Perceptions of Audit Quality in Malta

Henley Management College
PERCEPTIONS OF AUDIT QUALITY IN A

POST-ENRON WORLD
THE DIMENSIONS OF MALTESE FINANCIAL

QUALITY AUDITS
by
- Renzo Farrugia -
Dissertation submitted in partial fulfillment

of the requirements for the degree of
Masters of Business Administration
2007
HENLEY MANAGEMET COLLEGE
ABSTRACT
This dissertation reviews and evaluates the theory and practical implications on
financial audit quality with relevance to the Maltese environment.
Following the unheralded collapses of giant corporates like Parmalat, Enron and
World.Com, the focus is on how the auditing profession is organising its activities to
convey trust and credibility to users of financial information. In the midst of this
period of self-examination, various countries are rethinking their audit process with
a heightened zeal to ensure that such intricate plights do not happen in their
communities – and Malta is no exception.
The objective of this dissertation is to take stock of the large body of audit quality
literature and assess the current understanding of this concept from a Maltese
perspective – in particular the view point of audit partners and of audit committees
of companies quoted on Malta Stock Exchange. These views are then compared,
gaps are identified and recommendations are provided.
Consequently, a theoretical framework that treats audit quality as a construct with

multiple and interrelated dimension is built. This constitutes a well-defined space
for locating existing research and future hypothesis formation. Three hypotheses
are also presented to facilitate the construction of research taxonomy. These
hypotheses relate to the nature of audit quality, awareness of this dimension and
how audit quality can be the catalyst to ensure long-term sustainable competitive
advantage.
At the end of this study, a model detailing the different typologies of audit firms in
Malta is presented enabling practitioners to gauge their level of audit quality based
on their competitive focus and posture correlation.
It is hoped that these findings provide evidence for audit firms, not only to meet the
satisfaction level of their client and other stakeholders, but also to improve their
own audit quality.
Table of Contents
1 PART ONE – INTRODUCTION............................................................................. 2

1.1 BACKGROUND ..................................................................................................... 2
1.2 SCOPE AND OBJECTIVE ....................................................................................... 3
1.3 RESEARCH HYPOTHESIS...................................................................................... 3
1.4 STRUCTURE OF DISSERTATION ........................................................................... 4
1.5 ORGANISATIONAL ANALYSIS ............................................................................. 5
2 PART ONE - LITERATURE REVIEW................................................................. 8

2.1 DEFINING AUDIT QUALITY ................................................................................. 8
2.2 EVOLUTION OF AUDIT QUALITY ......................................................................... 9
2.3 PILLAR I - TECHNICAL APPROACH TO AUDIT QUALITY .................................... 10
2.3.1 Audit Quality and Fees Reliance ................................................................ 10
2.3.2 Audit Quality and Agency Conflicts............................................................ 11
2.3.3 Audit Quality and its relation to Brand Name Auditors............................. 12
2.4 PILLAR II - BEHAVIORAL APPROACH TO AUDIT QUALITY ............................... 14
2.4.1 Audit Quality and Client Satisfaction ......................................................... 15
2.4.2 Audit Quality and Stakeholders’ Perception .............................................. 15
2.4.3 Audit Quality and Service Quality – AuditQual ......................................... 16
2.4.4 Behavioural Theories and its implications in Malta .................................. 17
2.5 PILLAR III - REGULATORY REGIME PERSPECTIVE ............................................ 17
2.6 PILLAR IV - QUALITY ASSURANCE AUTHORITIES PERSPECTIVES ................... 19
2.6.1 US experience - PCAOB ............................................................................. 20
2.6.2 UK experience - POBA ............................................................................... 21
2.6.3 Maltese experience - QAOC ....................................................................... 21
2.7 PILLAR V - AUDITING STANDARDS PERSPECTIVE ............................................ 22
2.8 CONCLUSION – THE ‘AUDIT QUALITY WHEEL MODEL’ ..................................... 23
3 PART TWO – RESEARCH METHODOLOGY ................................................ 27

3.1 RESEARCH THEME ............................................................................................ 27
3.2 AREA OF FOCUS ................................................................................................. 27
3.3 CHOICE OF RESEARCH INSTRUMENT ................................................................ 28
3.4 DESIGNING THE RESEARCH QUESTIONNAIRE ................................................... 28
3.4.1 Addressing Questionnaire Risks ................................................................. 30
3.5 TARGET AUDIENCE AND RESPONSE RATE........................................................ 31
3.5.1 Audit Partners ............................................................................................. 32
3.5.2 Audit Committee of Companies listed on MSE........................................... 32
3.6 LIMITATIONS ON RESEARCH METHODOLOGY ................................................... 33
4 PART TWO – FIELDWORK RESULTS............................................................. 35

