kelomplocating audit expectations gap within a cultural context: the case of saudi arabia

Journal of International Accounting, Auditing and Taxation16 (2007) 179–206

Locating audit expectations gap within a culturalcontext: The case of Saudi Arabia

Roszaini Haniffa a,∗, Mohammad Hudaib b

a Bradford University School of Management, Department of Accounting & Finance, Emm Lane,Bradford BD9 4JL, West Yorkshire, UK

b University of Essex, Department of Accounting, Finance and Management, Colchester CO4 3SQ, UK

Abstract

This paper offers an insight into the types of ‘audit expectations gap’ that exist within a cultural context.Specifically, it investigates if the business and social environment affect the perceptions of audit performanceof users and auditors. Using a combination of mail questionnaires and semi-structured interviews, the studyreveals the existence of a ‘performance gap’ with respect to the roles specified in the statutory pronouncementsand those that can reasonably be expected of auditors in Saudi Arabia. The results further indicate the‘performance gap’ arises from four factors in the environment within which auditing is practiced: licensingpolicy, recruitment process, the political and legal structure, and dominant societal values. Interview resultsreveal the influence of institutional and cultural settings on the audit expectations gap and indicate that theinclusion of Islamic principles in auditing standards and the code of ethics would help reduce the expectationsgap that exists in Saudi Arabia.© 2007 Elsevier Inc. All rights reserved.

Keywords: Audit expectations gap; Saudi Arabia auditing; Socio-economic factors; Audit function; Audit performance

1. Introduction

The need for external auditors may be seen as a response to the agency problem. The auditfunctions as a mechanism to attest to the accountability and stewardship of company management(Chandler, Edwards, & Anderson, 1993) and reinforce trust and confidence in financial reporting.As a result of the increase in the complexity of business structures, globalization activities, andremoteness of fund providers from management, greater assurance about the financial informationprovided by companies is expected from auditors (Armstrong, 1987). The role of auditors has

∗ Corresponding author. Tel.: + 44 1274 234403; fax: +44 1274 235680.E-mail address: [email protected] (R. Haniffa).

1061-9518/$ – see front matter © 2007 Elsevier Inc. All rights reserved.doi:10.1016/j.intaccaudtax.2007.06.003

mailto:[email protected]

dx.doi.org/10.1016/j.intaccaudtax.2007.06.003

180 R. Haniffa, M. Hudaib / Journal of International Accounting, Auditing and Taxation 16 (2007) 179–206

changed over time to meet both local and global demands for their services. These changes haveresulted in an ‘expectations gap,’ in which there are differences between what the public expectsfrom an audit and what the auditing profession views the audit objectives to be (Chandler &Edwards, 1996).

Previous studies in the US (AICPA, 1978; Schelluch, 1996), the UK (Humphrey, Moizer, &Turley, 1993; Porter & Gowthorpe, 2001), Australia (Gay, Schelluch, & Reid, 1997; Monroe &Woodliff, 1993), Ireland (Robinson & Lyttle, 1991), New Zealand (Porter, 1993), South Africa(Gloeck & de Jager, 1994), Denmark (Højskov, 1998), Singapore (Best, Buckby, & Tan, 2001),Malaysia (Fadzly & Ahmed, 2004), China (Lin & Chen, 2004), Barbados (Alleyne & Howard,2005), and Egypt (Dixon, Woodhead, & Sohliman, 2006), have indicated the existence of an auditexpectations gap. The common response to the problem is to issue more accounting and auditingstandards and guidelines (Humphrey et al., 1993). However, the nature of the expectations gapand the remedies prescribed in addressing liability and credibility crises in one country may notwork in another because the auditing function is affected by the environment within which auditsfunction. Prescriptions to narrow the gap without understanding the interplay of factors in thebusiness environment that affect the nature, purpose, possibilities and limitations of auditing maybe futile. This problem exists for countries undergoing economic transitions from communism tocapitalism (see, for example, Hao, 1999; Lin & Chen, 2004; Sucher & Bychkova, 2001; Sucher& Zelenka, 1998) and for developing countries with different cultural values (see Hines, 1992),such as in the Middle East.

This study looks at Saudi Arabia because very little is known about the audit function in oil-rich, autocratic regimes in the Arabian Gulf region. Some cultural characteristics of Saudi Arabia,such as strong hierarchical social structure, importance of kinship and personal relationships,religion, the meanings of professionalism, accountability and trust, and the nature of some of itssocio-economic institutions, are similar to other developing countries and can provide insightsinto those countries that share similar characteristics. The findings of this research should be ofinterest not only to academic researchers interested in examining the uniqueness of auditing issuesin a country, but also to practitioners and policy makers in Saudi Arabia and other Middle-Easternand developing countries sharing similar socio-economic environment, as it has important policyimplications.

We used mail questionnaires to identify the types of expectations gaps that exist, and conductedinterviews to further explore how the various aspects of ‘culture’ that persist in the country mayhave influenced the perceptions of audit performance. The empirical results provide evidence thatan expectations gap exists with regard to audit performance in Saudi Arabia. Interviews with bothauditors and various user groups reveal how various factors in the business and social environmentaffect their perceptions of audit performance.

The remainder of this paper is organized as follows. The next section briefly reviews theliterature on the audit expectations gap and develops hypotheses to be examined based on thecultural paradigm that exists in Saudi Arabia. Section 3 explains the research design, and Section4 presents the empirical results and analysis. Section 5 provides the summary and conclusions.

2. Literature review and development of hypotheses

Humphrey et al. (1993) split the debate on audit expectations gap into four main issues: roleand responsibilities of auditors; the quality of the audit function; the structure and regulationof the profession; and the nature and meaning of audit report messages. Monroe and Woodliff(1993) address three audit expectations issues: auditors’ responsibilities, reliability of the financial

R. Haniffa, M. Hudaib / Journal of International Accounting, Auditing and Taxation 16 (2007) 179–206 181

statements, and prospects of the audit entity. Schelluch (1996) and Best et al. (2001) add anotherfactor to the debate, decision usefulness of audited financial statements.

Most studies on expectations gap focus on finding evidence of performance and/or reason-ableness gaps between auditors and various ‘sophisticated users’ with extensive knowledge andexperience in accounting and finance. Various explanations are posited for the variation in thescale of the audit expectations gap. Sweeney (1997) lists a number of areas where differences inexpectations arise: going concern, fraud, management performance, independence, and due care.One of the common explanations for the gap is the misunderstanding of the audit function byfinancial statement users and the public. For example, user groups expect auditors to detect andreport all frauds (Chung, 1995) or irregularities committed by management (Epstein & Geiger,1994; Lys & Watts, 1994). However, auditors argue their responsibility is limited to providingassurance that the financial statements conform to GAAP (Lin & Chen, 2004) and does not includedetecting and preventing fraud (AICPA, 1987; O’Sullivan, 1993) since truthful financial report-ing is the legal responsibility of management (Nair & Rittenberg, 1987). Researchers note thatthere is a need to educate audit beneficiaries because the gaps are attributed to users’ confusion(Gay, Schelluch, & Baines, 1998), widespread misunderstanding (APB, 1991), and ignorance(Humphrey, Moizer, & Turley, 1992).

From an expectation–performance point of view, there are two components to the gap: ‘rea-sonableness gap’ and ‘performance gap’ (CICA, 1988; Porter, 1991). The former arises whensociety’s expectation of auditors exceeds the duties that can reasonably be expected of audi-tors, such as reporting to relevant authorities every single irregularity detected (Porter, Simon,& Hatherly, 2003). The ‘performance gap’ arises when society’s reasonable expectation of audi-tors’ accomplishments falls short of their expectation of auditors’ achievement. This result couldbe due to either ‘deficient standards’ (the gap between duties reasonably expected of auditorsand auditors’ existing duties, as defined by the law and professional promulgations) or ‘defi-cient performance’ (the gap between the expected standard of performance of auditors’ existingduties and auditors’ perceived performance). Fig. 1 shows Porter’s (1993) structure of the auditexpectation–performance gap.

