The consequences of the auditor’s choice in group companies and expectations gap

Abstract

PurposeThe purpose of this paper is to investigate the consequences of the auditor’s choice in group companies and the expectation gap of listed firms on the Tehran Stock Exchange (TSE).Design/methodology/approachIn this study, 128 companies (768 observations) listed on the TSE during the period 2012 to 2017 have been investigated. To test the hypotheses, logistic regression has been used.FindingsThe results showed that companies that are members of business groups are more likely to choose their auditors from large audit firms. The research findings also showed no significant relationship between the business group firms that have used the large auditor and the financial reporting quality. The results showed a positive and meaningful relationship between the member firms that use the large auditor and the audit fees. The results showed a negative and significant relationship between membership in business groups and the audit expectations gap.Originality/valueDespite the importance of the audit performance, defining auditors’ roles most acceptably has always been challenging to create a gap through the diverse understanding of auditors’ role, which is the distance of perception between users’ auditors. For this reason, over the past years, the audit expectation gap and how to reduce it have focused on academics, professional accounting firms and users of financial statements. As any unmet expectations from the community will reduce the audit firm’s credibility and ability to gain and be widely detrimental to stakeholders, the audit study’s expectation gap in performing audit study is critical. Although there are extensive studies on the gap in auditing expectations in developed economies, most conclusions cannot be attributed to developing countries such as Iran due to cultural and legal differences. Besides, the audit environment in Iran and existing laws can have different results. This research also helps to bridge this gap by providing additional guidance to regulators. Besides, as all recent studies on the expectation gap were qualitative, the present study measures the expectation gap through quantitative statistical methods.