4.1 SECTION A, DEMOGRAPHIC ANALYSIS............................................................. 35
4.1.1.1 Summary on Section A.................................................................................. 36
4.2 SECTION B, LITERATURE REVIEW ANALYSIS ................................................... 36
4.2.1 Comparison of Respondents Opinions........................................................ 40
4.2.2 Comparison of Respondents Opinions........................................................ 41
4.2.2.1 Audit Firm Culture......................................................................................... 41
4.2.2.2 Partner Involvement....................................................................................... 45
4.2.2.3 Audit Team Involvement............................................................................... 48
4.2.2.4 Quality on the Field ....................................................................................... 50
4.2.2.5 Stakeholders’ Involvement ............................................................................ 53
4.2.2.6 Managing Customers Relationship................................................................ 55
4.2.2.7 Summarizing the Results of Section B.......................................................... 57
4.3 SECTION C, FREE-FORM COMMENTS ANALYSIS .............................................. 59
4.3.1 Audit Fees .................................................................................................... 60
4.3.2 Self-Regulating Profession.......................................................................... 60
4.3.3 Term of Office Duration.............................................................................. 61
4.3.4 Publicity of Defaulters................................................................................. 61
4.3.5 Monitoring by Government......................................................................... 62
4.3.6 Components of Audit Quality...................................................................... 62
4.3.7 Benefits of Audit Quality ............................................................................. 63
4.3.8 Duration of audit quality............................................................................. 63
4.3.9 Summary on Section C ................................................................................ 63
4.4 CONCLUSION ..................................................................................................... 64
5 PART THREE - DISCUSSION OF FINDINGS.................................................. 66

5.1 TESTING THE THREE HYPOTHESIS .................................................................... 66
5.1.1 Hypothesis One – Nature of Audit Quality ................................................. 66
5.1.2 Hypothesis Two – Recognition of Audit Quality dimensions ..................... 68
5.1.3 Hypothesis Three – Competitive advantage through Audit Quality .......... 69
5.2 AUDIT QUALITY COMPETITIVE MATRIX .......................................................... 69
5.3 WIDER VALIDITY OF DISSERTATION ................................................................ 74
5.3.1 The Five Pillars of Audit Quality – A guideline ......................................... 74
5.3.2 The Audit Quality Wheel Model.................................................................. 74
5.3.3 Audit Firm Competitive Matrix................................................................... 74
6 PART THREE, OVERALL CONCLUSIONS..................................................... 76

6.1 RECOMMENDATIONS ......................................................................................... 76
6.1.1 Enhancing the education of auditing practitioners .................................... 76
6.1.2 Educating society about the audit function and the work of the auditor ... 77
6.1.3 Installing a mechanism to receive complaints on the internet ................... 77
6.1.4 Improving the quality control in audit firms............................................... 77
6.1.5 Summary of Implementation measures....................................................... 78
6.2 AVENUES FOR FUTURE RESEARCH .................................................................... 79
6.3 PERSONAL LEARNING AND REFLECTION .......................................................... 80
7 APPENDICES .......................................................................................................... 83
APPENDIX A, SHORT NOTES ON ACCOUNTANCY PROFESSION ACT’S DIRECTIVES ........ 83
APPENDIX B, QUESTIONNAIRE......................................................................................... 85
APPENDIX C, LETTER TO CHAIRPERSONS OF AUDIT COMMITTEES................................. 96
8 BIBLIOGRAPHY .................................................................................................... 98
List of Exhibits
Exhibit Number Page

EXHIBIT 1, STRUCTURE OF DISSERTATION ............................................................................. 4
EXHIBIT 2, QAOC OBJECTIVES .............................................................................................. 5
EXHIBIT 3, MALTESE ORGANISATIONAL SET-UP IN ENSURING AUDIT QUALITY .................. 6
EXHIBIT 4, FIVE MAJOR APPROACHES TO AUDIT QUALITY ................................................. 10
EXHIBIT 5, RESULTS OF BEHAVIOURAL AUDIT QUALITY RESEARCH .................................. 14
EXHIBIT 6, THE AUDITQUAL MODEL ................................................................................... 16
EXHIBIT 7, ILLUSTRATIVE QUALITY CONTROL SYSTEM ADOPTED BY PCAOB .................. 20
EXHIBIT 8, ISQC 1 REQUIREMENTS...................................................................................... 23
EXHIBIT 9, THE AUDIT QUALITY WHEEL MODEL ................................................................ 24
EXHIBIT 10, CONTENTS IN MAIN BODY OF THE QUESTIONNAIRE.......................................... 29
EXHIBIT 11, ADDRESSING POTENTIAL QUESTIONNAIRE PITFALLS ...................................... 30
EXHIBIT 12, POPULATION OF AUDIT FIRMS AND MSE COMPANIES .................................... 31
EXHIBIT 13, WORK EXPERIENCE OF AUDIT PARTNERS BY GENDER .................................... 35
EXHIBIT 14, DEMOGRAPHICS OF AUDIT PARTNERS AND CHAIRPERSONS OF COMMITTEES 36
EXHIBIT 15, TEN MOST INFLUENTIAL FACTORS ON AUDIT QUALITY .................................... 37
EXHIBIT 16, TEN LEAST INFLUENTIAL FACTORS ON AUDIT QUALITY................................... 39
EXHIBIT 17 INDEPENDENT SAMPLE TEST (T-TEST) .............................................................. 40
EXHIBIT 18, RESULTS OF AUDIT FIRM CULTURE ................................................................. 42
EXHIBIT 19, RANKINGS FROM AUDIT FIRM CULTURE.......................................................... 44
EXHIBIT 20, RESULTS OF PARTNER INVOLVEMENT.............................................................. 45
EXHIBIT 21, RANKINGS FROM PARTNER INVOLVEMENT ...................................................... 47
EXHIBIT 22, RESULTS OF AUDIT TEAM INVOLVEMENT........................................................ 48
EXHIBIT 23, RANKINGS FROM AUDIT TEAM INVOLVEMENT ................................................ 50
EXHIBIT 24, RESULTS OF QUALITY ON THE FIELD................................................................ 51
EXHIBIT 25, RANKINGS FROM QUALITY ON FIELD ............................................................... 52
EXHIBIT 26, RESULTS OF STAKEHOLDERS’ INVOLVEMENT.................................................. 53
EXHIBIT 27, RANKINGS FROM STAKEHOLDERS’ INVOLVEMENT .......................................... 54
EXHIBIT 28, RESULTS OF STAKEHOLDERS’ INVOLVEMENT.................................................. 55
EXHIBIT 29, RANKINGS FROM CUSTOMERS’ INVOLVEMENT................................................ 56
EXHIBIT 30, MEAN SCORE FOR ATTRIBUTES – AUDIT PARTNERS’ VIEW ............................ 57
EXHIBIT 31, AUDIT QUALITY WHEEL MODEL – ILLUSTRATION OF MALTESE FINDINGS .... 58
EXHIBIT 32, SECTION C RESULTS ......................................................................................... 59
EXHIBIT 33, OBLIGATORY ELEMENTS OF AUDIT QUALITY .................................................. 67
EXHIBIT 34, AUDIT COMPETITIVE FOCUS-POSTURE MATRIX .............................................. 69
EXHIBIT 35 CHARACTERISTICS OF A BASIC AUDIT FIRM ..................................................... 70
EXHIBIT 36 CHARACTERISTICS OF A DARING AUDIT FIRM .................................................. 71
EXHIBIT 37 CHARACTERISTICS OF A CUSTODIAN AUDIT FIRM ............................................ 71
EXHIBIT 38 ADDING VALUE ................................................................................................. 72
EXHIBIT 39 CHARACTERISTICS OF AN ENVIED AUDIT FIRM ................................................ 73
EXHIBIT 40 GAANT CHART – IMPLEMENTATION MEASURES ............................................... 78
Acknowledgments
This dissertation has been completed with the help and support from a
number of people. I would especially like to thank:
Mr. David Murphy at Henley Management College who helped me in the

