The Audit Expectation Gap: Why the Public Thinks Auditors Do More Than They Actually Do

For over fifty years, regulators and academics have noted a persistent disconnect between what the public expects from financial statement audits and what auditors are actually required by law and standards to do. In simple terms, many people believe auditors should catch all fraud, verify every transaction, or even guarantee a company’s survival – expectations that exceed the audit’s defined scope. Auditing standards explicitly limit auditors to providing “reasonable assurance” on financial statements, not an absolute guarantee. As the PCAOB notes, “capital markets depend on transparent, relevant and reliable information,” and auditors “serve the public trust by assuring the integrity of this information”. Yet surveys and studies show that the public often misunderstands this role. This audit expectation gap – the gap between perceived auditor duties and actual auditor responsibilities – has deep historical roots and serious implications for trust in markets and investor protection. In this article we explore how this gap originated, how audit standards define auditors’ true role, real-world cases (outside the Big Four) that have fueled public confusion, why it’s so hard to narrow the gap, and what might be done to bridge it.

Origins and Definitions of the Expectation Gap

The term “expectation gap” in auditing dates back to 1974. Carl Liggio coined it as the difference between “the levels of expected performance as envisioned by the independent accountant and by the user of financial statements”. In other words, auditors and the public often have different ideas of what an audit entails. Over the years various definitions have emerged, but a useful working definition comes from the Association of Chartered Certified Accountants (ACCA): the expectation gap is **“the difference between what the general public thinks auditors do and what the general public would like auditors to do”**. This definition highlights that it’s not just ignorance on one side; the public’s desires for audit (often shaped by headlines and fear of fraud) can legitimately exceed what auditors are empowered to do under current rules.

Since the 1970s, numerous studies and commentaries have confirmed that the gap has not shrunk, despite improvements in audit quality. For example, ACCA notes that “the gap doesn’t seem to have narrowed” over time and may even grow as public expectations rise to meet what auditors achieve. The IAASB (the international audit standard-setter) has explicitly recognized the gap: a 2020 discussion paper describes it as *“the difference between what users of the financial statements expect and the financial statement audit”*. In practice, this gap manifests in several ways: a knowledge gap (many stakeholders lack detailed knowledge of audit procedures), a performance gap (where audit work fails to meet standards), and an evolution gap (where society’s expectations evolve faster than audit practices). Regulators like the U.S. PCAOB break it into normative, interpretative, information, and performance gaps to analyze its components. In short, the expectation gap is a broad, persistent issue: the public wants more confidence and assurance than audits are designed to provide.

What the Public Expects from Auditors

The public’s misconceptions about audit responsibilities tend to fall into a few recurring themes. Many people assume auditors exhaustively verify all information and will catch any fraud or error no matter what. Others think auditors function as a kind of company cop, overseeing management and operations. A common expectation is that an unqualified audit opinion guarantees the company’s health or future viability. Some believe auditors should check corporate budgets, operations, or even judge executive competence. In short, the public often treats an audit report as if it were a seal of perfection on a company.

Recent research confirms these perceptions. For instance, ACCA’s global survey highlights three “key messages” about public expectations: “The public sees audit as part of the solution for preventing company failure.” The survey found people want auditors to take on more responsibility in identifying fraud, and expect audits to evolve into mechanisms that prevent failure. In other words:

Audits are viewed as a tool to stop companies from collapsing. Many stakeholders believe auditors should flag warning signs or even save troubled companies before they fail.
The public demands that auditors hunt down fraud or financial misconduct. It is widely assumed that if fraud is present, the auditor will uncover it and report it.
There is an expectation that audits should evolve into proactive assurance work that prevents future problems (basically, moving beyond checking past financials toward preventing going concern issues).

These points are not based on fictional ideas – they come from ACCA’s analysis of stakeholder feedback, which explicitly notes these as public attitudes. In everyday terms, many people want the auditor to be a guarantor of corporate integrity, akin to an insurance for investors.

It’s also common for non-experts to conflate audits with other assurance roles. The public often doesn’t distinguish between an audit, an internal inspection, a regulatory review or even a forensic fraud investigation. For example, some assume auditors will assess a company’s compliance with all laws, or check every transaction. In truth, an audit focuses narrowly on financial statements and applies specific sampling techniques, but this nuance is not obvious to laypersons.

