The applicability of mandatory audit firm rotation in Maltese public limited companies

Abstract

Purpose: The main objective of this study was to evaluate the need for mandatory audit firm rotation, in Maltese public limited companies. Such a mandate was proposed by one of the European Commission's Green Papers. Apart from enhancing auditors' independence, the European Commission argues how mandatory audit firm rotation could help in injecting some dynamism in the audit market. Design: After analysing the pros and cons of audit firm rotation found in readily available literature, this dissertation examined the views of local public limited companies and audit partners through the use of online questionnaires and semi-structured interviews. The total response rate yielded from the questionnaires was of 52.2%. In addition, semi-structured interviews were held with five audit partners. Findings: According to the results of this study, audit firm rotation will most probably fail to inject some dynamism in the local audit market. It also transpired that such a system might not be feasible to Malta due to the limited number of local audit firms with the necessary resources to audit certain large clients. Key arguments against the mandate of audit firm rotation, emanating from this study were that audit firm rotation will: - increase costs for both the audit firms and their clients; - break up the audit-client relationship which is essential to make the client feel at ease in discussing certain issues with his auditor. On the other hand, this study established that audit firm rotation could help in mitigating auditors' partiality. This is because under audit firm rotation, the incumbent auditor would be aware that his work will eventually be scrutinised by a successive audit firm. Other mentioned benefits of audit firm rotation were the fresh look of the audit firm rotating inwards and the fortification of the publics' trust in auditors. Conclusion: This study did not come to a clear conclusion with regards to the performance of the current local mandate of audit partner rotation, implying that the participants need to gain more experience with the mandate before they would be in a position to assess its performance. Having said this, this study concluded that if made to choose, the majority of the respondents would prefer to go for audit partner rather than for audit firm rotation. Value: This study acts as a local response to the proposed mandate of audit firm rotation made in the European Commission’s Green Paper. In addition this study contributes by suggesting an alternative method of how to go about audit firm rotation, that is; to implement a system of joint audits in between every rotating period. Such a system would allow the audit firm rotating outwards to hand over its knowledge on the client to the audit firm rotating inwards.