literature review of audit report

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Literature Review for Accounting/Auditing

Main Objectives, Procedures & Resources

What is a literature review and what is the purpose?

A literature review consists of simply a summary of key sources, and it usually combines both summary and synthesis, often within specific conceptual categories. A summary is a recap of the important information of the source, but a synthesis is a re-organization, or a reshuffling, of that information in a way that tells how you are planning to investigate a research problem.

A literature review is conducted during the first phase of the research process (in the exploration stage). The purpose of a literature review is to:

To survey the current state of knowledge in the area of inquiry (concerning the research questions and/or related topics)
To identify key authors, articles, theories, and findings in that area
To identify gaps in knowledge in the research area

In this document, we will focus on the steps to follow in doing a literature search on a topic or author. While the steps below are listed in numerical order, some steps may need to be repeated, revisited, and/or skipped as you go through the process.

Consider a topic for the research question and determine the breadth and depth of your topic that is manageable in scope - hence preferably, not too wide nor too narrow. For instance, the topic - Audits and IPOs – could be a good one in this regard.
Audits > Auditor, auditors, auditing …
IPOs > IPOs, Initial Public Offerings …

Thus, we can change our original topic - Audits AND IPOs – into a new search statement as below:

(Audit * ) AND (IPOs OR Initial Public Offerings)
AND -- this narrows a search by telling the database that ALL keywords used must appear in the same records/results.
OR -- this broadens a search by telling the database that ANY of the words it connects are acceptable in the search results.
* -- this asterisk is a wildcard character , so using: Audit * = the search results may contain Audit, Audit s, Audit or, Audit ing
Link 1 - Results - Getting Search Results: 182 (as of 10/16/23)
Link 2 Results - Getting Search Results: 498 (as of 10/16/23)
Audit risk issues
Financial statements
Management structure or corporate governance
Compliance
Mergers or Acquisitions
Now, with the help of Boolean operator “ AND ” we can easily combine theses three concepts/keywords, thus forming some seemingly intricate, yet more promising search statements as below. That way, we could be able to pull out more meaningful, focused, and relevant results from a huge databases:
(Audit * ) AND (IPO * OR Initial Public Offerings) AND ( Risk * ) > Results from EBSCO
(Audit * ) AND (IPO * OR Initial Public Offerings) AND ( Financial statements ) > Results from EBSCO
(Audit * ) AND (IPO * OR Initial Public Offerings) AND ( management structure or corporate governance ) > Results from EBSCO
(Audit * ) AND (IPO * OR Initial Public Offerings) AND ( compliance ) > Results from EBSCO
Su (Audit * ) AND Ti (IPO * OR Initial Public Offerings) AND Su (merger * OR acquisition * OR m&a * ) > Results from EBSCO

Please note: (1) Following each of the search statements above, there is a link to results from our library subscription databases - EBSCOhost . EBSCOhost is one of our recommendation databases for any literature review as it is the largest databases for journals/articles coverage we subscribe to so far, and Business Source Complete ls just one of them. (2) #5 above is different from other in that the Fields - Su and Ti Fields - have been added and used in the search statement. Why Fields search will be discussed in the next Step (Step 5).

With the power of computing and databases, more often than not, users would get overwhelming results from whatever keywords used. How to overcome that? You can reduce the overwhelming number of results, and in the meantime not sacrifice any relevant and high-quality results by taking advantage of the content-related fields in structured databases – the fields that is already build-in with almost all databases, such as EBSCOhost . We are particularly interested in the following content-related fields:
Title - TI field
Subject - SU field
Abstract - AB field

As a result of using fields, you are actually limiting (forcing) the keywords of selection only appear in certain fields you’ve specified. Think about this: if in a title of an article, there is a word XYZ, the chances are content of the article is pretty much about XYZ. The same applies to the fields of subject and abstract.

au (Raman, K) AND ab (audit*) = 60 results > Results from ProQuest
au (Raman, K) AND su (audit*) = 42 results > Results from ProQuest
au (Raman, k) AND litigation = 18 results > Results from ProQuest
As the search results are returned, it is best to preview the results by looking for articles that are relevant to your specific research questions. Try to pay attention to words around the highlighted keywords (it may reveal why a particular article has been pulled out), skim the abstract and the introduction section, even try to read the literature review sections of these articles. This will help to determine the suitability of that article for a further review.
Overall, a well conducted literature review should indicate whether the initial research question or topics have already been addressed in the literature, whether there are newer or more interest research questions available, and whether the original research question should be modified or changed in light of findings of the literature review.
Last but not least, it is highly recommended to search the following UTSA subscription databases considering these databases’ coverage and relevancy to your academic discipline. Certainly, you can use the techniques and procedure we’ve discussed above within all of the databases below.
Academic Search Complete is a flagship of EBSCOhost
Business Source Complete – another sub-database of EBSCOhost —that also c overs Working Papers
including ABI/INFORM Collection and
Accounting, Tax & Banking Collection
NBER Working Papers
Provides access to books and journals in accounting and finance, economics, and more
Last Updated: Oct 16, 2023 9:40 AM
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Audit expectation gap: a comprehensive literature review

Asian Journal of Accounting Research

ISSN : 2459-9700

Article publication date: 28 April 2022

Issue publication date: 26 September 2022

Supplementary Material

This paper reviews a substantial body of scholarly work on the audit expectation gap (AEG) for many years and aims to construct a new synthesis of the existing knowledge of the AEG discovered by numerous scholars in the world.

Design/methodology/approach

A broad search of the literature was conducted using a few AEG related keywords in the Google Scholar search engine and two databases of Scopus and Emerald from 1974 to 2021. Only the articles published in reputable journals concerning the AEG were selected after applying some selection criteria.

The concept of AEG is a multidimensional concept. Different causes for the AEG were identified, and several strategies were summarized into major promising strategies for narrowing it. It was found that the AEG cannot be eradicated entirely from society.

Practical implications

This review of the literature will be of interest to auditors, financial statement users, regulatory agencies, and policymakers, among other parties. Further, this AEG synthesis may be useful in understanding misperceptions and determining how they differ across diverse stakeholders.

Originality/value

There is a dearth of literature review studies incorporating all the facets of AEG. Hence, this study incorporates all those facets, namely research methods and instruments and dimensions used along with causes and mechanisms to narrow down the AEG while addressing the gaps and highlighting the themes for future research. Finally, a fresh, yet more straightforward definition was generated as a result of the comprehensive review of the literature, adding novelty to the extant literature.

Audit expectation gap
Literature review

Deepal, A.G. and Jayamaha, A. (2022), "Audit expectation gap: a comprehensive literature review", Asian Journal of Accounting Research , Vol. 7 No. 3, pp. 308-319. https://doi.org/10.1108/AJAR-10-2021-0202

Emerald Publishing Limited

Published in Asian Journal of Accounting Research . Published by Emerald Publishing Limited. This article is published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce, distribute, translate and create derivative works of this article (for both commercial and non-commercial purposes), subject to full attribution to the original publication and authors. The full terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode

1. Introduction

The financial fiascos and downfalls of corporate giants such as Enron, World Com, Arthur Andersen, and Xerox radically boosted the public outburst regarding dishonourable corporate reporting. As a result, related authorities came up with new rules and regulations on corporate reporting and auditing practices to protect and enhance public confidence in the auditing profession ( Lin, 2004 ). However, Salehi et al. (2009) claim that reporting the reality in financial statements is expected by the financial statement users, comprising the shareholders and the general public. Nevertheless, Porter (1993) argues that the users might be disappointed if the financial information provided by auditors do not reflect reality. Hence, in most instances, financial statement users feel that the auditor's report is unclear ( Jayasena et al. , 2019 ). Thus, it is evident that there is a gap in expectations between financial statement users and auditors. This gap is broadly explained as the Audit Expectation Gap (AEG) ( Chowdhury et al. , 2005 ). It is evident in the literature in auditing that most of the scholars ( Liggio, 1974 ; Cohen, 1978 ; Humphrey, 1991 ; Power, 1998 ; Salehi et al. , 2009 ) have mainly suggested the disparity between the services obtained and the expected services offered by the auditors as the AEG. As a result, the presence of AEG between the auditor's view and that of audit report users has been explicitly acknowledged in the extant literature (see, for instance, Best et al. , 2001 ; Cohen, 1978 ; Humphrey, 1991 ; Liggio, 1974 ; Porter, 1993 ; Power, 1998 ; Ruhnke and Schmidt, 2014 ; Salehi, 2016 ; Siddiqui et al. , 2009 ).

To explain the meanings of the AEG derived from existing definitions.

To explore the research methods used in empirical studies by numerous researchers.

To identify the target groups engaged in exploring the AEG.

To explore the dimensions used to measure the AEG by different researchers.

To investigate the causes of the AEG and identify the mechanisms to reduce the gap recommended by numerous researchers.

The rest of the paper is arranged as follows, as per the structure recommended by Fisch and Block (2018) . The second section briefly explains the research process applied, and then the synthesis and interpretation of the literature review findings are presented in the third section. The final section of the paper presents the conclusion with a discussion of the practical implications of the findings and possible future research directions.

2. Research process

Ramdhani et al. (2014) assert that a literature review summarizes the available literature on a particular subject or field. This study is motivated by theoretical consequences that pursue a straightforward process, leading to conclusions derived from the reviewed literature. Hence, it is emphasized that this research paper is built on a review of the literature. In today's world, computers and electronic databases are the most frequently used tools for literature searches, and it is necessary to determine which databases are relevant to the subject ( Cronin et al. , 2008 ). We performed a comprehensive literature search using the keywords “audit expectation gap”, “audit expectations gap”, “audit expectation-performance gap”, and “expectation gap” combined with “audit” or “auditor” in the Google Scholar search engine and two databases of Scopus and Emerald from 1974 to 2021 as in Quick (2020) . This starting point seems justified since the formal definition of AEG comes from Liggio's study in 1974, while the ending point is considered the most recent year. Subsequently, we restricted our search to “titles, abstracts, and keywords” since they represent the areas of publications that are most likely to contain keywords in their text. Ramdhani et al. (2014) suggest that it is usually preferable to consult primary sources wherever feasible. Cronin et al. (2008) recognize “articles published in reputable journals” as primary sources and argue that journal articles are more updated than books as information sources. Therefore, only the articles published in reputable journals concerning the AEG were selected, whereas books, book chapters, conference papers, working papers, and published doctoral theses were excluded in the review of the related literature following Quick (2020) . Furthermore, the journal articles not in English were excluded from the review to avoid translational issues and language limitations. These delimitations seem to be justified when considering the objectives of the study outlined. Surveys could be considered the predominant research method ( Quick, 2020 ), and Tables I and II of Appendix I (available in supplementary material to article) provide a comprehensive overview of the survey-based literature review on the AEG. We discovered a total of 57 directly related articles that were relevant for this literature review study. Hence, it is believed that this study brings together and advances the literature on the AEG from its conception. The list of cited references has been provided at the end.

3. Synthesis and interpretation of findings

3.1 definitions of the audit expectation gap.

In achieving the first objective, it is necessary to compare and contrast the meanings of the AEG manifested from the existing definitions. Different researchers and some prominent professional accounting bodies have provided numerous definitions, and the most widely used definitions of the AEG are presented in Table I of Appendix I (available in supplementary material to article). Fisch and Block (2018) point out that tables and figures could be used to show how the numerous studies have changed over time, as well as which themes have received the most significant study attention. Thus, we present the definitions of AEG in chronological order, which clearly shows how the definitions have changed over time.

As far as the definitions given in Table I of Appendix I (available in supplementary material to article) are concerned, most of the definitions are referred to as; (1) discrepancies between what people anticipate of auditors and what auditors actually deliver; (2) differences in perceptions between auditors, the audit profession, accountants, and their responsibilities and financial statement users. The definitions given by Liggio (1974) and Cohen (1978) are believed as too myopic by Porter (1993) , and she introduces the concept of “Audit Expectation-Performance Gap” instead of “Audit Expectation Gap” for the first time in history by adding substandard performance as a part of the auditor's role. As far as all these definitions are compared and contrasted, it is observed that most of the definitions do not illustrate the significance of “sub-standard performance".

The majority of the scholars argue that the AEG has grown as a result of the auditing function's unrealistic expectations ( Chapman, 1992 ; Lin, 2004 ; Tidewell and Abrams, 1996 ). Moreover, it is evident that the focus of most of the recent studies has been targeted at analyzing (a) society's and auditor's views; (b) accountants' and auditors' perceptions; and (c) investors' and auditors' perceptions at the same time ( Salehi, 2011 ). Further, it is believed that definitions given by numerous authors on the concept of AEG have been centred on common themes such as audit profession ( Jennings et al. ,1993 ; Masoud, 2017 ; Salehi, 2011 ), auditor's performance ( Ebimobowei and Kereotu, 2011 ; Liggio, 1974 ; Porter, 1993 ; Porter et al. , 2012 ), and the auditor's duties and responsibilities ( Guy and Sullivan, 1988 ; Monroe and Woodliff, 1993 ; Ruhnke and Schmidt, 2014 ). In addition, ACCA (2021) perceives the AEG as a collection of three gaps, namely the “knowledge gap”, the “performance gap”, and the “evolution gap”, and the evolution gap can be introduced as a newly identified gap by the ACCA. Moreover, when the different dimensions used to measure the AEG are considered in different studies, slight differences can be identified in AEG definitions. However, it could be concluded that most of the definitions have been centred around Porter's (1993) basic definition pertaining to the expectation-performance gap. Astolfi (2021) expresses his dissatisfaction with Porter (1993) for failing to acknowledge the importance of accounting standards in his study on AEG. Despite this, International Financial Reporting Standards (IFRS) might play a critical part in an auditor's work since accounting standards currently result in regulations and financial statements that are more complicated and subjective.

3.2 Research methods and instruments used in empirical studies

It is evident that the quantitative research approach has been prominent in the studies on AEG, and the questionnaire surveys have been the most common means of gathering data. The extent of literature confirms the similarities of the research instruments deployed in numerous studies to examine the AEG and its causes. Subsequently, it is extensively evident that the Mann–Whitney U test, a kind of non-parametric test, has become the most widely used statistical analysis technique among researchers (for example, Akther and Xu, 2020 ; Best et al. , 2001 ; Dixon et al. , 2006 ; Ebimobowei and Kereotu, 2011 ) when examining the significant differences in perceptions in different interested groups (Please refer Table II of Appendix I (available in supplementary material to article)). In contrast with the questionnaire method used in many studies in the quantitative approach, it is observed that Salehi et al. (2020) have applied a statistical technique to examine the possible implications of the characteristics of the auditor on the AEG among the financial report users in Iran. Since stock price fluctuations are considered an important component in determining the current AEG, this study might be regarded as one of the significant studies that used a unique measurement compared to all other studies. Subsequently, empirical studies according to more advanced statistical instruments such as multivariate analysis ( Coram and Wang, 2020 ), logistic regression ( Salehi and Arianpoor, 2022 ), structural equation modelling methodology (PLS-SEM) ( García-Hernández et al. , 2021 ), and Wilcoxon Signed Rank test ( Ruhnke and Schmidt, 2014 ; Nguyen and Nguyen, 2020 ) have also been applied to confirm whether the broad generalizations might be drawn from survey data on the perspectives of various groups. On the other hand, fewer studies are carried out using the qualitative approach ( Chowdhury and Innes, 1998 ; Dewi et al. , 2021 ; Conteh and Hamidah, 2021 ). Moreover, conducting studies on the mixed method (for example, Ellul and Scicluna, 2022 ; Haniffa and Hudaib, 2007 ) may allow for a more thorough interpretation of the object of the study by complementing or describing data.

3.3 Target group used in the previous studies

The existing literature has proved the presence of the AEG, which has adopted a variety of samples for the various investigations that have been conducted. External auditors have represented the “auditor” side in the majority of the selected studies, whereas internal auditors have been engaged in a few selected studies (for example, Ebimobowei and Kereotu, 2011 ; Dewi et al. , 2021 ). Subsequently, the majority of the studies conducted to examine the AEG have selected the “audit firms” to represent the external auditor without considering the size of the audit firm ( Akther and Xu, 2020 ; Fadzly and Ahmad, 2004 ; Lin, 2004 ; Olojede et al. , 2020 ; Onulaka and Samy, 2017 ; Porter, 1993 ), whereas only the Big Four audit firms have been selected in some studies ( Baron et al. , 1977 ; García-Hernández et al. , 2021 ; Nguyen and Nguyen, 2020 ). As far as the studies on expectation gap related to the public sector are concerned, it is evident that the auditor side has been represented by the Comptrollers and Auditor General ( Chowdhury et al. , 2005 ) and the members of the National Audit Office of related countries ( Ellul and Scicluna, 2022 ; Oluyombo and Okunola, 2018 ).

AEG has been examined using different samples for the “society” perspective in numerous countries worldwide. Table I of Appendix I (available in supplementary material to article) demonstrates widely used samples representing the society used by the various authors in literature from 1977 up to date. It is observed that the studies conducted on AEG in the public sector have used different types of respondent groups, such as politicians, members of parliament, government regulators, members of the public accounts committee, secretaries of the departments, and delegates representing the international financial agencies such as the World Bank and the Asian Development Bank ( Chowdhury et al. , 2005 ; Ellul and Scicluna, 2022 ; Oluyombo and Okunola, 2018 ). There is a wide range of discrepancies in how the researchers identify the target groups for the study, even if they exclude the general public as a target group for analyzing perceptional disparities in the AEG by the researchers. Hence, it could be generalized that the target groups used in the previous studies examining the AEG are significantly diverse, and no unique group has been targeted.

3.4 Dimensions used to measure the AEG

The AEG concept is considered a highly complicated phenomenon ( Quick, 2020 ), and extant studies demonstrate that different scholars have used different dimensions to explain and define AEG. As far as the elements and components related to the concept of AEG are concerned, the extent, structure, and composition of the concept have been altered and modified subject to the association between the profession of auditing and the perceptions of the general population ( Porter and Gowthorpe, 2004 ). Column 5 in Table I of Appendix I (available in supplementary material to article) demonstrates the “scope of concern”, representing the areas of AEG that many researchers have extensively examined in the literature since 1977. As a foundation study, Porter (1993) identifies the “audit expectation performance gap” under the dimension of “auditor's duties” (using 30 suggested duties). She further classifies two main components of AEG as “reasonableness gap” and “performance gap”, in which the latter is further broken down into “deficient standard gap” and “deficient performance gap”. The reasonableness gap is defined as “the gap between what society expects auditors to achieve and what they can reasonably be expected to accomplish”. In contrast, the performance gap is clearly defined as “the gap between what society can reasonably expect auditors to accomplish and what they are perceived to achieve” ( Porter, 1993 , p. 50). Meanwhile, Salehi (2016) explores that the debate on AEG has continuously been centred on three main components, namely, the nature and importance of the audit report's messages, prior signalling on the corporate failures by the auditors, and the responsibility of the auditor in the detection and reporting of fraud. Subsequently, Akther and Xu (2020) deploy many dimensions to measure AEG, such as the auditor's liability towards detecting fraud, the objective and worth of the auditor's report, undertaking non-audit services, and the accountability of the auditor in reporting ongoing concerns. In contrast, Oluyombo and Okunola (2018) suggest different dimensions under the components of the knowledge gap, reasonable expectation gap, regulation gap, and actual performance gap.

Under the public sector audit perspectives, Chowdhury and Innes (1998) and Chowdhury et al. (2005) use performance auditing, Auditor General's reporting, competency of auditor, accountability, audit materiality, independence of auditor, audit evidence, and true and fair view in measuring the AEG. Azad et al. (2021) assert that materiality is required by those who utilize financial statement information since it is considered one of the most critical factors used by managers, accountants, and auditors when making decisions about reporting. As a consequence of the discussion summary depicted in Table I of Appendix I (available in supplementary material to article), different types of AEG dimensions have been applied for measurement purposes up to and including the year 2021. Hence, (a) the auditor's duties and responsibilities (particularly in detecting fraud), (b) the auditor's independence, skills, and performance, (c) form and content, and the message conveyed by the audit report, as well as (d) factors related to the audit profession, should be the most commonly used dimensions for measuring AEG, according to the evidence gathered from the literature.

3.5 Causes for AEG and mechanisms to reduce the AEG

Füredi-Fülöp (2015) asserts that the identification of the root causes of AEG is crucial since issues coming from various sources need different remedies to be implemented. Potential solutions to reduce the AEG can only be identified when the AEG and its causes in a particular society have been discovered and quantified accurately. As shown in Table I of Appendix I (available in supplementary material to article), researchers have extensively discovered several causes that contribute to the AEG, and they have recommended some mechanisms to reduce the gap. Füredi-Fülöp (2017) argues that the AEG is often caused by an accumulation of shortcomings in several areas, such as unrealistic expectations, misperceptions, and poor performance, and it is necessary to take actions in all of the affected areas since the gap in expectations will continue to exist unless effective and timely remedies are delivered.

It has been discovered via several studies that the AEG cannot be eradicated entirely from society but that a proportion of the AEG will always be associated with the audit function. Füredi-Fülöp (2017 , p. 15) asserts that “although valid general conclusions cannot be drawn from the obtained research results because of the economic, religious, and regulatory differences and derogations in specific societies, some typical, common components can be identified”. The Association of Chartered Certified Accountants (ACCA) (2021) emphasizes the necessity of reducing the AEG for the betterment of the public interest and recommends employing a comprehensive approach in minimizing the AEG in the areas of fraud and going concern, whereby all stakeholders are expected to engage in critical functions in bringing about significant changes. Accordingly, ACCA (2019) suggests three different strategies to reduce the AEG: (1) agreeing with all parties involved in the auditing process to educate the public in a fair, unbiased, and comprehensible manner on audit rules and auditing standards (for the knowledge gap); (2) avoiding standard-setters in developing requirements that induce judgement biases or are challenging to execute objectively (for the performance gap); and (3) the importance of having a wide-ranging conversation about how the audit profession should change to stay relevant and meet the public's needs (for the evolution gap).

After an extensive analysis of the existing literature, we summarized all the promising strategies suggested to minimize the AEG into four main categories: (1). Providing education and training ( Astolfi, 2021 ; Azagaku and Aku, 2018 ; Dang and Nguyen, 2021 ; Dewi et al. , 2021 ; Ellul and Scicluna, 2022 ; Fulop et al. , 2019 ; Kunz and De Jager, 2019 ); (2). Expanding audit report ( Behzadian and Nia, 2017 ; Conteh and Hamidah, 2021 ; Ellul and Scicluna, 2022 ; Okafor and Otalor, 2013 ; Olojede et al. , 2020 ); (3). Enhancing communication ( Akther and Xu, 2020 ; Conteh and Hamidah, 2021 ; Dang and Nguyen, 2021 ; Xu and Akther, 2019 ); and (4). Making regulatory changes ( García-Hernández et al. , 2021 ; Nguyen and Nguyen, 2020 ; Okoro et al. , 2019 ; Salehi, 2016 ). However, certain constructive criticisms may be made about those promising strategies and their implementation. Quick (2020) strongly argues that the feasibility of implementing education as a strategy is hampered since it appears to be impossible to teach “millions of stakeholders” simultaneously. Furthermore, Coram and Wang (2020) believe that reducing the AEG is not something that could be accomplished simply by increasing the amount of information disclosed in audited financial statements. Furthermore, it could be argued that the publication of information such as key audit matters (KAM) in audit reports might establish new gaps unless the information is sufficiently communicated and perceived well by the users. Moreover, establishing regulatory adjustments may not be as simple as it appears because regulators must determine which stakeholder category they need to align legislative activities to account for the differences in cultural, economic, social, and legal components among different countries ( Quick, 2020 ). Subsequently, ACCA (2019) firmly believes that reducing the gap cannot be accomplished only by profession.

