Credit crisis and the fallout of the subprime meltdown caught the financial systems in the world economies off guard. It has not only resulted in US recession, but its ripple effect has also resulted in a negative impact on the developed economies like the UK, Spain, Japan, Singapore and emerging economies like India and China. George Magnus, senior economic advisor to UBS, predicted that the subprime crisis would lead to a global recession. His prediction that the current credit crisis will not descend into a full-blown depression, but rather into a recession lasting for about two years might come true. The said financial turmoil brought to the fore huge gaps in business models, management, auditing, accounting and disclosure and risk management practices, especially in banks and other financial institutions and placed the policy makers, legislators and corporates on tenterhooks.

The Basel Committee for Banking Supervision underscored the importance of establishing a robust liquidity risk management framework that should integrate into a bank's risk management process, and which all banks should adopt. In this connection, it published `Principles for Sound Liquidity Risk Management and Supervision', where it calls for tougher liquidity regulations. With regard to the accounting profession, the credit crisis has renewed the debate on the use of fair value accounting. The Securities and Exchange Commission (SEC) Chairman, Christopher Cox, in his opening remarks at the SEC Roundtable on Mark-to-Market Accounting, asserted that illiquid markets pose a challenge to fair value measurement and emphasized the need to improve corporate tools to achieve transparency in financial reporting and decision making.

The collapse of subprime mortgage market, questions the role of auditors and audit committees as the protectors of financial markets and investors. External auditors are accused of abetting the boom mentality by under reporting risks and losses. While some retort that the gravest danger is the public perception of audit profession, others opine that the disclosures in financial statements are the success factors which help investors to avoid unpleasant surprises. Audit expectation gap is the difference between the levels of expected performance as envisioned by the user of a financial statement and the independent auditor. The first article, "Towards an Understanding of the Audit Expectation Gap", by Teck Heang Lee, Azham Md. Ali and Doria Bien, attempts to uncover the causes of audit expectation gap. It also reviews the prior empirical studies, and suggests solutions to narrow the expectation gap. The authors reveal that the misconceptions and misunderstandings by the public of the complicated audit function, lack of understanding of the subjective terms and concepts, excessive expectations, and insufficient performance of auditors are a few factors that contribute to the increased audit expectation gap. The authors suggest that the only way out from this is to redefine the role of auditors in tune with public expectation.

Auditors play an important role in the efficient, effective and ethical functioning of the financial markets. The second article, "Audit Market Competition: Causes and Consequences", by Zulkarnain Muhamad Sori, examines the impact of competition in Audit market on auditor independence. Through interview methodology, the author examines the Malaysian audit market which is small and competitive. The Four big firms which have a competitive edge in terms of resources, technical knowledge, experience and global reach over other audit firms control the audit market in Malaysia. The survey results reveal that a stiff competition in the audit market would not threaten the auditor independence. However, the dependence on a single client would cause the auditor to face a `self-threat' risk, and thereby threaten the auditor independence. The author suggests that regulatory authorities should closely monitor the profession.

Six years after the implementation of the Sarbanes-Oxley Act in the US, and other equivalent legislations elsewhere, the debate on providing Non-audit services still continues, especially in the field of research. The last article, "Provision of Non-Audit Services, Low Balling, Audit Tenure and Auditor Type", by Arvind Patel, Veer Singh Varma and Pranil Prasad, investigates into the supply side of Non-Audit Services (NAS), and seeks to establish reasons for the supply of NAS by audit firms. The sample consisted 86 firms listed on the New Zealand stock exchange where provision of NAS is not restricted. The study used data collected from the on-line Datex data service and also used the published financial statements. The results of regression analysis indicate that the provision of NAS supports the efficiency and expertise argument. Auditors provide NAS because there is scope to provide such services, which result in maximizing efficiency by transferring knowledge from audit to non-audit tasks. Hence, the authors conclude that restrictions on NAS enforced by regulators only add to unnecessary costs for the clients and auditors.

- C Padmavathi
Consulting Editor