critical phase of the dissertation with good advice and quick response on
my questions. His expertise in academic and research matters have
provided me with generous and continual support. His proficiency has
taught me a great deal as we worked together to adapt audit quality
thinking to the Maltese scenario.
I am also indebt to Mr. Francis Farrugia who helped me with his

knowledge concerning the subject of audit quality, with the pilot test of the
field research and with the revision of the field research question.
I also want to acknowledge how much I have learned by working with

colleagues at the Quality Assurance Unit, the Accountancy Board, the
Ministry of Finance and the Malta Institute of Accountants. Such talented
people all provided me with their practical experiences related to their
specific roles whilst contributing their expertise in building up this
dissertation.
My overriding debt is to my lovely expectant wife Bernice and my two kids

Brandon and Gabriel, who provided me with the time, support, and
inspiration needed for the dissertation. It is truly our work.
Acronyms
The acronyms are presented in alphabetical order, for ease of reference.
AB Accountancy Board (Malta)

AIU Audit Inspection Unit (UK)
APA Accountancy Profession Act, CAP 281
EGAOB European Group of Auditors’ Oversight Bodies
EU European Union
FEE Fédération des Experts Comptables Européens
FRC Financial Reporting Council (UK)
IAASB International Auditing and Assurance Standards Board
IAS International Accounting Standards
IFAC International Federation of Accountants
ISA International Standards on Auditing
ISQC1 International Standard on Quality Control
MIA Malta Institute of Accountants
PCAOB Public Company Accounting Oversight Board (US)
POBA Professional Oversight Board (UK)
QA Quality Assurance
QAOC Quality Assurance Oversight Committee (Malta)
QAU Quality Assurance Unit (Malta)
UK United Kingdom
US United States
These acronyms are utilised very sparsely in the dissertation to ensure a

holistic understanding of the matter in discussion.
Declaration
This Dissertation is submitted in partial fulfillment of the

Masters in Business Administration
(Henley Management College)
Unless otherwise stated, the findings, research methodology, analysis and

results of this dissertation is my work.
The following details the number of words for each Part of the Dissertation.
Abstract 288 words
Part One 5,342 words

Part One, Introduction (Chpt.1) 872 words
Part One, Literature Review (Chpt.2) 4,470 words
Part Two 8,827 words

Part Two, Research Methodology (Chpt.3) 2,034 words
Part Two, Fieldwork Results (Chpt.4) 6,793 words
Part Three 3,645 words

Part Three, Discussion of Findings (Chpt.5) 2,323 words
Part Three, Overall Conclusions (Chpt.6) 1,322 words
Total No of words (excl Abstract and Appendices) are 17,814 words
_______________________________
Mr. Renzo Farrugia CPAA, B.Accty(Hons)
Certified Public Accountant and Auditor
Student ID Number: 2059425 (MT)

Chapter 1
PART 0NE - INTRODUCTION
Audits serve a vital economic purpose and play an important role in serving the public
interest to strengthen accountability and reinforce trust and confidence in financial
reporting. As such, audits help enhance economic prosperity, expanding the variety,
number and value of transactions that people are prepared to enter into. However, in
recent years, and in the light of corporate scandals, the profession witnessed ongoing
global demands for improvements in audit quality. This raises questions about, what
really constitutes audit quality and what are its dimensions.
Hussey et al. 2001