4. Conclusion, implications, and future research

AEG is now being extensively addressed in the auditing literature by numerous scholars. Various researchers have presented different views on the existence and causes of AEG under different perspectives. With the expansion of society's knowledge, people are becoming increasingly aware of auditing, and their expectations are also continuously increasing at an accelerated pace. Ultimately, it leads to the expansion of the gap. With the aim of reviewing the literature on AEG, this study focused on five main objectives.

To accomplish the first objective, we compared and contrasted the meanings of the AEG as reflected by existing definitions. In defining the AEG by different researchers, slight differences were observed when AEG was measured based on different dimensions such as the auditor's role, audit report, duties and responsibilities, and independence. Nevertheless, most of the definitions have been centred around Porter's (1993) basic definition of audit expectation-performance gap. The concept of the AEG presented by academics has undergone significant modification over time, and it is still evolving. Despite the fact that Porter's (1993) notion is widely acknowledged as the foundational definition, the emphasis of this study has shifted away from it, towards discovering the nature, structure, and causes of the AEG and providing viable solutions for bridging the gap. Eventually, by referring to all the definitions presented by the numerous scholars in the extant literature, we came up with a fresh yet simpler definition for the AEG as “the difference between what the society as a whole expects auditors to do and what auditors actually do when performing an audit in practice”. In terms of achieving the second objective, we concluded that the quantitative method, as part of the positivistic approach, has dominated the exploration of the AEG. Subsequently, the Mann–Whitney U test has emerged as the most commonly used analytical technique in research where data has been gathered most widely via questionnaire surveys. It is found that qualitative studies are significantly lower than quantitative studies in AEG. Ratzinger-Sakel and Gray (2015) assert that qualitative research methods are commonly utilized to investigate policy creation and implementation challenges in fields other than accounting and auditing. Further, Oler et al. (2010) claim that accounting and auditing journals call for excessive study heterogeneity, yet qualitative research is less likely to get published. Accordingly, we encourage future researchers to conduct their studies using triangulation design under the mixed-method approach to compare quantitative statistical findings with qualitative results straightly and validate or integrate quantitative research findings with qualitative data. This paper reviewed the samples selected (target groups) by numerous scholars to achieve the third objective of this study and concluded that the target groups used throughout the studies on the AEG had varied substantially. Accordingly, it appears that there is no clear answer to the question of whom the exact target groups are concerning the AEG studies. The dynamic nature of the concept of AEG was addressed in achieving the fourth objective of this study and we concluded that AEG is a multidimensional concept. Consequently, there is a potential for combining different dimensions if appropriate evidence and justifications are provided and explored through the notion of AEG. As a result, numerous researchers have come up with different causes for the AEG. Finally, different approaches for reducing the AEG have been recommended, and these have been summarized into four major promising strategies, even though specific constructive criticisms have been levelled at those strategies.

The research work published under the AEG over the last 4 decades provides a solid platform on which additional advancements in the scope of the AEG can be established. As the overall conclusion, the findings of global investigations into the AEG cannot be extrapolated directly to a particular country without conducting thorough studies. This is due to the fact that the economic, social, and legal components of a specific state can have a significant impact on study findings and can even be used to manipulate the results of studies.

This comprehensive review of the literature is subject to certain specific limitations. The articles published in reputed journals were searched as primary sources, but books, book chapters, conference papers, working papers, or published or unpublished doctoral theses were not referred. Our review was also restricted to publications with AEG-related terminology in the title or abstract, with non-English journal articles omitted due to language restrictions.

According to the existing research findings, there are implications for future researchers. A literature review paper is an essential technique for gaining access to knowledge that can improve social work practice ( Strandberg and Simpson, 2020 ). Accordingly, this review of the literature will be of interest to auditors, financial statement users, regulatory agencies, and policymakers, amongst other parties. At least narrowing the AEG is essential right now for the sustainability of the auditing profession. Thus, this AEG synthesis may be useful in understanding misperceptions and determining how they differ across diverse stakeholders. Furthermore, the definitions, dimensions, causes of AEG, and potential techniques to reduce AEG synthesized in this study provide insights into establishing a more exhaustive theoretical foundation for AEG-related studies in the future.

As a potential future study subject, it is possible to distinguish between the AEG's relative significance of audit and accounting standards. Thus, scholars could further investigate the impact of new accounting standards, such as IFRS 16 or/and 17, on the AEG since those standards may enhance the complexity of financial statements. Future research might examine the impact of big data and artificial intelligence in determining the magnitude to which the AEG could be decreased via innovation. Subsequently, further investigations of the shift in the gap between auditing academicians and practising groups might be interesting to recognize whether the gap between audit practice and audit research is “converging or diverging” over time ( Ratzinger-Sakel and Gray, 2015 ). Cross-cultural, multicultural, and inter-religious studies on AEG should be conducted to investigate whether there is a perceptional divergence on audit expectations and the impact on the AEG.

It is observed that the AEG pertaining to the public sector has received minimal attention in the literature. As a result, researchers could concentrate on the existence of AEG, the causes of AEG, and mechanisms to reduce AEG in the public sector. There have only been a few studies undertaken on the AEG in the public sector, and most of them have been primarily focused on the financial audit perspective. The AEG relevant to performance audit, value-for-money (VfM) audit, and compliance audit have thus far been understudied, and they represent a promising avenue for future investigations. Subsequently, numerous codes of best practice on corporate governance, listing rules on stock exchanges, and many rules, acts, regulations, directives, and standards have been introduced from time to time. Even though there is a dearth of studies analyzing the impact of those on mitigating the gravity of AEG, the studies can also be focused on those avenues for future research. Moreover, future research should also examine the perspectives of different stakeholder groups about key audit matters (KAMs), as well as the impact of including different forms of KAMs in audit reports ( Coram and Wang, 2020 ). Information technology is crucial to modern accounting and auditing disciplines, with computer-assisted auditing techniques (CAATs) being one of the most extensively employed digital techniques. There may be more forensic accounting and analysis performed with the help of CAATs, and people who work for and with the company may have unrealistic expectations about the ability of digital tools to find fraud and errors in financial transactions. To better understand AEG, we finally suggest that researchers and practitioners devote more attention to this, as it will be a promising avenue for future research on AEG.

The supplementary material for this article can be found online.

Akther , T. and Xu , F. ( 2020 ), “ Existence of the audit expectation gap and its impact on stakeholders' confidence: the moderating role of the financial reporting council ”, International Journal of Financial Studies , Vol. 8 No. 1 , pp. 1 - 25 .

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Acknowledgements

Erratum: It has come to the attention of the publisher that the article Deepal, A.G. and Jayamaha, A. (2022), “Audit expectation gap: a comprehensive literature review”, Asian Journal of Accounting Research , Vol. 7 No. 3, pp. 308-319. https://doi.org/10.1108/AJAR-10-2021-0202 , was originally published with the tables/figures presented as supplementary material via external links that do not meet Emerald's latest repository requirements; these have now been amended and the supplementary material hosted here to ensure that it remains accessible in perpetuity: https://doi.org/10.1108/AJAR-10-2021-0202

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Audit and Feedback: An Evidence-Based Practice Literature Review of Nursing Report Cards

Affiliations.

1 Evidence-Based Practice Program Coordinator, Johns Hopkins Health System, Baltimore, MD, USA.
2 Nursing Emergency Medicine, The Johns Hopkins Hospital, Baltimore, MD, USA.
3 Clinical Informatics, The Johns Hopkins Hospital, Baltimore, MD, USA.
4 Academic Division of Emergency Medicine, The Johns Hopkins Hospital, Baltimore, MD, USA.
PMID: 33512082
DOI: 10.1111/wvn.12492

Background: As more hospitals transition to electronic health records (EHR) and rely on technology to inform practice, what is done with that information is increasingly important. Performance report cards for physicians and nurses are not new, yet there is little recent evidence on nurse-specific audit and feedback.

Aim: The aim of the project was to conduct an evidence-based practice (EBP) review to answer the question, "Does implementing an individualized audit and feedback report tool for nurses improve compliance, adherence, and/or performance of nursing tasks?".

Methods: Evidence was gathered from several databases. Reviewers read and appraised articles that answered the EBP question using the Johns Hopkins Nursing EBP Model. Data were then collated to synthesize and generate recommendations.

Results: Of the initial 613 unique articles, eight (two research and six quality improvement) were included. Six articles demonstrated improvements while two did not. Articles analyzed nursing documentation (n = 3), tasks or skills (n = 2), and best practice compliance (n = 3). One manuscript utilized an EHR-generated report; all others were completed by hand. Overall, there was not consistent and compelling evidence to support individualized audit and feedback report tools in nursing. However, several themes emerged related to sustainability, timing of feedback, audit, and feedback in the context of quality improvement, and the methods of acquiring and distributing data.

Linking evidence to action: The ubiquity and ease of the EHR make providing automated feedback to nurses tempting, yet it is not supported by the literature. More implementation science research is needed to explore audit and feedback reports in nursing. This article adds to the literature by highlighting a significant lack of consistent and compelling positive results from the well-established quality improvement strategy of audit and feedback in the nursing population. The absence of good data is as telling as its presence.

Keywords: audit and feedback; evidence-based practice; health information technology; performance improvement; quality improvement; report cards.

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The impact of key audit matter (KAM) disclosure in audit reports on stakeholders’ reactions A literature review

Posted: 19 Nov 2018 Last revised: 26 Dec 2020

Patrick Velte

Leuphana University of Lueneburg

affiliation not provided to SSRN

Date Written: October 29, 2018

This article presents a literature review of 39 empirical studies on key audit matter (KAM) disclosure in audit reports. The study involves a structured literature review on KAM disclosure based on the reactions of stakeholders. The limitations of former studies and useful recommendations for research are stressed. Five major streams of empirical research that analyse the impact of KAM disclosure on stakeholders’ reactions are focused: (1) shareholders (e.g. investors’ perceptions of auditors’ responsibility and litigation, value relevance and investors’ decisions); (2) debtholders (e.g. loan contracting terms); (3) external auditors (e.g. audit processes and audit fees); (4) boards of directors (e.g. earnings management); and (5) other stakeholders (e.g. informational value for suppliers and customers). We stress that most of the included studies use experimental or archival data and analyse the impact of KAM disclosure on investor reactions in a US-American setting. As the international standard setters assume a positive impact of KAM on stakeholder reactions, mixed empirical results are found. Although there are some indications of decreased earnings management behaviour, most studies find no significant changes in auditor behaviour. Furthermore, there are many insignificant results with regard to shareholders’ reaction in line with our stakeholder and behavioural agency framework. Our literature review is especially useful for management decisions because firm reputation may be positively or negatively influenced by KAM regulations.

Keywords: key audit matters, audit, auditor reporting, expectation gap, audit quality

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The impact of external auditors on firms’ financial restatements: a review of archival studies and implications for future research

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Published: 06 April 2022
Volume 73 , pages 959–985, ( 2023 )

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A systematic literature review includes 69 archival studies on the impact of external auditors on firms’ financial restatements, based on principal agent theory. In more detail, we separate between auditor incentives and auditor competencies to supply a high audit quality. Financial restatements represent one of the most important proxies of audit quality in archival audit research, stressing an increased relevance in empirical research, business practice and regulatory initiatives. The review highlights that many studies on auditor incentives and competencies show inconclusive results on firms’ financial restatements (e.g., fee and rotation studies). But there are indications that especially auditor expertise and audit firm size significantly decrease financial restatements. In discussing potential future research, we emphasize the need for a more detailed analysis of restatements proxies, controls for audit risk, inclusion of (corporate) governance mechanisms as possible moderators or mediators, and sustainability issues of the audit team.

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1 Introduction

The Enron case and the scandal of Wirecard, one of the former “DAX 30” fintech group companies in Germany, are prominent examples of reduced trust in capital markets. While the US-American standard setter implemented the Sarbanes Oxley Act 2002, as a consequence of the Enron scandal, also the German legislator finalized a financial market integrity strengthening act (“FISG”) in 2021 after the Wirecard case. Currently, the European Commission has started an initiative on future reform measures on corporate governance, external audit and enforcement (EC 2021 ). Major regulatory discussions on strengthening audit quality will follow during the next months.

Due to this increased relevance of the topic, our literature review focusses on the external auditor as a key monitoring mechanism and we analyze whether auditors decrease the probability of firms’ financial restatements. Based on the research framework by DeFond and Zhang ( 2014 ), we separate between auditor incentives and auditor competencies to supply a high audit quality. In view of the wide range of audit quality variables, lack of comparability within respected studies and heterogeneity of prior results, our aim is to focus on the existence of firms’ financial misconduct as violations of national and/or international accounting and related business law regulations and standards. Thus, we make a clear distinction between financial misconduct and other financial reporting variables, as earnings management. This strategy increases the validity and comparability of included studies and the deduction of explicit research recommendations. Financial restatements represent one of the most important proxies of both audit quality and firms’ financial misconduct in prior research (e.g., Ahn et al. 2020 ). Other misconduct variables, e.g., enforcement actions, are not focused in this review in view of their low relevance yet (Markelevich and Rosner 2013 ). A variety of studies have been conducted to analyze the impact of auditors on firms’ financial restatements, showing heterogeneous results (Trompeter et al. 2013 , 2014 ). Financial restatements are a significant threat for capital markets (Brody et al. 2012 ; Hammersley 2011 ) and the impact of external auditors should be analyzed in detail with the help of narrative literature reviews. As we are interested in the statistical relationship between external auditors and restatements, and we like to gain comparability within the included studies, we rely on archival studies. As the amount of other empirical research methods on that topic is rather low, we refer to archival studies as the dominant research method. Moreover, as archival audit research heavily relies on the US-American capital market and is mainly influenced by the Sarbanes–Oxley-Act (SOX) of 2002 (DeFond and Zhang 2014 ), we only include post-SOX-studies (starting with the business year 2004).

This leads to the following research questions of our literature review:

Do specific auditors’ incentives have an impact on firms’ financial restatements?

Do specific auditors’ competencies have an impact on firms’ financial restatements?

What are the main limitations of prior archival studies in this research field?

Which research recommendations can be formulated from a content and methodological perspective?

In the following, we stress the contribution and motivation of our study. We note an increased amount of literature reviews on firms’ financial misconduct in general (e.g., Zahra et al. 2005 , 2007 ; Free 2015 ; Amiram et al. 2018 ; Sievers and Sofilkanitsch 2019 ; Montesdeoca et al. 2019 ; Tutino and Merlo 2019 ; Albizri et al. 2019 ) and on related misconduct measures (e.g., Karpoff et al. 2017 ; Sellers et al. 2020 ). However, only few literature reviews concentrated on the impact of auditors on firms’ financial misconduct. Hammersley ( 2011 ) has addressed auditor judgments in fraud-related planning tasks. Nieschwietz et al. ( 2000 ) and Hogan et al. ( 2008 ) conducted a literature review on auditors’ detection of financial statement fraud before the SOX. Trompeter et al. ( 2013 , 2014 ) presented an update of empirical studies in comparison to Hogan et al. ( 2008 ) in their 2013 study and integrated research from other disciplines in 2014. As we only include archival studies in this analysis, we mention the different aims of meta-analyses and structured literature reviews and our decision to conduct a literature review. Meta-analyses become more important during the last years also in audit research and intend to measure the overall statistical significance of a specific economic relationship, based on a conglomeration of single study results. Moreover, by the help of a meta-analysis, possible moderator and mediator variables can be tested statistically. Our intention is more focused on a narrative analysis of auditor-related determinants of firms’ financial restatements and a detailed description and review of heterogeneous proxies. In contrast to meta-analyses, we are also interested in stressing explicit limitations in prior archival studies from a content and methodological perspective, and we like to guide future researchers with the help of explicit research recommendations for useful designs on firms’ financial restatements.

We make the following main contributions to prior literature reviews on related topics. First, we rely on archival research (post-SOX) on the impact of auditor characteristics on firm’s financial restatements, stressing the need for a specific literature review on this relationship. There is much debate whether the external auditor may have an impact on the occurrence of firms’ financial restatements and we know very little about the main auditor-related determinants, similarities and differences of included proxies. Second, we clearly differentiate between auditor incentives and competencies to supply a high audit quality on the one hand, and explicitly focus on restatements on the other hand. Thus, we show a clear structure of prior studies and make a useful contribution to prior literature reviews on overall audit quality. We list and compare the various auditor and restatement variables and deduce limitations and recommendations for future research in order to guide researchers for future innovative designs.

Our review of 69 archival studies identifies major limitations and gaps in the audit-restatements-research and highlights key challenges that researchers face in their research designs. First, our review highlights that many studies on auditor incentives and competencies show inconclusive results on firms’ financial restatements (e.g., fee and rotation studies). But there are indications that especially auditor expertise and audit firm size decrease financial restatements and thus increase financial reporting quality. However, financial restatements as the most prominent misconduct proxy are limited in their explanatory power, as restatements can be related to intentional or unintentional management behavior. Analyses on intentional misbehavior, e.g., on fraud events, are very rare in archival research due to their lower occurrence in business practice. We thus know very little about the impact of auditors on fraud events from an archival perspective. In discussing potential future research, we emphasize the need for a more detailed analysis of restatements proxies, controls for audit risk, inclusion of (corporate) governance as possible moderators or mediators, recognizing sustainability issues in the audit team, and for an inclusion of other conduct measures (e.g., enforcement actions or fraud events). As the external auditor fulfils both an assistant function for the audit committee and a gatekeeper function for capital markets, the interaction between the auditor and other (sustainable) corporate governance issues should be analyzed in future archival research.

Our analysis is structured as follows: First, we present an agency-theoretical foundation and our auditor-related determinants of firms’ financial restatements (Sect. 2 ). Next, we present the sample selection and the key results of our literature review, whereas we differentiate between auditor incentives and auditor competencies to supply a high audit quality (Sect. 3 ). Our analysis continues with a discussion of our results and research recommendations (Sect. 4 ). Section 5 provides a conclusion to our analysis.

2 Theoretical framework and measurements

2.1 agency theory.

Neoclassical economics theory assumes that an audit service is a type of economic good and, thus, is characterized as a typical supply‐and‐demand interplay in the audit service market (Habib et al. 2019b ). According to principal-agent theory, external audit represents a monitoring and bonding tool for the management to increase public trust in financial accounting (Chow and Rice 1982 ; Habib et al. 2019a ). The shareholders as the principals of corporations delegate parts of their monitoring duties to external auditors. In view of the investors’ lack of time, limited professional resources and rational apathy in listed corporations (Watts and Zimmerman 1983 ), this strategy is needed. While the auditor is a gatekeeper for shareholders and other stakeholders (Kraakman 1986 ), he also supports the audit committee in supervising the executive directors (assistant role). As the auditor is also an economic agent (Antle 1982 ), he may impair his ability and freedom to make a sound assessment in line with clients’ preferences. The agency problem of adverse selection may be linked with auditor’s lack of qualifications on the one hand, or his bias towards the audited company on the other hand (Chow and Rice 1982 ; Habib et al. 2019b ). Moreover, information asymmetries between top management, auditors and shareholders pose the risk of a moral hazard due to improper audits (shirking) and assessments (Velte and Loy 2018 ). There may be strong collaborations between auditors and management in contrast to the information needs of shareholders. Auditors may tolerate financial misconduct and grant an unqualified audit opinion (DeFond and Zhang 2014 ).

Information asymmetries and conflicts of interests should be reduced by ensuring high audit quality (Habib et al. 2019b ). Audit quality is heterogeneously defined both in practice and in research. According to DeAngelo ( 1981 ), audit quality refers to the combined probability that the auditor will not only discover but also report material misstatements. The probability of the discovery and reporting of financial misconducts by the auditor is mainly influenced by this effort, knowledge and independence. The supply of high audit quality is a function of both auditors’ incentives and competencies (DeFond and Zhang 2014 ). Market-based incentives include reputation and litigation concerns (Dye 1993 ) and refer to the first main group of determinants of audit quality (e.g., auditor independence). Auditor competencies are linked with the auditor’s ability to deliver high audit quality, as reflected in factors such as inputs to the audit process, and audit expertise. The auditor as a main part of external monitoring should decrease opportunities of firms’ financial misconduct, e.g., firms’ financial restatements. High‐quality auditors, therefore, are appointed to reduce the potential loss emanating from information asymmetry risk (Habib et al. 2019b ).

(Inter)national auditing standards require auditors to provide reasonable assurance that financial statements are free from material misstatements, whether caused by errors (unintentionally) or fraud (intentionally). As the range of financial audits is limited to “reasonable” instead of a “full” assurance, the possibilities of auditors to prevent or discover financial misconduct are also restricted. High expectations by stakeholders led to an increased expectation gap with regard to auditors’ responsibilities for detecting financial fraud. Forensic accounting methods are normally not included in “normal” financial audits. During the last few years, forensic detection modeling by advanced big data analytics, e.g., artificial intelligence or data mining, reaches great attraction in the (big four) audit profession (Tiwari and Debnath 2017 ). While it is very crucial that external auditors should guarantee a proper financial reporting quality, it is controversially discussed whether he is able to reduce the occurrence of firms’ financial restatements as violations of the accounting standards significantly.

2.2 Audit-related measures

2.2.1 auditor incentives to supply a high audit quality.

Figure 1 gives an overview of our research framework on the relationship between auditors and firms’ financial restatements. As auditor-related determinants, we differentiate between auditor incentives and auditor competencies to supply a high audit quality in line with DeFond and Zhang ( 2014 ). Figure 1 also depicts the main variables and proxies. The engagement of the auditor aims to counter litigation threats, e.g., through additional efforts, charging risk premiums or client retention. Auditors like to decrease the risk of material misstatement by increasing effort (Trompeter et al. 2013 ). This strategy implies increased audit fees or fee premiums if clients are willing to accept those fees. Audit fees represent one of the major audit proxies included in archival research (Widmann et al. 2021 ). This can be explained by prior meta-analyses on this topic (Hay et al. 2006 ). Two major reasons are apparent for this strategy. First, researchers like to analyse the competitiveness of audit markets, especially in light of the small number of international service providers. Second, issues of contracting and independence related to the audit process (for example, low-balling, non-audit services) can be explained. Audit theory assumes that a high level of effort and services by the auditor will be mainly represented by high audit fees (Whisenant et al. 2003 ; Habib et al. 2006) as one of the key inputs to the audit process. In contrast, higher audit fees may also lead to an increased economic bond to the client and thus decreased independence and professional skepticism during the initial audit (Beck et al. 1988 ; Magee and Tseng 1990 ). As a summary, as audit fees also capture risk premia and improved audit efficiency, the positive relationship between audit fees and audit quality has to be questioned and should be analyzed individually. Auditor incentives to supply a high audit quality are also mainly linked with auditor independence . During the last years, profit margins of classical financial audits have been shrunken in view of a strong price competition (DeFond and Zhang 2014 ). Especially the Big four audit firms expand their efforts on profitable consulting services, e.g., implementation of non-financial reports or big data techniques. While non-audit services (NAS) create attractive payments between clients and auditors, the independence of the auditor and the possibilities to conduct a strict audit can be impeded (Velte and Loy 2018 ). In view of these risks, there are many legal restrictions on NAS and on disclosure of audit services and NAS in the notes by listed corporations. Regulators assume that litigation and reputation incentives are insufficient to maintain auditor independence in the case of NAS. While NAS may decrease auditor independence, “knowledge spillovers” between audit and non-audit duties are existent, leading to improved auditor competency and efficiency (Simunic 1984 ). Improved knowledge spillovers may outweigh the costs of reduced independence by NAS. Audit (report) lag , or audit delay, is closely related to audit fees. Audit report lag is defined as the number of days between the fiscal year-end date and the date of the audit opinion (Habib et al. 2019b ). Audit lag represents a measure of both audit effort, e.g., the time the auditor requires to complete the audit, and audit efficiency (e.g., Knechel and Sharma 2012 ). As the audit report contains the auditor's opinion regarding the credibility of the financial statements, shareholders and other stakeholders prefer short(er) audit report lags by tendency (Habib et al. 2019b ). Thus, audit report lag may increase information asymmetries and conflict of interests between managers and the capital market.