Fig. 1. Structure of the audit expectation–performance gap. 1Duties defined by the law and professional promulgations.2Duties which are cost-beneficial for auditors to perform. Source: Porter (1993).


To detect a performance gap due to ‘deficient standards,’ involves comparing the role andresponsibilities de jure (based on legal and professional promulgations) and de facto (throughresponses from surveys and observations). Despite the presence of sufficient standards, a per-formance gap may also arise due to factors in the environment that do not support the effectivefunctioning of an audit. Hence, identifying and exploring the contextual aspects that may giverise to the performance gap will shed light on the best way to narrow the expectations gap.

In this study, the emphasis was placed on aspects of auditors’ responsibilities resulting fromlegal pronouncements, responsibilities related to fraud detection, and provision of ancillary ser-vices that can be reasonably expected from auditors, as well as factors in the environment thatmay impact on audit performance, namely the licensing policy, recruitment process, political andlegal structure, and dominant societal values.

2.1. Performance of duties based on legal pronouncement

The literature has documented the existence of an expectations gap in both developed anddeveloping countries because role expectations and behaviors are not static and have to be adjustedthrough the process of negotiation and mutual influence reflecting the preferences of both partiesin the course of their interactions. One of the causes of the performance gap in relation to theauditors’ role and responsibilities is due to a deficiency in the standards, a situation that ariseswhen auditors are not able to fulfill the role and responsibilities expected by the public becausethey are not clearly defined or are not included in the legal pronouncements.

In Saudi Arabia, the regulatory framework that describes the responsibilities of auditorsinclude the Companies Act 1965 (amended 1985), the Income Tax and Zakah Law 1950, theBanking Control Law 1966, the General Auditing Bureau Constitution and Regulation 1970,the Saudi Auditing Standards 1985, the Statutory Accountants Act 1973 (amended 1994), aswell as the Professional Code of Ethical Conduct (PCEC) 1994. Table 1 provides a summaryof the responsibilities of the auditors as found in the various Saudi Arabian legal pronounce-ments.

Table 1Summary of the responsibilities of the auditors in Saudi Arabia based on official pronouncements

Responsibilities of auditors Sources

1. Adding credibility to financial statements Saudi Auditing Standards 1985,Professional Code of Ethical Conducts 1994

2. Acting as an expert Saudi Auditing Standards 19853. Acting as a fair judge Saudi Auditing Standards 1985,

Professional Code of Ethical Conducts 19944. Ensuring adequate disclosure Saudi Auditing Standards 19855. Determining whether the balance sheet shows a

true and fair valuation of the companyObjectives and Concepts of Accounting 1985

6. Reporting any problems in getting access toinformation during the conduct of audit

Companies Act 1965, Article 131

7. Reporting any problems in getting clarificationfrom management during the conduct of audit


8. Reporting all violations of rules and regulations Companies Act 1965, Article 1329. Adhering to the professional code of ethics Statutory Accountants Act 1994

10. Express opinions on the representation ofcompany’s accounts



An overview of the differences in processes and the nature of assurance services between theUS, the UK and Saudi Arabia is provided in Appendix A.

Although the above responsibilities of auditors are included in the legal pronouncements(known as anzimah), closer examination indicates that they were derived from Anglo-Americansources without much consultation with relevant parties (Shinawi, 1970) or consideration of thesocio-economic peculiarities that exist in the country. Although the domestic standard-settingbody, Saudi Organization for Certified Public Accountants (SOCPA), was established in 1992, itis still considered to be in the infancy stage and has not had much impact. Thus, we expect anexpectations gap between auditors and users of audit reports concerning the current performanceof responsibilities prescribed in those pronouncements. Hence, our first hypothesis is:

H1. There is an expectations gap between auditors and users in relation to the performance ofthe audit responsibilities as prescribed de jure.

2.2. Performance of responsibilities reasonably expected of auditors

Besides an expectations gap that arises due to deficient standards and/or performance, a gapmay also emerge when society expects auditors to perform duties beyond those prescribed de jurebut which can reasonably be expected of them. These reasonable duties include those associatedwith fraud detection and provision of ancillary services.

2.2.1. Fraud detectionMost professional accounting bodies have issued pronouncements to protect society from the

risks of frauds and scandals such as aggressive earnings management.1 Users expect the auditorsto give them assurance on the reliability of the audited financial statements (i.e. free from materialfrauds and errors), and to detect fraud.

SOCPA is silent on the issue of fraud, despite increasing allegations of fraud in the businessenvironment.2 Unlike their counterparts in the West, the Saudi accounting profession is ratherweak, but the litigation cost is also much lower. Yet not a single firm has been sued, even in casesof corporate failure (Al-Sehali & Spear, 2004). Given the absence of standards that regulate thescope of audit and a strong legal system capable of protecting auditors and investors (as there existsa dual legal system that is often incompatible),3 and a highly corrupted business environment (seeTransparency International, 2004, where it was ranked 71 out of 145), we expect a gap to existconcerning fraud. Thus, the second hypothesis is stated as follows:

H2. There is an expectations gap between auditors and users concerning auditor responsibilityfor detecting and reporting fraud.

2.2.2. Provision of ancillary servicesIn addition to independent verification of clients’ financial statements, auditors render other

types of non-audit services such as bookkeeping, tax services and management advisory services

1 For instance, see SAS No. 82 Consideration of Fraud in a Financial Statement Audit (AICPA, 2002); SAS 110 Fraudand error (APB, 1995); and Fraud: Meeting the challenge through external audit (ICAEW, 2003).

2 See Asharq Al-Awsat Newspaper (2004, 1 September), Riyadh Newspaper (2004, 9 November), The Sunday Times(2004, 25 July), and The Guardian Newspaper (2004, 14 December).

3 The Shariah (Islamic teaching) plays a major role in the formulation and development of the legal system and supersedesall other sources of legislation (Ernst & Young International, 1998).


(MAS) to their incumbent clients. According to Kell (1968), bookkeeping and tax services areclassified as ‘accounting services’ because they evolved naturally from the audit engagement andthe auditor’s familiarity with the client’s information systems (Patten & Nuckols, 1970). MAS areclassified as ‘administrative services’ because they are outside the traditional scope of the audit,and extend beyond the client’s information and control system (i.e. beyond accounting services).The duality in providing audit and non-audit services, especially administrative services, increasesthe auditor’s economic interest in the client, thus giving rise to conflict of interest and threateningauditor independence (Moizer, 1985). Those who support auditors providing ancillary servicesargue that independence is a matter of degree rather than absolute, and believe that the auditorcan still achieve the adequate degree of independence while rendering consultancy.

SOCPA was less proactive in dealing with issues of independence than the professional bodiesin the US and the UK. Its professional code identifies provision of management advisory services(MAS) as impairing independence but does not consider provision of tax and zakah services asthreatening independence, although auditors often advocate clients’ interests. The code is silenton the issue of bookkeeping services. Hence, the perceptions of auditors and users of audit reportsregarding the performance of ancillary services may differ. The third hypothesis is:

H3. There is an expectations gap between auditors and users concerning whether auditors shouldbe permitted to provide ancillary services.

2.3. Impact of factors in the environment on audit performance

As previously mentioned, a performance gap may also arise due to factors in the environment.This study explored whether four factors, the licensing policy, recruitment process, political andlegal structure, and dominant societal values, shape the perceptions of audit performance in SaudiArabia.

