The ownership of Maltese audit firms : an assessment

Abstract

As a result of the concern expressed by market regulators on the reduction of competition in the audit industry following the extensive number of mergers and the current ownership restrictions on audit firms, the European Commission (EC) carried out a study to assess the role that ownership restrictions play in limiting the number of audit firms and the implications of relaxing these ownership rules. The study identified issues relating to restricted competition, external funding for audit firms, threats to the independence and integrity of the auditor. Other commentators hold that the relaxation of the current rules would create opportunities for accelerated growth and enhance competition. This dissertation explores the opinion of Maltese audit and investment firms regarding the current ownership rules and the impact should such rules be amended. Taking into account the opinion of the respondent audit and investment firms as well as other research, this dissertation also analyses the effects that changes to audit ownership rules may have on Maltese audit firms. It explores the possibility for medium-sized and small audit firms to increase capital funding for expansion by means of relaxing ownership rules and the effect on competition with the Big Four, both in terms of choice and costs for the audit client as well as the effect on the professional status of audit firms and resources. Current ownership rules are meant to ensure higher levels of audit quality and auditor independence and hence any changes may also affect these factors. But competition is somewhat restricted. Downsides as a result of changes to these rules, as acknowledged in this dissertation, include the effects that outside shareholders may have on governance as well as the iii independence and inte Domestically, the possibility of external investment in small-sized audit firms seemed to present insurmountable obstacles when compared to the Big Four due to liability exposure towards third parties and competition. As a result of these concerns, safeguards need to be implemented to ensure that the negative impact that the relaxation of these rules might have will be minimized as much as possible. These safeguards, inter alia, include the need for qualified auditors to maintain the power to take executive decisions and to decide on issues which are relevant to the audit itself, ensuring that the Quality Assurance and Oversight Committee (QAOC) imposes a high level of quality assurance and requiring that non-audit partners/owners adhere to the auditors' Code of Ethics and a fit and proper test for participating non-audit members by the audit regulator.