Research framework on the link between external auditors and firm’s financial restatements

Other variables of auditor incentives belong to the auditor–client-relationship. One of the major controversies is the length of auditor tenure . Regulators mainly criticize long-client tenure of auditors, as it may create familiarity with the firm that threatens auditor independence. Thus, many regulators discussed and finally introduced mandatory auditor and audit firm rotation. In line with NAS regulations, restrictions on auditor tenure are controversially discussed as it destroys client-specific knowledge and allows “opinion shopping” (Chung et al. 2019 ). Audit theory assumes that auditors have less client-specific knowledge in initial audits, and hence less competence in detecting firms’ financial misconduct (DeFond and Zhang 2014 ). Regulators are also concerned that market concentration , mainly by the big four audit firms, may threaten audit quality there is a reduced competition, which fosters entrenchment and decreases auditor incentives to provide high quality (GAO 2003 , 2008 ). However, market concentration may also improve audit quality, because client importance decreases and choices for opinion shopping are lower. While less researched, auditors may also attenuate litigation risk by lobbying , leading to decreased incentives to supply a high audit quality.

2.2.2 Auditor competencies to supply a high audit quality

Auditor competencies to deliver a high audit quality can be achieved by training, skills and expertise (DeFond and Zhang 2014 ). But there are many interdependencies between auditor incentives and auditor competencies. Greater incentives to supply audit quality will also motivate auditors to increase their competencies that facilitate high audit quality. Auditor competencies are mainly connected with auditor experiences and expertise. Auditor industry specialization represents one of the most relevant proxies in this context. This variable includes an audit quality differentiation at the intra-audit firm level (Stanley and DeZoort 2007 ). There will be an economic interest for auditors for more industry specialization if they perceive increased fees or market share from higher audit quality and economies of scale of these competencies. Literature assumes that industry specialists may supply a higher audit quality because of their superior knowledge of industry-related business models and reporting practices (Dopuch and Simunic 1982 ). According to Habib ( 2011 ), industry specialization supports audit firms to strengthen the demand for (non) audit services, increases audit efficiency through economies of scale, builds barriers to entry by requiring new entrants to invest significant resources in relevant industries, and influences client-relevant audit outcomes like audit fees and financial reporting quality. Stakeholders will trust more in audit reports by industry expertise of the external auditor in line with principal agent theory. In view of the increased reputational capital of auditor specialists, e.g., bank auditors, the incentives to deliver high audit quality are more pronounced. Client industry expertise or concentration is mostly based on sales, size, fees, number of clients, or the Herfindahl index (DeFond and Zhang 2014 ). Thus, classifying auditors by some arbitrary market share rule, as (non) specialists, has been widely used in the literature with heterogeneous results. While the interpretation of specialization based on market and portfolio share is rather simple for researchers, this procedure bears the risk that this measure of industry specialization is biased (Habib 2011 ). Specialists are industry leaders or have a market share of at least 10–30%. As the big four audit firms dominate most industries from an international perspective, they are usually classified as national-level specialists. Thus, a strong link between audit firm size and industry expertise is existent. Literature states that specialist auditors have greater competencies and reputation incentives to provide high audit quality (DeFond and Zhang 2014 ).

In line with industry specialization, an increase amount of studies address whether large auditors, e.g., Big N membership, provide relatively higher audit quality. Auditor size as cross-sectional variation in audit quality is relevant because large auditors should have stronger incentives and greater competencies to provide high audit quality (DeAngelo 1981 ). Especially big four audit firms are expected to be more independent because they are connected with an increased reputation risk and less pressure to succumb to an individual client (“deep pockets”). As auditor size is also related to auditor incentives with regard to increased auditor independence, it also relates to auditor competencies. Big four audit firms gain economies of scale with a positive impact on auditor quality (Watts and Zimmerman 1983 ). Larger audit firms have the possibility to use better audit resources, e.g., human resources and expertise (Dopuch and Simunic 1982 ). In line with audit firm size, auditor office is also included in prior research, mainly related to big n office size. Literature states that larger audit offices have greater in-house expertise and are thus linked with increased audit quality (Francis et al. 2013 ).

Last but not least, auditor competencies refer to the quality of auditor reporting . Based on agency theory, the gatekeeper function of the auditor is directly linked with the audit opinion (Kraakman 1986 ). Especially shareholders request a reliable financial reporting, based on an informative audit reporting. Audit reports include key information about the going concern principle, internal control weaknesses and key audit matters. High quality audit reports are a main factor to analyze auditor competencies, as the auditor may give an unqualified opinion, while material financial misconduct was existent during the respective business year.

2.3 Measures of firms’ financial restatements

Firms’ restatements of financial statements represent the most important measure of firms’ financial misconduct in archival research (Karpoff et al. 2017 ). According to Sievers and Sofilkanitsch ( 2019 ), restatements can be defined as firms` acknowledgement of former reporting failures and correction of intentional and/or unintentional misreporting. Financial restatements can be a result of an error, fraud, or GAAP misapplication. Some restatements are thus fraud-related, while others are not. Most restatements (approximately 98%) refer to unintentional misreporting, such as “mistakes” or “clerical errors” in contrast to “fraud” or “manipulation”. Restatements vary in misreporting severity (Sievers and Sofilkanitsch 2019 ) and represent a well-suited indicator of malfeasance by the auditor when past misreporting goes undetected. Literature assumes restatements to be the most readily available indicator of low audit quality (Christensen et al. 2019 ). The majority of studies included in our literature review interpret financial restatements as an inverse measure of audit quality. However, restatements also depend on a successful detection and announcement of past reporting. Restatements may also indicate a strict audit in the past (Srinivasan et al. 2015 ). Pyzoha ( 2015 ) stated that top managers who face a high audit quality are more likely to agree with correcting prior financial statements. However, restatements are perceived and applied as a proxy for low audit quality in most cases because restatements are mainly linked with initial undetected misreporting rather than to a subsequent successful detection of misreporting. The US-American researchers heavily rely on two major databases for their restatement variable: the databases by the Government Accountability Office (GAO) and by Audit Analytics (AA) (Karpoff et al. 2017 ).

In contrast to financial restatements, the presence of fraud charges under regulatory enforcement actions (e.g., Karpoff et al. 2017 ) is another way to analyze firms’ financial misconduct. In the USA, since 1982, the Securities and Exchange Commission (SEC) has issued Accounting and Auditing Enforcement Releases (AAER) during or at the conclusion of an investigation against a company, an auditor, or an officer for alleged accounting and/or auditing misconduct. The data is provided by the Center for Financial Reporting and Management (CFRM) at the University of Berkeley (Karpoff et al. 2017 ). Similar databases including enforcement actions also exist for other regimes, e.g., the China Stock Market and Accounting Research Database (CSMAR). As the amount of studies related to this proxy is rather low in comparison to financial restatements and we note a low comparability between these studies, we focus on financial restatements in the following.

In the following, we justify our focus on financial restatements in comparison to earnings management proxies, which represent another key variable of audit quality in archival research during the last decades. The main advantages of restatement proxies are that they are very direct and egregious measures of audit quality as the auditor erroneously issued a clean opinion on materially misstated financial reports (DeFond and Zhang 2014 ). Thus, restatements measure actual audit quality as an output of the audit process. In view of their discrete character with high homogeneity, the measure error is relatively low. According to DeFond and Zhang ( 2014 ), restatements represent “strong evidence of poor audit quality”. With regard to limitations of this proxies, an absence of a financial restatement does not imply proper audit quality. Solely egregious failures are recognized by restatements. Material misstatements by low quality audits may not be detected. Moreover, restatements are relatively rare, which decreases the statistical power and may lead to small sample sizes. Moreover, external auditors only provide “reasonable” assurance that financial reports are free of material errors.

Compared with restatements, earnings management proxies are less direct than restatements as the impact of external auditors on financial reporting quality is limited. Thus, accruals models and other prominent earnings management proxies are less egregious than restatements. While most earnings management measures are continuous, we note a great variety of different proxies and high level of measurement errors (DeFond and Zhang 2014 ). Moreover, while audit quality is one component of financial reporting quality, there are other criteria to be recognized. In view of these circumstances, we do not rely on the various earnings management proxies, but focus on financial restatement proxies in this literature review.

3 Research on the impact of external auditors on firms' financial restatements

3.1 sample selection and content analysis.

Empirical research on the link between auditors and firms’ financial restatements is confronted with a heterogeneity of collected data, study designs, theoretical foundations, and analytical models. Literature reviews are an important and relevant research method for scholars, researchers and business practice. We rely on several international databases to select our studies included in this literature review practitioners, and regulators seeking to decrease research complexity (Torraco 2005 ; Webster and Watson 2002 ). Our literature review is based on established processes (Denyer and Tranfield 2009 ). We identify relevant studies for our analysis via a comparison of (inter)national databases (EBSCO Business Source Complete, Web of Science, Google Scholar and SSRN). These databases were searched for the terms “restatement”, “manipulation”, “error”, “irregularity”, “revision”, “misconduct”, “misreporting” and “misstatements”. We additionally combined these terms with “accounting”, “audit”, “auditing”, and “financial”. This leads to an initial sample of 191 studies. We are interested in archival research as the most important research method on this topic and our aim is to gain an appropriate level of comparability within the included studies. We thus exclude 53 analytical, experimental, and qualitative papers. While there is a research dominance on the US-American capital market, there is no limitation on a special country. The reason for this decision is that recent studies also analyze the non-US environment, e.g., EU member states, Australia/New Zealand, or Asian regimes. After the passing of the SOX of 2002, several countries conducted similar studies, so that the SOX can be classified as an international catalyst for a global audit regulation initiative. Thus, only empirical studies whose sample covers the period after the commencement of the SOX 2002, and which use archival statistics have been included. The SOX rules that would have affected the variable examined in the studies were not effective for most companies until 2004. Insofar, all of the included studies should have samples of 2004 or later. Apart from the increased complexity of the findings, which necessitates a temporal limitation of the study inclusion, the increased regulatory density makes a comparison between US-based studies before and after the SOX impossible. Given that research is focused on the US-American capital market, the temporal limitation is adequate. This leads to a reduction of 23 studies. For quality assurance reasons, only the contributions published in international journals with double-blind review have been included. Moreover, we only include studies published in journals which are included in the “Jourqual ranking 3” of the German association of university teachers for business administration. This resulted in a sample reduction by 46 papers to a final sample of 69 studies. Figure 2 presents a flow diagram on the sample selection process.

Flow diagram of the sample selection process

We coded the included studies according to the selected auditor-related (sub-)determinants of firms’ financial restatements and match them to our research framework. We noted the significant findings and their indicators in line with vote-counting technique (Light and Smith 1971 ).

Table 1 provides an overview of the papers per publication year (Panel A), region (Panel B), journal (Panel C), content (Panel D), and theory (Panel E). Panel A reported a steady increase in studies over the last few years. The years 2019 and 2020 were most important year due to the amount of included studies (12 studies). This can be explained by the overall increased relevance of archival studies in audit and corporate governance research. But we also note, that the quality of databases on financial restatements, e.g., based on audit analytics as data source, has been increased during the few years. Most of the included studies focus on the US-American setting (47 studies) in comparison to other settings. As the US-American capital market is most attractive for empirical research and is characterised by strong regulation and homogeneous legal environment, this dominant setting in our literature review is not surprising. As the passage of the SOX (2002) was directly linked to external audit regulations and corporate governance (e.g., audit committees), the SOX leads to a massive increase of archival research during the last decade. With one exception, we do not indicate any cross-country settings. This can be explained by massive country-related attributes, which may influence the impact of external auditors and financial restatements. International samples should explicitly include these factors, which decrease the validity of studies on the solely impact of external auditors in a specific country. Panel C illustrates that heterogeneity of the journal publications, regarding discipline and quality. The best-known publication outlets are for example, Contemporary Accounting Research (12 studies), Auditing (12 studies) and The Accounting Review (11 studies). As archival audit research is most popular in these US-based journals, including US settings, this dominance is also obvious. As seen in Panel D, studies exploring auditor incentives (46 studies) are dominant, compared to auditor competencies to supply a high audit quality (29 studies). One explanation may be the easier selection of audit-related proxies and the strong link to principal agent theory as incentive alignment. Moreover, as Panel E indicates, most studies choose principal agent theory as theoretical framework (62 studies). We also note few studies with no clear indication of theoretical foundation (8 studies) or other theories (5 studies, e.g., resource-based view or institutional theory). Most archival researchers on external auditors are rather disciplinary business researchers. Other theories from the management discipline or other sciences are not well introduced in US-American top journals in this field and decrease the motivation of researchers to increase the variety (theory bias problem). Thus, in the following section, we refer to agency theory as theoretical framework of our literature review (see also Habib et al. 2019a ). We are aware of the critiques in literature that both managers and external auditors are not always opportunists, leading to a rather bad picture of their attitudes (Habib et al. 2019a ).

3.2 Auditors’ incentives and firms’ financial restatements

3.2.1 (non) audit fees, audit time and range.

Audit fees represent one of the key variables, which have been included as auditor incentives to supply a high audit quality, leading to lower financial restatements. We already noted that audit fees can be linked with both increased and decreased audit quality due to either improved audit efforts and auditor dependence on the client. Prior research results confirm this heterogeneous relationship. Some researchers found a positive relationship between abnormal audit fees and restatements (Files et al. 2014 ; Hribar et al. 2014 ). Others have reported a negative link (Blankley et al. 2012 ; Li and Ma 2020 , based on a Chinese sample). According to Lobo and Zhao ( 2013 ), (abnormal) audit fees reduce annual restatements, but there is no influence on annual or quarterly restatements. Beardsley et al. ( 2019 ) analyzed audit fee pressure and documented a positive impact on restatements, especially in large audit offices. Ettredge et al. ( 2014 ) also found a positive relationship between these variables. There are no indications, that audit fee discounting in initial year audits influence firms’ financial misconduct (Barua et al. 2020 ). Moon et al. ( 2019 ) reported that auditor premium fee, but not engagement premium fee, reduces financial restatements. Hoopes et al. ( 2018 ) analyzed audit personnel salaries at the associate, senior, and manager ranks for big four audit offices and found a negative impact on restatements. Lo et al. ( 2019 ), based on a Chinese sample of firms, reported that smaller staff-partner ratios reduce financial restatements. This relationship is weaker, when engagement partners have excessive workload. More recently, Pittman and Zhao ( 2021 ) found a positive link between audit fees and unfavorable non-income increasing misstatements.

In line with audit fees, we note an increased amount of studies on the link between non-audit fees and restatements. Compared to audit fees, empirical evidence is also heterogeneous. Non-audit fees can either increase (Campa and Donnelly 2016 , based on a UK sample) firms’ financial misconduct. Lisic et al. ( 2019 ) stated that non-audit fees and restatements are positively linked before the SOX and insignificantly connected after the SOX. According to Meckfessel and Sellers ( 2017 ), non-audit fees paid to big four audit firms increase accounting rules and errors, but there is no impact on fraud. Castillo-Merino et al. ( 2020 ) conducted a study on the Spanish audit market and found a positive impact of other non-audit fees and high concern restatements. Insignificant results were documented by Files et al. ( 2014 ). Some researchers also differentiated between specific subgroups of NAS to increase our knowledge about the impact on restatements. Tax consulting fees are very important in this context, as there are main synergies between consulting and audit in business practice. There is a long-time controversial discussion whether tax consulting fees should be restricted while conducting audit duties for the client. Seetharaman et al. ( 2011 ) reported that tax consulting fees only lead to reduced tax-related restatements, but not to lower general restatements. Paterson and Valencia ( 2011 ) found that recurring tax services decrease financial restatements. However, other NAS (non-recurring) lead to more restatements, while audit related services do not have any impact. A similar differentiation between several kinds of NAS was conducted by Wahab et al. ( 2014 ) in Malaysia. The authors reported a negative influence of recurring NAS, tax and audit-related services on restatements. Moreover, audit related and non recurring other NAS are moderated by non-politically connected firms.

In line with (non) audit fees, auditor incentives are mainly linked with audit time and audit range . Blankley et al. ( 2014 ) found that abnormal audit report lag, moderated by time pressure, increases financial restatements. Similar results were reported by Chan et al. ( 2016 ), based on a Chinese setting, and Files et al. ( 2014 ). Clients’ financial statement deadline concentration leads to increased restatements, as indicated by Czerney et al. ( 2019 ). According to Bhaskar et al. ( 2019 ), double audit as financial and internal control audit leads to higher firms’ financial misconduct. Heo et al. ( 2021 ) introduced busy season audit as audit conducted under workload imbalance. The authors found a positive influence on restatements in Korea, while time spent by auditors during interim audits reduce restatements.

3.2.2 Auditor–client-relationship

(Non) audit fees are closely linked with the auditor–client-relationship, as an independent external auditor may be more successful in achieving adequate audit fees for their services. The auditor–client-relationship may influence auditor incentives to supply a high audit quality. In line with NAS, the literature controversially discusses whether auditor tenure and rotation leads to better audit quality. Many regulators from an international perspective already implemented mandatory auditor rotation rules and also stipulate audit firm rotation. Prior research results are rather inconclusive. Singer and Zhang ( 2018 ) found that audit firm tenure reduces timeliness of restatements, but increases their magnitude. According to Stanley and DeZoort ( 2007 ), for short tenure, auditor industry specialization and audit fees are negatively related with restatements. For long tenure, the authors found an insignificant relationship between non-audit fees and restatements. A recent study for the European audit market was conducted by Garcia-Blandon et al. ( 2020 ), indicating that audit firm tenure with both more than 10 years and 20 years does not influence firms’ financial misconduct. Some studies also analyzed the impact of audit partner switch on restatement. Kuang et al. ( 2020 ) reported that (material) restatements are higher, but not their announcements, when mandatory audit partner rotation was recognized. According to Laurion et al. ( 2017 ), audit partner rotation increases both restatement discovery and announcement. Auditor switches at the restatement disclosure date lead to more 8-K restatements, as Irani and Xu ( 2011 ) found in their study. The timing of auditor changes in initial year of audit engagements also seems to be relevant. Cassell et al. ( 2020 ) documented that changes during or after the fourth quarter in comparison to earlier change and no change lead to more restatements. An auditor switch between the end of the misstatement period and the restatement announcement lowers financial misconduct (Files et al. 2014 ). Pacheco-Paredes et al. ( 2017 ) did not find any relation between auditor switches closer to the year-end and restatements. Chang et al. ( 2019 ), based on the audit market in Taiwan, analyzed whether clients following audit partners who switch audit firms will have more or less restatements. The authors did not find any relationship. However, opinion shopping increases financial restatements according to Chung et al.’s ( 2019 ) study. Audit firms that subsequently leave the market did not impact restatements (Fargher et al. 2018 ). Both audit market concentration, based on industry market share distance (Willekens et al. 2020 ) and political connections between auditors and clients (Burnett et al. 2018 ) lead to decreased firms’ financial misconduct. More recently, Greiner et al. ( 2021 ) found a positive impact of auditor rotation as within-firm office changes to a smaller office and restatements.

Personal ties between client and auditors may also influence financial restatements in the future. School ties between signing auditor and client top executives are positively related to downwards restatements (Guan et al. 2016 ). He et al. ( 2017 ) analyzed the Chinese audit market and found that social ties between engagement auditors and audit committee members increase restatements. This relationship is more pronounced by the audit committee chair, accounting background of audit committee members, identical provinces, reputational capital of the audit committee members and low corporate governance quality. According to Finley et al. ( 2019 ), employee movement from audit firms to client do not influence firms’ financial misconduct. Moreover, shareholder voting on auditor selection decreases financial restatements (Dao et al. 2012 ).

3.2.3 Summary

Our literature review on auditors’ incentives indicates that (non) audit fees and auditor tenure (rotation) studies represent the most important proxies in prior research on firms’ financial restatements. Other proxies of auditor incentives, e.g., audit time (range) and auditors’ networks, are of lower relevance yet. While (non) audit fees are dominant in prior research designs, the great heterogeneity of results stresses that the impact of (non) audit fees on firms’ financial restatements is inconclusive and may be explained by conflicting effects or influenced by unobserved factors, e.g., firm risk or industry. Similar arguments can be transferred to audit tenure and rotation proxies in our literature review. We cannot find any clear hints that these variables may have a significant positive or negative impact on firms’ financial restatements in total.

3.3 Auditors’ competencies and firms’ financial restatements

3.3.1 auditor expertise and experience.

Auditor competencies to supply a high audit quality are mainly linked with auditors’ experience and expertise. Stanley and DeZoort ( 2007 ) found that auditor industry specialization is negatively related with restatements for short audit tenure engagement. Big four audit partner industry expertise is also negatively related to financial restatements on the audit market in Taiwan (Chin and Chi 2009 ). Ahn et al. ( 2020 ) analyzed auditor task-specific fair value expertise and documented a negative impact of level 3-related expertise, but not of level 2. According to Beck et al. ( 2019 ), geographic decentralization of audit firms negatively impacts firms’ financial misconduct. This relationship is more pronounced by including the monitoring role and industry knowledge of the auditor. There are also indications, that auditor connectedness lowers the degree of restatements in Italy (Bianchi 2018 ). Gunn and Michas ( 2018 ) found restatements to be lower when local audit offices’ expertise in conducting multinational audits is higher. However, this link is only evident by including moderator variables, e.g., clients with larger percentage of overall sales generated in foreign countries.

Auditor expertise can also be increased by networks and M&A transactions of audit firms. In a recent study, Donelson et al. ( 2020 ) found that the acquisition of audit-related (non-audit-related) consulting firms by big four audit firms leads to lower (higher) restatements. Sun et al.’s ( 2020 ) study, based on the Chinese audit market, includes whether audit firms share the same auditor network among group-affiliated firms. The authors reported a positive impact on both downward restatements. Moreover, high audit quality is associated with use of specialist and firms that operate in industries that are more homogeneous. Non-Big N collaborations in association with other non-Big N auditors are also related to lower restatements (Bills et al. 2016a ). However, international non-Big N network membership does not have an impact on misconduct in China (Mao et al. 2017 ). More recently, Domico et al. ( 2021 ) found a positive impact of foreign subsidiaries of US multinational firms’ principal auditors’ engagement of a component auditor and restatements.

MohammadRezaeia et al. ( 2018 ) recognized audit firm ranking in Iran and found a positive influence on restatements. Two studies also address gender diversity in audit firms as proxy of auditor competencies. While Lee et al. ( 2019 ) did not find a link between audit partner gender and financial misconduct, female auditors reduce restatements in the Spanish audit market (Garcia-Blandon et al. 2019 ).

