The Development of Auditing and the Possible Existence of an Expectation Gap in Libya

Auditing has grown considerably recently but this growth has not been impeded by steady criticism, misgivings and discussions concerning the worth of the auditing function and audit report communication. A great deal of such criticism and discussion typically emerge following major financial scandals and company collapses such as the crash of Enron, Arthur Andersen, not only in countries that suffered from such corporate collapses, but also in countries that have never experienced such crises. This criticism is attributed to the fact that this serious problem is referred to as the “Audit Expectation Gap”. Consequently, the “expectation gap”, has been investigated by various scholars in order to examine its occurrence in numerous countries such as the USA and the UK; nevertheless, the scope of such gap has not been explored in many emerging economies such as that of Libya.

The main aim of carrying out this research study is to explore and examine the development and current state of auditing in Libya, and the possible existence of an expectation gap in auditing in economic transition conditions in one of the less developed countries, namely Libya.

To realise the research objectives and to respond to the research questions, mixed research methods were applied. A questionnaire was conducted with the general auditing bureau, private auditors, financial statement preparers, lenders and private investors, aimed at investigating the existence of an audit expectation gap and the effectiveness of audit report communication in Libya. 270 questionnaires were gathered. The questionnaires were followed by 15 semi structured interviews to gain an understanding of the gap the reasons behind the existence of an audit expectation gap.

The outcomes of this study reveal that the Libyan accounting and auditing framework is not properly developed. Furthermore, the study demonstrates that the lack of the accounting and auditing principles has resulted in flaws in the accountability and responsibility of external auditors. Moreover, the findings of both the questionnaire and the interviews evidently indicate that the audit expectation gap (which contributes to the reasonableness gap and deficient standards gap) exists in the Libyan private sector with respect to a certain number of auditing issues. These encompass auditors and the auditing process, audited financial statements, and the audited company, together with
prohibitions and regulations in the audit milieu. Also, an expectation gap (a deficient standards gap) was detected especially related to the purpose of an audit, the responsibility factor, assurance of future feasibility, and the utility of decision making processes. On the other hand, it is proposed that the present audit report is not a wellunderstood document whereas it is surprising to find out that one of the unqualified audit report communication factors examined in this study – the reliability of the financial statements – appears obviously to be communicated in the audit report; both groups were
unsure pertaining to this matter as – on average – their responses displayed uncertainty’ relating to the reliability issue. These findings have significant implications for the Libyan Authorities regarding the actions that should be considered to bridge the gap. Reducing the gap may need to develop the Libyan auditing profession and increase the utility of the audit report as the main source for taking investment decisions.