2.3.1. Licensing policyMembers of a profession have specialist knowledge and skill gained through an advanced level

of education, training and experience. Professional organizations have procedures to monitor themaintenance of standards of competence and behavior to exclude those who are ‘unqualified’(Flint, 1988). One procedure is licensing.

The rapid shift in economic development in Saudi Arabia increased the demand for auditors,especially following the oil boom in the 1970s. To cope with the increased demand for auditors,licenses were issued to anyone holding a CPA or Chartered Accountants certificate, or a degree inaccounting or management. Even those with no certificate or degree who had some accounting andauditing experience (Shinawi & Crum, 1971) were granted a license. Due to the lack of qualifiedand experienced Saudi nationals, foreign professional audit firms dominated the profession, andintroduced accounting and auditing standards and procedures, as well as professional ethicalcodes from their home countries (Al-Rehaily, 1992). They also created an image as providers ofhigh quality audits. Following the formation of SOCPA in 1992, licensing rules became slightlymore stringent, and required a university degree in accountancy and successful completion ofthe SOCPA qualifying test. However, those who were qualified under the old rules were allowedto continue to practice. SOCPA also issued a new set of accounting and auditing standards,ethical codes, and other procedures to enhance the profession. The lax licensing policy in the pastcreated a disparity in the types of auditors practicing in Saudi Arabia. Such a situation may affectperceptions of audit performance. Hence, our next hypothesis is:


H4. There is a difference in the perceptions of auditors and users concerning whether the licensingpolicy hinders the effective performance of the audit.

2.3.2. Recruitment processThe recruitment of highly competent staff is vital in ensuring the delivery of high quality audits

and protecting the reputation of the profession. Hence, the selection criteria should be based onmerit and equal opportunity.

The existence of a strong class structure based on the tribal system in Saudi society determinesthe power and influence of certain groups on key government policies (Helms, 1981), includingdomination of key posts. Favoritism and mediation (wassattah), i.e. seeking favorable decisionsthrough one of the official’s favored persons, are normal and dynamic forces in daily activities(Al-Awaji, 1971). This societal structure gives rise to nepotism and cronyism (Kay, 1982), andlimits professionalism in most key institutions, including the auditing profession. SOCPA requiresall audit firms to have at least 30% of their staff composed of Saudi nationals. To meet this policy,it is common to find staff hired not on merit but just to fill the quota. This may not only affect auditperformance, but also harm the integrity and image of the profession. Thus, the next hypothesisis:

H5. There is a difference in the perceptions of auditors and users concerning whether therecruitment process hinders the effective performance of the audit.

2.3.3. Political and legal structureThe political and legal structure may also affect the audit function and limit its ability to serve

the public interest. The power of the autocratic regime in Saudi Arabia is unlimited, extending toall spheres of life, including the legal system and the day-to-day life of its people. The auditingprofession is not permitted to determine its own course in Saudi Arabia, and is the apparatus forthe state to implement its policies and exercise control. Thus, the next hypothesis is:

H6. There is a difference in the perceptions of auditors and users concerning whether interventionof the state hinders the effective performance of the audit.

It is widely recognized that the auditing profession evolves based on the legal environment inwhich it operates (Anderson, Maletta, & Wright, 1998; Willekens, 1995). Judicial assessmentsof auditor’s liability, fraud, and auditor independence affect the profession. A dual legal sys-tem operates in Saudi Arabia. One is based on Shari’ah Islami’iah (Islamic teachings) and theother on secularized (non-religious) laws, known as nizam. These regulations are issued by theKing through the exercise of his political legislative power (Vogel, 1993). This legal system hasimportant implications for the auditing profession, since auditors must deal with two differentsets of systems that are often contradictory.4 Having two types of judges with differing judicialbackgrounds and forcing judgments to be made on two ‘incompatible’ sets of laws have causedconfusion and frustration (Vogel, 1993), and have resulted in most auditing disputes being settledout of court or by the Ministry of Commerce. A lack of faith in the dual legal system and a lack of

4 The Islamic judiciary code is based on microcosmic interpretation (i.e. appraising the case against the divine commandof revealed texts), while the commercial law is substantially based on macrocosmic interpretation (i.e. sanctions not ofindividual conscience but of a world-existing institution or collectivity, such as in judicial precedent or a jury, as commonlyfound in the West).


consistency in solving disputes have caused many foreign companies to specify in their covenantsthat any disputes should be solved according to the law of their home country (Al-Saleh, 1994).

The legal institution in Saudi Arabia is not totally independent, as the King has ultimate powerin appointing and dismissing judges. Such a legal environment not only distorts the developmentof regulations and rulings but also the development of a healthy and active profession. Given thelegal context within which auditing is practiced, the standard of performance expected of auditorsmay not achieve its full potential and, consequently, will give rise to an audit performance gap.Our next hypothesis is as follows:

H7. There is a difference in the perceptions of auditors and users concerning whether the duallegal system hinders the effective performance of the auditing role.

2.3.4. Societal valuesThe importance of culture5 on the behavior and attitude towards accounting and auditing

practices is well recognized (Haniffa & Cooke, 2002; Neu, 1992). The concept of culture is broadsince it refers to social, political, and other factors that influence individuals’ behavior (Hamid,Craig, & Clarke, 1993) and must be narrowed down in any study to best describe its effect (Meek,1988). One element of culture is societal values, which include norms, ethics, belief systems,religion, and philosophy. An understanding of social values is important, not only because itreflects the system of shared beliefs that provide norms for human conduct (Blau & Scott, 1962)at a particular point in time, but also because it indicates the standards which influence members ofthe society. Similarly, value systems may influence perceptions and meanings of auditing concepts(Belkaoui & Picur, 1991) such as independence, accountability, and trust.

Religion is said to be the most important factor in Saudi culture (Nyrop, 1977) and influencespractically every act and moment in life (Patai, 1952) and at all levels, concurring with Islam asa way of life. Besides religion, Arab traditions, which include family institutions and essentialcustoms, norms, and practices that are deeply rooted in history, are still strongly maintained (Aba-Alkhail, 1988). The social attitudes and conceptions of fate, destiny, and time that persist amongArabs have substantial influence on auditing.

Fatalism, the belief that whatever happens is God’s will, and that there is very little one can doto change the course of events, is dominant in Saudi society (Al-Awaji, 1971). Such a fatalisticattitude has produced negative consequences towards creativity, authority, and the utility of time. Italso has negative implications for auditor independence, as a fatalistic auditor may not take auditplanning seriously and may lose the quality of professional skepticism. Insignificance of timeis manifested in behaviors such as leaving work early, idleness during working hours, spendingwork-time on private activities, and unexcused absenteeism (Aba-Alkhail, 1988). Thus, people arenot internally motivated towards achievements but rather the maintenance of the status quo. Therelaxed attitude towards time may not only affect the quality of the audit, but also waste resourcesand slow the progress towards professionalism. Another common societal value is secrecy andpreference for confidentiality. These values affect the quality and quantity of information disclosedin the audit process. Hence, our next three hypotheses are as follows:

H8. There is a difference in the perceptions of auditors and users concerning whether the fatalisticattitude hinders the effective performance of the auditing role.

5 Culture is defined as “. . . the shared ways groups of people understand and interpret the world and the way in whicha group of people solves problems” (Trompenaars, 1993, p. 6).


H9. There is a difference in the perceptions of auditors and users concerning whether theindifferent attitude towards time hinders the effective performance of the auditing role.

H10. There is a difference in the perceptions of auditors and users concerning whether the highsecrecy in society hinders the effective performance of the audits.

Saudis tend to have a lax attitude towards rules and regulations, especially if they are not relatedto religion. This attitude is reinforced by the lack of enforcement by the relevant authorities. Hence,the individuals in the profession must ensure that some form of accountability and safeguards forsociety are in place, especially when dealing with dominant personalities in a highly secretivebusiness environment. In other words, there exists an uncomfortable relationship between the richand powerful and the professionals, which will affect audit performance. Hence, our next threehypotheses are:

H11. There is a difference in the perceptions of auditors and users concerning whether the laxattitude towards rules and regulations hinders the effective performance of the auditing role.