To illustrate, consider fraud: most people assume auditors will detect any fraud. But as one study notes, auditors’ duties on fraud are often “misinterpreted” by stakeholders. Auditing standards (ISA 240) define fraud precisely and limit auditor responsibility to material misstatements caused by fraud or error. Stakeholders, however, vary in how they define “fraud.” Society may consider bribery or corruption as fraud and therefore expect auditors to spot those schemes. In fact, one analysis explicitly observes that “a society might…include corruption as one of the categories of fraudulent actions and expect auditors to detect it, even though it is not specified in ISA 240”. In short, the public’s broad view of “fraud” often encompasses areas (like criminal collusion) outside the audit’s formal remit.

In practical terms, then, public expectations tend to be far higher than audit standards allow. People often list things auditors should do that in reality they do not. For example, common public expectations include:

Detecting and preventing fraud or criminal activity. (In reality auditors look for material misstatements whether error or fraud, but they cannot guarantee catching every deceitful act.)
Reviewing every transaction or detail. (Auditors use risk-based sampling; they do not examine every single transaction in an organization.)
Ensuring a business will continue to operate. (Auditors express an opinion on current financials, not on future viability.)
Evaluating management performance or efficiency. (Auditors focus on financial statements, not on judging managers’ competence.)

These beliefs are understandable in an environment of corporate scandals and headlines. But they outstrip what an audit is designed to do. The gap lies partly in what the public thinks an audit is for, compared with the audit’s actual formal purpose.

What Auditors Actually Do

In contrast to the public’s expansive view, standards and laws define a much more limited auditor role. The core mandate of an audit is to provide reasonable assurance that the financial statements are free from material misstatement. Auditing standards (e.g. ISA 200) make this explicit: *“An auditor conducting an audit in accordance with ISAs obtains reasonable assurance that the financial statements… are free from material misstatement, whether due to fraud or error.”*. “Reasonable assurance” is intentionally not absolute – standards acknowledge that due to inherent limitations, auditors cannot be 100% certain. ISA 200 goes on to list these limitations (sampling, control limits, reliance on management’s evidence) and plainly states that “absolute assurance is not attainable”. In fact, the standard explicitly notes that “an audit is not a guarantee” and **“an audit opinion does not assure the future viability of the entity nor the efficiency or effectiveness with which management has conducted the affairs of the entity”**.

Likewise, U.S. PCAOB standards similarly describe the assurance level. A PCAOB guidance paper explains that reasonable assurance “includes the understanding that there is a remote likelihood that material misstatements will not be prevented or detected… Although not absolute assurance, reasonable assurance is… a high level of assurance”. In practice, auditors follow a risk-based audit approach. They plan and perform procedures (test balances, controls, transactions) based on where misstatements could materially occur. They sample items – they do not review every single invoice or entry. They seek sufficient audit evidence to support their opinion, but they accept a small risk that something material could slip through. Auditors also apply professional skepticism – they challenge assumptions – but they still often rely on management’s representations for many matters.

In summary, the actual tasks of an external financial audit are fundamentally:

Provide reasonable assurance on the financial statements. Auditors gather evidence to be satisfied that, overall, the financial reports are fair and comply with accounting rules.
Identify material misstatements, if any. This includes errors or fraud that are large enough to mislead users. However, auditors are not expected to detect all fraud – only those that produce material errors in the financials.
Perform limited testing and inquiry. Auditors perform selected audit procedures (inspection of records, confirmations, recalculations, etc.) based on assessed risk. They generally do not inspect every single transaction. For example, PCAOB standards emphasize that reasonable assurance still carries a “remote likelihood” of undetected errors.
Issue an opinion on the financial statements. The audit report states whether the financial statements present fairly, in all material respects, the company’s financial position and results. It does not say anything about future prospects or management quality.

Put in a short list, the main outputs of an audit are:

An audit opinion on the financial statements’ fairness, and
An audit report documenting the scope and results.

What auditors do not do, contrary to common belief, is give a verdict on every aspect of a company’s operations. They do not ensure all bank balances are correct to the penny, nor do they provide a certificate of fraud-freeness. They explicitly do not guarantee the ongoing survival of the business.

