Public Trust in the Auditors’ Work and the Prevailing Macroeconomic Conditions
Keywords:
Audit Expectation Gap; Economic Growth; Public Interest; Public Interest Entities; Public Trust in the auditors’ work
Abstract
This paper aims to explore whether the audit profession is impacted by global economic growth, how, and to what extent. In that manner, the study paper explores the interrelationship between the public trust in the auditors’ work and the prevailing macroeconomic conditions. For the applied research methodology, the proportion of audit company revenue, for the period from 2005 through 2022, derived from audit services and non-audit services, is used as a proxy to measure ‘the public trust in the auditors’ work’ and ‘the audit expectation gap’. These resultants are multiplied to calculate the ‘public interest’, which is juxtaposed against the global gross domestic product growth for the same period, to support the conceptual assertion that the public interest follows the current trends in the global economy. The study finds that public interest is directly related to the public trust in the auditors’ work. In this view, enhanced demand for audit services implies an increased public trust in the auditors’ work. The higher the demand for audit services, the bigger the public trust in the auditors’ work. The function of the audit expectation gap implies the general public to obtain a bigger scope of data and information regarding the operational activity of the auditees. The audit profession is connected with global economic growth through the public interest. This is because public interest follows the current trends in the global economy. The higher economic growth is accompanied by bigger public interest. In this regard, bigger public interest implies a bigger demand for audit services which in turn increases the public trust in the auditors’ work. This paper which uses the public interest as an indicator for global economic growth, contributes to understanding the relationship between the audit profession and prevailing macroeconomic conditions.
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References
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47. Shahzad, K., Rubbaniy, G. and El-Temtamy, O. Audit Quality During the Global Financial Crisis: The Investors’ Perspective. Research in International Business and Finance. 2017; 45: 94-105.
48. Tara, I. The Going Concern – Theory and Practice in the Financial Audit. University of Oradea, Economic Sciences Department. 2011.
49. Tepalagul, N. and Lin, L. Auditor Independence and Audit Quality: A Literature Review. Journal of Accounting, Auditing and Finance. 2015; 30 (1): 101-121.
50. Velte, P. and Freidank, C-C. The Link between in - and External Rotation of the Auditor and the Quality of Financial Accounting and External Audit. European Journal of Law and Economics. 2015; 40 (2): 225-246.
51. Zager, L., Sever Malis, S. and Novak, A. The Role and Responsibility of Auditors in Prevention and Detection of Fraudulent Financial Reporting. Procedia Economics and Finance. 2016; 39: 693-700. and
52. Zeman, Z. and Lentner, C. The Challenging Role of Going Concern Assumption Supporting Management Decisions after the Financial Crisis. Polish Journal of Management Studies. 2018; 18: 441-454.
2. Bedard, J.C. and Johnstone, K.M. Audit Partner Tenure and Audit Planning and Pricing. Auditing: A Journal of Practice and Theory. 2010; 29 (2): 45-70.
3. Bruhn, M. Qualitätsmanagement für Dienstleistungen. Grundlagen, Konzepte, Methoden. Springer. 2011; 8th Edition.
4. Centre for Financial Reporting Reform. News Letter July 2016. The World Bank. 2016;
5. Cohen, J.K.G. and Wright, A. Corporate Governance in the Post-Sarbanes-Oxley Era: Auditors’ Experiences. Contemporary Accounting Research. 2010; 27 (3): 751-786.
6. Danescu, T. and Spatacean O. Audit Opinion Impact in the Investor’s Perception – Empirical Evidence on the Bucharest Stock Exchange. Audit Financiar, 2018; XVI (1): 111-121.
7. DeAngelo, H., et al. Reversal of Fortune: Dividend Signalling and the Disappearance of Sustained Earnings Growth. Journal of Financial Economics. 1996; 40: 341-371.
8. Douglas, B. and Wodak, J. Who Speaks for and Protects the Public Interest in Australia? Essays Notable to Australians. 2015; 21: 24-25.
9. Duréndez, A. The Usefulness of the Audit Report in Investment and Financing Decisions. Managerial Auditing Journal. 2003; 18 (6/7): 549-559.
10. European Parliament. Directive 2014/56/EU. 2014.
11. European Parliament. EU Audit Regulation No. 537. 2014.
12. European Parliament. Directive 2006/43/EC. 2006.
13. Feigenbaum, A.V. Total Quality Control. McGraw Hill, New York. 1991; 3rd Edition.
14. Fiolleau, K., Hoang, K., Jamal, K. and Sunder, S. How do Regulatory Reforms to Enhance Auditor Independence Work in Practice? Contemporary Accounting Research. 2013; 30 (3): 864-890.
15. Garvin, D.A. What Does "Product Quality" Really Mean? Sloan Management Review. 1984; 26 (1): 25-43;
16. Gibson, C.H. Financial Reporting and Analysis – Using Financial Accounting Information. The university of Toledo, Emeritus. 2018;
17. Gros, M. and Worret, D. The Challenge of Measuring Audit Quality: Some Evidence. International Journal of Critical Accounting. 2014; 6 (4): 345-374.
18. Heinhold, M. and Pasch, H. Qualitätsmanagement in Steuerberatung und Wirtschaftsprüfung. Oldenbourg Verlag. 1999.
19. IFAC. International Standard on Auditing 701 – Communicating Key Audit Matters in the Independent Auditor’s Report. New York. 2016.
20. IFAC. Code of Ethics for Professional Accountants. New York, USA. 2018;
21. IFAC. International Standard on Auditing 320 - Materiality in Planning and Performing an Audit. New York. 2009.
22. IFAC. International Standard on Auditing 240 - The Auditor’s Responsibilities Relating to Fraud in an Audit of Financial Statements. New York. 2009.
