The applicability of the financial health concept and its audit in Maltese listed companies

Abstract

Purpose: The late-2000s financial crisis has brought to the forefront questions surrounding both the scope and quality of external audit. In order to address the perceived information gap a number of solutions have been proposed by several accounting and non-accounting bodies; including clarification of technical language, reducing the auditor's report to an opinion only, providing further commentary to the audit opinion, disclosing additional communications, a new reporting model, and even providing additional assurances. Each of these proposals warrants careful consideration, taking into account the information needs of users and the role of auditors, and the challenges that might preclude modifications thereto. Design: The study is based on two questionnaire surveys, one directed at shareholders of Maltese listed companies and the other to audit firms. These were supplemented by five interviews, four with auditors of listed companies and the other with the MFSA in order to explore the issues in greater depth. Findings: The key findings pose general challenges as they produced conflicting results. Shareholders are in constant search of more information and assurances and the absolute majority believe that the auditor's report needs to be enhanced. On the other hand, predominantly auditors think that users have enough relevant information for decision making and are reluctant to provide additional information/assurances. Conclusions: From an auditing point of view, auditors can report on the financial health of companies as long as the information concerned is not forward-looking. However, as a premise it is the responsibility of those charged with governance to disclose all information users require about the company.