H12. There is a difference in the perceptions of auditors and users concerning whether the lackof enforcement of rules and regulations hinders the effective performance of the auditing role.

H13. There is a difference in the perceptions of auditors and users concerning whether dominantpersonalities in society hinder the effective performance of the auditing role.

3. Research method

The main method of research on the audit expectations gap has been the questionnaire using aLikert scale (Beasley, 1996). Survey-based empirical studies fail to conduct deeper analysis of thereasons behind the expectations gap. We employ a qualitative approach to support the quantitativesurvey to help us understand the causes of the expectations gap and suggest ways to narrow it.

3.1. Data collection

The collection of data comprised three stages: pilot interviews6 with a number of auditorsand users who have substantial knowledge of accounting and auditing (credit managers, finan-cial analysts, shareholders, financial directors, and representatives of governmental bodies); mailquestionnaires to 350 subjects comprising eight separate groups; and face-to-face semi-structuredinterviews with 48 respondents selected from the 8 groups who have extensive knowledge aboutfinancial statements and auditing practices.

3.2. Development of mail questionnaire

The mail questionnaire was designed to ascertain the respondents’ perceptions about auditperformance of auditors as required under Saudi statutory requirements, audit performance thatcan be reasonably expected of auditors (specifically, fraud detection and provision of ancillaryservices), and factors in the environment that may affect audit performance. The questionnaire has

6 These interviews were used to identify any problems with the language used and the scope covered in the mailquestionnaire and interview schedule, as well as to gain a better understanding of the make-up of the population underinvestigation.


four sections. The first section is related to demographics (age, nationality, work position, edu-cational background, experience, familiarity with audited financial statements, etc.). The secondsection comprises a list of propositions (10 statements) related to audit performance as specifiedin Saudi statutory pronouncements. The third section is related to propositions regarding auditperformance that can be reasonably expected of auditors (eight statements). Finally, the fourthsection consists of a list of propositions related to factors in the environment that may affectaudit performance (10 statements). Respondents were asked to indicate their agreement or dis-agreement on a Likert scale of −2 (strongly disagree) to 2 (strongly agree), with ‘no opinion’or ‘neutral’ as a score of 0. The mail questionnaire was originally written in English and latertranslated into the Arabic language. The translation was validated by an English-speaking Arabcolleague.

3.3. Survey samples and analysis of mail questionnaires

The population chosen for this study comprised eight groups: auditors (large and small), finan-cial directors, credit managers, investment analysts/funds managers, shareholders (substantial andnon-substantial), and representatives from governmental bodies, namely Saudi Arabian MonetaryAgency (SAMA), Department of Income Tax and Zakah (DITZ) and the General Auditing Bureau(GAB). These groups were chosen because they have been identified as primary users of auditreports in Saudi Financial Accounting Standards (1999), and have been shown to rely on suchstatements to reach decisions (El-Saqa, 1997).

The sample size for each group was based on our judgment of appropriate numbers repre-sentative of the population of each group, taking into account Saudi’s secretive culture and alsothe cost involved in distributing questionnaires.7 Auditors (n = 115) from both large and smallaudit firms were randomly selected from a list of names and addresses obtained from SOCPA.This represents about 20% of the population. Financial directors (n = 60) of the top 100 largestcompanies were randomly selected from the Directory of Saudi Share Registration Companies(SSRC) 2000, representing 60% of the population. The nine banking institutions operating inSaudi Arabia were contacted, and they provided a list of names of their credit managers work-ing in major cities, from which a random sample from each bank was then selected (n = 60).This represents about 20% of the population. The population of investment analysts and fundmanagers was dispersed, and there was no official record of them. Various banking and finan-cial institutions, as well as two recognized local investment companies, were contacted and theirco-operation was obtained in getting a list of names of their investment analysts and fund man-agers. We then selected 30 names out of 60 (50% of the population) for our sample. SaudiArabia’s top 100 largest companies were contacted to seek their cooperation in getting a list ofnames of their substantial and minority shareholders. Sixty names were identified, representing30% of the population. Heads of governmental bodies, namely SAMA and GAB, were con-tacted, and 25 officers out of 50 (50% of the population) were selected from the list of namesprovided.

A pilot test of the questionnaire was initially conducted on 10 respondents in the Riyadharea, and feedback was sought on the instrument. Only minor changes were made after the pilot

7 We do not know the exact population size for each of the groups and we had to rely on information made available tous. The percentages given are based on estimated population size.


test. In total, 350 questionnaires were mailed.8 Details of the distribution of the questionnaires,number of responses, and demographics of respondents are presented in Table 2. Results of atest for non-response bias (comparison of early and late respondents) indicate no significant biasbetween the two groups. Early responses refer to those received from the first mailing, and lateresponses refer to those received from subsequent mailings and follow-up. Non-parametric testswere also performed in order to determine whether responses to the questionnaire were in anyway associated with these demographic and related details, but no significant differences werefound.

The results in Table 2 indicate an overall response rate of 49.7%. All auditors have accountingqualifications, but less than 50% of each user group has accounting qualifications. More than 50%of respondents from the user groups (except for ‘other shareholders’) have accounting and auditingexperience, with the mean number of years of experience being 16 years. This provides evidencethat the respondent groups have adequate knowledge and experience related to the accountingand auditing process.

The results from the mail questionnaire were analyzed using SPSS. To analyze the expectationsgap that may exist between the various interest groups, the non-parametric Mann–Whitney U-testwas used as the primary statistical test of significance, since it is regarded as particularly powerfulin testing mean differences between the eight independent samples without having to test fornormality of distribution (Siegel & Castellan, 1988). Any significant differences found betweenthe eight groups suggest the existence of an expectations gap.

3.4. Interviewees and analysis of semi-structured interviews

Although the mail questionnaire provided sufficient quantitative data, semi-structured inter-views were undertaken to complement and enhance the information obtained from thequestionnaire. Triangulation of methods has the advantage of increasing confidence (Fielding& Fielding, 1986), and enriching and validating each approach (Faulkner, 1982). Furthermore, asnoted by Patton (1990, p. 132), “qualitative data can put flesh on the bones of quantitative results,bringing the results to life through in-depth case elaboration.”

Judgmental sampling was used as a basis for the selection of the size of both groups of respon-dents (auditors and users) for the interview, since the aim was to include all those persons relatedto the phenomenon. Hence, much emphasis was placed on quality rather than quantity. The sampleof respondents interviewed was restricted to a sub-sample of those to whom the questionnairewas sent (Williamson, Karp, Dalphin, & Gray, 1982), and who had indicated willingness to beinterviewed in the mail questionnaire. Personal face-to-face interviews using a semi-structuredinterview schedule9 were conducted between 2001 and 2002. Our interview schedule encom-passes three aspects: auditor’s role based on legal pronouncement, auditor’s expected role, andfactors affecting audit performance. Under each aspect, we had a list of questions to further verifythe findings from the questionnaire survey, and also to help us probe the underlying motivations,feelings, values, attitudes, and perceptions about the audit environment in Saudi Arabia. We didnot ask respondents to answer all questions in our list but instead allowed them to talk more

8 Each respondent received a marked questionnaire (for tracking purposes) together with a cover letter outlining theobjective of the research, respondent confidentiality, and availability of survey results upon request, as well as a stamped-addressed envelope.