Henley Management College Part ONE, Introduction
1 PART ONE – INTRODUCTION

This dissertation is submitted in part fulfillment of the requirements for the Henley
Management College degree of Masters of Business Administration and aims to
meet the academic standards required of a rigorous and insightful research
study, culminating in tangible recommendations for management practice.
The subjects investigated in this work are of great interest to the author because
it traverses his career as an auditor and his current position with the Quality
Assurance Unit [QAU]. The objective of this dissertation is to identify the different
perceptions of audit quality within the Maltese1 context.
1.1 Background
Financial audit quality has attracted a great amount of interest from the
accountancy profession on an international basis. Enron's collapse, and the
implications of serious control issues that accompanied it, are having a profound
impact on how the auditing profession view their control environments. Various
countries are rethinking their governance processes with a heightened zeal to
ensure that such intricate plights don't happen in their communities.
On 14th December 2005, the European Union [EU] established the European
Group of Auditors’ Oversight Bodies [EGAOB] to ensure smooth and efficient co-
operation amongst public oversight systems within Member States and with third
countries. Furthermore, the EU Statutory Audit Directive2 issued during March
2006, obligates Member State to establish a regulatory authority with the remit to
ensure effective quality, thereby minimising threats of lack of credibility in the
auditing profession.
1 The Maltese Archipelago consists of Malta, Gozo, Comino and two small uninhabited islands - all over
the area of 316 sq km (122 sq miles). Being located south of the Italian island of Sicily the island lies
virtually in the centre of the Mediterranean Sea between Europe and North Africa. The Maltese
population is 397,000 (UN, 2005) and the GNI is US $13,590 (World Bank, 2006).
2 The EU Statutory Audit Directive is the short name for ‘Directive of the European Parliament and of the
Council on statutory audits of annual accounts and consolidated accounts, amending Council Directives 78/660/EEC
and 83/349/EEC and repealing Council Directive 84/253/EEC.’
Renzo Farrugia Page 2

Student Id: 2059425 (MT)
Henley Management College Part ONE, Literature Review
On a Maltese context, Directive 4 of the Accountancy Profession Act [CAP 281],

issued during 2006, established an independent Quality Assurance Oversight
Committee [QAOC] with the remit to assist firms to maintain and improve their
quality of their audit work, whilst co-operating with European counterparts. This
relatively new set-up is expected to undertake on-the-spot reviews of auditors on
a case-by-case basis to enhance public faith in the profession.
1.2 Scope and Objective

The scope of this dissertation is to identify, possible critical antecedents of audit
quality within the Maltese auditing profession.
The objective of this dissertation is to analyse how local practitioners actually

manage their audit quality and to suggest a model that might assist audit firms in
attaining sustainable competitive advantage through the rejuvenation of audit
quality methodologies in their daily operations.
1.3 Research Hypothesis

To focus the research, the author is presenting the following set of hypothesis
that represent current problem areas as will be described in Chapter 3 [pp.26] of
this dissertation.
The prime hypothesis is that the dimensions of audit quality are not something
static or universal. Instead it is a multi-dimension construct that evolves due to
continual changes in the environmental influences effecting the profession.
A priori it is expected that managing audit quality is in an emerging state, leading

to the second hypothesis that; such dimensions, are not fully recognised within
the local auditing profession.
Focusing on audit quality can be the means through which firms gain competitive
advantage. However, history has shown that even large, reputable audit firms
imminently collapsed due to negligent wrong-doing of some minor staff. This
leads to the third hypothesis; audit firms who manage audit quality at all levels of
its organisation, ensure long term sustainable competitive advantage.

The objective is to confront these hypotheses by mirroring literature findings on

antecedents of audit quality against present practices in the auditing profession
derived from a field research. Furthermore it is the objective of the research to
debate literature findings and practical experiences from the field research and
derive conclusions on the Maltese experiences.
1.4 Structure of Dissertation

The framework of the dissertation adheres to the guidelines issued by Henley
Management College [2004]. The general outline of the dissertation is divided into
three parts as illustrated in Exhibit-1.
Exhibit 1, Structure of Dissertation
Introduction
Aim, Hypothesis and

Objectives
Part 1 - Literature Part 2 – Field Work

Review
Evidence identifying
Conclusions from antecedents of audit
research related to audit quality within Maltese
quality Part 3 - Evaluation context
4 – Discussion
Findings and
evaluation
5 – Conclusions
Recommendations
Source: Henley, 2004. Study Guide for Undertaking a Research Project, Henley Management College.

