In the Netherlands, November 2009, the House of Representatives set up the Parliamentary Inquiry Committee on the Financial System (De Wit Committee).
The committee performed a parliamentary inquiry into the emergency measures taken by the Dutch government between September 2008 and January 2009 to deal with the urgent problems of the financial system in the Netherlands. In May 2010 the chairman of the committee, Mr. Jan de Wit, presented the committee's report, called ‘Credit Lost’ to the President of the House of Representatives.
According to the Committee, the immediate cause of the financial crisis was the bursting of the housing market bubble in the US, when it became clear that many bad mortgages had been issued. The committee states that the deeper underlying causes of the crisis had to do with macroeconomic considerations (trade and monetary policy, globalization and deregulation of the financial markets).
Concerning the role of the auditor, the Committee (2010, 24) judges that financial crisis has shown that the audit profession failed to succeed its social responsibility to provide a clear and adequate clarification on the financial statements of financial corporations, especially on the uncertainties concerning the valuation of financial assets.
The Committee states that a gap exists between the expectations of the ‘public at large’ and the nature of the audit. It is questioned whether the auditor did enough to fulfill his social responsibilities. Material risks have not been clearly communicated to management and regulators.
The De Wit Committee (2010, 156) concludes that in the Netherlands no incorrect audit opinions have been issued. Financial statements generally were not required to be restated. However, the Committee questions the value relevance of the audit report for assessing the health of financial organizations and the financial system.
The Committee underwrites the initiatives taken by the professional association to use the collective knowledge that is available for the early identification and monitoring of risks, problems, and areas of attention within financial institutions as well as within the financial sector.
The Committee (2010, 158) was interested to learn of the proposals for a new kind of tripartite conference, that is, consultation between ‘De Nederlandsche Bank’ (DNB), the financial company, and the external accountant. These initiatives could contribute restoring trust in auditors as reliable parties in the public sphere and the financial sector.
In this chapter, a several studies on the value relevance of the audit report have been described. A schematic representation of these studies and their contents and findings is presented in appendix 3. The next chapter focuses on the design of the empirical part of this research.
5. Outline of the empirical research
The purpose of this research is to investigate the value relevance of the auditors’ communications. ‘Value relevance’ implies the ability of the auditors’ communications, i.e., the audit report, in communicating effectively about the audit process, the responsibilities of the auditor, the nature of assurances provided by the auditor and other items which could be important in a decision-making process.
Effectiveness will be established by assessing users’ understanding of messages as contained in the audit report and identifying users’ needs and requirements regarding topics which should be attended to (more extensively) in the audit report.
This chapter provides an outline of the empirical research. Research approach, type of research and the research strategy; the research characteristics, are depicted. This chapter also defines units of analyses and describes strategies of sample selection and data collection. At last, this chapter reports on the design of the questionnaire (research instrument) and data analysis.
Characteristics of the research
Empirical research derives its data by means of direct observation or experiment. Data is used to answer a question or to test a hypothesis. Two generally accepted approaches exist as to the design of an empirical research: qualitative research and quantitative research.
According to Verschuren en Doorewaard (2007, 160) determining a research approach is a choice between breadth and depth. Either breadth (quantity): a large-scale approach that enables a generalization of the results or depth (quality): a small-scale approach that enables to achieve depth, elaboration, complexity and a sound foundation with a minimum of uncertainties.
Whereas quantitative research refers to counts and measures of elements, qualitative research refers to the meanings, the concepts, the definitions, the symbols, the characteristics and the descriptions of elements. Qualitative data collection requires researchers to interpret the information collected, most often without the benefit of a statistical support.
Following Babbie (2007, 23), quantification often makes observations more explicit. Quantification also can make it easier to aggregate, compare, and summarize data and opens up the possibility of statistical analyses. Quantitative data offer the advantages that numbers have over words as measures of some quality.
In this research, a qualitative research strategy will be applied. This study is not intended to be accurately representative of its population. Different groups of financial statement users will be involved; however, the actual selection of sample items will be non-random.
The quantification of data makes observations more explicit. Quantification also can make it easier to aggregate, compare, and summarize data (Babbie, 2007, 23). Considering the advantages of quantitative data collection, the possibility of performing statistical analyses, in this research is decided to arrange the research instrument as such that quantified data will be obtained.
