The development of audit fees in Malta : an analysis

Abstract

PURPOSE: This longitudinal study primarily seeks to assess the stability or otherwise of the pricing of statutory audits in Malta over time. To this end, the intertemporal development of audit fees is examined with a view of changes in their determinants, the global financial crisis and other potentially significant events. DESIGN: After giving an overview of the pertinent literature, a mixed approach is employed. In fact, a dynamic model of audit fees is attempted, using observations for 110 different Maltese companies for each of the 8 years under study. This is supplemented by 10 in-depth semi-structured interviews with audit partners from different audit firms. FINDINGS: Changes in auditee size and complexity are found to be explaining the change in the audit fee, albeit with a one-period lag, together with how organised the auditee is. A degree of price rigidity seems to characterise the Maltese auditing market, even though there appears to be more openness where companies are foreign-owned or not in the hands of the government. Evidence is found of a statistically significant increase in audit fees since 2008, yet this study suggests a prevalence of implicit contracts between audit firms other than the Big 4 and audit clients to mitigate such rise that is expected in the light of the global financial crisis. CONCLUSIONS: The research community is made aware that audit fees in Malta seem to exhibit a degree of stickiness as in larger countries, attributed to elements of imperfect competition and imperfect information in the market. VALUE: This study complements that of Attard (2010) by arguing that the assumption of frictionless audit markets implied in such standard audit fee models should be rejected. In fact, it seems to be difficult for auditors to re-align the engagement fee over time in response to variations in its drivers.