We also recognize two studies on litigation experiences and sanctions . Lennox and Li ( 2014 ) reported a negative link between auditor’s experience of litigation and restatements. This effect was even stronger on the audit office level, if offices were directly implicated in the litigation. In contrast to this, audit partner sanctions by authorities lead to increased restatements in Taiwan (Chang et al. 2016 ).

3.3.2 Audit office and firm size

Auditor experience and expertise have interactions with both audit office and audit firm size because audit office/firm size will have an impact on the supply of auditor experience and expertise. A typical example is the oligopoly by the ‘big four audit firms’ who centralize industry expertise, e.g., on financial institutions or insurances, and long-term experience on specific topics, e.g., big data technology or sustainability assurance.

Francis et al. ( 2013 ) found big four audit firm office size reduces restatements, but not non-big four audit office size. According to Newton et al. ( 2013 ), office size leads to decreased income-decreasing restatements), but there is no impact on income-increasing restatements. There are also indications that large office size of big four audit firms mitigate the positive impact of late filings on restatements (Cao et al. 2016 ). Bills et al. ( 2016b ) found local audit office growth to be positively linked with firms’ misconduct.

Audit firm size is mainly restricted to Big N membership. Prior studies found that restatements are lower if the audit firm belongs to the Big Four (Eshleman and Guo 2014 ) Big N (Files et al. 2014 ), or Big 10 audit firms (Fang et al. 2017 ). There are also indications that big four audits mitigate the positive impact of late filings on restatements (Cao et al. 2016 ). Jiang et al. ( 2015 ), based on a Chinese sample, found that Big 8 audit firm membership leads to lower restatements related to balance sheet and income statements, but not related to cash flow statements. Small US-auditors for US-listed Chinese firms were also related to higher restatements (Dang et al. 2017 ).

3.3.3 Auditor reporting

Audit office (firm) size and auditor reporting are characterized by interrelations, as more resources may be available to increase the quantity and quality of audit reports. Christensen et al. ( 2019 ) found that remediation for internal control weaknesses in the audit report increases the probability of financial restatements (Christensen et al. 2019 ). Czerney et al. ( 2014 ) analyzed auditor explanatory language in unqualified audit reports. The authors reported a positive influence on restatements, mainly driven by language that references the division of responsibility for performance of the audit, adoption of new accounting principles, and previous restatements. Fang et al. ( 2018 ) analyzed modified audit opinions that discusses related party transactions and reported a positive influence on restatement, related to a Chinese sample of firms. Wang et al. ( 2015 ) reported a positive link between audit opinions and restatements in China, whereas the relationship was moderated by engagement partner and client importance.

3.3.4 Summary

Auditor competencies are mainly measured by auditor industry expertise and networks, audit office/firm size and auditor reporting. While some proxies are inconclusive in their impact on firms’ financial restatements, we note a clear tendency of a negative impact of both auditor expertise , based on auditor industry specialization, and audit firm size on firms’ financial restatements. Thus, these quality drivers may increase the monitoring role of external auditors and put pressure on the managers to increase their financial reporting quality in line with stakeholders’ information needs.

4 Discussion and future research recommendations

Referring to our main research questions in the introduction, due to many included studies in our literature review, there are no clear indications that both auditors’ incentives and competencies have a significant impact on firms’ financial restatements in general. Prior research results on this topic are rather inconclusive, leading to limitations and room for recommendations for future research. First, one reason for these inconclusive results may be the too narrow measurement of firms’ financial restatements. In more detail, we know relatively little about auditors’ impact on different kinds of restatements . In line with Sievers and Sofilkanitsch ( 2019 ), future research should differentiate between severe (intentional) and less severe (unintentional) restatements. Auditors may be more successful in preventing or detecting unintentional restatements in comparison to intentional ones. Newton et al. ( 2013 ) assume that auditors should be able to identify material and less material restatements and therefore include all restatements for the main analyses. But more severe errors can be hardly detected by the auditors. We recommend to differentiate between severe and less severe restatements separately for robustness checks (Meckfessel and Sellers 2017 ; Newton et al. 2013 ).

Restatements can be used as a proxy for both disclosures of prior reporting failure (restatement announcement) and misreporting (restated periods). Hoitash and Hoitash ( 2018 ) stressed a very heterogeneously use in the literature, which decreases the comparability of prior studies. For example, while Stanley and DeZoort ( 2007 ) rely on the restatement announcement year, Newton et al. ( 2013 ) refer to the restated years. Restatement type is also differently used in prior archival research (e.g., annual vs. quarterly, severe vs. less severe). As restatements can be an indicator of both high and low audit quality, we refer to the recommendations of Sellers et al. ( 2020 ). The authors assume that periods leading up to the beginning of misreporting could be classified low audit quality, as executives assess audit quality before they decide to misreport.

We also noted that other firm’s financial misconduct proxies are rarely used, leading to our strategy to exclude these variables in our literature review due to comparability. We know very little about the relationship between auditors and fraud events in archival research in comparison to corporate governance variables. As fraud events are lower in comparison to restatement cases in business practice, researchers focused on financial restatements and related databases (Karpoff et al. 2017 ). We recommend future researchers to use multiple misconduct variables to increase the validity of archival research. An interesting question relates to the development of fraud probability scores before and after financial restatements. The relationship between earnings quality and restatements before and after the restatement events should be further analyzed. Changes in the F-score (Dechow et al. 2011 ) and the M-score (Beneish 1999 ) should be included as moderator or mediator variables in future archival research.

Our methodological recommendations also relate to auditor-related determinants . We like to stress endogenous concerns of auditor characteristics and financial misconduct in prior research (Irani et al. 2015 ). Irani et al. ( 2015 ) show that financial restatements have an effect beyond that of just affecting the restating companies; they also affect the reputation of the auditor involved with the restatement. A bidirectional link between external auditors and firms’ financial restatements may be realistic. Auditors’ incentives and competencies may also be the consequence of financial restatements in the past. However, this bidirectional relationship was rather neglected in prior research designs. Advanced analytical approaches, including dynamic regression models (Generalised method of moments [GMM] estimation), instrumental variable (IV) approaches or simultaneous equations models [SEM]) are relevant to recognize concerns in archival research due to reversed causality or omitted variables (Wintoki et al. 2012 ).

While there is an increased amount of studies, which analyze the impact of audit fees on firms’ financial restatements, we see inconsistencies in control variables , e.g., control risk (Sievers and Sofilkanitsch 2019 ). The literature states that financial restatements are positively associated with ex-ante internal control weaknesses (Rice and Weber 2012 ). As control risk is positively associated with audit fees, audit fees may be influenced by ex-ante risk for restatement firms. Moreover, if researchers include audit fees as a proxy for audit effort, it is crucial to control for non-auditor-related factors that may have an impact on audit fees (e.g., material weakness, earnings quality, or accounting complexity (Hoitash and Hoitash 2018 ).

While prior research has also included corporate governance variables as main determinants of firms’ financial restatements (Habib et al. 2021 ), we know very little about the interdependencies between external auditors and other corporate governance mechanisms. We already noted that auditors mainly support the audit committee, leading to a strong cooperation between both parties. This relationship should be extended by the internal audit function. We thus recommend to include board composition variables, e.g., independence and expertise of audit committee members, and their contribution to firm’s financial misconduct in line with auditors’ duties (Velte 2021a ). It can be assumed that audit committee effectiveness, strong auditor incentives and competencies to supply a high audit quality may be classified as complementary mechanisms to reduce financial restatements. In line with board composition, we know very little about the interdependencies between auditors and shareholders on this research topic. Ownership structure, e.g., block holders, or institutional ownership, may have a strong impact on both auditor characteristics and managers’ incentives to financial misconduct. Our recommendations are not only restricted on corporate governance, but are also related to country-related governance. We encourage future researchers to conduct cross-country studies and include country effects, e.g., strength of shareholder rights, enforcement strength or cultural aspects.

Audit quality is a latent variable, leading to a wide range of constructs, measures and perspectives. Many determinants used in earnings management research are missing in the restatement research. As financial restatements imply a violation of recent accounting regulations by top managers, we like to encourage future researchers to include sustainability proxies in their research designs. Ethics, gender and culture diversity within the audit team may be enrich our knowledge on the impact of external auditors on firms’ financial restatements. Some fruitful research designs on earnings management may be easily transferred to financial restatements (e.g., Kung et al. 2019 ; Ittonen et al. 2013 ; Lai et al. 2018 ; Sun et al. 2016 ). Ethical behavior in both top management teams and audit teams may be an important factor in increasing financial reporting quality. Moreover, culture within the (audit) firm may have a major impact of managers’ motivations to conduct misconduct.

5 Conclusion

This article includes a systematic review of archival research on the link between auditors and firms’ financial restatements, based on an agency-theoretical framework. Principal agent theory assumes that the external auditor represents a major monitoring tool to detect and prevent firms’ financial restatements (Habib et al. 2019a ). This is in line with (inter)national auditing standards: the auditor must provide reasonable assurance that financial reporting is free from material misstatements. There is a controversial discussion whether stricter audit regulations are needed to decrease the probability of firms’ financial misconduct (Habib et al. 2021 ). Yet, auditors’ duties to prevent or discover financial restatements are limited, because traditional financial audits do not include forensic accounting methods (Tiwari and Debnath 2017 ). This leads to the expectation gap of the stakeholders.

Based on the recommendations by DeFond and Zhang ( 2014 ), we clearly differentiate between auditor incentives and auditor competencies to supply a high audit quality. We assume that auditor incentives and competencies will lead to lower firms’ financial misconduct and thus increased audit quality. As financial restatements represents one of the most important audit quality and financial misconduct variables, we focus on this variable in this literature review. Our focus guarantees an appropriate comparability within included archival research and a more nuanced deduction of explicit research recommendations in this research field. We contribute to prior research on overall audit quality studies, as audit quality proxies are very complex in business practice and have a lack of comparability.

We deduce four main research questions in order to evaluate, whether certain proxies of auditors’ incentives and competencies may have a major impact on firms’ financial restatements. Then, based on the results of our literature review, our aim was to stress key limitations of prior research and give useful recommendations for future research. Our review of 69 archival studies indicates that many studies on auditor incentives and competencies show inconclusive results on firms’ financial restatements (e.g., fee and rotation studies). But there are indications that audit expertise and audit firm size as auditors’ competencies decrease financial restatements. Other included proxies are either too low in amount or too inconclusive to identify a tendency of research results. Thus, the impact of external auditors on financial restatements remains controversial. Based on limitations of prior research due to methodological and content issues, we give useful recommendations for future archival research on the link between auditors and firms’ financial restatements. We include both content-specific and methodological suggestions. More specifically, we encourage future researchers to increase the validity of research designs due to inconclusive research designs. Restatement events should be better analyzed with regard to their nature. Future studies should include a mixture of financial restatements and other misconduct proxies (e.g., enforcement actions or fraud) and evaluate, whether corporate governance and earnings quality moderates or mediates the link between auditors and restatements. Methodological concerns also arise in the prior analysis of auditor-related determinants of firms’ financial misconduct. Researchers should be more aware of the implementation of control risk variables in archival studies and of major endogeneity concerns within their research designs. Moreover, future researchers should include both corporate governance and country-related governance variables in their research design. In more detail, board composition, e.g., audit committees, and ownership structure have major interdependencies with external auditors’ duties and motivations to detect financial misconduct of the firm (Velte 2021a ). Finally, sustainability issues, e.g., ethics, gender and cultural diversity, in audit firm teams should be integrated in future studies on the impact on firms’ financial restatements in line with prior research on earnings management. This may lead to an increased knowledge about the auditor-related determinants of firms’ financial restatements.

This study has main implications for regulatory bodies and business practice. After the Enron scandal, the US-American government implemented the Sarbanes Oxley Act 2002, which leads to massive regulations on business reporting, corporate governance and external auditors. The famous Wirecard scandal in Germany also leads to a financial market integrity strengthening act (“FISG”) in 2021. In line with the mandatory implementation of audit committees by PIEs, auditor independence was increased by stricter external rotation rules after 10 years and stricter separation of auditing and consulting duties. The German legislator has also mainly increased the liability regimes for external auditors in order to ensure a careful financial audit. A similar initiative by the European Commission was started by the end of 2021 as a reaction to the Wirecard scandal and other European scandals (EC 2021 ). There is a current controversial discussion, among others, whether the implementation and monitoring of anti-fraud-management systems by PIEs will be useful to increase the quality of corporate governance and auditing within the European capital market. We see a great challenge to analyze the impact of internal corporate governance systems, e.g., risk management and compliance management systems, on financial reporting and audit quality from an international perspective. However, future regulators should recognize internal auditors, audit committees and external auditors as a “golden triangle” of supervision and should strengthen their cooperation. Regulators also discuss recently, whether the “traditional” financial audit should be extended by forensic auditing tools in combination with modern instruments of big data tools (e.g., artificial intelligence). Non executives should implement adequate incentives for top managers to strengthen financial reporting quality and decrease intentional misreporting. Stricter legal rules cannot prevent financial scandals of the firm if corporate culture is unethical and leadership style of executive directors is questionable. Firms’ financial misconduct should be linked to corporate social responsibility (CSR) (Velte 2021b ) and compliance management systems in the future.

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Velte, P. The impact of external auditors on firms’ financial restatements: a review of archival studies and implications for future research. Manag Rev Q 73 , 959–985 (2023). https://doi.org/10.1007/s11301-022-00264-x

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The influencing factors of audit opinions have always been the focus area of academic research. This article categorizes research by Chinese and international scholars, and analyzes the research status of audit opinions. Starting from the factors that affect audit opinions, they are divided into two aspects: Chinese and international, and they are discussed in order to find the commonality and characteristics of related research and provide a reference for in-depth research on audit opinions.

Audit Opinion , Literature Review , Influencing Factors

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1. Introduction

As the final result of CPA audit, the type of audit opinion is related to the company’s financing in the capital market on the one hand, on the other hand, it is related to whether the investors and other relevant stakeholders can make a correct evaluation and decision on the company. Therefore, the type of audit opinion is influenced and concerned by the company’s own quality, investors, government supervision departments, and even the accounting firm itself.

As an important field of audit research, Chinese and international academic circles have carried out long-term and effective research on the influencing factors of audit opinion types, among which international research has made a lot of meaningful exploration in theory and empirical aspects. In China, due to the special economic system and relatively imperfect market mechanism, coupled with the recovery of CPA audit in recent years, some scholars have done a lot of empirical research on the influencing factors of audit opinion and come to some conclusions. However, there are many factors that affect audit opinion, in the study of these different factors, due to the different national conditions and research perspectives, the research at Chinese and abroad will also form different conclusions.

2. Literature Review of Audit Opinions

2.1. Review of International Documents on Audit Opinions

2.1.1. Audit Opinion and Financial Status of the Company

International scholars mainly select the financial indicators reflecting the company’s financial ability, such as profitability, solvency, asset operation and management ability, to test the impact of the indicators on the non-standard audit opinion. The conclusion is relatively consistent: the company’s financial situation has a significant impact on the audit opinion. Clive Lennox (2002) had studied and proved that the probability of enterprises receiving non-standard audit opinions is positively related to financial leverage, and negatively related to their cash flow [1].

Chen and Church (1992) take the severity of the crisis of listed companies as the starting point, and conclude that when the crisis of listed companies becomes obvious (such as net loss, debt default, pending litigation), auditors are more likely to find the crisis of going concern, so they are more likely to issue non-standard audit opinions [2]. Lennox (2002), empirical research shows that companies with high liabilities have a high probability of receiving non-standard audit opinions due to the high risk of bankruptcy [3].

2.1.2. Audit Opinion and Auditor Change

Chow and Rice (1982), put forward the same view: the change of auditor has a positive correlation with the retained audit opinion of the most recent fiscal year before the change [4].

Lennox (2000) uses the British listed companies as the research sample, designs the audit opinion estimation model to estimate the types of audit opinions that the listed companies may receive when they do not change their auditors, and compares it with the audit opinion types after changing their auditors, and finds that the British listed companies have successfully realized the purchase of audit opinions.

Defond and Subramanyam (1998) concluded that even if the company changed the accounting firm or audit that provided audit services for it, the subsequent firms would still maintain a high degree of prudence in their statements [5].

2.1.3. Audit Opinion and Scale of Accounting Firm

Lennox, C. (2003) thought that the partner of the auditee’s former accounting firm was an associated enterprise [3]. They found that such an associated enterprise was more likely to receive clean audit opinions, and receiving clean audit opinions would make the company feel that this association was more valuable.

The common conclusion of De Angelo (1981) and Dye (1993) is that the larger the accounting firm is, the higher the audit quality it provides. De Angelo (1981) found that the larger the size of the firm, the higher the reputation, so as to maintain a high degree of independence and professional judgment [6]. A large-scale firm can reduce its economic dependence on a certain customer and provide non-standard audit opinions. If the audit failure leads to the loss of the firm, the larger the scale, the greater the loss, that is to say, “deep pocket” effect. These reasons make the large-scale firm more cautious, and will issue more non-standard audit opinions, which means the higher the audit quality.

Through the empirical analysis of Chinese market from 1993 to 1996, Defond and T.J. Wong found that no matter single variable analysis or multi variable analysis was used, no matter the number of clients audited or the size of clients audited was taken as the base, the test result was that there was a significant positive correlation between the size of accounting firms and audit independence.

Lindsay (1988), through an empirical study of the Canadian market, concludes that the size of the firm will have an impact on the independence of the audit, and ultimately the type of audit opinion [7].

2.1.4. Audit Opinion and Corporate Governance Structure

Combing the international literature about audit opinion and corporate governance structure, we find that: the foreign research mainly starts from the audit committee member structure, corporate governance mechanism, management shareholding and overseas shareholding and so on, and studies their impact on audit opinion.

The conclusion is more uniform, that is, a good corporate governance structure may improve the quality of financial reports and reduce the possibility of being issued non-standard audit opinions.

Fama (1980) thinks that the board of directors is the governance center of modern enterprises [8]. The more perfect the corporate governance structure is, the higher the decision-making efficiency of the board of directors is, that is, the corporate governance structure affects the audit opinion issued by auditors.

The higher the ownership concentration of La. Porta (1999), the more likely the auditors are to issue non-standard opinions, because the higher the ownership concentration, the larger the shareholders will manipulate the financial statements, and the greater the probability of the audited issuing non-standard opinions.

Warfield et al. (1995), according to relevant research, a company with good governance can send a favorable signal to the registered accountant, that is, a good governance structure. The lower the probability of breaking the law, the lower the relative risk during the audit, and the greater the probability of the standard audit opinion received by the company.

Clen (2001), through research, shows that: listed companies improve the quality of their financial information by improving their intelligence level, and ultimately their probability of being issued non-standard audit opinion will be smaller. Taking the listed companies from 1998 to 1999 as the research object, Carcello and Neal (2003) found that the larger the proportion of independent directors in the company audit committee, the smaller the probability of receiving non-standard audit opinions [9].

2.1.5. Audit Opinion and Earnings Management

The existence of principal-agent leads to the conflict of interest and information asymmetry among different stakeholders, which provides the possibility of earnings management. On the relationship between audit opinion and earnings management, there have been a large number of literature studies internationally. Generally speaking, this kind of research takes the manipulative accruals as the measurement index of earnings management, but so far there is no clear and consistent conclusion. Becker and Defond et al. (1998) found that audit plays a role in limiting earnings management, and high-quality audit is easier to find and report misstatements, which has a good effect on finding earnings management.

Eli and Ferdinand, et al. (2001) connected earnings management with audit opinion [10]. They first tested the effect of various earnings management measurement models, and then connected them with audit opinion types. They found that the higher the degree of earnings manipulation, the more likely to be qualified.

Contrary to the above conclusions, Butler and Leone et al. (2004) found that in the US market, the non-standard opinion was issued because the company’s accrued profit was negative and the amount was huge, which had nothing to do with the company’s earnings management [11].

2.1.6. Audit Opinion and Internal Control

Prior to SOX act, the disclosure of internal control information of listed companies was voluntary, and the academic research lacked public data, so the empirical research on internal control in foreign countries was limited. Since 2002, Section 404 of SOX Act requires audit and disclosure of internal control, and then there are more and more researches based on the background of the United States. Most studies have come to a consistent conclusion: the better the quality of internal control, the easier it is to receive standard audit opinions.

Beneish (2008) measured the quality of internal control with the guidance of internal control elements [12]. The research believed that the higher the quality of internal control of listed companies, the lower the risk of audit failure faced by auditors. This is helpful for auditors to issue standard audit opinions.

Doyle et al. (2007) examined the relationship between internal control deficiencies and the quality of accruals [13]. They found that companies with internal control deficiencies had lower quality of accruals. There is a direct relationship between earnings quality and audit opinion.

Recently, the research of Tahinakis, P and Samarinas, m (2016) considers that audit opinion has significant market impact, which includes incremental information, while the size and financial situation of the company can significantly affect the content of incremental information of audit opinion [14].

These international documents all show that audit opinions have a significant impact on the market, and the market will give feedback based on the type of audit opinion, and these feedbacks are reflected in the microeconomic activities of enterprises.

2.2. Chinese Literature Review of Audit Opinions

2.2.1. Audit Opinion and Financial Status of the Company

The financial indicators selected by Chinese scholars are different. Most scholars choose the financial indicators such as profit and loss, net interest rate of total assets and stocks to replace the financial ability of listed companies, and study the relationship between them and the types of audit opinions, and get a more consistent conclusion: non-standard audit opinions and financial ability are significantly negatively related, that is, the financial ability of listed companies The better the strength is, the less likely it is to receive non-standard audit opinions.

According to Zhu Xiaoping and Yu Qian (2003), quick ratio, asset liability ratio, proportion of accounts receivable to total assets, years of listed companies and other factors are negatively related to the probability that listed companies receive non-standard audit opinions, while factors such as return on net assets, asset scale, cash flow ratio, ratio of goods to total assets and other factors are positively related to the probability that listed companies receive non-standard opinions [15].

Tang Lianjiong and Wang Zhenyi (2005) adopted three indicators to measure the financial status of an enterprise, namely profitability, debt repayment ability, and asset utilization [16]. The research found that the financial status of listed companies significantly affected the types of audit opinions they received. The worse the financial capability of a listed company, the more likely it is that a certified public accountant will issue a non-standard audit opinion.

Song Xiuchao, Liu Meiyue, (2010), through in-depth analysis of Listed Companies in household appliances industry, concluded that the larger the company’s asset liability ratio index, the higher the possibility of being issued with non-standard audit opinions, the stronger the company’s profitability, and the easier it is to receive standard audit opinions.

2.2.2. Audit Opinion and Auditor Change

Some Chinese scholars think that companies with opinion buying motivation can successfully achieve opinion buying，but the evidence is relatively weak. Lu Zhengfei and Tong pan (2003) also show that there is a significant correlation between auditor changes and audit opinions of the previous year, which shows that listed companies in China have the motivation to purchase audit opinions and try to improve audit opinions [17]. However, through the study of market reaction, it is found that there is no information increment in the information disclosure of auditor change, and there is no significant result in the market reaction (Li Shuang, Li Hui, Wu Xi, 2001) [18]. These two contradictory research results show that there is no clear conclusion in the field of audit opinion purchase in China.

2.2.3. Audit Opinion and Firm Size

Qian Guangming and Chen Deyan (2014) took the listed companies that issued A shares on the main boards of Shanghai and Shenzhen stock markets as the statistical samples, and used the multivariate statistical analysis method to study the impact of the scale of accounting firms on the audit quality. The results show that there is a weak positive correlation between the size of accounting firms and audit quality.

