A private company perspective of the audit expectation gap

Purpose This study aims to assess whether the factors contributing to the audit expectation gap (AEG) in listed companies also apply to private companies, while also identifying additional factors unique to the private company context. Aim Extant research on the AEG focuses on listed companies, despite private companies being more prevalent and differing in context, regulation and user expectations. Relying on listed-company findings risks overlooking these differences and misinforming stakeholders. This study addresses this shortcoming in a meaningful, though not exhaustive, way. Research approach/design and method Semi-structured interviews were conducted with internal and external users of the financial statements of private companies, which include shareholders, members of management, credit managers at banking institutions and representatives of the South African Revenue Service. The constant comparative method was used to analyse the data. Main findings Not all factors contributing to the AEG in listed companies are relevant to private companies. Users expect auditors to verify compliance with all laws and regulations and the effectiveness of internal controls, but do not expect auditors to detect all fraud. Additional contributors to the AEG, such as reliance on auditors to resolve agency conflict, are also identified and explained. Practical implications This study’s findings better equip standard setters and regulators to understand and address continued AEGs in the private company context. Contribution/value-add This study extends the AEG literature by showing that conclusions drawn from listed-company contexts cannot automatically be applied to private companies, highlighting the need for context-specific research.