Type of research
According to Babbie (2007, 87), three of the most common and useful purposes of research are exploration, description and explanation. Exploratory studies are conducted to ‘explore’ a topic. Exploratory research helps determine the best research design, data collection method, and selection of sample items. The exploratory approach typically occurs when a researcher examines a new interest or when the subject of the research itself is relatively new.
In exploring descriptive research, the researcher observes and then describes what has observed. The purpose of descriptive studies is to identify patterns or trends in a situation, but not the causal relationships between different elements. Descriptive studies help in generating hypotheses on which further research can be based.
Descriptive studies answer questions of what, where, when and in which way, explanatory studies of why. Conducting explanatory research, the researcher goes beyond merely describing characteristics, to analyze and explain why and in which way something is happening. The purpose of explanatory studies is to identify and measure causal relationships among phenomena.
The nature of this research could best be described as ‘explorative’. The purpose of the research is to learn about financial statement users’ conception and understanding of certain messages in the audit report, i.e., to identify and describe the value relevance of ISA 700 unqualified audit reports.
Verschuren en Doorewaard (2007, 161) distinguish five main research strategies:
the survey (survey research)
Survey research is a research method involving the use of questionnaires to gather information about people and their thoughts and behaviors. Surveys include the use of a questionnaire: an instrument specifically designed to elicit information that will be useful for analysis.
To gather information on a population at a single point of time, cross-sectional surveys are used. In purpose of collecting data at different points in time, longitudinal surveys are used. Surveys may be used for descriptive, explanatory, and exploratory purposes.
the experiment (experimental research)
The experimental method is a systematic and scientific approach to research in which the researcher manipulates one or more variables, and controls and measures any change in other variables. Experimental research is especially appropriate for hypothesis testing. Seeing that the key to experimental research is discovering causal relationships, experiments are better suited to explanatory than to descriptive purposes.
the case study (case study research)
The case study is a research methodology based on an in-depth, longitudinal investigation of a single individual, group, or event: a case. Case studies can be based on a mix of quantitative and qualitative evidence. The case study method focuses on description and exploration.
the grounded theory approach
Grounded theory is the attempt to derive theories from an analysis of the patterns, themes, and common categories discovered in observational data. Data are collected in the absence of hypotheses. The grounded theory approach is different from hypothesis testing, in which theory is used to generate hypotheses to be tested through observations.
Desk research, or secondary analysis, is a form of research in which another reanalyzes the data collected and processed by one researcher. This is especially appropriate in the case of survey data.
In examining respondents’ opinions and interpretations regarding messages in the audit report, survey research is the most applicable research strategy. A mail survey (e-mail survey) will be performed in which questionnaires will be used to elicit information from sample items.
Units of analyses
The units of analyses are the investigated elements. In addition, the units of analysis in a study are usually the units of observation. In this research, the aim is to investigate behavior of individuals: financial statement users. In fact, every citizen can be classified as being a financial statement user. Anyone could own shares and, being a shareholder, taking cognizance of financial reports. As a result, it will be impossible to define accurately the extent of different groups of financial statement users.
According to the IASB-framework (IASB, 2005), the objective of financial statements is to provide information about the financial position, performance and changes in financial position of an entity that is useful to a wide range of users in making economic decisions. The Framework lists the following ‘principal classes’ of financial statement users:
According to the Framework (IASB, 2005), all of these categories of users rely on financial statements to help them in their decision-making. The Framework concludes that because investors are providers of risk capital to the entity, financial statements that meet their needs will also meet most of the general financial information needs of other users.
The providers of risk capital, investors (shareholders) could be classified as a main class of financial statement users. Investors rely on financial accounting information as their major source of financial information. In economic decision-making, investors need reliable information. Information should not contain material error and bias, and need to represent events and transactions faithfully.
A financial statement audit is conducted to enhance the degree of confidence of intended users in the financial statements. Decision makers use the audited information on the assumption that it is reasonably complete, accurate, and unbiased. Because the audit report represents the auditor’s communications of findings to financial statement users, such a report is considered an essential tool in evaluating companies’ performances and creating investment decisions.
Concerning the purpose of this research, and considering the information before, is decided that ‘investors’ will form a major part of the sample. Various groups of financial statement users will use and analyze the audit report from different points of view; consequently, it is essential to engage different stakeholders. In forming conclusions, investors, as well as bankers and financial analysts, practice different ideas and perspectives.