9 A copy of the interview schedule is available from the authors.

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Table 2Response rate and demographics of mail respondents

Subject groups Mailed Usable response Accountingexperience

Accountingqualifications

Mean age(years)

Mean years ofexperience

Mean years of experiencein current role

n % n % n %

Practitioners at large auditfirms [LA]

75 38 50.7 38 100 38 100 41 12 5

Practitioners at smallaudit firms [SA]

40 20 50.0 20 100 20 100 51 16 7

Financial directors [FD] 60 31 51.7 14 45 31 100 42 12 6Credit managers [CM] 60 33 55.0 12 36 23 70 37 15 8Investment analysts and

funds managers [IA]30 16 53.3 5 31 12 75 45 20 5

Substantial shareholders[SS]

20 12 60.0 4 33 6 50 47 18 6

Other shareholders [OS] 40 15 37.5 3 20 6 40 40 10 3Governmental bodies

[GB]25 9 36.0 2 22 6 67 48 22 10

Total 350 174 49.7 15.6a

a Mean.


about areas with which they were comfortable and that concerned them the most. Our openingquestion in each interview was to ask the respondents what they perceived to be the objective ofaudit in Saudi Arabia, and this was followed by a series of questions. In total, we conducted 48interviews, which lasted approximately 90 min each. The interviews were tape-recorded exceptfor three (6%) where the interviewees declined to be tape-recorded. Details of the intervieweesand their demographics are provided in Table 3.

It can be seen in Table 3 that 75% of interviewees are native Saudis and the remaining 25% arenon-Saudis. The table also indicates that 73% of interviewees have accounting experience, 75%have qualifications, and all had extensive occupational experience.

The responses from the interviews were analyzed in two stages. The first stage was to fullytranscribe (on average 5 pages and 3500 words) all the tapes of the interviews. The fully transcribedtapes were then sent to the interviewees for their comments and approval. No adjustments weremade to the transcripts. The Arabic transcripts were then translated into English and verified byan English-speaking Arab colleague to ensure that the translations were accurate. The next stageinvolved coding and categorising the data to get a general pattern of the respondents’ views inanswering the various questions.

4. Empirical results

4.1. Performance of duties based on legal pronouncement

Respondents were asked to indicate on a five-point scale their agreement or disagreement witheach of the 10 statements related to the performance of the audit responsibilities as specified bythe Saudi statutory pronouncements. Table 4 presents the results of our findings.

The results indicate significant differences in opinion between the two groups on the perfor-mance of all audit responsibilities as prescribed de jure, except for four (statements 1, 2, 5, and 6),where there is total agreement for each of the following audit responsibilities: adding credibilityto financial statements, acting as an expert, determining whether the balance sheet shows a trueand fair valuation of a company, and reporting problems in getting access to information.

The greatest difference between auditors and users was in relation to the responsibility of gettingclarification from management (statement 7), followed by acting as fair judge (statement 3). Thesignificant difference in the perceptions of the two groups concerning six of the responsibilitiesas prescribed de jure supports our first hypothesis (H1).

Interviews with auditors reveal that although seeking clarification from management (state-ment 7) is part of their responsibility, auditors face problems due to lack of cooperation frommanagement. Auditors also do not see themselves capable of acting as fair judge (statement 3),since this activity requires a wider audit scope. In terms of adhering to the code of ethics (state-ment 9), interviews reveal dissatisfaction among many auditors with the current code of ethics.The code is viewed as “a ‘cut and paste job’ from an alien source fascinated with quantifying andcodifying ethical behaviors in a checklist style.” The auditors highlighted that Islamic ethics isingrained in them, and they are more comfortable conducting audits based on Islamic principlesinstead of ‘borrowed’ codes, as expressed by one of the auditors:

“. . . it is true that we must adhere to some sort of code of ethics, but the one that existedhere is largely influenced by the American code of conduct which tends to go into minutedetails and quantifies everything and leaves nothing for expression of your religious andethical views. We cannot adhere to codes that do not reflect our Islamic ethical values orregulations that do not fit local practice . . ..”

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Table 3Demographics of interviewees

Interviewees n Accountingexperience

Accountingqualifications

Mean age(years)

Nationality Mean years of experiencein current position

Yes No Yes No Saudi Non-Saudi

Practitioners at largeaudit firms [LA]

7 7 0 7 0 41 6 1 8

Practitioners at smallaudit firms [SA]

7 7 0 7 0 47 2 5 10

Financial directors[FD]

7 4 3 7 0 50 5 2 10

Credit managers [CM] 7 5 2 4 3 45 4 3 11Investment analysts

and funds managers[IA]

5 3 2 4 1 39 4 1 8

Substantialshareholders [SS]

5 2 3 3 2 48 5 0 9

Other shareholders[OS]

5 3 2 2 3 40 5 0 4

Governmental bodies[GB]

5 4 1 2 3 53 5 0 12

Total 48 35 (73%) 13 (27%) 36 (75%) 12 (25%) 36 (75%) 12 (25%)

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Table 4Views of respondents in relation to the performance of audit responsibilities as prescribed de jure

Statements Auditor groups User groups

LAs(n = 38)

SAs(n = 20)

Auditors overallgap

FD(n = 31)

CM(n = 33)

IA(n = 16)

SS(n = 12)

OS(n = 15)

GB(n = 9)

Usersoverall gap

1. Auditors add credibility tofinancial statements

1.84 1.65 1.78 1.84 1.79 1.88 1.83 1.67 1.78 1.80

2. Auditors are expert 1.84 1.80 1.83 1.90 1.85 1.75 1.83 1.87 1.78 1.843. Auditors are fair judge −0.55 −.045 −0.52 0.58* 0.24* −0.94 1.42** 0.47 1.67** 0.43**4. Auditors ensure adequate

disclosure0.84 0.80 0.83 0.81 0.79 1.88** 1.83* 1.87** 1.67 1.26*

5. Auditors determine whetherbalance sheet shows a trueand fair valuation of acompany

1.84 1.90 1.86 1.84 1.91 0.88** 1.83 1.93 1.78 1.73

6. Auditors report problems ingetting access to informationduring the conduct of audit

1.42 0.90 1.24 −0.58** 1.79* 1.81* 1.83 1.87* 2.00* 1.19

7. Auditors report problems ingetting clarification frommanagement during theconduct of audit

1.16 1.60 1.31 −0.71** −0.73** 1.38 −0.75** −0.67** 1.33 −0.27**

8. Auditors report all violationsof rules and regulations

1.87 1.90 1.88 0.55** 1.85 1.75 1.92 1.93 2.00 1.52**

9. Auditors adhere toprofessional code of ethics

−0.79 −0.15 −0.57 −0.55** 1.85** −0.44 −0.58 −0.80 1.56** 0.28**

10. Auditors express opinions onthe representation ofcompany’s accounts

1.82 1.75 1.79 1.10** 1.03** 1.63 0.75** 1.00** 2.00 1.17**

Note: **Significantly different from auditors overall gap at p < 0.01 (*p < 0.05), based on Mann–Whitney U-test. LA: large audit firms; SA: small audit firms; FD: financialdirectors; CM: credit managers; IA: investment analysts; SS: substantial shareholders; OS: other shareholders; GB: governmental bodies.


Some users share the same views, as noted by a financial analyst:

“. . . the standards here are similar to the AICPA’s Professional Code of Conduct . . . theyare 100% translation without taking into account our specific environment such as religion,customs and traditions. This creates a lot of problems . . .”

However, some users believe auditors should adhere to the professional code of ethics as “theyare internationally accepted” and “will help enhance our reputation and image.”

In relation to the duty of reporting all violations of rules (statement 8), credit managers high-lighted that auditors do not always report violations unless they are very serious because therehave been rapid changes in the rules and regulations and most violations are not deliberate. One ofthe finance directors highlighted the problem faced by auditors in performing this responsibilityin Saudi Arabia:

“Most auditors seldom report violations because society does not care much on enforcementof rules unless they are badly hit . . . also auditors who dare report violations often findthemselves in trouble, especially if it involves companies headed by an influential personor with links to an influential person . . .”