Li Chuntao (2006) and Yu Peng (2007) concluded that “Big Institute” can perform audit business more independently and issue more strict audit opinions [19].

Liu Feng (2002), based on the in-depth study of the companies with non-standard audit opinions in 1998, put forward that the larger firms have stronger ability to issue more strict audit opinions [20].

However, some scholars have found that there is no significant correlation between audit opinions of firm size. For example, Xia Lijun and Yang Haibin (2002) found that: in China, early research in this field found that there was no significant relationship between the size of the firm and the audit opinion, and thus believed that the international “Big Four accounting firms” audit quality was not higher than “non Big Four accounting firms” [21].

2.2.4. Audit Opinion and Corporate Governance Structure

Recently, some Chinese scholars have focused on the relationship between corporate governance structure and audit opinion. However, there is no systematic theory in relevance research. Most scholars only study the impact of one aspect of corporate governance on audit opinion. Among them, the most studied are the ownership structure and the characteristics of the board of directors. Chen. (2001) based on the empirical study of China’s stock market, believed that the higher the proportion of management shares and overseas shares, the more likely it is to improve the quality of financial reports and reduce the possibility of being issued with non-standard audit opinions [22]. Cai Chun, Yang Lin (2005) showed that the internal management quality characteristics of the company had a significant impact on the audit opinion [23].

2.2.5. Audit Opinion and Earnings Management

In China, the research on the correlation between earnings management and audit opinion has not reached a consensus conclusion. Some scholars in China, such as Xia Lijun (2002), pointed out that companies with higher earnings management have a higher probability of being issued non-standard audit opinions, which means that auditors can identify earnings management behavior of listed companies [24]. In contrast, research by Li Dongping (2001) and Wu Liansheng et al. (2011) shows that there is no significant correlation between earnings management and non-standard audit opinion.

2.2.6. Audit Opinion and Internal Control

Most of the related literatures about internal control and audit opinion think that the most direct economic consequence of the effectiveness of internal control is earnings quality. Yang Deming and Hu Ting (2010) found that the higher the quality of internal control is, the less likely CPAs are to find earnings management [25]. With the improvement of the quality of internal control of listed companies, the probability of CPAs issuing non-standard audit opinions on earnings management is significantly reduced. Yang Qunhui and Wang Yurong (2011) also investigated the relationship between internal control and audit opinion of listed companies, which was slightly different from the research methods of Yang Deming and others (2010). They used random matched samples and self-designed internal control scores, but the conclusions were similar. Xiao Chengmin and Li Rong (2012) used the latest internal control index after design adjustment to reflect the improvement of the effectiveness of internal control to a certain extent. The research conclusion is still consistent with the previous research, that is, the internal control of listed companies The weaker the validity, the higher the probability that its annual report will be issued a non-standard audit opinion by a certified public accountant [26].

3. Literature Review

Achievements of the research on audit opinions: 1) In the research on the financial indicators and audit opinions of the audited units, although the selection criteria are not completely the same at China and international, the conclusions are basically the same, that is, the financial situation of the listed companies is the key factor affecting the audit opinions. 2) In the study of corporate governance structure, firm size and audit opinion, the same conclusion has been drawn in foreign countries: firm size will have a great impact on the independence of certified public accountants, and then affect the type of audit opinion. And a good corporate governance structure is more likely to be issued with standard audit opinions. However, there is no clear conclusion on the research of these two factors in China. 3) In terms of the factors affecting the audit opinion, there are also differences in the research of scholars at home and abroad. If the non-standard audit opinion is issued in the previous period of the company, the current period is more inclined to change the audit firm or auditor who provides audit services for the company. However, the difference is also obvious, that is to say, international scholars think that after most companies change accounting firms or auditors, the audit opinion of this period has not been significantly improved, while Chinese scholars think that after most companies change accounting firms and auditors, the audit opinion of this period has been better improved. It formed the purchase of audit opinions. At present, there are two ways to divide audit opinion in the research of audit opinion at China and international one is to take standard unqualified audit opinion as standard audit opinion, the other is non-standard audit opinion. This is also the method adopted by most of the literature, and the conclusion is relatively stable. The second is to define the type of unqualified audit opinion as the standard unqualified audit opinion and the unqualified opinion with emphasis, and the rest as the non-standard audit opinion.

4. Future Research Outlook

There are still some shortcomings in this aspect of research. The Chinese and international literatures on audit opinions are focusing on how financial conditions, earnings management, and internal control affect audit opinions. Few focus on the relationship between corporate strategy and audit opinion. The emerging Internet business model can be regarded as the choice of corporate strategy. With this specific corporate strategy, the relationship between the two can be observed intuitively. On the other hand, due to the rise of the Internet, a large number of articles so far have analyzed this business model at the theoretical level, and there are few empirical studies related to it. This direction is a direction that can be in-depth research on the factors affecting audit opinions.

Conflicts of Interest

The authors declare no conflicts of interest regarding the publication of this paper.

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The impact of changing external auditors, auditor tenure, and audit firm type on the quality of financial reports on the saudi stock exchange.

1. Introduction

1.1. significance and contribution to knowledge, 1.2. statement of the problem, 1.3. research questions.

Do the Big Four audit firms have a positive correlation with the quality of listed companies’ financial reports in Saudi Arabia?
Are external auditor firm tenures of three or more years for a given listed company positively associated with the quality of the company’s financial reports in Saudi Arabia?
Do changing external auditor firms positively impact the quality of listed companies’ financial reports in Saudi Arabia?

1.4. Agency Theory

2. literature review and hypothesis development, 2.1. external auditor firm types and financial reporting quality, 2.2. audit tenure and financial reporting quality, 2.3. external auditor change and financial reporting quality, 3.1. research design, 3.2. the quantitative method, 3.3. methods of sampling, 3.4. methods of data collection, 3.5. measurements, 3.6. rationale for utilising the modified jones model, 4.1. descriptive statistics, 4.2. regression analysis, 4.3. robustness analysis, 5. discussion, 5.1. big four firms and financial report quality, 5.2. auditor tenure and the quality of the financial reports, 5.3. auditor change and the quality of the financial reports, 5.4. contribution to knowledge, 6. conclusions, author contributions, data availability statement, acknowledgments, conflicts of interest.

Variable	Definition
DACC	Discretionary accruals are a measure of accruals that are part of the total accruals in a firm’s total balance sheet and are created to manage profits or convey private information about the firm’s future performance ( ).
Big4	The four largest auditing firms in the world. According to ( ), the Big Four auditing firms account for the vast majority of the Saudi Arabian audit market: PwC, KPMG, Ernst & Young, and Deloitte Touche Tohmatsu (value of 1 if the company was audited by Big4; otherwise, 0).
A-tenure	Audit tenure refers to the length of time an external auditor has continuously audited the same company. Specifically, this variable examines whether an external auditor’s tenure of three years or more impacts the quality of the company’s financial statements. In this study, audit tenure is measured as follows: if the external auditor has remained with the same company for three or more consecutive years, it is assigned a value of 1; otherwise, it is assigned a value of 0.
At-change	Auditor change is a variable that indicates whether a firm has switched its external auditor. It is measured as follows: if a firm changes its external auditor, the value is assigned as 1; if the firm retains the same external auditor in the following year, the value is assigned as 0.
LEV	Leverage (LEV) is a control variable in this study, as suggested by ( ), due to the well-established association between leverage and accruals (e.g., ). LEV is calculated by scaling total liabilities by the prior year’s total assets. Leverage (LEV) is a control variable measured as the ratio of a firm’s total liabilities to its total assets from the prior year, reflecting the company’s debt level relative to its assets.
ROA	Return on Assets (ROA) is a business gauge used to assess the ability of the whole affair to generate operational revenue from all the tangible and intangible assets invested in a business. The ratio is calculated using equity and operation income, as well as operation increase and total assets in the firm. The main reason for adopting this ratio is to reduce the influence of high operational performance when estimating discretionary accruals, as postulated by ( ). The data disclosed in the model represent the extent to which a firm is capable of generating profits from its assets; a higher ROA means higher utilisation of assets, while a lower ROA means less effective use of assets.
Size	Size (SIZE) is a control variable defined as the natural log of total assets, reflecting that larger companies are more likely to accumulate greater and more stable accruals ( ).
Age	Age (AGE) is a control variable measured as the number of years for which a company has reported total assets in Research Insight since 1982, reflecting changes in accruals over the company’s life cycle ( ; ).

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Click here to enlarge figure

Steps	Description	Observations
Population	Listed on the Saudi Stock Exchange (Tadawul).	220 firms
Step 1: Sector Selection	The materials sector.	44 firms
Step 2: Time Frame	Available data for the period 2017–2021.	35 firms
Step 3: Exclusion Criteria	The inclusion criteria (e.g., missing data).	9 firms excluded
Final Sample	The final firms.	35 firms
Observations	Five-year period (35 firms’ × 5 years).	175 observations

Components	Definitions
	=Total accruals in year ,
	=Change in current assets in year ,
	=Change in cash and cash equivalents in year ,
	=Change in current liabilities in year ,
	=Change in short-term debt included in current liabilities in year ,
	=Depreciation and amortisation expenses in year .

Components	Definitions
	=Total accruals in year divided by total assets in year ,
	=Revenue in year less revenue in year ,
	=Net receivables in year less net receivables in year ,
	=Gross property (plant and equipment) in year ,
	=Total assets in year ,
, , and	=Parameters to be estimated, namely alphas,
	=Residuals in year .

Numbers	Variables	Observations. N	Mean (%)	SD	Min	Max
1	DACC	175	−0.0355	0.0135	−0.0641	0.0045
2	Big4	175	0.3829	0.4875	0.0000	1.0000
3	A_tenure	175	0.6400	0.4814	0.0000	1.0000
4	At_change	175	0.2000	0.4011	0.0000	1.0000
5	LEV	175	0.3396	0.2277	0.0082	0.9210
6	ROA	175	0.0451	0.0727	−0.1539	0.5883
7	Age	175	2.8157	0.3008	1.9459	3.2581
8	Size	175	8.0648	1.5152	5.4993	12.683

Variables	DACC	Big4	A_tenure	A_change	LEV	ROA	Age	Size
DACC	1.000
Big4	0.009	1.000
A_tenure	0.129	0.076	1.000
A_change	−0.018	−0.041	−0.548 *	1.000
LEV	0.019	−0.021	0.006	0.004	1.000
ROA	0.199 *	0.358 *	−0.081	0.016	−0.381 *	1.000
Age	0.143	0.079	−0.309 *	0.168	−0.012	0.072	1.000
Size	0.009	0.582 *	0.087	−0.041	0.124	0.246 *	0.007	1.000

Independent Variables	Dependent Variable (DACC)
Big4	−0.0076
	(−2.37) **
A_tenure	0.0054
	(2.02) **
A_change	0.0036
	(1.27)
LEV	−0.004
	(−0.60)
ROA	0.054
	(3.91) ***
Age	0.0114
	(2.98) ***
Size	0.0008
	(0.78)
_cons	−0.0761
	(−6.41) ***
R	0.3542
F	5.61
Prob > F	0.000
N	175

Variables	Large Firms	Small Firms	High ROA	Low ROA
Big4	−0.0103 (0.462)	−0.0205 (0.377)	0.0032 (0.791)	−0.0141 (0.596)
LEV	−0.0226 (0.554)	−0.0370 (0.256)	0.0244 (0.417)	−0.1009 (0.008) ***
ROA	−0.0147 (0.878)	0.4023 (0.007) ***	-	-
Size	-	-	−0.0048 (0.253)	0.0087 (0.279)
Constant	0.0126 (0.461)	−0.0027 (0.863)	0.0314 (0.322)	−0.0324 (0.577)
R	0.014	0.139	0.020	0.089
F-stat	0.400 (0.753)	4.460 (0.005)	0.561 (0.642)	2.689 (0.0516)

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Share and Cite

Alhazmi, A.H.J.; Islam, S.; Prokofieva, M. The Impact of Changing External Auditors, Auditor Tenure, and Audit Firm Type on the Quality of Financial Reports on the Saudi Stock Exchange. J. Risk Financial Manag. 2024 , 17 , 407. https://doi.org/10.3390/jrfm17090407

Alhazmi AHJ, Islam S, Prokofieva M. The Impact of Changing External Auditors, Auditor Tenure, and Audit Firm Type on the Quality of Financial Reports on the Saudi Stock Exchange. Journal of Risk and Financial Management . 2024; 17(9):407. https://doi.org/10.3390/jrfm17090407

Alhazmi, Abdulkarim Hamdan J., Sardar Islam, and Maria Prokofieva. 2024. "The Impact of Changing External Auditors, Auditor Tenure, and Audit Firm Type on the Quality of Financial Reports on the Saudi Stock Exchange" Journal of Risk and Financial Management 17, no. 9: 407. https://doi.org/10.3390/jrfm17090407

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Report highlights

What this report is about.

Students in rural and remote areas of NSW face greater challenges compared to their metropolitan peers.

This report examined how the NSW Department of Education (the department) is ensuring that rural and remote students have access to the same quality of early childhood, school education, and skills pathways as metropolitan students.

What we found

A decade since the previous (2013) strategy to address educational disadvantage, there remain considerable gaps in access and outcomes between rural and remote students and metropolitan students.

The Rural and Remote Education Strategy (2021–24) is unlikely to address these longstanding and known issues of educational disadvantage in rural and remote areas.

Key enabling factors such as resourcing a dedicated team, setting performance measures, and establishing suitable governance arrangements were not put in place to support effective implementation of the 2021 strategy.

The department has programs aimed at addressing remoteness challenges, but does not know if these initiatives improve access or outcomes.

The department does not monitor or report on student access or outcomes according to geographic location.

What we recommended

The Department of Education should:

develop a new strategy that addresses disadvantage in regional, rural and remote education
establish and report publicly on regional, rural and remote key performance indicators
improve data collection by using a standard remoteness classification
improve governance arrangements for regional, rural and remote education
review the resources provided for regional, rural and remote areas that recognises the additional costs
develop an approach that ensures all students can access best practice modes of delivery.

Executive summary

In February 2021, the department of Education (the department) released the ‘Rural and Remote Education Strategy (2021–2024)’. The strategy sets a vision that ‘every child in regional New South Wales has access to the same quality of education as their metropolitan peers’. It recognises that students in rural and remote areas of New South Wales face greater challenges compared to students in metropolitan locations. These challenges contribute to regional, rural and remote students underperforming on major educational indicators compared to their metropolitan peers.

In recent years, regional, rural and remote communities experienced a series of natural disasters as well as the COVID-19 pandemic. In response to the pandemic and subsequent school closures, the department introduced new initiatives aimed at minimising the disruption to children including online learning and small group tuition.

The department established a regional, rural and remote education policy unit in 2021 to support delivery of the strategy and its vision.

The objective of this audit was to assess the effectiveness of the department’s activities to ensure that regional, rural and remote students have access to the same quality of early childhood, school education, and skills pathways as their metropolitan peers.

In making this assessment, the audit examined whether:

The department developed and implemented a strategy that enables regional, rural and remote students to access the same quality of early childhood education, school education, and skills pathways as students in metropolitan New South Wales.
The department has been addressing the complexities and needs of regional, rural and remote early childhood education, school education, and skills pathways.

The department's rural and remote education strategy is unlikely to achieve its vision that every child in regional New South Wales has access to the same quality of education as their metropolitan peers. Shortcomings in the design and implementation of the strategy have meant there is little to report on its impact after more than two years since its release.

The department did not take on board lessons learned from the previous strategy. The department did not provide additional resources to meet the strategy aims, establish strong central coordination, set timeframes, set measures of success, or identify new programs to address gaps in regional and remote access and outcomes. Instead, the department relied on matching existing programs and activities across its business areas to meet the stated actions and goals of the strategy.

There was not enough work put in to plan for successful implementation. A changeover in staff responsible for coordinating implementation of the strategy and lack of fit-for-purpose governance arrangements slowed its momentum. The department took one year to recruit a central team and almost two years to set up governance that gives relevant department executives oversight of the strategy. This was not fast enough to support a four-year strategy with an ambitious vision.

The department did not establish a program logic model, set baseline measures or develop an evaluation plan to assess the impact of the strategy. Consequently, it has not adequately monitored changes in access or outcomes for regional, rural and remote students. Two years after its release, there has not been any public reporting against the actions or outcomes of the strategy.

The department is not addressing the complexities of delivering regional, rural and remote early childhood, school education and skills pathways. There are a range of programs targeted to overcoming challenges of remoteness, but the department does not monitor data to determine whether these programs are sufficient to close the persistent gaps in access and outcomes for regional, rural and remote students.

A decade after the Rural and Remote Education Blueprint was launched in 2013, there remain considerable gaps in access and outcomes between metropolitan and regional, rural and remote areas. The department identifies 'equity' as a key value in its strategic plan but does not monitor or report on performance against key indicators according to geographic location. Data produced in response to our requests for this report demonstrate that previously identified gaps in access and outcomes remain.

Different areas of the department recognise the challenges of delivering services in regional, rural and remote locations and have developed specific programs or approaches aimed at addressing these challenges. The department does not know whether these interventions are sufficient to close the gaps in access or outcomes. Schools we spoke with as part of the audit reported significant ongoing challenges with attracting and retaining staff, providing a full curriculum and accessing support services when needed.

1. Key findings

Regional, rural and remote disadvantage is a longstanding and well-known issue.

In 2013, the department released 'Rural and Remote Education: A blueprint for action'. The blueprint identified that disadvantage experienced by students in rural and remote areas begins in early childhood and flows through to school and employment outcomes. These issues have long been identified in multiple government and non-government reports, for example, the Commonwealth Schools Commission released a report on 'Schooling in rural Australia' in 1988. In introducing the 2013 blueprint, the then Minister for Education committed to implementing actions to close the remoteness gap.

The department published an evaluation of the blueprint in 2020, which found that it had achieved limited success against its aims of reducing the gaps between metropolitan and rural and remote students. It noted the persistence of the gaps required an ongoing focus and offered recommendations for how future efforts may be better targeted for greater impact.

The 2021 strategy proposed a whole systems approach to addressing disadvantage

In response to the evaluation report, the department began to develop a new strategy to support regional, rural and remote education. It consulted with relevant stakeholder groups and held online surveys to get feedback on priority areas. It had proposed to update a literature review from 2013 and commission a new research project but these were not completed in time to inform the 2021 strategy.

The Rural and Remote Education Strategy (2021–24) was released in February 2021. The strategy included four focus areas with supporting goals, aims, and actions. While the overall focus areas of the strategy were similar to those of the blueprint, the strategy proposed a 'whole systems' approach for implementation. This approach aimed to make all areas of the department responsible for improving student learning and wellbeing outcomes in rural and remote schools.

Key enabling factors were not in place to support effective implementation

The department's evaluation of the blueprint recommended several things be put in place to support the development and implementation of a new strategy. These included an evidence base, a program logic methodology, clear and robust measures of success, coherence across activities, and strong, central coordination to enable continual monitoring and adjustment of initiatives as required.

There were gaps across all of these recommended enabling factors:

the proposed evidence base was not completed on time to inform the new strategy
there was no program logic model
measures of success were not defined
there was no clear understanding of initiatives that would contribute to the strategy
the team responsible for coordination was not in place at commencement of the strategy
governance arrangements were not fit-for-purpose for the 'whole systems' approach.

There have been delays in implementing the strategy

The change in responsibility once the strategy was announced, and gaps in enabling factors, led to delays in implementing the strategy. The Rural and Remote Education Policy Unit was announced in February 2021 as having the key role in coordinating implementation but was not fully staffed until mid-2022. The role of the policy unit was unclear, and it spent the second half of 2021 considering and consulting on how it would approach its role.

The strategy did not identify initiatives that would contribute to its goals and aims. The new policy unit spent time consulting with different areas of the department and cataloguing over 100 initiatives that it considered aligned to the aims of the strategy. It viewed this as the first step of setting an implementation plan and approach to monitor the performance of the strategy.

Governance arrangements from the previous blueprint and development of the new strategy were carried over for early implementation. These arrangements were not fit-for-purpose, which meant there was limited action and insufficient influence to ensure priority was given to regional, rural and remote issues. The policy unit proposed two governance models during 2022 before a new steering committee was formed in December 2022. At this stage, it is unclear whether the new steering committee will be effective in taking a strategic approach to holistically address gaps in regional, rural and remote education delivery.

The new strategy included programs that already existed in other areas of the department

The new strategy incorporated several programs that different areas of the department had already developed to address the challenges of delivering quality education to regional, rural and remote areas. These programs ranged from early childhood education, through to school education (K-12), and transitions from school into employment or tertiary education. The department provides additional funding to recognise the greater costs of delivery or develop innovative delivery models where traditional models are not viable.

In early childhood education, the department provides additional funding for mobile preschool services to improve access in regional, rural and remote locations where standalone services are not viable. It also subsidises travel costs for families in remote areas and has developed a program to support a distance model of early childhood education. Schools we spoke with reported difficulty accessing quality early childhood education.

Difficulties recruiting and retaining teachers to regional, rural and remote areas is an ongoing challenge. The department has a range of incentives to encourage teachers to areas which are hard to staff. Its data shows that despite the incentives, there are significant numbers of vacancies across these areas. Schools we spoke with reported difficulty keeping a full complement of staff with the relevant subject area expertise.

Shortages of qualified staff and smaller student cohorts mean that secondary school students in regional, rural and remote areas are less likely to have access to a full set of curriculum choices. The department provides distance education options for students but there can be practical barriers for students accessing these options and the learning style may not suit all students.

Secondary students in regional, rural and remote areas face challenges with post-school transitions. The Educational Pathways Program includes a range of initiatives aimed at supporting secondary students in their transition from school to work. There are regionally focused initiatives that aim to overcome these barriers, but the program is still being rolled out across the state.

There are significant gaps in regional, rural and remote education and wellbeing outcomes

Despite the department's programs, it does not know the extent to which these programs have closed gaps in educational outcomes between major cities and the rest of the state across early childhood, school education, and transitions from school. The department does not regularly monitor gaps in outcomes but was able to produce this data for us to include in this report (see sections 4 and 5).

The Australian Early Development Census (AEDC) measures children's development, as they enter the first year of full-time school. Children in regional and remote areas are less likely to be developmentally on track across five key domains compared to children in major cities.

The National Assessment Program, Literacy and Numeracy (NAPLAN) measures student literacy and numeracy skills as they progress through schooling. Students who are below the national minimum standard are at risk of being unable to progress satisfactorily at school without targeted intervention. Students in regional and remote areas are less likely to perform above the minimum standards compared to students in major cities.

One of the main indicators of educational achievement is completing high school to Year 12. Young people who do not successfully complete Year 12 have a narrower range of post-school options than those who do. Students in regional and remote areas are less likely to continue their schooling to Year 12 compared to students in major cities.

There is not enough public reporting on the department's actions and their outcomes

The department set 'equity' as a key value in its strategic plan for 2018–22. It set performance indicators in its annual business plans to measure progress towards its strategic plan goals. These indicators, however, did not include an assessment of performance by remoteness.

The department's Annual Reports for 2021 and 2022 stated that it 'monitor(s) performance data for our key targets, focusing on our cohorts and students in most need: Aboriginal students, students from low-socioeconomic-status backgrounds, rural and remote students, and students with disability'. Despite this, the department was not able to demonstrate it regularly produced, monitored, or reported on this data for rural and remote students. It only produced this data when required by this audit.