1.5 Organisational Analysis

In Malta, the Accountancy Board owes its origin to the late seventies when the
Accountancy Profession Act [CAP 281] was first enacted. Being an independent
body under the Ministry of Finance, the Board issues Directives to align local
audit firms with best practices, and with EU statutory requirements3. In fact, some
of these EU requirements, have already been implemented by means of the
Directives4 which have been issued by the Accountancy Board as follows:-
• Directive 1, Continued Professional Education;

• Directive 2, Code of Ethics;
• Directive 3, Annual Return; and
• Directive 4, Audit Quality.
The latter Directive introduced during 2006 sets up the Quality Assurance
Oversight Committee [QAOC], as a committee of the Board. The remit of QAOC is
illustrated in Exhibit-2.
Exhibit 2, QAOC Objectives
• establish the quality assurance system;

• supervise (planning and control) the quality assurance system;
• evaluate the review results; and
• approve the public reporting of overall results of the running of the
quality assurance system including the results of inspections.
Source: Directive 4 of Accountancy Profession Act, 2006
The QAOC delegates its day-to-day running to a new organisational set-up –

Quality Assurance Unit [QAU]. The work of the QAU is focused to ensure quality
assurance on all audit firms and sole practitioners, by carrying out on-site visits
and writing reports to the QAOC recommending necessary action. The QAOC is
responsible for monitoring practitioners thereby fulfilling their ‘regulator role’ in the
profession.
3 Malta has become a Member State of the European Union in June 2004.
4 Appendix A, pp.83 details a summary of the salient issues of Directives 1,2,3 and 4 of the APA, Cap 281

On the other hand, the ‘educator role’ is carried out by an independent

professional institute - the Malta Institute of Accountants [MIA]. It is the remit of
the MIA to provide any technical assistance and support to practitioners to align
their present methodologies with best practices. Exhibit-3 illustrates the interplay
of relationship between these key players.
Exhibit 3, Maltese Organisational Set-up in ensuring Audit Quality
Accountancy Board
(AB)
Quality Assurance
Oversight Committee
(QAOC)
Performs on-site visits
on audit firms.
Quality Assurance Unit
(QAU)
MINISTRY OF FINANCE
REGULATOR
Audit Firms &

Practitioners in public practice
Malta Institute of
Accountants (MIA)
Audit firm solicits

support from the MIA.
EDUCATOR
Source: Author, 2006. Compiled from various sources.

Chapter 2
LITERATURE REVIEW
Audit quality can be viewed in its broadest sense as encompassing all those activities that are
carried out to assure that audit services meet or exceed expectations of quality. These audit quality
activities are cross cutting in any business organization. They are concerned with the inputs,
processes and outcomes of the business system, and they must involve, to some extent, every
department and every individual auditor.
Lemont et al. 1987
2 PART ONE - LITERATURE REVIEW
This review begins with a brief explanation of the origins of ‘audit quality’
research. This is followed by a detailed analysis of audit quality from the
perspectives of the technical and behavioural schools of thought. Reference is
also made to the present legalistic turmoil and the adaptation of recently
introduced professional auditing standards both of which are impacting the
development of this term into unexplored dimensions.
2.1 Defining Audit Quality

Though there is no one single definition of audit quality, DeAngelo, L. E. [1981]
provides a definition that is cited in much of the subsequent audit quality
literature. She defines audit quality as:
‘the market assessed joint probability that a given auditor will both (a)
discover a breach in the client’s accounting system, and (b) report the
breach.’
DeAngelo’s seminal work considers quality of an audit to be dependent on two

factors. First, audit quality relates to the auditor’s ability to examine the accounts
and identify errors or anomalies - i.e. their technical competence. Secondly, audit
quality depends on the auditor’s objectivity - i.e. their independence. This
classical dual definition is necessarily a subjective one as it does not fully capture
the potentially conflicting roles of the various audit market participants [Mansi et
al., 2004]. The latter participants (or stakeholders) can be grouped into three
categories: first; external statement users; second, audit clients and third,
auditors [Sutton, 1993]. Consequently various researchers explored other
elements that constitute audit quality such as:
• the probability that an auditor will not issue an unqualified report for
statements containing material errors [e.g., Lee et al., 1999];
• auditors with low litigation services represents high quality suppliers [e.g.,
ZV. Palmrose, 1997]; and
• a measure of the audit's ability to reduce noise and bias and improve
fineness in accounting data [e.g., Wallace, 1980].
2.2 Evolution of Audit Quality

Whilst way back in the 1980s and 1990s academics and researchers were
sending alerts to the business community, provoking the immediate
professional’s attention to the importance of audit quality, it was not until recent
corporate scandals that the profession actually realised the importance of this
term. In fact, following the exodus of these scandals - that were somewhat
grossly amplified by international media, both the United States [US] and the
European Union [EU] developed their own models to thwart industry corruption
and boost their overall business credibility as a country. So in 2002 [for the US]
and in 2005 [for the EU], the business environment of the profession entered a
relatively new area - the period of intensified government enforcement and
regulations.
Thus it is the intention of the author to critically analyse the different literature
sources and practical implications in this turbulent environment, whereby various
Governments are designing their regulatory measures, audit firms are rethinking
their methodologies and the business community is still somewhat confused on
what the fuss is really about.
Exhibit-4 [pp.10] illustrates the major approaches to audit quality that will be
discussed in this literature review. It is believed that the analogy of the Greek
‘Parthenon Temple’ offers valuable insights in this review.
Firstly, audit quality definition is based on five pillars being (i) technical; (ii)
behavioural; (iii) legalistic; (iv)oversight bodies; and (v) professional standards
perspectives. If one ignores any one of these ‘pillars’, the exploration of audit
quality dimensions cannot hold for long and it will eventually collapse.
Secondly, if the builder builds these pillars with unequal height, the temple will
look really crooked and it will not succeed the test of time. It is thus considered
that each of these dimensions carry equal importance.
Finally, though these Greek pillars look the same, they are still different from
each other. In fact, each pillar can stand on its own right. However one cannot
call a pillar – the ‘Parthenon Temple’. It is when the whole construction is
collectively unified when the temple can actually be formed.

