Audit Expectation Gap (AEG) in Bangladesh

Abstract

The Audit Expectation Gap (AEG) represents the critical misalignment between what stakeholders, particularly investors, expect from auditors and the responsibilities auditors are mandated to fulfill under professional standards, such as the International Standards on Auditing (ISA). In Bangladesh, where corporate scandals like Evaly, Destiny Group, and Hallmark have heightened public scrutiny of audits, the AEG undermines trust in financial reporting and challenges the credibility of the auditing profession. This study investigates the nature, extent, and causes of the AEG in Bangladesh by comparing the perceptions of two key stakeholder groups: auditors and investors. Employing a quantitative research design, the study collected data from 60 respondents (30 auditors and 30 investors) using a structured questionnaire with a 5-point Likert scale. The survey focused on four critical audit dimensions: fraud detection, going concern assessment, internal control evaluation, and audit report interpretation. Descriptive statistics (mean, standard deviation) and inferential statistics (Mann-Whitney U Test) were used to analyze the data, with the questionnaire’s reliability confirmed by a Cronbach’s Alpha of 0.802. The findings reveal significant perception gaps across all dimensions, with investors consistently overestimating auditors’ roles (mean scores: 4.05–4.22) compared to auditors’ more conservative perceptions (mean scores: 2.98–3.45). The largest gap was observed in internal control evaluation, where investors mistakenly believed auditors are responsible for designing or guaranteeing control systems (mean: 4.12 vs. 2.98). The smallest, yet still significant, gap was in audit report interpretation (mean: 4.22 vs. 3.45), reflecting misinterpretations of terms like “true and fair view.” The Mann-Whitney U Test confirmed that these differences are statistically significant at the 1% level (p < 0.01), providing robust evidence of a pervasive AEG. The study identifies key drivers of the AEG, including limited financial literacy among investors, ambiguous audit report language, insufficient auditor-stakeholder communication, and reactive regulatory frameworks. These factors are particularly acute in Bangladesh’s developing capital market, where corporate governance is evolving, and public expectations are shaped by media narratives and past scandals. To address the AEG, the study proposes a cyclical policy integration model—Education → Audit Reform → Communication → Trust Building—with actionable recommendations, such as plain-language audit summaries, investor education campaigns, mandatory Key Audit Matters (KAMs) disclosures, and enhanced auditor training on stakeholder communication. Academically, the study contributes Bangladesh-specific empirical evidence to the global AEG literature, applying theoretical frameworks like Agency Theory and Stakeholder Theory to explain the gap’s persistence. Practically, it offers a roadmap for auditors, regulators (e.g., Bangladesh Securities and Exchange Commission, BSEC), and professional bodies (e.g., Institute of Chartered Accountants of Bangladesh, ICAB) to align expectations with auditing standards. By fostering greater transparency and financial literacy, this research aims to strengthen trust in Bangladesh’s auditing ecosystem, enhance investor decision-making, and support the nation’s economic growth. vi

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