Investor Perception of Audit Expectation Gap a Study of the Nairobi Securities Exchange

Abstract

The study sought to establish investor perception of audit expectation gap. This was informed by the well-publicised collapses of large companies and the eventual incrimination of the external auditors, during recent time. This has highlighted the audit expectation gap. There is a common viewpoint that for an individual who is interested in a company, they should easily rely on the financial statements that have been audited as an assurance of business viability. The individuals who invest in companies trust that the information given by the external auditor acts as a guarantee of a company’s financial condition. There thus seems to exist a relationship between investor perception and the audit expectation gap, the narrowing or widening of this expectation gap is thus pegged on investor understanding of the role of auditors. The study made a comprehensive analysis of audit expectations on investors and auditors’ own view of the expectations gap. The study utilized both analytical and descriptive methodology to examine the gap between audit expectation and investors perception. The study used a questionnaire as the key tool for collecting data. Covariance and correlation matrices were used to identify how investors’ decisions (market, usefulness, responsibility and nature of audit factors) were influenced by the audit expectation.Statistical analysis was used to capture empirical data on all variables explaining the audit expectations gap and to determine the factor with the greatest impact on audit expectations gap. A second regression analysis was applied to capture auditors’ responses concerning the audit expectations gap. It was therefore a longitudinal study which sought to investigate the investor perception on audit expectation gap by studying the Nairobi Securities Exchange. The study found out that there is indeed an expectations gap in the role of external auditors in company audits. The analysis shows that there is a positive correlation between audit expectations gap and investor perception. The results from statistical analysis indicate that audit expectation gap increases by 0.2378 when investor perception increases by a unit. This basically explains the hypothesis of how investors will have a look on the audited financial statement to allocate their investment resources. The findings on the investor perception of audit expectations gap can be used to inform a number of policy decisions at improve understanding of the work that auditor’s do. Future researchers may focus on how improved stakeholder participation in the audit process may reduce the investor expectations gap and how this can improve investor understanding of what auditors actually do