Exhibit 4, Five Major Approaches to Audit Quality
AUDIT QUALITY
Technical Behavioural Legalistic Oversight Prof. Stand.

Approach Approach Perspective Bodies View Perspective
ACADEMIC RESEARCH PRACTICAL FIELD
2.3 Pillar I - Technical Approach to audit quality

Throughout the past decades, there were various academics and researchers
who focused on the technical dimension of audit quality. Perhaps the most
notable work relates to the relationships found to exist between audit quality and
fees determination [DeAngelo, 1981], brand name auditors [Francis et al.1988] and
stakeholders’ expectations [Davidson et al. 1993].
2.3.1 Audit Quality and Fees Reliance

DeAngelo [1981] provides an economic argument linking higher audit quality to
larger audit firm size. She argues that initial start-up costs are so significant for
incumbent auditors that these eventually quit the market. This is because the
environment of an audit firm is so taxing on its resources that these specific
quasi-rents are subject to loss if it is discovered that the auditor has provided
lower than expected monitoring strength. This serves to deter the auditor from
behaving opportunistically, whilst provides protection to existing audit firms.

Empirical research carried out by Krishnan G. [2003] have also established that
as larger audit firms have a wider spectrum and volume of clientele, these are
less likely to rely on a particular business for his/her major source of income –
hence questioning the independence of an auditor. All of this leads to the
conclusion that the bigger the audit firm, the more assurance there is in providing
higher audit quality services – a view also supported by empirical work carried
out by Watkins A. in 2004. The only way that remains for the small practitioner is
to fight back in this oligopolistic market is through a reduction in audit fee charged
– often referred to as ‘low balling’ [Wallace, 1980].
Low-balling refers to pricing initial audits significantly below cost to tap in a new
customer. Such a practice could lead to time and budget pressures as well as
making it more difficult for auditors to refuse accounting concessions because of
the threat of termination. This could impair auditor independence and contribute
to lower quality audits [Lee and Gu, 1998]. Although studies presenting theoretical
arguments and analytical models have provided support for the existence of low-
balling, these studies have also demonstrated that such practices do not
necessarily reduce auditor independence, nor do they lower audit quality [Zang,
1999]. Empirical evidence relating to the affects of low-balling on auditor
independence is thus nonexistent. This, coupled with the various theoretical
arguments for its existence, makes it difficult to assess the implications of low-
balling on audit quality [Stice, 1991].
2.3.2 Audit Quality and Agency Conflicts

Francis, J. R. and E. R. Wilson [1988] examined the association between various
agency conflicts and audit quality using both levels and changes in specific
agency conflict proxies. Francis and Wilson proposed that clients with higher
agency conflict are more likely to switch to brand name auditors in order to
reduce uncertainty relating to company value, and thus, increase management
compensation. They have found out two proxies for audit quality being: (1) a
categorical variable, brand name (Big Audit firms/non-Big Audit firms) and, (2) a
continuous size variable, total client sales audited by the audit firm. Two
representations of agency cost were also included in this study being: (1) the
changes in agency proxies over a three-year period preceding the auditor switch
and (2) the levels of agency cost proxies in the year prior to the auditor switch.

These authors posit that auditors should not undertake any work other than audit
for their audit clients as this hefty impairs on their independence. However, this
work fails to highlight the key determinants of such independence infringements
[Ahmed and Hopson, 1990].
Relating Francis et al. findings to the Maltese scenario, it is customary that the
book-keeping processing and the actual performance of an audit are done by one
and the same firm. This may have a direct bearing on the auditor’s ethical values
to express an independent opinion on the financial statements. Yet, audit firms
argue that they have put safeguards to ensure that auditing and accounting work
is done through separate departments - what is often referred to as the ‘Chinese
walls’ concept. However though this set-up was acceptable during the late 1980s,
the new regulatory regime restricts this ‘safeguard’ to the extent that one cannot
accept such client engagements. For instance in Ireland, Section 74 of Company
Law Enforcement Act [2001] puts the onus on the auditor to report any business
entity that has not kept adequate book of accounts to the Registrar of
Companies. If this regulation is enforced in Malta, the auditor may find himself in
a bizarre situation of the need to report himself to our authorities – clearly a
‘conflicts of interest’ case.
2.3.3 Audit Quality and its relation to Brand Name Auditors

Davidson, R. A. and D. Neu. [1993] tested the relation between auditor reputation,
auditor monitoring strength, and a measure of information quality. Davidson and
Neu posit that managers have an incentive to minimize the difference between
forecasted income and reported income and will utilize accruals and other
discretionary accounting practices to manipulate reported income to minimize
that difference. However, managers will be less able to manipulate earnings to
achieve forecasted earnings when they hire brand name auditors as against
other smaller firms. Davidson and Neu caution that while this suggests that larger
auditors may do a better job of minimizing earnings management, it is also
possible that the same factors that drive clients not to engage in earnings
management also drive those clients to seek brand name auditors. These
authors argue that larger auditors have more reputation collateral at risk and are,
therefore, less likely to behave opportunistically. In fact the reputation of a big
audit firm is so significant that if this is shattered, the entire clientele collapse.