To illustrate this difference concretely, consider fraud detection. Although the standards (ISA 240) require auditors to consider fraud risk, they do not require a forensic-level investigation of every possible wrongdoing. As discussed above, auditors must be alert for material fraud, but they take it as a given that some sophisticated frauds might go undetected. For example, one study quotes auditors saying there is “an unavoidable risk that some material misstatements… will not be detected”. This technical stance often clashes with public sentiment; many non-experts feel that “if the auditor is there, they should catch it all.” Standards carefully avoid promising that.

In brief, the auditor’s scope is defined by the relevant auditing standards and regulations, which focus on financial statement accuracy and compliance with accounting rules. The gap arises precisely because the public thinks the scope is much broader than it legally is.

How Audit Standards Define the Scope

Audit standards around the world – whether International Standards on Auditing (ISAs, set by IAASB/IFAC) or country-specific rules (e.g. PCAOB in the U.S.) – all emphasize similar principles. The auditor’s overarching objective is to express an opinion on whether the financial statements are free of material misstatement. For example, ISA 200 (Objective and Principles) states this goal explicitly:

*“An auditor conducting an audit in accordance with ISAs obtains reasonable assurance that the financial statements…are free from material misstatement, whether due to fraud or error.”*.

The standard then clarifies what reasonable assurance means and its limits. It lists factors like the use of sampling and the fact that much audit evidence is persuasive rather than conclusive. ISA 200 concludes that because of these factors, *“an audit is not a guarantee… absolute assurance is not attainable”*. It goes further to say that *“an audit opinion does not assure the future viability of the entity…”*. In other words, the standards themselves discourage any misunderstanding that an audit is a cure-all or full guarantee.

Similar language appears in other frameworks. The PCAOB’s auditing standard (AS 3101 for U.S. public companies) echoes these limitations, and even explicitly lists management override and collusion as inherent risks that audit alone can never fully eliminate. In practice this means auditors comply with detailed checklists (for example, internal control testing, revenue recognition checks, etc.), but they all tie back to the reasonable assurance principle.

Because these standards are global, the expectation gap is a global issue. For instance, the International Auditing and Assurance Standards Board (IAASB) – part of the IFRS Foundation’s network – has acknowledged the gap in its public consultations. A 2020 IAASB discussion paper on fraud and going concern explicitly describes the expectation gap as *“the difference between what users of the financial statements expect and the financial statement audit”*. The IAASB has been considering whether to update standards (e.g. on fraud) partly to help narrow misunderstandings. Likewise, professional bodies (AICPA, ACCA, IFAC) regularly publish reports and guidance emphasizing the auditor’s limited scope and encouraging better public understanding.

Ultimately, the way audit standards are written contributes directly to the gap. By design, standards use technical language (“material misstatement”, “reasonable assurance”, “key audit matters”) that most outsiders do not hear about. They frame the auditor’s role in legalistic terms (e.g. only material items, sampling, disclaimers). To a layperson reading the audited financials or hearing about an audit, these nuances are invisible. The standards also insist auditors report only on historical financial statements. The public expectation that the audit should somehow comment on future viability or the inner workings of the company is simply outside the standards’ scope. As one PCAOB analysis puts it, some of the gap is normative – a mismatch between *“what market participants think an audit should be versus what an audit actually is required to be”*.

High-Profile Audit Failures Outside the Big Four

Public scrutiny of auditors tends to spike when companies collapse or restate earnings, and headlines often blame “the auditors”. Many well-known audit scandals involved Big Four auditors and make headlines (e.g. Enron/Andersen, Wirecard/EY). To stay within our scope, we focus here on other firms. Examining these cases highlights how even mid-sized firms and other accountants can have major failings – and how the public reacts.

