responsibility and lack of knowledge in auditor’s
independence. Misunderstanding from users will lead to a complicated relation
between auditor and user. The decreasing quality of audit may lead to
unsatisfactory from users and they will hesitate or not confidence in their
decision making.
43 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
CHAPTER V
CONCLUSION AND RECOMMENDATION
5.1. Conclusion
In this sub-chapter, author concludes the audit expectation gap is exist
and its influences to work of auditor. Based on description and analysis of the
data in the previous chapters, author concludes that the audit expectations from
auditors in RSM Indonesia and users are too high. User expects auditors to act in
ways which are different from what auditor act in a real work. Those
expectations arise because of different perception on auditor’s responsibility
between users and auditors.
In conclusion about independency the auditors in RSM Indonesia are
independence enough in facing the client who has lack implementation in
independency. They also might have same perceptions in auditor’s
independence, but perceptions from both respondents are too general. The
perceptions which are too general will lead to lack of implementation. However,
“the expectation gap itself might be arises from a combination of excessive
expectations and insufficient performance.” (Knutson, 1994)
Performance of auditor will keep decreasing if the expectation gap from
user and client always growing. In order to increase performance from auditor
public need to make their expectation not too high. “The persistence of
damaging expectation gap is not new and it seems to be growing to determent of
the profession’s standing with the public.” (Chandler et al., 1993) Expectation
44 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
gap may lead to several problems in auditing process. The relation between
auditor and client not in a good condition because when they have an
expectation gap, it means they don’t understand each other responsibility. It will
also lead to a decreasing in quality of audit. However the research shows that the
expectation gap and different perception between auditor and user did exist.
5.2. Recommendation
Based on the conclusion above and scope limitation in this research, the author
provides several recommendations for related parties and further research.
In order to reducing gap, users need to have more knowledge in auditing
profession and its responsibility. The less knowledge users have about
auditors the higher misunderstanding will be. The auditors performance will
keep decreasing if the expectation from user higher than the reality. In this
problem, author can conclude that better communication between auditor
and user or client will reduce the problem and gap. Auditor need to
increasing their implementation of independency in doing audit to avoid the
client who expects their mistake to be covered by auditors.
The author recommends future researchers to expending the respondent for
interview in order to obtain more information from several aspects. Besides
discovering the problem of audit expectation gaps related to responsibility
and independence the future researcher expected to discover other variable
that can relate to expectation gap. Since this research is using internal user as
another respondent besides the external auditor, author recommends future
45 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
research to use external user as respondent. Another recommendation from
author for future research is to expending the population of external auditor.
Author recommends future research to use auditor from others accounting
publics firm or more than one public accounting firms to obtain general
conclusion or result.
46 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
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49 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
APPENDICES
1. Interview question for internal user related to the topic of this thesis.
2. Interview question for external auditors in RSM Indonesia related to the topic of this
thesis.
3. Letter of Interview Statement from RSM Indonesia.
50 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
Interview Questions for Internal User
1. Did you ever be a client/user from public accounting firm in order to audit your
financial statement?
2. Did you ever directly face to face with you auditor?
3. How was your communication with auditor?
4. Did you ever have different opinion with your auditor about financial statement or
audit process?
5. Did you ever have relation with auditor?
6. Did you ever meet an auditor that doesn’t really understand with their
responsibility? If yes, what do you think and what should you do?
7. In your opinion what are the responsibilities of auditor?
8. Did you think auditors in Indonesia are professional in doing their responsibility to
public, client and user?
9. Did you ever be a client from auditor and give some benefit that is actually outside
from engagement letter?
10. In your opinion what are the criteria for professional auditor?
11. Did you ever have audited financial statement that not in a good quality? How was
the impact to your decision or economic activities?
12. Do you understand what is the meaning of auditor’s independence is? And did you
think independency is the most important thing for all auditors?
13. In your opinion, is the auditor in Indonesia independence enough?
14. Do you have a high expectation from auditor? Can you mention and explain your
expectation from auditor?
15. Is the audited financial statement by auditor the same as what was expected?
16. Did you ever disappointed with audited financial statement from auditor? What
was the impact from your disappointed?
17. Is the audited financial statement are easy to understand?
51 | Auditor’s Independency and Responsibility: Expectation Gap between Auditor and User’s Perception
Interview Questions for External Auditor
18. Did you ever be an auditor in order to audit your financial statement?
19. Did you ever directly face to face with you client or user?
20. How was your communication with client or user?
21. Did you ever have different opinion with your client or user about financial
statement or audit process?
22. Did you ever have relation with client or user?
23. Did you ever meet client and user that don’t really understand with auditor’s
responsibility? If yes, what do you think and what should you do?
24. In your opinion what are the responsibilities of auditor?
25. Did you think auditors in Indonesia are professional in doing their responsibility to
public, client and user?
26. Did you ever get some benefit that is actually outside from engagement letter from
your client or user?
27. In your opinion what are the criteria for professional auditor?
28. Do you understand what is the meaning of auditor’s independence is? And did you
think independency is the most important thing for all auditors?
29. In your opinion, is the auditor in Indonesia independence enough?
30. Do you have a high expectation for your client or user? Can you mention and
explain your expectation?
31. Is the client and user the same as what was expected?