Although both users and auditors agreed on the role of ensuring adequate disclosure (statement4), the interviews reveal dissatisfaction among users with the current level of disclosure andtransparency, as expressed by the following finance director and investment analyst:

“The business environment here is highly competitive, so there is high tendency to beingmore secretive. Furthermore, the current rules do not put emphasis on transparency andonly require minimal disclosure . . .”

“Lack of transparency of regulations limits information availability and confidence in thestock market . . .”

Users expect auditors to acknowledge whether the source of income and the business conductare within Islamic parameters. Auditors indicate that they would like to do so, but the statutorypronouncements limit their role. As noted by one auditor:

“I once refused to issue a clean audit report on the financial statements of one of the Islamicbanks because their source of income was partly from non-permissible (haram) activitiesand I faced a lot of pressure due to this, but I abided by my principles.”

4.2. Performance of responsibilities reasonably expected of auditors

4.2.1. Fraud detectionOne of the roles that may be reasonably expected of auditors is fraud detection. The perceptions

of the two groups concerning auditor responsibility for detecting and reporting fraud are presentedin Table 5 (Panel A).

Auditor responsibility for detecting and reporting fraud (statements 11–15) is highly expectedby all users except finance directors, who shared the same view as auditors who do not believe thisto be part of their responsibility. The most significant difference between auditors and users was inrelation to the responsibility for reporting any suspicion of frauds and thefts to relevant authority(statement 15), followed by detecting material fraud and thefts (statement 11), disclosing detectionof distortion of financial information in audit report (statement 12), and detecting all frauds andthefts committed by management (statement 13). The least significant difference between the

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Table 5Views of respondents concerning responsibilities that can reasonably be expected of auditors to perform

Auditor groups User groups

LAs(n = 38)

SAs(n = 20)

Auditorsoverallgap

FD(n = 31)

CM(n = 33)

IA(n = 16)

SS(n = 12)

OS(n = 15)

GB(n = 9)

Usersoverall gap

Panel A statements—Auditors should:11. Detect material fraud and thefts −1.29 −1.20 −1.26 −0.61 1.94** 1.94** 1.92** 1.87** 1.67** 1.22**12. Disclose detection of distortion

of financial information in auditreport

−0.82 −0.60 −0.74 −1.26* 0.88** 1.25** 1.58** 1.53** 0.44 0.48**

13. Detect all frauds and theftscommitted by management

−0.74 −0.70 −0.72 −0.81 0.55** 0.88** 0.75** 1.00** 1.67** 0.40**

14. Detect deliberate distortion offinancial information

0.68 1.00 0.79 0.71 1.94** 1.88** 1.83** 1.80* 1.89* 1.57**

15. Report any suspicion of fraudsand thefts to relevant authority

−1.68 −0.80 −1.38 −1.90* 0.55** 0.38** 0.33** 0.67** 0.67** 0.89**

Panel B statements—Incumbent auditors should be permitted to provide:16. MAS 1.97 1.30 1.74 1.10** −1.39** −1.00** −1.08** 0.93 −1.00** −0.31**17. Tax and zakah services −0.82 −0.85 −0.83 1.06** 1.09** −0.50 −0.92 −0.60 1.11** 0.44**18. Accounting and bookkeeping

services0.76 0.95 0.83 0.55 −0.91** −0.88** −0.67** −0.73** −0.89** 0.47**



two groups was in relation to the responsibility of detecting deliberate distortion of financialinformation (statement 14). Overall, the results show the existence of an expectations gap in auditperformance associated with detecting and reporting fraud, and support the second hypothesis(H2).

Interviews with auditors revealed their reservations in performing fraud detection since it isbeyond the scope of their responsibilities. They also believe there is a misunderstanding of theconcept of ‘materiality’ by users who expect them to verify every single transaction withoutconsidering the constraints of both time and audit fees. Auditors also noted that to make inde-pendent judgments on fraud, they need to depend heavily on information provided by internalauditors. Unfortunately, not all companies in Saudi Arabia operate an internal audit function. Toperform fraud detection, a greater level of professional competence and skepticism as well astough disciplinary measures, is needed. As one auditor stated:

“To perform this task, auditors must have good professional experience but the supply ofgood auditors is limited. Also, there is a lot of collusion between management and someinternal and external parties that makes this role almost meaningless.”

Finance directors also indicated that they were a bit apprehensive about auditors performingsuch a role since they believe it may do more harm than good, because of public ignorance. Asone finance director stated:

“When the auditor reports to outsiders the violations of certain rules that are not material,it will undermine management’s integrity and can damage the business severely, becauseour people cannot distinguish between different types of violations and think everything isfraud.”

4.2.2. Provision of ancillary servicesBesides fraud detection, another responsibility that may be reasonably expected of auditors is

the provision of ancillary services. The results of the perceptions of auditors and users regardingperformance of this responsibility are presented in Table 5 (Panel B). The results indicate signif-icant differences between the two groups for all three duties related to the provision of ancillaryservices (statements 16–18), thus supporting our third hypothesis (H3). The most significant dif-ference is related to the provision of MAS (statement 16), followed by the provision of tax andzakah (statement 17). The least significant difference between the two groups was related to theprovision of bookkeeping services (statement 18).

Interviews with auditors revealed that they do not foresee any problems in the provision ofMAS, especially if both parties would benefit, and as long as they are not involved in the finaldecision-making, as expressed by the following auditor:

“. . . our big clients want us to provide them with consultancy services because we knowtheir business well and they trust we could provide better advice. Furthermore, not all auditfirms could provide such services . . . what is important when providing such services is toavoid being involved in decision making . . .”

However, some users indicated their reservation due to the apparent conflict of interest. Theyacknowledged that large Saudi Arabian corporations need consultancy services, but the numberof audit firms that have this expertise is limited. Therefore, some users believe that SOCPA mustbe flexible in its ruling against the provision of consultancy services by the incumbent auditor, asnoted by the following credit manager:


“. . . only a few of our audit firms have the expertise in providing such services and so it isnot easy to appoint one to be your auditor and the other to provide you with consultancyservices. So, the country’s special circumstances should be taken into account . . .”

As for the provision of tax and zakah services, auditors, investment analysts and shareholdersbelieve that auditors should not provide such services to audit clients mainly due to the loss ofindependence. The current rules issued by SOCPA permit auditors not only to prepare and submitthe accounts but also to defend the client’s tax and zakah liabilities to the DITZ. An extensiveinvolvement in the company is deemed to damage the profession’s integrity. Representatives fromgovernmental bodies expect auditors to provide this service, as this will ensure steady revenuefrom tax and zakah to the state. Auditors also do not foresee any problems in the provision ofbookkeeping services, since they are mainly technical, as long as they are not performed for theirown clients. However, users expressed concern because despite being technical, bookkeeping doesinvolve some level of decision-making, given the availability of a variety of accounting methodchoices as highlighted by the following financial analyst:

“. . . there is no problem in providing such service but how can I be sure that the auditordoes not either directly or indirectly decide on the accounting methods being used? So, Ithink it would be safer for the auditor to distance himself from providing such services . . .”

4.3. Impact of factors in the environment on audit performance

Audit performance may be affected by factors in the business environment. Table 6 presentsthe results of the perceptions of respondents concerning four factors in the business environmentconsidered in this study. Panel A of Table 6 presents results related to licensing policy, recruitmentprocess, and the political and legal structure, while Panel B consists of results related to dominantsocietal values.

4.3.1. Licensing policyThe results in Table 6 (Panel A) indicate a significant difference in the perceptions of auditors

and users concerning whether the licensing policy hinders the effective performance of the audit(statement 19), thus supporting the fourth hypothesis (H4). Auditors and all users agree to the state-ment, except the finance directors, credit managers and representatives of governmental bodies.