This has meant that the size of gaps between major cities and other areas of the state have not been adequately monitored or reported. Monitoring and reporting on differences in outcomes across geographical areas is important to target programs and interventions where needed.

Similarly, the Rural and Remote Education Strategy (2021–24) set an overarching vision to provide equitable access to quality education. It stated that regular updates on strategy actions would be made available but, as at June 2023, there had been no public reporting. Communicating publicly on the progress of strategy actions and the outcomes they have achieved is important for transparency and public accountability.

2. Recommendations

By August 2024, the Department of Education should:

1. renew its commitment to meeting the principles of the Education Act 1990 that 'every child receives an education of the highest quality' through development of a long-term strategy that addresses regional, rural and remote education

2. commence preparations for a new strategy by:

finalising an evaluation of the 2021–24 strategy
publicly reporting on actions and impact of the 2021–24 strategy
undertaking research to inform directions, including a literature review
embedding stakeholder engagement arrangements to inform the development and execution of a new strategy

3. put in place quality key performance indicators for regional, rural and remote students aligned to the department's strategic plan success measures and routinely report publicly on the regional, rural and remote indicators

4. routinely and consistently collect data in a manner that enables a standard remoteness classification to be applied across different functional areas of the department, which will support the department to:

monitor trends and issues with access across the state
analyse factors driving differences in outcomes across the state
enable public reporting on key performance indicators

5. implement governance arrangements for regional, rural and remote education that:

enable the central coordinating unit for regional, rural and remote education to effectively undertake its assigned functions
enable ongoing quantitative and qualitative analysis to identify issues in program delivery to regional, rural and remote areas
prioritise efforts based on identified opportunities and areas of the greatest need
provide authority for the central coordinating unit to make decisions to direct the work of relevant business units accountable for delivering on those responsibilities
clearly allocate responsibilities and hold business units accountable for delivering on those responsibilities

6. review the financial resources provided for regional, rural and remote areas to recognise the additional costs for regional, rural and remote locations

7. review the different modes of hybrid learning across the department and use this to develop an approach that ensures all students can access best practice modes of delivery.

1. Introduction

1.1 regional, rural and remote areas of new south wales, geographic coverage.

Exhibit 1 is a map of New South Wales based on 'areas of remoteness'. There are five classes of remoteness which are characterised by a measure of relative geographic access to services.

Map of remoteness areas in NSW, divided into five regions: Major cities of Australia; Inner Regional Australia; Outer Regional Australia; Remote Australia; and Very Remote Australia.

Around three-quarters of the population of New South Wales live in major cities, whilst one quarter live in regional areas and less than 0.4% live in remote or very remote areas (Exhibit 2).

Exhibit 2: Estimated New South Wales population by remoteness area (as at 30 June 2022)

Major cities	6,158,533	75.5
Inner regional	1,584,921	19.4
Outer regional	379,597	4.7
Remote	26,498	0.3
Very remote	6,837	0.1

Number of schools and students

In terms of access to education in New South Wales, over half of government schools are located in major cities and these schools make up 75% of enrolled full-time equivalent students. In contrast, only 50 out of 2,215 schools are located in remote or very remote areas and these schools make up around 3,500 of the nearly 791,000 students in New South Wales (Exhibit 3 and Exhibit 4).

Exhibit 3: New South Wales government schools by remoteness area (2022)

Major cities	1,235	55.8
Inner regional	584	26.4
Outer regional	345	15.6
Remote	39	1.8
Very remote	12	0.5

Tree map chart shows a greater proportion of full-time equivalent enrolled students are located in the major cities of NSW, with lower proportions located in Very Remote NSW.

1.2 Bushfires, floods, and the COVID-19 pandemic

In recent years, schools in regional, rural and remote areas have been impacted by a series of natural disasters and the COVID-19 pandemic which disrupted students' regular schooling.

Between July 2019 and March 2020, bushfires burnt approximately 5.5 million hectares across coastal regions of New South Wales. The bushfires were described as unprecedented in scale, duration, and intensity. More than 250 schools were affected by the bushfires, with some damaged and others destroyed.

During the 2019–2020 bushfires, the first case of COVID-19 in Australia was recorded in January 2020. Social distancing measures were introduced in schools in New South Wales in March 2020, and, by the end of the month, the Premier of New South Wales had encouraged parents to keep children at home where possible. Students could access a blended learning model, either on-line or face-to-face in a classroom setting. Students returned to full-time, face-to-face learning at the end of May 2020. As of June 2023, the COVID-19 pandemic declaration was still active.

In February, March, and July 2022, coastal regions of eastern New South Wales, and the central west region of New South Wales, experienced major flooding. Evacuation centres were set up in various locations, including at schools. In 2022, 573 schools were closed due to severe floods and storms.

1.3 Legislation and policy

Education act 1990.

The Education Act 1990 is the legislative framework for the education and training of school children in New South Wales. An overarching principle in the Education Act 1990 (NSW) is that ‘it is the duty of the State to ensure that every child receives an education of the highest quality’. The objects for administration of the Act (as far as is practicable or appropriate) make reference to:

mitigating educational disadvantages arising from the child’s gender or from geographic, economic, social, cultural, lingual or other causes
recognition of the special problems of rural communities, particularly small and isolated communities.

Department of Education Strategic Plan (2018–2022)

The Vision as set out in the department's Strategic Plan for 2018–2022 is 'to be Australia's best education system and one of the finest in the world'. The department outlines six values in its strategic plan which guide how it operates and makes decisions. The overarching goal is to 'ensure every student is engaged and challenged to continue to learn, and every student, every teacher, every leader and every school improves every year'.

One of the values outlined in the strategic plan is 'equity' with a commitment to deliver on the outcome 'our education system reduces the impact of disadvantage'.

To support the strategic plan, the department also developed the Outcome and Business Plan 2022–23 which outlines how it will achieve its vision, goals, and performance indicators. The business plan includes details of various actions that support regional, rural and remote education but there are no performance indicators specifically targeted to remoteness.

Rural and Remote Education Strategy (2021–2024)

The department's Rural and Remote Education Strategy (2021–2024) was launched in February 2021 by the then New South Wales Deputy Premier and Minister for Education and Early Learning. The vision outlined in the strategy is 'every child in regional New South Wales has access to the same quality of education as their metropolitan peers'. The department aims to achieve this vision by:

improving staff recruitment, retention and planned professional learning to ensure high quality curriculum delivery
providing regional students with more curriculum choices and learning opportunities
supplying state-of-the-art technology to support flexible curriculum implementation
enabling stronger partnerships with higher education providers, vocational education suppliers and local industry.

1.4 Research and reviews

New south wales rural and remote education literature review (2013).

The department's Centre for Education Statistics and Evaluation (CESE) released a literature review on rural and remote education in 2013.

The first part of the report explored differences in educational outcomes for students in rural and remote and metropolitan areas of New South Wales. The report found that most differences in outcomes can be explained by factors which are already known to have an impact upon student outcomes, for example, socio-economic status, and the proportion of Aboriginal students.

The second part of the report examined the national and international literature available on regional and rural education, identifying major issues and responses to those issues.

Australian Independent Review into Regional, Rural and Remote Education (2018)

In 2017, the then Deputy Prime Minister and Australian Government Minister for Education and Training announced a national independent review into regional, rural and remote education. This review aimed to identify ways to improve the education of students in non-metropolitan areas to enable them to reach their full potential. The review was commissioned to:

consider the key issues, challenges, and barriers that impact the learning outcomes of regional, rural and remote students
identify innovative approaches to support improved access and achievement of students both in school and in their transition to further study, training, and employment.

The Independent Review into Regional, Rural and Remote Education (IRRRRE), was released in 2018 and based its findings on 340 public submissions and a broad literature review. The report made eleven recommendations with 53 supporting actions for the recommendations.

Evaluation of the Rural and Remote Education Blueprint (2020)

In November 2013, the department released 'Rural and Remote Education: A Blueprint for Action' ('the Blueprint'). The Blueprint committed funding to implement a set of actions to address the disparity of educational outcomes between metropolitan and non-metropolitan students.

In 2020, CESE completed an evaluation of the Blueprint. The evaluation examined the implementation and impact of actions in the Blueprint. It examined education performance indicators to assess any changes in the gaps between metropolitan and non-metropolitan students. Overall, the evaluation found that:

the 50% rental subsidy had little impact on teacher retention
the gaps between rural and remote and metropolitan students have generally not reduced on key indicators related to student achievement
education networks and networked specialist centres have had little impact
virtual school Aurora College provides an important opportunity for gifted and talented students in rural and remote areas
enrolments of 4 and 5-year-old Aboriginal children in community preschools in rural and remote areas have increased.

A Review of Rural and Remote Incentives in New South Wales Public Schools (2021)

In late 2020, due to the ongoing challenge of attracting and retaining staff in rural and remote schools, the then Minister for Education and Early Learning requested a review of rural and remote incentives offered in New South Wales. The review examined the current operation of the incentives offered and their role in attracting and retaining teachers to work in rural and remote locations.

A report of this review was released in September 2021. The report found that:

financial and non-financial incentives provide useful levers which contribute to the attraction and retention of staff in rural and remote schools but are only part of teachers’ motivation
a number of changes could be made to current incentives to increase their impact
other critical system features are fundamental enablers of the incentive scheme (for example, intake mechanisms, experience and training opportunities, and whole-of-government responses)
incentives should be designed and administered as part of a broader strategy which takes account of the range of rural and remote factors, including incentives.

The report made a number of recommendations including to:

provide a distinct, supported, and long-term pathway for rural and remote teaching
update the 'transfer points' system to account for a wider range of factors (see section 1.5)
simplify the incentives scheme with wider eligibility criteria and better targeting for retention
provide wraparound supports to ensure sufficient preparation prior to every entry point
take a whole-of-government approach to address systemic challenges such as housing
improve transparency, monitoring, and reporting against specific measures.

1.5 Additional funding to address disadvantage

School funding.

In December 2011, a report on the 'Review of Funding for Schooling' was released by the Australian Government Department of Education. The report made 41 recommendations and led to a greater focus on needs-based funding for schools. This is reflected in the principles of the Australian Education Act 2013 . The Act details the School Resourcing Standard (SRS), which provides an estimate of how much funding a school needs to meet its students' educational needs. The SRS has formulae to calculate a base amount and up to six needs-based loadings.

In terms of needs-based funding in New South Wales, the department uses the Resource Allocation Model to allocate funds to New South Wales public schools. This model makes specific provision for location funding as part of its base school allocations. This funding is in recognition of the disadvantage experienced by students in remote and isolated areas. As part of this model, remoteness is measured using the Accessibility/Remoteness Index of Australia (ARIA+).

Staffing incentives

The department offers a range of benefits and incentives to attract and retain permanent, temporary teachers and executives working at certain rural and remote public schools.

Each school is allocated one, two, four, six or eight 'transfer points'. The more remote the location, the higher the number of transfer points, with eight-point schools mostly being those in far-western areas. Permanent teachers accrue transfer points per year of service and can use these points to have a priority transfer to their preferred school following a period of service in a rural and remote location.

The level of financial and professional (non-financial) benefits are generally aligned with the number of transfer points assigned to the school. These include:

Financial incentives:

recruitment bonus of $20,000 (where applicable)
relocation payment of up to $8,000
rural teacher incentive of up to $30,000 (less the value of rental subsidies)
rental subsidy varying between 50–90% (deducted from rural teacher incentive)
stamp duty relief payment up to $10,000
retention benefit of $5,000 per annum for up to ten years (applies to selected schools only)
experienced teacher benefit of $10,000 per annum for up to five years.

Professional (non-financial) incentives:

ten-week trial placement prior to permanent appointment
additional personal leave of between two to five days
additional four professional development days
priority transfer after a set number of years (period varies based on points accrued).

1.6 About the audit

The objective of this audit was to assess the effectiveness of the Department of Education’s activities to ensure that regional, rural and remote students have access to the same quality of early childhood, school education and skills pathways as their metropolitan peers.

The audit focused on organisational activities undertaken between 2018 and mid-2023.

The audit interviewed 12 schools as case studies, including a mix of school types and locations across regional New South Wales (South Coast, South West, North West).

This audit also examined four program initiatives aligned with key focus areas in the strategy:

Curriculum reform program – Assistant Principals, Curriculum and Instruction
Early childhood education – Start strong preschool funding program
Educational pathways program
Teacher supply strategy.

2. Strategy development

This chapter examines the process to develop the Rural and Remote Education Strategy (2021–2024). It considers whether there was a comprehensive program of stakeholder consultation, whether relevant research and evidence was incorporated and whether an effective performance monitoring system was established.

The department made genuine efforts to consult with stakeholders on the new strategy

The department had a clear process to engage and obtain feedback from key stakeholders during the development of the new strategy. It developed a range of documents to support the consultation process including a stakeholder engagement plan, communications plan, and presentation. The department used the International Association for Public Participation (IAP2) Spectrum of Public Participation principles to help ensure that relevant stakeholders were included in the planning and decision-making process.

In late 2019, the department began its first phase of consultations with internal and external stakeholders to get their views on rural and remote education. It consulted internally with department directors, advisory groups, and learning communities, and externally with government agencies, service providers, non-government schools, and universities.

In March 2020, the department developed a stakeholder engagement paper to test the key issues from stakeholder consultations. Four focus areas were identified and included in a consultation paper that went out to key stakeholders for the second round of consultations in May 2020.

In the third consultation phase, the department conducted a workshop with stakeholders to review the earlier feedback, prioritise issues, identify gaps, and provide further input.

This consultation process enabled the department to identify issues and challenges to inform the new strategy. However, it was already aware that the blueprint was having limited success, and had already identified potential focus areas, following the evaluation of the blueprint in 2019.

The department did not consider recent research when developing the new strategy

The department's guidance materials promote the importance of considering research during policymaking. The guidelines describe the need to understand a topic, consult with stakeholders, identify gaps in existing knowledge, and ensure future work is informed by current literature.

In 2013, the department published a literature review on rural and remote education to inform the blueprint. The literature review found that students in rural and remote schools were not performing as well as their metropolitan peers, and that this performance gap was widening. The review attributed this to the higher number of children from low socio-economic backgrounds attending rural and remote schools. The review also identified several other factors that could negatively impact performance outcomes for rural and remote students. The department used the findings of the literature review to develop the key focus areas in the 2013 blueprint.

When the department began developing the new rural and remote education strategy in 2019, it recognised the need to review the literature on recent international initiatives. However, it has not yet released this review. This means that the department could have missed important new developments since it last examined the literature in 2013. Incorporating up-to-date research is important where past strategies have not met all their intended outcomes.

A national review into rural and remote education in 2018 examined Australian and international literature to inform its findings. The review made 11 recommendations to the Australian and state governments. While the NSW Government was not required to formally respond to the review, it could have considered the work done by that review when developing the new strategy. Several review recommendations are addressed in the strategy, while several others are only partly addressed. Gaps between review recommendations and specific strategy actions include improving the availability of quality accommodation, substantially reducing the waiting times for specialist assessments of students with learning difficulties and disabilities and increasing access to high quality distance education.

In 2019, the department commissioned a rural and remote project to contribute a research and evidence base to the new strategy. The main aim of the project was to help the department understand how it could better support rural and remote schools to increase educational outcomes. There was not enough time for this review to be completed prior to the release of the strategy. As of June 2023, the research project had not yet been released.

The strategy did not address all findings and recommendations from a recent evaluation

In 2020, the department's Centre for Education Statistics and Evaluation (CESE) published an evaluation of the blueprint. The evaluation examined how the actions in the blueprint were implemented. It recommended that a new strategy be developed, and made recommendations for things that should be incorporated into the strategy.

The blueprint aimed to ensure students in rural and remote areas could access the same quality of education as their metropolitan peers. The blueprint identified four focus areas to meet that aim:

quality early childhood education
great teachers and school leaders
curriculum access for all
effective partnerships and connections.

The department developed several initiatives to help meet the objectives of each of the four focus areas. These initiatives are described in Exhibit 5 below.

Exhibit 5: Key initiatives in the Rural and Remote Education Blueprint (2013)

Quality early childhood education
Great teachers and school leaders
Curriculum access for all
Effective partnerships and connections

The evaluation found that initiatives in two of the four focus areas – Quality early childhood education and Curriculum access for all – had performed well. However, the evaluation found that initiatives in the other two focus areas – Great teachers and school leaders and Effective partnerships and connections – did not achieve intended outcomes.

On the whole, the evaluation found that the 'remoteness gap' between rural and remote students and metropolitan students had not reduced since the blueprint was introduced. It recommended that the department continue its focus on rural and remote education by developing a new evidence-based strategy that focused on student outcomes and clear measures of success.

Objectives and actions in the new strategy were similar to those in the blueprint

The 2021 strategy sets an overall vision that 'every child in regional New South Wales has access to the same quality of education as their metropolitan peers'. It also states that the department 'is committed to ensuring all rural and remote students have equitable access to educational opportunities'.

Exhibit 6: Comparison of objectives in the blueprint and the new strategy

Provide more children with access to quality early child education in the year before school.	Ensure all students have access to quality preschool in the year before school.
Ensure rural and remote schools have greater capacity to attract and retain quality teachers and leaders.	Increase supply of high-quality educators in rural and remote communities.
Build the capacity of teachers and leaders in rural and remote schools.	Better develop rural and remote teachers to deliver quality learning opportunities.
Address wellbeing needs through effective partnerships and connections.	Address wellbeing needs through connections with local communities.
Develop partnerships so that rural and remote students have access to quality pathways into further education, training, or employment.	Build partnerships to increase student access to post-school opportunities.

Four areas in the blueprint remained a focus in the new strategy – early childhood education, teacher recruitment and retention, curriculum, and student wellbeing support services. Each focus area identifies a goal, as well as the aims and actions that contribute to those goals.

While this shows the department identified that these areas required continued attention, most actions were to 'increase', 'expand' or 'improve' existing programs and resources. The new strategy did not propose any new ideas or solutions, despite the blueprint achieving limited success in improving outcomes for rural and remote students.

There were no baseline or target measures set to monitor progress of the new strategy

The blueprint evaluation recommended that the department develop a new evidence-based strategy which focused on improving student outcomes. It also recommended the department use a program logic methodology to ensure there was a clear definition of success, adequate measures of success, and continual monitoring to ensure success.

Program logic models are a visual representation of the various components of a program. They can be used to illustrate program priorities, inputs, activities, outputs, outcomes, and assumptions. Logic models are used to explain how a proposed solution will address a specific problem. They are important because they can help test assumptions, build business cases, and identify potential enablers or barriers that could impact the project.

The department did not complete a program logic model during development of the new strategy, nor did it define measures to monitor whether the strategy's overall vision for quality education or the commitment to equitable access was on track to be achieved.

The department has not comprehensively monitored changes in educational outcomes in regional, rural and remote areas since the evaluation of the blueprint in 2020. This evaluation had seven indicators of educational outcomes by remoteness. The measures used in the evaluation could have provided a starting point given the similarity in focus areas between the blueprint and the new strategy. Not addressing past review recommendations increases risks that issues will be repeated.

The policy unit advised it has plans to set up a dashboard to monitor performance across the department's business plan measures by remoteness. This is intended to identify areas where system-wide improvements are required. This is not a comprehensive account of the strategy outcomes because the business plan measures don't capture all the goals of the strategy.

There were no timeframes or resources identified for implementing new strategy actions

The strategy has an overall timeframe of 2021–2024 but does not clarify when it expects the vision, goals, or aims to be achieved, or actions to be implemented.

The department's guidance on policymaking sets out how projects should be transitioned between the policy and implementation teams. This guidance is intended to help ensure the policy intent and scope of the project are not lost during the delivery of the project. The guidance highlights that the policy team should establish clear project implementation timeframes. It is important to have clear timeframes because it enables teams to measure progress, manage resources, and prioritise actions to ensure project outcomes are achieved.

The strategy states that there is a further $1 billion of investment planned over the next three years for rural and remote education but does not identify how this is allocated across its focus areas. It is important to identify the resources required to support the implementation of a program so that program objectives are met in a timely and cost-effective manner. The previous blueprint identified much lower funding of $80 million but more clearly showed how it would be allocated for identified actions across the four focus areas.

In response to our requests, the department separately identified $1.286 billion in expenditure for regional, rural and remote schools referenced in the strategy. Most of this expenditure related to existing department programs and activities rather than new initiatives. The total amount included:

$576.9 million for new and upgraded schools
$365.8 million for upgraded information technology equipment and resources
$120 million for school facility upgrades to be co-funded by schools
$60 million to replace school roofs
$60 million for the COVID Intensive Learning Support Program
$32 million for the Early Action for Success program
$29.7 million for staffing incentives
$21.7 million for literacy and numeracy interventions
$18.8 million in school location allowances
$1.45 million for the Rural Learning Exchange Pilot
$0.4 million for Rural and Remote Network initiatives.

3. Strategy implementation

This chapter examines the arrangements in place to implement the strategy. It considers whether effective governance arrangements are in place and how progress is monitored and reported.

3.1 Governance arrangements

The role of the policy unit in driving implementation was not initially clear.

There was initial confusion about what role the policy unit would play in implementing the strategy. Prior to the strategy release, the department had proposed implementing the strategy using a system-wide approach across relevant functional areas. Once the strategy was released, the then Minister announced a new policy unit that would be tasked with implementing the strategy. This meant responsibilities during the first stages of 2021 were unclear.

On 3 February 2021, the then Minister for Education and Early Learning released the strategy and announced the creation of a Regional, Rural and Remote Policy Unit. The then Minister said 'the new unit would be devoted to raising regional, rural and remote students’ educational outcomes, and implementing the government’s ambitious reform agenda in regional, rural and remote schools'. The then Minister also said 'kids in the regions need a team that can drive reforms and implement programs to eliminate the equity gap that exists between the bush and the city'. On 17 February 2021, at a speech following the strategy launch, the then Minister stated the 'new unit will implement reform under the newly introduced Rural and Remote Education Strategy'.

During strategy development, there was not enough consideration given to arrangements to support successful implementation. The project management plan for development of the Rural and Remote Education Strategy kept arrangements for implementation out of scope.

The department's policymaking guidance encourages teams to plan for implementation when developing policy. It directs teams to establish project management fundamentals including processes, timeframes, sequencing, interdependencies, accountabilities and risks.

There was no dedicated team in place at the commencement of the strategy, which slowed its momentum. After the announcement in February 2021, an Executive Director commenced in August and most of the team had started by mid-2022.

During the second half of 2021, the new policy unit worked out how it intended to implement the 'systems approach'. Under this approach, it has defined a role as working with different areas of the department and outside agencies to improve regional, rural and remote outcomes. It aims to do this by providing an evidence-base and structures to inform change to existing policies and programs, and to guide development of new initiatives where needed.

Key risks to implementation were raised multiple times are yet to be fully addressed

At several points during strategy development and implementation, the policy team raised risks relating to the level of commitment across the department to the strategy. The lack of a well-resourced team, lack of separate strategy funding and lack of strong governance arrangements at the commencement of the strategy increased these risks. Initial actions to mitigate the risks were not effective as the risks continued to be raised throughout 2021 and 2022.

In March 2020, the department developed a project management plan for the strategy, which raised risks that different areas of the department would not understand they would be responsible for funding identified initiatives. The plan proposed discussions with relevant areas, providing clear information on expectations and tracking deliverables as actions to mitigate those risks.