This research indicates that in the eyes of a client, audit quality tends to vary with
auditor’s reputation and brand. However it fails in identifying the extent of such
positive correlation and in asserting that high brand name auditors equates
higher quality [Myers et al, 2003].
From the 1990s, to date, we have witnessed the downfall of one of the big audit
firm giants – Arthur Anderson, thereby emphasising the importance of Davidson
and Neu’s emphasis on reputation and the implications it has on the firm as a
whole. On the other hand, in Malta small practitioners and middle-sized firms still
blossom and carry out a substantial proportion of audit work. What still needs to
be attested is whether the quality of a small practitioner is of equal standard to
that of a middle-sized or big audit firm. Perhaps whilst one reckons that due to
economies of scale, larger audit firms perform better quality audits from the
technical point of view, small practitioners are more in proximity with their
clientele. But being in close proximity with constituency is often viewed as a
threat to independence in the auditing business environment [Davis, 2002]. This
shed concern on the debate as to whether the auditor should occupy a term of
office for a fixed duration period of time indicated by law – i.e. auditor rotation
[Husey and Lan, 2001]. The latter concept was well accepted within the European
Union authorities, though the Fédération des Experts Comptables Européens5
exerted pressure to withhold such initiative to safeguard the interests of its
members.
5 Fédération des Experts Comptables Européens is the representative organisation for the accountancy profession in
Europe. FEE's membership consists of 44 professional institutes of accountants from 32 countries. FEE member
bodies are present in all 25 member states of the European Union and three member countries of EFTA. FEE
member bodies represent more than 500,000 accountants in Europe.

2.4 Pillar II - Behavioral Approach to Audit Quality

Despite the academic focus on technical aspects of audit quality, other empirical
research focused on the humane side of the audit engagement – what the author
classifies as ‘behavioural approach’. In fact, academics particularly in the US,
have encouraged auditing firms to cultivate a marketing culture [Ahmed & Hopson
1990], to consider developing a marketing positioning strategy [Ellis & Mosher,
1995], and to extend their portfolio of services [Diamantopouos, O’Donahue, &
Petersen, 1995]. Exhibit-5 summarises the most notable results and
methodologies adopted of such researches as from 1990’s to date.
Exhibit 5, Results of Behavioural Audit Quality Research
Authors Research Method Results

Sutton Nominal Group technique on Identified 19 quality factors
(1993) experienced auditors to which could be categorised into
develop and validate a set of three groups: planning, fieldwork
audit quality factors and and administration.
measures
Behn et al. Survey of controllers in the Responsiveness to client needs,

(1997) US to evaluate existing executive involvement, effective
auditor using 12-item and ongoing interaction with
questionnaire to identify audit committee, industry
determinants of audit client expertise and prior experience
satisfaction. of client all positively associated
with client satisfaction.
Waming – Survey of shareholders, External users tend to perceive
Rasmussen financial journalists, auditors audit quality attributes as
and Jensen and managing directors’ attributes that inspire confidence
(2001) perceptions of a quality. in the auditor: six main quality
dimensions identified; four
groups rate quality dimensions
differently.
Angus Duff UK Survey of auditors, Identified 8 audit gaps and the

(2006) auditees and stakeholders’ antecedents of audit quality:
perceptions of a quality nine main quality dimensions
through the use of the identified; three groups rate
Servqual instrument quality dimensions rather
developed by Zeithaml, et homogeneously.
al.
Source: Adopted from A. Duff, 2006
This section gives an oversight of these studies and concludes by attesting their
applicability to the Maltese scenario.

2.4.1 Audit Quality and Client Satisfaction

In 1997, Behn et al. carried out a research exercise to determine the relationship
between audit quality and client satisfaction. Previous marketing literature
revealed that though these are related, such attributes exhibit unique
characteristics [Cronin & Taylor, 1994]. Working on 12 audit quality attributes found
by Carcello et al. [1992], Behn identified that six of these had a positive
relationship with client satisfaction and with the audit team being:- (i)
responsiveness to client needs; (ii) effective interaction with the audit committee;
(iii) audit firm executives actively involved in the audit, (iv) appropriate conduct of
audit-fieldwork, (v) industry expertise and (vi) team and firm experience with
client. The only audit quality variable that was negatively associated with client
satisfaction was –‘the audit team members maintained a skeptical attitude
throughout the audit engagement’. Perhaps this finding relates to the fact that the
auditor needs to balance out the need of satisfying his customer whilst at the
same time has a legal obligation towards stakeholders’ expectations. Behn et al.
also suggest that there exists some evidence that client satisfaction is higher
during the first few years after a change in auditors. However, though this
research assists in determining the key attributes of audit quality, it focuses only
on the relationship between client satisfaction and the audit team, ignoring other
behavioural dimensions of audit quality [Krishnan, 2003].
2.4.2 Audit Quality and Stakeholders’ Perception

Warming-Rasmussen and Jensen [2001] studied the stakeholders’ perception of
audit quality, with the intention of developing an audit quality scale. Warming-
Rasmussen and Jensen found out that there are 6 major quality dimensions,
focusing largely on moral and ethical issues, which they labeled as: (i) personal
credibility; (ii) auditor’s independence of company management; (iii) openness in
the report ; (iv) knowledge of the industry; (v) loyalty about minority shareholders;
(vi) auditors skeptical attitude to the auditee. These audit quality dimensions tend
to be ranked higher by stakeholders than auditors. Notwithstanding the moral and
ethical focus of this research, Warming-Rasmussen concluded that the
effectiveness of maintaining good relationships with clients is quite often
overlooked by auditors.

