Introducing internal control reporting in Maltese listed companies : an assessment

Abstract

Purpose: The purpose of this study is to assess whether the internal control reporting provisions of Section 404 of the Sarbanes-Oxley Act would be applicable to Maltese listed companies. Hence, the study aims to evaluate the perceived benefits, drawbacks and costs of the Internal Control over Financial Reporting (ICFR) report and to determine the applicability of such report in Maltese listed companies. Design: To achieve these objectives, semi-structured interviews were conducted with the Chief Financial Officer or equivalent of eight Maltese listed companies, an external auditor from each of the Big Four audit firms, a representative of the Accountancy Board and a representative of the Malta Financial Services Authority. In total, fourteen interviews were conducted. Findings: The study shows diverse opinions as regards the benefits and costs of the ICFR report in Maltese listed companies. While some respondents perceive the ICFR report as suitable for Maltese listed companies, other respondents believe that it would be too costly to adopt such a report in Malta, considering the small size of local companies. In addition, other respondents believe that, given that the domestic market consists mainly of retail investors, the users of the ICFR report would be limited in Malta. Conclusion: Whether Maltese listed companies would reap the full benefits of ICFR reporting is uncertain. Moreover, ICFR reporting might be too burdensome for certain Maltese listed companies. The study observes that, if internal control reporting had to be introduced in Malta, its implementation should not be a ‘onesize- fits-all’ approach. Value: This study aims to promote further the importance for companies to have effective ICFR in place. Additionally, the study seeks to increase awareness on internal control disclosures and how these disclosures can assist companies to build and sustain a good reputation of sound corporate governance.