Grant Thornton LLP (US) – In 2015 the U.S. Securities and Exchange Commission charged Grant Thornton (a major non–Big Four firm) over audits of Assisted Living Concepts (senior housing) and Broadwind Energy. The SEC found that Grant Thornton had *“ignored red flags and fraud risks”*. The firm and partners settled charges and paid millions in penalties. The SEC press release warned: *“Audit firms must be held responsible when systemic failures… cause the firms’ work to fall significantly short of expected standards”*. In other words, this was a clear performance failure: auditors failed to do the basic procedures needed, allowing the companies to file misleading statements. The fallout highlighted that even large firms outside the Big Four can produce seriously deficient audits and that outsiders cannot easily distinguish reliable audits from poor ones.
Grant Thornton UK (Sports Direct) – In 2022 the UK’s Financial Reporting Council (FRC) fined Grant Thornton UK (the country’s sixth-largest firm) £1.3 million for audit failures in Sports Direct (a retail chain). The FRC found the auditor had not treated related-party transactions properly and had “serious failings” in key audit judgments. For example, the auditor failed to identify that a company paid to Sports Direct was in fact a related party. This lapse prompted the FRC to warn that auditors must “follow up with due rigour” and maintain professional skepticism. The press coverage of this case underlined a common reaction: outraged headlines about auditors missing obvious issues, fueling public belief that “auditors should have caught this.”
BDO LLP (UK) – In November 2025 the FRC imposed record sanctions on BDO UK (a large mid-tier network firm). A company insider at BDO had been inserting fake audit evidence and reports without partner approval for years. Two senior partners failed to supervise, allowing fraudulent audit reports. The FRC concluded this was “serious misconduct” and fined BDO £5.85 million (after discounts), alongside bans for the partners. The FRC’s statement emphasized that BDO’s failures “undermining the integrity and quality of numerous audits” and that the sanctions reflect “the extent to which the serious failings… will undermine confidence in audit and the accountancy profession”. This case shocked even the accounting world – a reminder that audit failures can occur at any firm and that the public’s confidence can be shaken when they do, regardless of the firm’s name.
Mazars LLP (UK) – In 2023 Mazars (another top-ten global network) was sanctioned by the FRC for errors in a publicly traded company’s audit (related to convertible loan notes). The audit had a material misstatement that Mazars did not catch until after filing. The FRC noted a “lack of quality control” and imposed a £72,000 penalty. While this was smaller in scale than the others, media coverage highlighted that even well-known firms can “fall far short of the applicable standards” and “undermine confidence in auditors”. City A.M. reported that the FRC said the audit “fell far short” and risked undermining trust in the profession. Such reports feed the public narrative that auditors must do better, even if the actual error (misclassifying loan notes) may seem obscure to non-accountants.

These examples have two lessons. First, audit failures and disciplinary findings are not limited to the Big Four. Mid-tier networks like Grant Thornton, BDO, Mazars (and even smaller firms) appear regularly in enforcement actions. Second, when such failures come to light, public reaction tends to conflate them with the expectations gap. Media stories often imply that audits should be omniscient (even though legally they need not be). For example, in the Mazars case, a City A.M. headline described the firm’s work as “far short” of standards and warned it could “undermine confidence” in auditors generally. Such language, while about one audit, resonates with public fears that “if our auditor doesn’t catch this, who will?”

Why the Gap Persists: Regulators and Education

Auditing bodies and regulators have long grappled with closing this gap – but with limited success. Several factors keep it wide:

