The audit expectation gap and strengthened independence standards in the European Union: measuring the effects of the new EU Directive

ABSTRACT The European Union has addressed the moral hazard that auditors may present by doubly reinforcing auditor independence. This has been done through the formulation of a general principle of independence in conjunction with a preventive and sanctioning framework of safeguards and prohibitions. This article evaluates whether the audit expectation gap has provoked a shift towards increasing the protection of auditor independence. The Directive provides a new framework to harmonise and protect auditor independence in the EU. The article covers a gap in relation to the effects of new auditing regulations within the EU affecting the ethical problem of auditor independence and its connection to the audit expectation gap. A qualitative study addressed to a sample of 192 auditors has been developed. Following the structural equation modelling methodology (PLS-SEM), our results display evidence of a relationship between the audit expectation gap and auditor independence. Furthermore, the results show a mediating effect of new auditor safeguards and quality controls and a sanctioning system to protect independence when an audit expectation gap exists. The results also show that the more restrictive auditor prohibitions considered in the latest European reform have a positive effect on the protection of auditor independence.