In December 2020, the Rural and Distance Education team raised risks to the department executive relating to the lack of additional funding to target objectives and initiatives of the strategy, and that directorates may not embed the strategy's goals and actions in their work streams. The team did not clearly outline how it proposed to mitigate these risks.

In May 2021, the Rural and Distance Education team again raised risks to the department executive relating to the timely development of a strategy implementation plan. This was due to inadequate team resourcing and poor engagement from different areas of the department. It proposed hiring additional internal and external staff to meet its needs.

In July 2022, the Rural and Remote Education policy unit raised risks to the department executive relating to engagement from different areas of the department. These included competing priorities and misalignment of expectations. The actions to mitigate those risks were finalising the governance approach and developing a stakeholder engagement plan.

As at March 2023, the Rural and Remote Education policy unit risk register identified risks across five areas:

gaps in student outcomes are not reduced in line with targets
governance arrangements are ineffective
stakeholder relationship management is sub-optimal
communication and media engagement is sub-optimal
operational resilience is sub-optimal.

The main controls to mitigate these risks rely on oversight by the Rural Assurance Steering Committee. The role of the steering committee is limited by a lack of monitoring and reporting on the gaps in student access and outcomes across different educational and wellbeing areas. At this stage, the steering committee has only met three times so it is too early to tell how effective it will be at mitigating the remaining identified risks.

The risk previously raised on multiple occasions, that different areas of the department are not sufficiently committed to delivering initiatives in the strategy, is not included in the risk register.

Initial governance arrangements were not fit-for-purpose for strategy implementation

The blueprint evaluation in 2020 had recommended 'strong, central coordination enabling continual monitoring and adjustment of initiatives as required'. It was important for the department to have in place governance arrangements that supported central coordination and decision-making.

In early 2020, the department established the Rural and Remote Education Project Control Group. This group aimed to provide executive direction and visibility of rural and remote initiatives, with the Director, Rural and Pathways coordinating the secretariat. The group had frequent turnover in leadership (six different Chairs across its eight meetings) and mostly served as a forum to provide information updates and seek feedback rather than to make decisions.

The project control group met four times before the launch of the strategy (April, July, September, and December 2020). The group provided updates and took feedback from members on development of the strategy and key programs affecting regional, rural and remote areas. There were three different Chairs across the four meetings in 2020 and few decisions made.

After the launch of the strategy, the project control group met another four times (April, July, September, and December 2021). The group operated in much the same manner as it had prior to the strategy being announced. It continued to provide updates and take feedback from members on progress with the strategy and key programs affecting regional, rural and remote areas. There were three different Chairs across the four meetings in 2021 and few decisions made.

The group did not meet its stated terms of reference to provide:

a whole of department/system approach to regional, rural and remote issues
advice on actions, indicators and achievable outcomes for the strategy
advice on recommendations to overcome barriers to student learning outcomes
advice on emerging risks and strategies to prevent or mitigate these.

Terms of reference for the group were endorsed on 11 March 2020 and updated on 17 June 2021. There were no significant changes made to the functions of the group between development and implementation of the strategy (Exhibit 7). We expected to see greater explanation of how governance arrangements would support implementation of the whole of systems approach (identified as central to the strategy) and monitor the progress of identified actions across different areas of the department.

Exhibit 7: Functions of the project control group, 2020 and 2021

There was a gap in governance during 2022 as new arrangements were developed

In December 2021, the newly formed policy unit identified its next steps as working with a central team on enterprise-wide governance arrangements. Under enterprise-wide arrangements, the Rural and Remote Education Strategy (2021–24) is identified as a horizontal program (Exhibit 8). The policy unit made two proposals in March and July 2022, which took until December 2022 to commence. This meant there was a gap in formal cross-department governance for the strategy from December 2021 to December 2022.

Organisational diagram shows the NSW Department of Education's governance structure and key groups. The structure includes Executive Committees, Sub-committees, Program teams, and Horizontal Programs. The Rural and remote strategy is a horizontal program.

Exhibit 8: Department governance structure and key groups
The highest level of department governance. Attended by the Secretary, deputy secretaries, and other key staff. Considers business in two forums: Sub-committees are attended by deputy secretaries and key executive directors who govern and ensure delivery of specific components of the department’s strategy. There are four sub-committees across the department. The sub-committees oversee a wide range of programs. These programs bring business to relevant sub-committees, escalating issues or risks, and seeking endorsement for key decisions. Individual programs may have their own governance approaches that inform the day-to-day delivery of their work before it comes to a sub-committee. Some programs are relevant to multiple sub-committees and therefore do not sit within one sub-committee alone. These ‘horizontal programs’ report directly into the executive committee. Horizontal programs engage with relevant sub-committees where there are identified risks or issues affecting the delivery of a horizontal project or workstream or there is a decision required.

In March 2022, the policy unit briefed the department’s executive on a proposed governance structure. This was revised in July 2022 (Exhibit 9). Under this approach, the advisory group reports to the Transformational Executive Committee as well as Sub-Committees where relevant.

Organisational diagram shows the NSW Department of Education's proposed governance structure. The structure includes the Minister, the Secretary/Executive, Regional, rural and remote governance groups, and Strategy and Delivery.

The renamed Rural Assurance Steering Committee first met in December 2022. In this meeting, it set an expectation that 'members assigned responsibility for actions are to make sure they are visible to their relevant sub-committee executive'. The relevant sub-committee, rather than the steering committee, has the main authority to ensure actions are completed.

Because the Rural Assurance Steering Committee has only met three times so far, it is not yet clear how it will choose to escalate issues to the relevant sub-committee or the Executive Committee. If issues must first be raised with a sub-committee, this will slow their resolution. Sub-committees and the Executive Committee must consider a wide range of business and there is a risk that regional, rural and remote issues will not be a high priority.

3.2 Monitoring and reporting on progress

There is no clear performance information to monitor initiatives linked to the strategy.

The strategy set out high level goals against four themes. Under each theme there were a series of 'what we will do' statements. These represented program initiatives in general terms. These initiatives were not specifically defined at the time the strategy was put together but were intended to be identified once the strategy was released.

A department update to the Minister in July 2021 noted that a 'mapping process' was in progress to identify initiatives that will address the strategy aims and that the mapping process would then inform an implementation plan for the strategy. By December 2021, the policy unit had collated an inventory of over 100 programs that it identified aligned with actions in the strategy.

During 2022, the policy unit developed Program Assurance Guidelines (Exhibit 10) to guide it in working with partner directorates to establish clear performance measures for initiatives relevant to regional, rural and remote learning communities, engage with problems affecting the delivery of initiatives, and developing recommendations for program improvements.

Exhibit 10: Rural and Remote Education Policy Unit Program Assurance Guidelines
This phase aims to: This phase aims to: This phase aims to:

The policy unit collates data from program leads to monitor progress of initiatives aligned to actions in the strategy, determine their reach and track performance. From March 2023, it has presented this information to the steering committee quarterly through a dashboard. The dashboard aims to identify initiatives that are not meeting assurance requirements or targets and need intervention.

As of May 2023, 13 of 42 initiatives met all performance targets. One initiative had partially met performance targets, 16 were below targets, and 18 had not finalised a target. Most initiative performance measures are of activities. This means it is difficult to link initiatives to changes in student outcomes and whether initiatives are sufficient to meet the overall goals of the strategy.

It is important for program owners to provide clear metrics on the impact of their work in regional, rural and remote areas. This information is needed for the policy unit to implement its assurance approach, provide clear updates to external stakeholders, and evaluate the impact of programs.

There were no timeframes established to monitor overall progress of the strategy

There was no implementation plan in place when the strategy was released to guide it through its first years. This made it difficult for executives to monitor whether the strategy was on track. The policy unit gave periodic updates to senior executives on its activities but did not have defined timeframes for completing actions.

A draft implementation plan was created in mid-2021 but only had high-level timeframes. It planned for quarterly updates, a mid-point interim report, and a final evaluation report in early 2025.

In December 2021, the policy unit advised the project control group it aimed to develop an implementation plan in the first half of 2022, once program mapping was completed. As at June 2023, there was no finalised implementation plan or timeline.

More comprehensive public communication on strategy progress is required

The strategy document stated that 'regular updates on the successes of the strategy would be made available on our website'. There were no updates as of June 2023. There were plans for a mid-point strategy update to be publicly released at the end of 2022. The policy unit prepared a draft in February 2023, but it was not released.

The department had conducted and publicly released an interim monitoring and evaluation report on the previous blueprint in 2016. This reported on the implementation of specific actions in the blueprint as well as educational performance indicators. This level of public reporting showed better accountability for progress on the blueprint.

The 2013 blueprint created a Rural and Remote Education Advisory Group. This group included relevant stakeholders and aimed to provide a rural perspective on blueprint actions. The advisory group continued to give program updates to stakeholders up to September 2021.

Several stakeholder groups we spoke with reported a mixed understanding of the role of the policy unit in supporting the strategy and also wanted to see more reporting on strategy progress.

The policy unit has developed a stakeholder engagement strategy and communications plan to support its communications. The stakeholder engagement strategy clarifies the purpose of engagement and how stakeholder views will be used to inform the design and delivery of programs and policies. The communications plan defines objectives, key messages, and methods.

As part of this strategy, the policy unit sends out a quarterly newsletter on new initiatives and resources targeted to regional, rural and remote school communities. It has also set up 'Principal Connection Days' in regional, rural and remote locations. These days support school leaders by delivering face-to-face professional learning on resilience and wellbeing. School leaders we spoke with told us about the importance of networking at face-to-face professional learning events and how this was more difficult outside of major cities.

4. Access to quality education

This chapter considers the effectiveness of arrangements to ensure regional, rural and remote students have access to quality early childhood education, school education, and post‑school transitions.

4.1 Early childhood education

Within the department, the Early Childhood Outcomes division is responsible for program funding, policy change, reform and sector transformation. It leads the delivery of early learning and child development initiatives to support children, families and the early childhood education and care sector to improve quality and access to services.

Families in regional, rural and remote areas face unique challenges accessing preschool

Students in rural and remote communities do not always have access to quality preschool education in the year before school. One of the barriers is limited availability of preschools and preschool places, which means that families may have to travel long distances to access services. Public transport in regional, rural and remote areas can be poor or non‑existent which can make it more difficult for families to access preschools.

The department currently provides school‑based preschool to around 4,000 children in 98 public preschools. Most preschool education is delivered by private not‑for‑profit and for‑profit providers. The department provides additional loadings for community and mobile preschool providers in regional and remote areas to recognise greater costs of delivery.

Five of the seven primary and central schools we visited as part of the audit reported difficulty accessing quality early childhood education in their local area (the other two schools offered a preschool service directly). Some of the reported difficulties included no local preschools, no available places in local preschools, and lack of public transport for families to get to preschools. Schools reported this can affect the readiness of children to begin school and can increase the need for specialist supports.

In 2022 and 2023, the department co‑delivered a Preschool Drive Subsidy program with Transport for New South Wales to subsidise the costs families in remote and very remote areas incur in transporting their children to and from preschool.

The department has initiatives to help regional, rural and remote families access early childhood education

Regional, rural and remote areas have higher representation of children who are Aboriginal, from diverse language backgrounds, and/or are from low socio‑economic backgrounds. Children in each of these cohorts are less likely to be developmentally 'on track' by the time they start school. Identifying children's developmental needs early is important because regional, rural and remote areas can have significant wait times to have children assessed, formally diagnosed, and access specialist services.

The department has new early childhood education initiatives to address the unique challenges in providing access to early childhood education in regional, rural and remote areas (Exhibit 11). The department advised that it is setting up teams across the state to support local partnerships with early childhood services and will support access to department programs, projects and funding to lift quality, participation, inclusion and affordability.

Exhibit 11: Department initiatives to support early childhood education
The Start Strong preschool funding program was developed to increase the proportion of children in preschool in the two years before school. The program provides fee relief to families with children in a community, mobile, or public preschool. The department used a program logic methodology for the Start Strong preschool funding program to determine the need, activities, and outcomes of the program. Families and children in regional, rural and remote areas can face barriers in accessing preschool services, including the cost and availability of centre‑based preschools. The department's research indicates that: Children who attend preschool are more likely to have the social, cognitive, and emotional skills they need to learn, and good transitions to kindergarten help improve educational and social outcomes. The department is aiming for universal preschool access, with work currently underway, including on the delivery of 100 new preschools on public school sites and a further 50 on non‑government school sites. The department advised consultation is planned for term 3, 2023 with 36 department preschools and 36 early childhood education services to inform further policy work. Consultation is also planned for determining potential sites for new preschools on public school sites and non‑government school sites. This program was piloted in 2017 and aims to establish a unique preschool program in very remote communities with less than ten preschool‑aged children that do not have any early childhood service options. It currently supports seven very remote communities. The program uses a flexible approach to support children and families who have difficulty engaging in traditional distance learning. Preschool children are enrolled in the distance education program and supported by early childhood teachers. Instead of at‑home delivery, enrolled children attend a space in the school where they are supervised by a School Learning Support Officer and access the program virtually.

The blueprint evaluation found that the number of 'equity children' enrolled in preschool increased between 2013 and 2017. The number of Aboriginal children increased by 45%, and the number of children from low socio‑economic backgrounds increased by eight per cent. However, the number of 'non‑equity' children enrolled in preschool declined. This indicates that department incentives were only partially effective in getting more children into preschool in the two years before school.

School staff we spoke with said that mobile preschools were important for regional, rural and remote communities. They bring early childhood education to areas where it is geographically or financially difficult for families to access centre‑based preschool services. However, we also heard that in some cases families were only able to access a mobile preschool a few days a week. In other cases, families could not get their children into a mobile preschool at all.

The department set a target that 95% of children who are enrolled in an early childhood education program, are enrolled for at least 600 hours in the year before school by 2023. The department has not been regularly producing, monitoring, or reporting on this performance indicator by remoteness but supplied us with data on this measure in response to our requests.

Exhibit 12 shows an increase in the proportion of children who are enrolled in an early childhood program for at least 600 hours in the year before school across all areas of New South Wales between 2018 and 2021. Despite the increase, children in major cities are more likely to be enrolled for at least 600 hours than children in inner regional or outer regional areas.

Column chart shows an increase in the proportion of children enrolled in an early childhood program for at least 600 hours in the year before school across all five remoteness areas of NSW between 2018 and 2021.

4.2 Teaching workforce

The School Workforce unit in the department is responsible for many of the initiatives in the Teacher Supply Strategy (2021–31), including upskilling, retaining, and attracting teachers in regional and remote areas.

Teacher vacancies in rural and remote areas affects the ability of the department to provide quality education

S chools in rural and remote communities do not always have a full complement of staff with the right skills to deliver all areas of the school curriculum. The department is responsible for ensuring that every child receives a high‑quality education under the Education Act 1990 .

One of the biggest challenges facing schools in regional, rural and remote areas is attracting and retaining experienced and curriculum‑qualified teachers. School staff we spoke with reported difficulties recruiting teachers and finding casual teachers to cover absences. This can mean that teachers are unable to attend professional development or training courses to enhance their skills and stay up to date with current teaching methods.

Teacher shortages can also affect the quality of education provided to students. Staff in one school reported having to combine a sizeable portion of its classes in term one of 2023 due to teacher shortages. Schools also reported relying on local retired teachers to cover staff absences, who were not always trained in the subjects they were required to cover. This can mean students have fewer subject choices, inconsistent learning experiences, and lower educational outcomes.

The Teacher Supply Strategy (Exhibit 13) was developed to help ensure there are enough qualified teachers to meet current and future demand across the state. The strategy has three priorities:

grow overall supply of teachers
encourage more teachers to train in high‑need and specialist subject areas
provide targeted teaching support for students in the places it is needed.

Exhibit 13: Department initiatives to increase teacher supply
The Teacher Supply Strategy was designed to address the shortage of teachers in New South Wales. The strategy has three priorities – to grow overall teacher supply, encourage teachers to train in specialist subject areas, and provide targeted teaching support for students. All three priorities include actions to attract, support, and retain teachers in regional, rural and remote areas. The department understands that schools in regional, rural and remote locations face unique challenges in attracting and recruiting teachers. Disincentives for teachers considering moving to rural and remote areas can include social isolation, limited accommodation options, and a perceived lack of support and/or development opportunities. To address these challenges, the department designed several initiatives: – provides experienced permanent, temporary and casual teachers with the opportunity to take up a short‑term placement in a rural or remote school. Teachers receive financial incentives, and support to help them build connections within the community. – aims to help early career teachers who have recently moved to a regional, rural, or remote area feel less isolated. Participating teachers receive a financial incentive and other supports such as an orientation person, peer support, and community information. The aim is to help new teachers build local social and professional connections. – aims to increase the number of teachers in regional, rural and remote locations. Participants receive financial incentives and benefits while completing an initial teacher education qualification, and agree to work in a regional, rural or remote location following the successful completion of their studies. The department used the recommendations of the Rural and remote incentives review (2021) to inform teacher supply initiatives. It also used a program logic methodology to determine how these initiatives would increase the number of teachers in regional, rural and remote schools.

Exhibit 14 shows the number of permanent teacher vacancies, by areas of remoteness, between January 2018 and 2023. For comparison, in 2022 there were 583 schools in inner regional areas, 341 in outer regional areas, 38 in remote areas, and 12 in very remote areas.

Exhibit 14: Number of permanent teacher vacancies (January 2018–23)

Major cities	1,132	952	916	855	1,280	1,246
Inner regional	410	431	256	269	587	523
Outer regional	155	159	108	148	324	314
Remote	25	23	19	32	55	63
Very remote	1	7	6	10	22	22

The department advised that a new position introduced in 2022 (Assistant Principal, Curriculum and Instruction) had the effect of increasing the number of vacancies in all schools (Exhibit 15).

Exhibit 15: Department initiatives to support literacy and numeracy
In July 2022, the department created new executive‑level leadership Assistant Principal (Curriculum and Instruction) positions to support improvements to student literacy and numeracy outcomes. The department found that schools in regional, rural and remote areas face unique challenges recruiting APC&Is. These challenges include a lack of available staff to fill the positions, and a lack of staff that are professionally ready to take up a leadership position. In 2021, the department established a Small Schools Working Party and a Small Schools Advisory Group to understand how to best support schools unable to find an APC&I. It then developed two specific initiatives designed to help ensure rural and remote schools and distance education schools were not disadvantaged. The Virtual APC&I Program is an interim model of support for schools unable to recruit a permanent APC&I. The virtual program has the same aims as the broader APC&I Program, which are to strengthen literacy and numeracy outcomes in schools. However, the virtual program is delivered online. In addition, the department combined the Rural Experience Program with the APC&I Program to fill APC&I positions in rural and remote schools. The joint initiative provides financial incentives for temporary and permanent teachers to take up a placement in a rural or remote school as an APC&I. The position is shared across several schools on a part‑time basis. Schools may jointly advertise for a shared APC&I position to increase the number of applications. While the joint program has several benefits, there are also disincentives for potential candidates. These include the distances APC&I staff are required to travel when working across a network of schools, and the limited availability of housing in rural and remote areas.

Schools we spoke with as part of this audit provided mixed feedback on the APC&I position. Staff in one school reported a smooth transition to the APC&I model. The school recruited two APC&I positions – one full‑time and one part‑time. The APC&Is identified which children needed additional literacy and numeracy support and established a team to provide professional learning support.

Staff in another school said they received funding for a three‑year APC&I position, which was to be shared with another school approximately 180 km away. Staff said, however, that it was difficult to recruit for the position due to the travel distance required to work across both schools.

We heard that the APC&I position was sometimes used to cover teacher shortages, particularly due to the ongoing impacts of COVID-19 absences. We also heard that staff selected for the APC&I position did always have the right expertise to successfully perform the role.

Many teachers are often required to teach outside of their subject specialisation

Data provided by the department shows that many teachers are often required to teach outside of their key learning area or field (Exhibit 16).

Column chart shows many teachers are required to teach outside of their key learning area across all five remoteness areas of NSW.

Teaching out of a key learning area or field occurs when teachers teach a subject or topic that is not in their area of expertise or academic specialisation (university major or minor). For example, when a physical education teacher is required to teach geography. Teachers who teach outside of their key learning area or field may not have the level of subject knowledge to be able to teach the material effectively and this may impact student outcomes.

In our 2019 audit report: 'Supply of secondary teachers in STEM related disciplines', we recommended that the department improve its workforce planning model to better understand and communicate supply and demand for teachers by geographic area. We also recommended that the department increase the proportion of scholarship recipients and practicum placements in priority locations. The department accepted these recommendations, stating it would incorporate new data sources to improve its workforce planning model and work with universities to improve the process for professional experience placements.

4.3 School curriculum

Students in regional, rural and remote schools do not always have access to face‑to‑face schooling or the same range of curriculum choices as students in metropolitan schools. Children and young people in rural and remote areas can sometimes find it difficult to get to a local school. Also, senior secondary students in regional, rural and remote areas may not be able to access some subjects at their local school due to smaller cohorts or access to subject specialist teachers.

The department has developed several approaches to mitigate disadvantage faced by regional, rural and remote students. These include Distance education schools, Aurora College, the Rural Learning Exchange Program, the Access Program, and the Specialist Teacher Stream Program.

The blueprint evaluation recommended the use of 'innovative approaches', such as technology, to help overcome some of the challenges faced by regional, rural and remote students. Technology can help provide students with access to the same subjects as their metropolitan peers, particularly in schools that are unable to access curriculum‑qualified teachers.

Distance education schools enable students to access a broader curriculum, but it is a challenging medium with less teacher‑student engagement than face-to-face delivery

Distance education helps meet the needs of students from preschool to Year 12 whose circumstances make it difficult for them to regularly attend school. Distance education schools also provide individual subject enrolment, widening study opportunities for secondary students and helping them meet the mandatory requirements of senior secondary study.

At mid‑2021, there were 839 primary and 1,747 secondary students enrolled in distance education (full‑time equivalent). The number of enrolments increased from 2,769 in 2018 to 2,540 in 2022.

Students can enrol full‑time in a distance education school for several reasons, including:

geographic isolation
students travelling within Australia
students temporarily resident or travelling overseas
students with a medical condition
pregnant students/young parents
vocationally talented students
students with additional learning and support needs
students in extraordinary circumstances
students affiliated with the national school for travelling show children.

Enrolments in distance education are jointly managed by a student's home school and the distance education school. For a student to be accepted into a distance education school, the principal of the distance education school must be satisfied that the student's needs cannot be met within their home (regular) school or setting, or by accessing other local resources.

Schools we spoke with gave mixed feedback about the distance education model. Some staff reported that distance education gave greater curriculum choices to their students and helped retain them to Years 11 and 12. Other staff said that distance education can be a challenging medium for some students due to limited teacher‑student engagement. This requires students to be self‑motivated in progressing their studies and can result in students dropping out of courses. Stakeholders also reported the quality of distance education differs depending on the school.

Distance education must cater for students across a range of categories with specific needs. Geographically isolated students made up only 11.7% of distance education enrolments in 2022 (Preschool to Year 12) compared with 46.9% of students enrolled due to additional or significant support needs. This increases the complexity of delivering a service that meets the specific circumstances of all students. For example, students travelling within Australia or overseas are less likely to want scheduled face‑to‑face online lessons.

Aurora College offers more subject choices for gifted students, but timetabling can be a challenge for some schools

In addition to the distance education schools, the department operates Aurora College. Established in 2015, Aurora College is a virtual school that delivers specialist and advanced subjects online to gifted and talented students living in rural and remote parts of the state.