Complexity of Audit vs. Simplicity of Misunderstanding. Audit work is technical and hidden. The typical audit report has legalese that most readers do not parse. The average investor or citizen does not know (and has no obligation to know) about audit sampling or materiality thresholds. When a scandal occurs, headlines will always say “auditor failed,” but without nuance. This feeds the simplistic view that auditors should’ve done everything possible. Regulators note that audit is a **“credence good”**: users rely on auditors’ reputation because they cannot directly assess each audit’s quality. As the PCAOB observes, “the quality of an individual audit… is unknown to those investors”, even after it’s completed. That opacity makes it hard for the public to calibrate expectations realistically.
Regulatory and Professional Culture. Sometimes the profession itself has been slow to correct misunderstandings. In the past, some accountants even tacitly blamed the public for not understanding audit. ACCA specifically rejected that attitude, stating that public concern is *“legitimate”*. But in practice, auditors rarely speak directly to non-expert audiences. Audit regulators issue technical standards, not layman’s guides. When misconceptions persist, professional bodies may publish explainer documents or press releases, but their reach is limited. Efforts like requiring companies to hold more shareholder education have uneven effects. In many countries, average investors simply do not learn in detail about what an audit does or does not cover.
Educational Gaps. Formal accounting and auditing education can help – but it usually only reaches those training to be accountants. Some research shows that students who take auditing courses have a narrower misunderstanding gap. For example, a study found that students who studied auditing had significantly less “misunderstanding” of audit scope compared to those who didn’t. This suggests that better education can help insiders appreciate the gap. But educating the general public (or even professionals in other fields) is much harder. Audit topics rarely enter non-accountancy curricula. Outside finance circles, most people learn about auditors only when something goes wrong.
Evolving Expectations vs. Static Standards. Society’s demands evolve faster than audit rules. Stakeholders want auditors to keep pace with new risks (cybersecurity fraud, crypto irregularities, climate disclosures, etc.). Auditing standard setters (IAASB, PCAOB) attempt to update standards (for example, adding Key Audit Matters disclosures, or strengthening fraud rules), but these are typically modest changes. Meanwhile, any new scandal instantly triggers calls for “expanded audit responsibility.” Professional bodies find themselves arguing that legally auditors did their job if they followed standards, but that message is rarely front-page news.
Regulatory Complexity Across Borders. The expectation gap is global, but standards and regulations differ by country. For example, public companies in the U.S. follow PCAOB rules, while companies in Europe follow ISAs enforced by local regulators, and some jurisdictions have their own adaptations. The public, however, often doesn’t distinguish these. A story about an audit issue in one country can influence opinions elsewhere. Audit regulators (IOSCO, IFAC) have formed task forces to study the gap, but they emphasize *“engaging all stakeholders”*. In practice, aligning global communication is a slow process.
Auditor Behavior and Market Structure. Some argue that too-big auditor firms (even excluding the Big Four, still very large networks) contribute to mistrust. Mid-tier firms often fight to win market share. In our examples above, firms like Grant Thornton or BDO suffered public fines that regulators hoped would reassure markets. But public fine reports can cut both ways: they show regulators are active, yet they also underscore that audits sometimes fail. Moreover, many in the public confuse audit failures with auditors playing by the rules. When a court later rules that an auditor was negligent, that blurs the line between a legal finding and the public’s view of what the auditor’s job should have been in the first place.

All these factors mean that regulators and educators struggle to close the gap. Professional bodies have called for more dialogue: ACCA urged “all stakeholders – auditors, regulators, journalists and politicians” – to work together on solutions. Yet practically, most interventions are incremental. For example, IAASB’s recent discussion paper on fraud includes outreach to companies and investors to clarify auditor responsibilities. The U.S. PCAOB has surveyed market participants about expectations. But changing general perception is like steering a large ship – it takes time, consistent messaging, and rare highly visible successes.

Potential Solutions to Narrow the Gap

Despite the challenges, experts have suggested several ways to at least lessen the misunderstanding. Some proposals focus on transparency and communication:

