Close relationships and their implications on Maltese external auditing : a practitioner’s viewpoint

Abstract

Purpose: This research analysed the extent of close relationships in the local auditing environment from the perspective of Maltese practitioners. It also examined their viewpoints regarding long audit tenure and identified the implications resulting from instances of close relationships. Finally, the measures and controls implemented by practices to manage situations of close relationships and their appropriateness were assessed. Design: The research methodology undertaken comprised a qualitative research method. This involved 27 semi-structured interviews, mostly held with different-sized practitioners and a couple of them were held with experts from within the field. Findings: It resulted that family and other close relationships are commonly encountered in Malta and various safeguards are adopted to manage close relationships’ issues, including independence declarations, quality reviews, rotation, and training. The merits of the EU Regulation were acknowledged and there was a willingness among practitioners for rotating the partner of large non-PIE auditors. Long association with the client was commonly perceived to have a positive influence on audit quality, although the decreased professional scepticism and loss of reputation resulting from the auditor’s involvement in close relationships were recognised. Conclusions: Most practices have adequate measures and controls, however, small practices are lacking. Exempting small companies from the statutory audit requirement was suggested, alternatively introducing a review engagement. Nonetheless, some practitioners are unaware that independence is still required for review engagements. Moreover, some practitioners seem to consider the CoE as a rules-based regulation instead of applying its principles. It was concluded that improvement with regards to the enforcement by the QAU and the MIA training is necessary. Value: Besides determining Maltese practitioners’ perceptions on the various relationships of which the auditor is part, this research also served to identify shortcomings in policies and procedures, and deficiencies in the enforcement of these measures and the ethics training provided.