We received mixed feedback from stakeholders we spoke with about Aurora College. Some external stakeholders said that Aurora College can offer great opportunities to students. Some school staff said that Aurora offers an engaging and responsive model that is appealing to young people. We also heard that Aurora provides good face‑to‑face teacher‑student engagement, with students being required to go online for every class. However, some stakeholders reported challenges managing the Aurora timetable, and others said the quality of teaching varied.

Stakeholders we spoke with reported perceived competition between distance education schools and Aurora College. Aurora College was originally a selective school for Year 9 and 10 Mathematics and English. However, that provision has been extended to Years 11 and 12. We heard that some schools encourage their more talented students to attend Aurora College, while the less capable students are encouraged to choose distance education.

Several other programs support rural and remote students to access the curriculum

In addition to Distance Education and Aurora College, the department has several other programs to support curriculum access for regional, rural and remote students. These include the Access Program, Teachers in the Field – Specialist Teachers Pilot, Covid Intensive Learning Support Program online option, and the Rural Learning Exchange Program.

The Access Program enables Year 11 and 12 students in rural areas to access the curriculum at their local school. The program commenced in 1990 and currently delivers 73 Year 11 courses and 83 Year 12 courses across approximately 21 small rural schools, which are arranged in five clusters. Students interact via videoconferencing and other technologies. Because subjects are taught by different schools, students have a wider choice of courses and course levels.

The Teachers in the Field – Specialist Teachers Program aims to deliver specialist subjects, including additional Higher School Certificate (HSC) subjects, to students in small rural schools. Specialist teachers will be based at a 'hub' school and travel to other schools within a cluster of schools. Teachers will be employed on a full‑time temporary basis for up to two years. Under the program, students will receive face‑to‑face learning from in‑field specialist teachers to complement other options, such as distance education. The department expects the program to be delivered to approximately 30 regional, rural and remote schools in Term 1, 2024.

The Covid Intensive Learning Support Program provided small group tuition, aiming to help address students who were disadvantaged by the impact of COVID-19 and natural disasters. The department developed an option for the program to provide small group learning through an online platform to schools to find teachers to deliver the program face‑to‑face. As part of our 2021 'COVID intensive learning support program' audit report, we found the online tuition program had the potential to provide ongoing support to schools in regional, rural and remote areas.

The Rural Learning Exchange Program supports small schools in rural areas by facilitating online collaboration between teachers and students studying for the Higher School Certificate. This program also aims to improve the curriculum skills of rural and remote teachers through peer interactions and access to specialist resources. Eighty‑three schools took part in a pilot of the program between 2020 and 2023.

Despite the department's range of programs, students in regional, rural and remote areas are less likely to enrol in higher level HSC English and Mathematics courses compared to students in other areas (Exhibit 17 and Exhibit 18).

Bar chart shows regional and remote students were less likely to enrol in higher level Higher School Certificate English courses compared to students in other areas across all five remoteness areas of NSW between 2018 and 2021.

4.4 Wellbeing support

The Learning and Wellbeing arm of School Services is the area of the department that has lead responsibility for supporting wellbeing in schools.

Regional, rural and remote schools reported difficulty accessing wellbeing support services

Wellbeing is defined in departmental policy and strategy documents broadly, and as directly linked to learning and positive learning outcomes. Wellbeing can be described as the quality of a person’s life. It is more than the absence of physical or psychological illness. Wellbeing, or the lack of it, can affect a student’s engagement and success in learning.

The School Counselling and Telepsychology Rural and Remote Schools program provides mental health and wellbeing services to students in rural and remote areas through face-to-face and video conferencing. It also provides professional learning for staff and school communities to support student wellbeing. Between Term 1 2021 and Term 2 2023, 2,826 students in 138 schools were supported by the program. The department is currently finalising an evaluation of the program.

Schools we spoke with as part of this audit reported mixed feedback with online wellbeing services. School staff said it is helpful to have online support, particularly where there are no local services, but students with additional learning needs can find it difficult to engage online. School staff also said that online support worked to an extent, but only if in-person support is provided as well.

In 2022, the department introduced the 'Team Around a School' model. The model aims to ensure 'readily available access to specialists and experienced staff to provide timely and accurate support and advice on wellbeing matters'. The specialist support provided by the team includes linking to external agencies and third-party providers.

There are 28 'Team Around a School' units set up around the state. Each unit in regional, rural and remote areas supports between three and five principal networks (between 60 and 100 schools). Having a large number of schools to service, combined with long travel distances, can make it difficult to provide face-to-face services to schools in need of support. For example, a team based in Dubbo supports around 90 schools across Western New South Wales (Exhibit 19).

Map shows that one Team Around a School based in Dubbo supports 90 schools across Western NSW.

Program staff we spoke with told us of difficulties attracting and retaining specialist support staff to some regional, rural and remote areas. They also reported difficulties with travel distances for face-to-face assessment and support. Both these factors affect the capacity to deliver early access to wellbeing support services. Ten of the 12 schools we visited as part of the audit reported difficulties accessing internal and external support services.

Our 2019 audit report, 'Wellbeing of secondary school students', recommended the department develop a service model and commensurate resourcing for wellbeing activities. The department's response indicated that it was improving its systems to monitor engagement with schools and the impact of these activities. The department advised it monitors service patterns, response times and areas of high demand across geographical areas of the state. This is important to ensure that students in regional, rural and remote areas have early access to services when required.

The department's data shows that as of May 2023, there were around 15,000 active Team Around a School support cases. Of these, around 8,500 were in regional, rural and remote areas. The most common category of support in regional, rural and remote areas was for 'behaviour' issues. In metropolitan areas, the most common category was for 'access' to services. Monitoring activity levels is not sufficient to determine whether there are gaps in access to services as it does not show the underlying level of demand for services or waiting times.

Small and isolated schools play a dual role as the community point for external services, but do not receive additional supports

The physical health and wellbeing of a child has important long-term educational, health, and social outcomes. Health services are critical to ensuring that families and children stay healthy.

Communities in regional, rural and remote areas, however, tend to have fewer or no local health services and a higher number of people from lower socio-economic backgrounds. Children from low socio-economic backgrounds tend to be less 'on track' in terms of their physical and mental wellbeing by the time they start school.

While the majority of schools we spoke with reported difficulties accessing external services, these challenges can be especially acute for small and isolated schools, and teaching principal schools (Exhibit 20). Staff at one teaching principal school reported long wait times of up to six months for children to see a paediatrician, and three months to see the local GP. School staff said they work with parents to make appointments, and often a teacher and an aide will drive children to appointments. This can have a significant impact on the operation of the school and the educational outcomes of students. This is because it can be especially difficult for these schools to find casual teachers to provide temporary cover.

Some small teaching principal schools in isolated areas play a dual role as the community point for allied health services to fill the gap. While these sorts of arrangements support student and community access to essential services, they are generally facilitated by the teaching principal in addition to their normal workload.

While isolated schools receive additional funding to address disadvantage experienced due to location, they report it is often not enough to meet the additional needs of their students.

Teaching Principal Schools are unique educational settings where one person is responsible for both the management responsibilities of a principal and the teaching responsibilities of a classroom teacher. These schools have fewer enrolments, and are typically located in regional, rural and remote areas of New South Wales.

There are approximately 450 Teaching Principal schools across New South Wales with around 400 of these in regional, rural and remote areas. Teaching Principal schools make up about 20% of all government primary schools. The red dots in the image below show the location of the smallest teaching principal schools (TP1) and blue dots show larger teaching principal schools (TP2).

Map shows the geographical location of 450 Teaching Principal Schools across NSW.

Exhibit 20: Teaching Principal Schools
Teaching Principal schools face unique challenges that can affect the educational outcomes of students, including limited access to essential government services and supports, such as health and social supports. One teaching principal school in western New South Wales has 11 students. The local community has a low socio-economic status and a high unemployment rate, which can contribute to educational disadvantage. The community is geographically isolated and has limited access to essential government services. A converted room in the principal's residence is being used by government service providers to deliver important health services to the local community. One teaching principal school in north-west New South Wales has six students. The local community has a low socio-economic status, which means that its students have a higher level of educational disadvantage compared to other schools. The community has no access to allied health services. The Royal Flying Doctor Service provides GP and dental services, and an Aboriginal medical service travels 100 km to provide health checks and vaccinations. The region is prone to flooding, and the school becomes the local meeting and rescue point during emergencies.

4.5 Facilities and assets

Regional, rural and remote schools face longer wait times and higher costs to purchase, maintain, and repair some assets.

The department describes school infrastructure as a key enabler for 'building the foundations for learning in early childhood, through teaching and learning in schools and into lifelong learning for a highly skilled and adaptive workforce'. This includes satisfaction and suitability, disability access, and maintenance of school infrastructure.

School Infrastructure NSW is the area of the department responsible for maintaining school assets. Non-urgent repairs, to keep an asset safe and operational, are scheduled by School Infrastructure NSW depending on the asset. If schools need an essential or urgent repair, for a broken window, roof leak, or electrical fault for example, they can log a maintenance request.

Up to mid-2023, the department used a whole-of-government maintenance contract for school infrastructure. Some assets, which are more likely to be located in regional, rural and remote areas, were not covered under the contract. These included: demountable air-conditioning, antennas and satellite dishes, irrigation systems, water tanks, and shade cloth shelters. The maintenance of these assets, and the cost of maintenance, was the responsibility of the school. From 1 July 2023, the department moved to a new maintenance contract that will centrally cover maintenance of more items that schools had previously been required to fund.

The department provides additional 'location' funding to schools in outer regional, remote, and very remote areas based on their distance from population centres and other schools. This funding aims to recognise the additional costs of goods and services outside of metropolitan areas. Schools we spoke with reported the location funding did not fully meet the additional costs they faced due to their remoteness. They reported using their location allowance to pay for the additional costs relating to a range of areas including school excursions and learning events, staff professional development, technology, and repairs and maintenance.

Six of the 12 schools we spoke with reported high maintenance and repair costs. They reported this is due to the additional costs associated with remoteness, including labour, materials, travel, and accommodation. Higher costs can impact small schools with modest budgets. Staff in one school told us that they hired a grant writer to help apply for additional funding to cover the cost of repairs. It can also impact schools that need to make reasonable adjustments for students. Three schools reported the high cost of installing structures to provide protection for students from the sun and rain, including ramp cover for students with disability.

In addition, ten of the 12 schools we spoke with said they were not able to get repairs done in a timely manner. Two schools reported waiting four months for broken classroom windows to be repaired. While schools are able to employ local tradespeople, we heard that many schools were unable to source labour locally and had to rely on out-of-area contractors which can take time.

Further, schools in regional, rural and remote areas face additional costs when procuring some equipment types. They pay more for delivery and have longer wait times, by up to an additional ten business days, for products such as seats, desks, workstations, storage, and first aid furniture.

4.6 Skills pathways

The Skills and Pathways team is responsible for improving education and career outcomes for secondary students by introducing them to a range of vocational training and employment pathways.

The Department has initiatives to improve student career outcomes, but there are challenges accessing these due to distance and limited local opportunities

Students in regional, rural and remote areas do not have access to a breadth of training opportunities at training providers aligned with their aspirations.

Three of the six central and secondary schools we visited as part of the audit reported difficulty accessing vocational education and training. Schools reported strong interest from senior students in vocational education and training but practical difficulties with timetabling, transportation and work experience placements. School staff told us that some of their students were not experienced using public transport, which can make it difficult for them to get to training or work experience placements. We also heard that it can be difficult for schools to find local work experience places for students relevant to their training programs.

The Educational Pathways Program aims to help improve student career outcomes (Exhibit 21). Program staff reported they had used insights from the evaluation to improve the pilot program to better support rural and remote students. School staff we spoke with reported receiving strong support from the program's on-site careers advisors, school learning support officers, and program coordinators. These staff provide careers advice, make local connections with the community, businesses, and educational providers, and help arrange courses and work placements. Outside of the program, staff reported receiving limited support from the department with those things.

Exhibit 21: Department initiatives to support post-school pathways
The Educational Pathways Program is designed to help prepare secondary students for the transition between school and tertiary education and/or employment. The program aims to improve career outcomes for secondary students by ensuring they have access to career guidance, vocational training pathways, and opportunities to undertake apprenticeships, traineeships, and work experience. In 2020, the department began a pilot of the Educational Pathways Program in 24 schools across south-west Sydney and the north coast. In 2022, the pilot program was expanded to 145 schools in nine regions, including several regional, rural and remote areas. The pilot program was evaluated in June 2021. The evaluation found that rural and remote students face additional barriers when accessing educational pathways compared to metropolitan students. These barriers included the availability of public transport and local business or industry partners in regional, rural and remote areas. This can mean that students may turn down vocational training or employment opportunities due to a lack of suitable transport options, or students may not have access to opportunities. The department expanded on the findings of the evaluation by conducting a series of focus groups to understand whether the pilot program was meeting the needs of students, and identify where the program could be improved. It also collected information about the specific challenges facing rural and remote students in accessing a quality range of vocational education opportunities. The department found that students in rural and remote locations have limited or no transport options, higher transport costs, a lack of face-to-face vocational training options, and a lack of qualified vocational teachers.

The number of students in regional and remote areas commencing a vocational course or apprenticeship has decreased since 2018

Vocational education and training (VET) courses delivered to school students in New South Wales are delivered by either a school based registered training organisation (RTO), or another RTO approved by the department to deliver VET courses to secondary school students.

In March 2021, the New South Wales Government released the report 'In the same sentence: Bringing higher and vocational education together'. The report provided advice on how the state’s VET system could address ongoing and emerging skills shortages, paying regard to its quality, efficiency and complexity. The review cited data on the reasons employers were dissatisfied with training. Nationally, the proportion of surveyed employers reporting the reason for dissatisfaction as 'poor access to training in regional or rural areas' increased from 12.2% in 2019 to 19.2% in 2021. In relation to school students, the report suggested that greater collaboration was needed in the development of innovative delivery models (including through remote learning).

The department's 'Pathways for Secondary Students Strategy' aims to address the challenges students face in pursuing vocational pathways including vocational education for secondary students and school-based apprenticeships or traineeships.

Exhibit 22 below shows an increase in the proportion of students in major cities enrolled in a VET in Schools course between 2018 and 2021. The proportion of students in regional and remote areas enrolled in a VET in Schools course over the same timeframe was relatively constant.

Column chart shows an increase in the proportion of students in major cities enrolled in a Vocational Education and Training Course between 2018 and 2021. The number of regional, rural, and remote students enrolled remained relatively constant.

School based apprenticeships and traineeships provide students with the opportunity to attain a Vocational Education and Training qualification and their Higher School Certificate while gaining work skills and experience through paid employment.

Exhibit 23 below shows an increase in the number of students commencing a school-based apprenticeship or traineeship between 2018 and 2022 for most areas. There was an increase in commencements in major cities, inner regional and remote areas but a decrease in commencements in outer regional and very remote areas over this timeframe.

Exhibit 23: Number of school-based apprenticeship or traineeship commencements, 2018 to 2022

Major cities	710	803	825	859	887
Inner regional	383	422	363	453	472
Outer regional	265	252	253	231	220
Remote	7	21	28	25	27
Very remote	9	9	12	8	2

5. Educational and wellbeing outcomes

This chapter considers the department's arrangements to monitor educational and wellbeing outcomes of students by remoteness. It reports on differences in outcomes between students in metropolitan areas and those in regional, rural and remote areas.

Those living in regional, rural and remote areas can have greater difficulty in accessing government services, often needing to travel long distances, or facing lower service levels than provided in major cities. This context is important when considering educational and wellbeing outcomes, given the disruptive effects of waiting or missing out on important services.

The rest of this chapter details key measures in the department's outcome and business plan.

5.1 Student educational outcomes

Equity is a stated priority, but the department is not doing enough to report performance.

The department's strategic plan (2018–23) identified 'equity' as a value, aiming to 'ensure all New South Wales students have access to a quality education, regardless of who they are or where they live'. It set six outcomes and 16 indicators to measure progress against those outcomes. It allocated three indicators to the 'equity' outcome but there were none specific to regional, rural and remote areas:

increased proportion of Aboriginal students attaining the HSC, while maintaining their cultural identity
reduced gap between Aboriginal and non-Aboriginal students in literacy and numeracy, as well as sense of belonging, expectations for success and advocacy at school
reduced socio-economic gap in literacy and numeracy, as well as sense of belonging, expectations for success and advocacy at school.

The Outcome and Business Plan (2022–23) outlines the department's outcomes and how it intends to achieve them, including performance indicators. It set seven corresponding targets for improving outcomes for Aboriginal students and students with low socio-economic status backgrounds but no targets for students from regional, rural and remote areas.

The department's annual reports for 2021 and 2022 state that it 'monitor(s) performance data for our key targets, focusing on our cohorts and students in most need: Aboriginal students, students from low-socioeconomic-status backgrounds, rural and remote students, and students with disability'.

Despite this statement, we did not see any evidence that the department was regularly producing, monitoring, or reporting data on the business plan indicators split by remoteness. We expected the department to produce and monitor this data as part of its normal operations as it is a defined equity category in the strategic plan. This data is also critical to understanding how it is meeting the needs of regional, rural and remote students and, if it is not, whether changes are required.

In response to our requests, the department produced data for key business plan indicators disaggregated by remoteness. This data is outlined in the following sections.

Children outside of major cities are less likely to be on track as they enter school

The Australian Early Development Census (AEDC) is a national measure of children’s development, as they enter their first year of full-time school. Conducted every three years, the AEDC assesses children against five domains of early childhood development:

language and cognitive skills (early literacy and numeracy skills)
communication skills and general knowledge
emotional maturity
social competence
physical health and wellbeing.

Exhibit 24 shows that in government schools in 2021, 55.3% of children in major cities were on track on all five AEDC domains compared with 51.9% of children outside major cities. The proportion of children on track on all five domains declines with the level of remoteness.

Column chart shows 55% of children in major cities in NSW were on track against all five Australian Early Development Census domains in 2021. The proportion of children on track against all five domains declined with the level of remoteness.

Children outside of major cities are less likely to meet reading and numeracy standards

The National Assessment Program Literacy and Numeracy (NAPLAN) is a national measure of literacy and numeracy of school children at Years 3, 5, 7, and 9. The national minimum standards describe some of the skills students can generally demonstrate at their particular year of schooling, in a specific subject area. Students who are below the national minimum standard have not achieved the learning outcomes expected for their year level and are at risk of being unable to progress satisfactorily at school without targeted intervention.

There is a clear pattern of a higher proportion of children in major cities above minimum standards compared to students in inner regional, outer regional or remote/very remote areas of New South Wales. Averaged across Years 3, 5, 7 and 9, the proportion of children above minimum standards in 2022 was highest in major cities (81.8% for reading and 81.3% for numeracy) and lowest in remote/very remote areas (54.4% for reading and 52.3% for numeracy).

Exhibits 25 and 26 present data on the proportion of students above the minimum standards for reading and numeracy by remoteness areas.

Column chart shows a higher proportion of children in major cities in NSW were above national minimum standards for reading compared to students in regional and remote NSW in 2022.

Students in regional and remote areas are less likely to continue schooling to Year 12

Young people who have successfully completed Year 12 have a broader range of post-school options and a greater likelihood of engaging in further education, training, and employment.

Exhibit 27 shows the New South Wales public school students in major cities are more likely to continue to Year 12 compared to students in inner regional, outer regional or remote/very remote areas. Data are not available for 2021 and 2022 for outer regional and remote/very remote areas due to small numbers of students.

Column chart shows children in major cities in NSW were more likely to continue to Year 12 compared to students in regional and remote areas between 2018 and 2022.

The Higher School Certificate (HSC) is a significant credential, which provides a foundation for students wishing to pursue higher education, training or employment. Student performance in each HSC course is divided into six bands. Each band is aligned to what a student at that level of performance typically knows, understands and can do. Student results in the top two bands (band 5 and band 6) for a standard course indicates an above average level of performance.

Exhibit 28 shows that the proportion of public school students' HSC results in the top two bands declines by remoteness.

Column chart shows public school students' Higher School Certificate results in the top two achievement bands declined by remoteness between 2018 and 2022.

Students in regional and remote areas are less likely to go on to further education, training or employment after leaving school than students in major cities

An indicator of successful transitions out of school is the proportion of recent school leavers (who left school the previous year) participating in further education, training, or work.

The New South Wales Post-School Destinations and Experiences Survey collects information about students’ main destination in the year after completing Year 12 or leaving school early. The survey provides information on education pathways, attainments, and destinations of young people in New South Wales.

Exhibit 29 shows that the recent school leavers in regional and remote areas are less likely to be in further education, training, or employment than their counterparts in major cities.

Column chart shows recent school leavers in regional and remote areas of NSW were less likely to be in further education, training, or employment compared to students in major cities between 2018 and 2022.

5.2 Student wellbeing outcomes

Students in regional and remote areas are less likely to report positive school experiences.

Students who feel supported, safe, and connected are more likely to be active participants in their learning, achieve stronger academic results and experience better life outcomes.

The department uses ‘Tell Them From Me’ surveys to track students' experience of their school and set indicators for student engagement. Its strategic plan set a target to increase the proportion of students reporting a sense of belonging, expectations for success and advocacy at school.

Exhibits 30 and 31 present data on these measures by remoteness. Students in major cities are more likely to report positive school experiences than students in inner regional, outer regional or remote/very remote areas.

Column chart shows primary students in major cities in NSW were more likely to report positive school experiences compared to students in regional and remote areas between 2018 and 2022.

The department's Child Wellbeing and Mental Health Services team facilitates access to a mental health and suicide prevention program for young people aged between 14 and 16. Regional, rural and remote schools have access to this program for students in Years 9 and 10.

Students outside of major cities are less likely to be attending school 90% of the time or more

Regular attendance at school is important for academic and other long-term outcomes. Students who do not attend regularly are less likely to complete school and more likely to experience poorer long-term health and social outcomes.

A measure of 'regular' school attendance is the proportion of students attending school at least 90% of the time. This equates to missing one day of school per fortnight or one week per term.

Exhibits 32 and 33 show the proportion of students attending school regularly is higher in major cities than in inner regional, outer regional and remote/very remote areas. Regular school attendance rates in 2021 and 2022 were lower due to greater prevalence of COVID-19. In 2022, school attendance was also affected by floods and high incidence of influenza in the community.

Column chart shows primary students in major cities in NSW were more likely to attend school 90% or more compared to students in regional and remote areas between 2018 and 2022.

Our 2022 audit into student attendance raised concerns that targeted support programs for schools with low attendance rates were not available for small schools, which are more likely to be outside of metropolitan Sydney. Where schools in outer regional and remote areas are targeted for additional support, this can place an additional burden for department staff to provide face-to-face support as long travel distances can be required.

Appendix one – Response from agency

Appendix two – About the audit

Appendix three – Performance auditing

© Copyright reserved by the Audit Office of New South Wales. All rights reserved. No part of this publication may be reproduced without prior consent of the Audit Office of New South Wales. The Audit Office does not accept responsibility for loss or damage suffered by any person acting on or refraining from action as a result of any of this material.

Parliamentary reference - Report number #385 - released 10 August 2023

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The 2021 strategy proposed a whole systems approach to addressing disadvantage

Key enabling factors were not in place to support effective implementation

There have been delays in implementing the strategy

The new strategy included programs that already existed in other areas of the department

There are significant gaps in regional, rural and remote education and wellbeing outcomes