Respondents indicated during the interviews that the ineffective performance of the audit maybe attributed in part to the lenient licensing policy in the past, and welcomed the move by SOCPAto be more stringent to enhance professionalism. Some respondents from the three groups of usersthat disagree, i.e. finance directors, credit managers and representatives of governmental bodies,indicated that they distinguish the expertise or quality of auditors, since not all licensed auditors inSaudi Arabia have rigorous professional training and experience and are able to handle complexaudits. They regard audit firms with international partners as having more expertise in auditingbanks and financial institutions, as indicated by the following credit manager10:

“In our bank, we classify auditors into class A, B and C based on our perception of theirexpertise. Class A includes the Big 5 as well as two other Saudi local audit firms. So, anyaudited information by auditors included in the A list is considered as sound opinions.”

10 This concurs with the assertion of Moizer (1997), whose study indicated that big international audit firms generallyenjoy a higher reputation and are often associated with a higher audit quality.

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Table 6Views of respondents on the factors in the environment that may hinder effective performance of the audit

Auditor groups User groups

LAs(n = 38)

SAs(n = 20)

Auditors overallgap

FD(n = 31)

CM(n = 33)

IA(n = 16)

SS(n = 12)

OS(n = 15)

GB(n = 9)

Usersoverall gap

Panel A statements—Effective performance of the audit is hindered by the:19. Lenient licensing policy 1.34 1.75* 1.48 −0.97** −0.64** 1.44 1.17* 0.93** −0.22** −0.02**20. Recruitment process not based

on merit0.79 0.90 0.83 0.90 0.30** 1.00 1.17* 1.07 0.67 0.78

21. Excessive intervention of thestate on the profession

1.05 0.84 0.98 0.97 1.09 0.56** 1.33* 0.80 −0.11** 0.88

22. Dual legal system 1.21 1.05 1.16 1.06 1.03 1.44* 1.00 0.80 0.44** 1.02

Panel B (societal values) statements—Effective performance of the audit is hindered by the:23. Fatalistic attitude of society 1.18 1.50* 1.29 1.45 1.91** 0.88 0.75** 0.67** 0.89* 1.2824. Indifferent attitude towards

time by society1.21 1.30 1.24 1.13 0.97** 1.44 1.92** 1.20 1.78** 1.27

25. Secrecy and preference forconfidentiality in society

0.95 0.75 0.88 1.00 0.64 1.50* 1.58* 0.80 −0.78** 0.86

26. Lax attitude towards rules andregulations in society

1.74 1.95 1.81 1.00** 0.94** 1.38** 1.75 1.87 1.78 1.28**

27. Lack of enforcement of rulesand regulations by the relevantauthorities

0.74 0.85 0.78 −0.61** −0.73** 1.06* 1.17** 1.47** 1.11* 0.17**

28. Presence of dominantpersonalities in society

0.87 1.00 0.91 −1.58** 0.82 0.94 −0.75** 1.20 −0.89** −0.05**



4.3.2. Recruitment processThe results in Table 6 (Panel A) indicate no significant difference in the perceptions of auditors

and users concerning whether the recruitment process not based on merit (statement 20) impedesthe effective performance of the audit. Hence, the fifth (H5) hypothesis is rejected. In other words,both groups recognised recruitment as a problem.

Some respondents admitted during the interviews that recruitment is problematic due to nepo-tism, cronyism, networking and wassattah (favoritism) that prevail in Saudi Arabia. This problemaffects not only audit performance but also perceptions of professionalism and reputation of theprofession.

Auditors also highlighted during the interviews the difficulty in recruiting good staff amongSaudi nationals. As one auditor noted:

“We would like to employ more Saudis but most of them are below minimum standard andthey are not serious about finishing their training and very often quit halfway. This is costlyfor us and that is why we insisted on employing foreigners.”

4.3.3. Political and legal structureThe survey results indicate no significant difference in the perceptions of the two groups con-

cerning whether intervention of the state and the dual legal system hinder the effective performanceof the audit (statements 21 and 22, respectively), thus both hypotheses H6 and H7 are rejected.This means that both auditors and users recognized the two factors as problematic.

All groups, except representatives of governmental bodies, agree that the autocratic politicalstructure and excessive intervention in all aspects of life, including the audit profession, meant theprofession does not have any autonomous power, and this hinders the effective performance of theaudit function. Some respondents criticized SOCPA for “not being independent in promoting andprotecting the profession.” Despite being a semi-independent body, it allows itself to be “heavilyinfluenced by the state’s political and economic policies and agendas.”

The results from the interviews also indicated that the dual legal system is problematic and itaffects audit performance, as highlighted by one of the respondents:

“The current legal and judicial system is in fact a big problem. The dual legal system doesnot work . . . the Shari’ah Courts here are not capable of solving auditing disputes not onlydue to their lack of awareness of the auditing profession but also their ruling is based ontheir knowledge and interpretation of fiqh [Islamic jurisdictions], which is often contraryto Western commercial laws.”

4.3.4. Societal valuesThe survey results concerning perceptions of auditors and users on the impact of dominant

societal values in hindering effective performance of the audit are presented in Table 6 (Panel B).The results indicate no significant difference in the perceptions of both groups on whether thefatalistic attitude of society (statement 23), indifferent attitude towards time by society (statement24), and high secrecy in society (statement 25) contribute to the ineffective performance of theauditing role. Thus, the results do not support our hypotheses H8, H9, and H10. All groups believedthe ineffective performance of audits might be attributed to those three dominant societal values.However, the governmental group did not perceive high secrecy in society as contributing to theineffective performance of audits.

During the interviews, respondents provided examples of how fatalism and indifferent attitudetowards time affect audit performance. The following are some examples:


“Sometimes when I try to explain to my client the need to improve their internal controlbased on prior audits, they always say ‘Inshaallah’ [God willing] and I know this meansthey will not take any action . . .!”

“When we ask our Saudi staff to be at a client’s premise tomorrow at 10, he goes there at 11,and when you ask him why, he gives excuses. Such careless attitude towards time affectsour reputation and professionalism.”

The most significant difference between the two groups regarding the impact of societal val-ues on ineffective performance of the audit includes the presence of dominant personalities insociety (statement 28), followed by lack of enforcement of rules and regulations by relevantauthorities (statement 27), and lax attitude towards rules and regulations (statement 26). Hence,our hypotheses H11, H12, and H13 are not rejected. Both auditors and users, except for financedirectors, substantial shareholders, and governmental bodies, recognized dominant personali-ties as problematic. The lack of enforcement of rules and regulations in society is believed byauditors and the majority of users, except the finance directors and credit managers, to be a con-tributor to ineffective performance. All groups strongly agree that the lax attitude towards rulesand regulations by society hinders effective performance of audit, with credit managers weaklyagreeing.

The auditors highlighted the difficulties they often face in performing their audit task whenclients have a dominant personality, and when they are well connected with those in power, asexpressed by an auditor:

“. . . the business environment is highly secretive and worse if the company is headed by adominant personality who would use his power, influence and networking to twist arms . . .

so I look to auditors as a safeguard mechanism and expect them to check thoroughly anddisclose any detected fraud at the AGM . . .”

Some users, especially minority shareholders, credit managers and investments analysts,expect auditors not to succumb to such individuals and care more about the public interestby standing up to the pressure. Some respondents indicate that the lax attitude towards rulesand regulations and lack of enforcement has become a nationwide problem. One respondentnoted:

“The flexible and careless attitude of society has put less pressure on relevant authorities toenforce rules and regulations. Also, enforcement is difficult when society does not honorthose who comply and punish those who do not. This affects audit performance and alsodamages the image of the profession.”