23. IFAC. International Standard on Quality Control 1 – Quality Control for Firms That Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements. New York. 2009.
24. Iliev, K.P. Challenges to Financial Audit in Enterprises of Public Interest. Open Journal for Research Economics. 2018; 1 (1): 23-30.
25. International Monetary Fund. Real GDP Growth - Annual Percent Change. In site https://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD. 2023 October.
26. Jones, M. Audit Quality: Detection of Material Misstatement. West Virginia University, ProQuest Dissertations. 2018.
27. Köhler, A.G. Audit Committee, Board of Director Characteristics and Earnings Management. Journal of Accounting and Economics. 2005; 33: 375-400.
28. Karkacier, A. and Ertas, F.C. Independent Auditing Effect on Investment Decision of Institutional Investors. Accounting and Management Information Systems. 2017; 16 (3): 297-319.
29. Kellner, K. Internationales Marketing, Lecture in Kufstein. Austria. 2010.
30. Koh, H.C. and Woo, E-S. The Expectation Gap in Auditing. Managerial Auditing Journal. 1998; 13 (3): 147-154.
31. Kusaila, M.M. Managing Informal Learning in the Auditing Profession: How Auditors Develop Proficiency. Walden University, ProQuest Dissertations. 2017.
32. Leidner, J.J. and Lenz, H. Client's Business Risk, Public-Interest Entities, and Audit Fees: The Case of German Credit Institutions. International Journal of Auditing, University of Würzburg, Germany. 2017.
33. Mansur, H. and Tangl, A. How to Bridge the Audit Expectation Gap? Centre for Excellence for Scientific and Research Journalism, COES and RJ LLC. 2018; 7 (2);
34. Maroun, W. and Atkins, J. Whistle-Blowing by External Auditors in South Africa. Accounting, Auditing and Accountability Journal. 2014; 27 (5): 834-862.
35. Mareque, M., López, E.R., Villanueva-Villar, M. and Lago-Peñas, S. Determining Factors for Audit Opinion in Private Family and Non-Family Firms - Evidence from Spain. SAGE Open. 2019; 9 (2): 1-12.
36. Marten, K-U., Quick, R. and Ruhnke, K. Wirtschaftsprüfung - Grundlagen des Betriebswirtschaftlichen Prüfungswesens Nach Nationalen und Internationalen Normen. Schäffer-Poeschel, Stuttgart. 2015; 5th Ed.
37. Marx, B. An Analysis of Audit Committee Responsibilities and Disclosure Practices at Large Listed Companies in South Africa. South African Journal of Accounting Research. 2009a; 23 (1): 31-44.
38. Marx, B. An Analysis of the Development, Status and Functioning of the Audit Committees at Large Listed Companies in South Africa. PhD Thesis, University of Johannesburg. 2009b.
39. Marx, B. Challenges Facing the Modern Day Auditing Profession, Accountancy SA. 2009c. In site https://www.accountancysa.org.za/challenges-facing-the-modern-day-auditing-profession/. 2023 October.
40. Mickhail, G. The Big 4 Global Monopoly. 2012. In site http://www.metacapitalism.org/pubs/wps/. 2023 October.
41. Mill, J.S. The Collected Works of John Stuart Mill. The Later Letters of John Stuart Mill 1849 – 1873, Part II and III (eds. Mineka, F., Lindley, D.). Toronto, ON, Canada, University Press. 1972; XV & XVI.
42. Mustikarini, A. and Samudera, M.B. Does Modified Audit Opinion Matter to Investors? Evidence from Indonesia. Universitas Gadjah Mada, Indonesia. 2017. In site www.foura.org. 2023 October.
43. Porter, B. An Emirical Study of the Audit Expectation – Performance Gap. Accounting and Business Research. 1993; 24: 49-68.
44. Rice, S. The Meaning(s) of Public Interest in Law. University of Tasmania, Faculty of Law. 2015.
45. Sang Ho, L. Public Policy and the Public Interest. Lingnan University, Hong Kong. 2012.
46. Sirucek. M. Macroeconomic Variables and Stock Market: US Review. International Journal of Computer Science and Management Studies. 2015; MPRA paper No. 39094. In site https://mpra.ub.uni-muenchen.de/39094/. 2023 October.
47. Shahzad, K., Rubbaniy, G. and El-Temtamy, O. Audit Quality During the Global Financial Crisis: The Investors’ Perspective. Research in International Business and Finance. 2017; 45: 94-105.
48. Tara, I. The Going Concern – Theory and Practice in the Financial Audit. University of Oradea, Economic Sciences Department. 2011.
49. Tepalagul, N. and Lin, L. Auditor Independence and Audit Quality: A Literature Review. Journal of Accounting, Auditing and Finance. 2015; 30 (1): 101-121.
50. Velte, P. and Freidank, C-C. The Link between in - and External Rotation of the Auditor and the Quality of Financial Accounting and External Audit. European Journal of Law and Economics. 2015; 40 (2): 225-246.
51. Zager, L., Sever Malis, S. and Novak, A. The Role and Responsibility of Auditors in Prevention and Detection of Fraudulent Financial Reporting. Procedia Economics and Finance. 2016; 39: 693-700. and
52. Zeman, Z. and Lentner, C. The Challenging Role of Going Concern Assumption Supporting Management Decisions after the Financial Crisis. Polish Journal of Management Studies. 2018; 18: 441-454.
Published
2023-11-23
Section
Accounting and Auditing