Enhanced Audit Reporting. Many jurisdictions have reformed audit reports to include more information. For instance, ISAs now encourage Key Audit Matters (KAM) paragraphs in the auditor’s report for public companies – these highlight the areas that required most auditor attention. The idea is that telling the users what the auditor focused on (e.g. revenue recognition, asset valuations) may help users understand the audit’s scope and limitations. If done well, KAM can show auditors aren’t ignoring fraud or going-concern risks but are addressing them systematically. However, KAMs have had mixed effects: they increase transparency of certain issues, but they still do not say “everything is fine” or “fraud was found/not found,” so public interpretation remains uncertain.
Education and Outreach. Some suggest that companies should do more investor education about audits (via annual reports or shareholder meetings). Audit regulators could publish plain-language Q&As or FAQs for the public. Accounting and business curricula could emphasize audit role and its limits more broadly, not just for accountancy students. There are initiatives (e.g. the AICPA in the U.S. launched websites and videos to explain audits), but reaching the average person is hard. Government campaigns are unlikely, so most efforts rely on accountants to explain after the fact (typically only after an enforcement action or scandal).
Regulatory Reforms. Many countries have recently overhauled audit regulation in response to failures, which indirectly addresses the gap. For example, the UK created ARGA (a new oversight body) and mandated firms with public sector audits to rotate auditor every 10 years. The EU has tightened rules on auditor independence and firm rotation. Australia strengthened mandatory auditor reporting (e.g. a requirement to explain how misstatements identified by management were resolved). The intent is to make audits more robust and to show regulators are acting; the hope is this builds trust. But critics say stricter regulation may also fuel public expectations (if we make auditors rotate or expand liability, perhaps the public expects even more from them). Balancing tough standards with clear communication is tricky.
Stakeholder Engagement. Some suggest more direct engagement between auditors and users. For instance, audit committees (in public companies) are now required to discuss audit findings directly with investors. Audit firms sometimes meet analysts to go over how an audit was done. These practices can help sophisticated investors form realistic views. However, the general public (retail investors, taxpayers, etc.) rarely have such access.
Audit Quality Indicators (AQIs). Regulators have called for publishing metrics that reflect audit quality (staffing levels, partner turnover, inspection findings, etc.). If companies share these, perhaps investors will see that audits are about process quality, not magic. This could educate users about what a “good audit” looks like. The PCAOB and IAASB have floated ideas for AQIs, but so far no global standard exists. One barrier is that such metrics might not be easily interpretable by non-experts either.
Legal and Liability Changes. In some countries, the law makes it easier or harder for auditors to be sued. The audit expectation gap also appears in the context of lawsuits: courts often cite the gap concept (though not the name) to justify limited auditor liability. If the law were reformed (for example, to require auditors to include fraud disclaimers or to limit their liability more sharply), this could clarify roles. On the other hand, increased liability pressure might make auditors even more defensive. This is a debated area; in practice, legal reforms tend to follow public sentiment, not lead it.

In the meantime, better communication from the audit profession could help. Auditors could publish plain-English brochures with every financial report (“What does an unqualified opinion mean?”). Some companies include auditing policies or auditor comments in their annual reports – these practices could be expanded. Accountancy bodies can also partner with investor advocacy groups to clarify roles (e.g. AICPA’s “What Does an Audit Do?” brochures). Journals and media could adopt clearer language (e.g. explicitly distinguishing audit scope in news stories). No single solution will erase decades of misunderstanding, but a combination of clear language, education and transparency could chip away at the gap over time.

Implications for Trust, Investors, and Reform

Why should we care about the audit expectation gap? Because trust in the financial system depends on it. If investors and the public expect too much from auditors, they will feel betrayed when problems emerge – even if the auditors did what standards required. Every high-profile audit failure (like those above) shakes confidence; some of that shock is due to unfairly high expectations. Conversely, if expectations were aligned with actual duties, people might focus less on blaming auditors and more on the real culprits.

Audit quality and investor protection hinge on credible audits. The PCAOB has warned that misunderstandings about audits can impede effective regulation: “auditors are between Scylla and Charybdis” – caught between public expectations and legal constraints. If the gap is not addressed, there is a risk that the public will demand radical changes (for example, giving auditors even more powers, or penalizing them for things beyond their control) which could distort the audit process. On the other hand, failing to respond could further erode trust, potentially leading to heavier-handed regulation or even social distrust of markets.

In summary, the audit expectation gap matters because it affects how people perceive the reliability of financial information. Audits are meant to reassure investors, but when expectations aren’t met, that reassurance turns to suspicion. Bridging the gap – through education, communication, and thoughtful reform – is essential for trust in capital markets. Investors deserve to know exactly what an audit is and is not, so they can make informed decisions. As regulators and practitioners emphasize, narrowing the gap will help ensure audits meet society’s legitimate needs without promising the impossible.

Ultimately, the goal is a system where the public understands that an auditor’s clean opinion means the financial statements are free of material errors, not that the company is flawless. When this understanding prevails, audit reports can achieve their purpose – enhancing confidence in the numbers investors rely on – and promote the very market integrity everyone demands.

Auditors provide reasonable assurance on financial statements (focused on material errors), but the public often expects absolute certainty and broad fraud detection. Audit standards worldwide spell out audit limits (no guarantee of future viability), yet media stories of failures reinforce the perception that auditors should catch everything. Efforts to educate investors, improve audit reports, and enforce stricter audit quality standards aim to close the gap, but progress is slow. Addressing the expectation gap is crucial: only when expectations align with reality can the public truly trust auditors and the capital markets they support.