The interviews also reveal that wassatah, or networking, further limits the enforcement of rulesand regulations, as cited in the following comment:

“. . . when they come to my office and discover some wrongdoings, the first thing that crossesmy mind is to find my wassattah to help me sort out the problem and my client will also dothe same through his wassattah . . .”

5. Summary and conclusions

This paper investigates whether an audit expectations gap exists in Saudi Arabia and how thebusiness environment influences perceptions of audit performance. The survey results provide


evidence of an ‘audit expectation–performance gap’ in relation to some of the responsibilitiesarising from legal pronouncements, especially responsibility in getting clarification from man-agement, acting as a fair judge, adhering to the professional code of ethics, ensuring adequatedisclosure, reporting all violations of rules and regulations, and expressing opinions on the repre-sentation of company accounts. Auditors indicate the main drivers for the expectations gap are thelimited audit scope and exclusion of Islamic principles in the current auditing rules and regula-tions (i.e. deficient standards). Users perceive the standard of performance of auditors to be belowtheir expectations. This perception is acknowledged by auditors (i.e. deficient performance), andthey attribute it to having to deal with constant changes in rules and regulations and unsupport-ive management clients. Hence, it is important for the regulatory body to review the role ofauditing as specified in the legal pronouncement to narrow the audit expectation–performancegap. If this problem is not addressed soon, it may damage the reputation of theprofession.

Similarly, we found evidence of an expectations gap concerning responsibilities related todetecting and reporting fraud that can be reasonably expected of auditors. Although users expectauditors to perform such roles, auditors are reluctant to do so since the official pronouncementsare silent on such roles. This gap may be attributed to deficient standards. In addition, the lackof internal controls in many Saudi companies, and auditors who do not have competence andprofessional skepticism to perform such roles, impinge on audit performance (i.e. expectationsgap arising from deficient performance). Thus, the regulatory body should seriously considerintroducing rules and regulations related to fraud detection and reporting, as they are highlydemanded by users. If the regulatory body does not take action soon, it will shake public confidencein the profession.

An expectations gap exists for all three types of ancillary services. Unlike auditors, users areagainst incumbent auditors performing these services because they may lead to impairment ofauditor independence. Despite the prohibition by the regulatory body, auditors continue providingthese services, which gives rise to a perceptions gap. The regulatory body needs to take a tougherstand against violators to prove its seriousness in enforcing the regulations. If the regulatory bodydoes not act soon, it will lose its credibility in society.

The survey results indicate no significant differences in the opinions of the two groupsconcerning three factors in the business environment that hinder the effective performanceof the audit, i.e. recruitment process, the political structure and the legal system. Interviewsrevealed nepotism and cronyism, excessive intervention by the state, and the ineffective opera-tion of the dual legal system, hinder the effective performance of the audit. The results indicateboth auditors and users also agree that all the societal values surveyed hinder the effectiveperformance of the audit. However, auditors’ opinions are significantly stronger in relationto the presence of dominant personalities in society, lack of enforcement of rules and reg-ulations by relevant authorities and lax attitude towards rules and regulations by society. Inshort, factors in the business environment beyond the control of the profession have signifi-cant impact on the effective functioning of the audit. It is the responsibility of the governmentto implement political, economic and social reform that would lead to democracy and trans-parency.

The expectations gap found in this study is the result of failure by auditors, the professionalbody (SOCPA), and the state to meet society’s expectations. The three groups must work toimprove standards, professionalism, and governance as well as educate society about the roleof auditors. A proactive approach is also needed in changing negative societal values, whichmay prove to be a challenging task that will take time to accomplish. Our findings have impli-


cations for other countries in the Arabian Gulf region as well as other developing countriessharing similar socio-economic structure. Blindly adopting the developed countries’ approachin narrowing the audit expectations gap is futile without locating it within the cultural con-text.

This study has several limitations. First, it focuses on only four factors in the environment thatcontribute to the ‘audit expectation–performance gap.’ Future research could look at other factorsthat may help narrow the gap. We also used a five-point scale instead of a seven-point scale inour questionnaire and this may affect the interpretation of the results. We limited our users toonly six groups, and future research may explore the views of judges (both Shari’ah and legalexperts) in Saudi Arabia on the roles and responsibilities of auditors. Future research could alsofocus in greater depth on the impact of the dual legal system and its implications for developingand regulating the auditing profession in the kingdom of Saudi Arabia.

Acknowledgments

The authors gratefully acknowledged the helpful comments and suggestions of the anonymousreviewers and the editor (Kathleen Sinning).

Appendix A. Differences in processes and nature of assurance services between the US,the UK, and Saudi Arabia

Areas of differences US/UK Saudi Arabia

Independence of the professionalbody in developing high qualityaccounting and auditing standards

Professional bodies actively involvedin developing standards andresponding to contemporary issuesfacing the business community andits wider society (e.g. fraud,transparency, governance, etc.)

Professional body lacks confidencein developing its own standards, andoften relies on and collaborates withother organizations, especially theAICPA, in issuing standards.Furthermore, it continuously seekssupport and approval from higherauthorities in all its activities

Respect for rules and regulations Practitioners expected to adhere tostandards issued

Standards issued forwindow-dressing, seldom followed,and often overruled by powerfulelites

Role of professional body Professional bodies closely engagedwith relevant authorities to servepublic interest

Professional body acts in the interestof government rather than public

Sovereignty of legal system Highly litigious environment,especially in the US. Strongindependent legal system exists toprotect public interest

Operations of a dual legal systemwith limited power, which weakensthe profession’s role in protectingpublic interest

Degree of professionalism Professionals working in audit firmsare highly competent and may havewide experience in other areas suchas law, insurance, etc. This may beattributed to meticulous recruitmentprocess and rigorous training

Most of those working in audit firmsare not as competent sincerecruitment is often based onnetworking and fulfilling governmentquota rather than based on merit


Appendix A (Continued)

Areas of differences US/UK Saudi Arabia

Types of people who work as auditors Auditors who practice in the US meetAICPA qualifications. In the UK,auditors are qualified by one of theUK bodies, e.g. ICAEW, ICAS,ACCA. Hence, in terms ofqualifications, they are morehomogeneous

Auditors practicing in Saudi Arabiaare a mixed group both in terms ofnationality (Yemen, Syria, Egypt,Sudan, Jordan, India, Pakistan,Philippines, American, British, etc.)and qualifications

Some permitted to practice withoutproper qualifications/supervision dueto lenient licensing policy prior to1992. Furthermore, many work on acontractual basis and if the contract isnot renewed, they have to leave thecountry

Types of audit firms and servicesprovided

Wider scope of services offered bylarge audit firms, e.g. assurance andregulatory reporting (including SOAadvice, IFRS convergence, regulatorycompliance, sustainability), taxservices, transaction services(including financial and commercialand market due diligence), corporatefinance (including M&A, IPOs),performance improvementconsultancy, business recovery,forensic services (anti-moneylaundering services and intellectualproperty), human resource services,actuarial, etc.

Scope of services provided by largeaudit firms with internationalaffiliations is quite limited comparedto their US/UK counterparts. Themain activities are audit andassurance services (including internalaudit and assurance on capital markettransaction), tax and zakah, and crisismanagement (including businessrecovery services and disputeanalysis and investigations), as wellas other management advisoryservices, including Islamic bankingand takaful (insurance). Theseservices are provided to family-runbusinesses

In the US, the incumbent auditorscannot provide non-audit services totheir clients but in UK, it ispermissible

Small audit firms more involved inproviding bookkeeping and tax andzakah services, and only somemanagement advisory servicesspecifically related to inheritance andfeasibility studies. Firms seldominvolved in providing services tobanking sectorDe jure, incumbent auditors notallowed to provide non-audit servicesto audit clients but de facto, they do

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