2.4.3 Audit Quality and Service Quality – AuditQual

The Servqual questionnaire [Zeithaml, Parasuraman and Berry, 1990] is one of the
preeminent instruments for measuring the quality of services as perceived by the
customer. This questionnaire was adopted by Duff A, [2006] to study the gaps
between auditors’, clients’ and stakeholders’ expectations. The author identified
that the perceptions across the three sampled groups of auditors, auditees and
external users were relatively homogenous, though accounting firm partners
tended to rate technical aspects of audit quality higher than the other two.
Nonetheless, it is worthwhile noting that reputation and credibility received the
highest rating from the three samples. The researcher identified eight gaps
(through Servqual) that could be duly filled in through nine distinct dimensions.
These dimensions relate to both technical quality and service quality, and are
illustrated in Exhibit-6.
Exhibit 6, The AuditQual Model
Reputation
Status
Capability
Independence
TECHNICAL
Expertise QUALITY
Knowledge
Experience
Responsiveness
Non-Audit Services SERVICE

Empathy QUALITY
Understanding
Client Service
Source: Angus Duff, 2006.
This study also suggests that audit quality is very much dependent on the audit
firms’ ability to attract, train and develop staff of highest caliber with both
technical and interpersonal quality to provide the best possible service to clients.
However notwithstanding its recent issue, Auditqual may be criticised on the
same basis of Servqual, due to the problems associated with using different
scores. This negatively impinges on the reliability, discriminant validity,
convergent validity and predictive validity of the measure [Van Dyke et al, 1999].
2.4.4 Behavioural Theories and its implications in Malta

There has been limited (if any) research on the attributes of audit quality within the
Maltese environment. The communal perception is that the auditing profession is
obligatory by law and very limited value added is delivered to constituency. The
latter exhibit very limited interest in the profession, whilst authorities seem to be
quite hesitant to promote their initiatives. It is thus suggested that few accounting
firms have sufficient understanding of themselves or their clients, to improve the
quality of service they provide to those clients [Ellis et al, 1995].
Furthermore, it is believed that an audit firm is not so market-oriented and instead

it tends to focus more on technical issues rather than positioning strategy [Dopuch
et al, 1982]. Perhaps keeping a low-profile and doing the work ad verbatim, is still
rendering results in Malta. However the gashing winds of change from the
legislative side and international business community, are putting into question
the sustainability of such rudimentary audit firm strategies. These may be
considered to be ill-equipped to meet the taxing requirements of the new
regulatory regime, let alone compete in a constrained market.
2.5 Pillar III - Regulatory Regime Perspective

Way back in the eighties, Simunic et al. identified that as auditing has a direct
bearing on public interest obligations, it should be viewed as an essential part of
the regulatory infrastructure of the economy. It is thus deemed appropriate to
solicit the regulatory regime perspective as such legislation is shaping out the
manner of audit conduct in the real world [Krishnan, G. V. 2003].
Though currently various European countries have their own legislative

frameworks, the enforcement of Directive 2006/43 of The European Parliament
and of the Council on Statutory Audits of Annual Accounts and Consolidated
Accounts issued on 17 May 2006, obligates Member States to harmonise their
legislative frameworks by not later than 29th June 2008. This revamped legislation
sets out various requirements including:-

• The setting up of an online public register detailing the details of

auditors/audit firms (Chapter III);
• The obligation of auditors to observe the fundamental principles of
professional ethics, independence, objectivity, confidentiality and
professional secrecy (Chapter IV);
• Obligation to comply with International Standards on Auditing (ISA)
(Chapter V);
• Obligation that each Member State should have institutions responsible
for the national public oversight system on the audit profession (Chapter
VI);
• Co-operation between Public oversight bodies and regulatory
arrangements between Member States (Chapter VIII); and
• Obligation for auditor to issue ‘transparency report’ for public interest
entities (Chapter X).
All of the above indicate the measures adopted by the EU to ensure sustainable
audit quality within the Community level. However, no one single Member State
has fully adopted all the provisions of this Directive yet. Though perhaps at the
forefront, one will find the United Kingdom and Germany, other Member States
need to literally revamp their legislative framework (eg. Slovenia, and Lithuania).
Turning our focus to the Maltese scenario, the framework regulating the auditing
profession is governed by the Accountancy Profession Act, [Chapter 281];
Accountancy Profession Regulations [Chapter 281.1]; Companies Act, [Chapter
386] and Directives issued by the Accountancy Board. The latter include
regulations for Continued Professional Education (Directive 1), the formulation of a
Code of Ethics for accountants and auditors (Directive 2), formulation of annual
return (Directive 3) and the setting up a system of Quality Assurance (Directive 4).
One can out rightly say that various mandatory Articles defined by European
counterparts are included in Maltese Law. In fact, the fundamental articles like
the setting up of a quality assurance system, that an audit needs to be carried out
in accordance with ISA and that there is a set of rigorous academic and practical
training to attain an auditors warrant are all duly integrated in the Maltese
legislative framework. However more work still needs to be done with respect to
other key areas like cooperation and exchange of information with other EU
countries and transparency reports.

However it is interesting to note that Section 9 of Directive 4 of the Accountancy

Profession Act attempts to hint to a definition of what constitutes audit quality in
the Maltese Context:
‘The Quality Assurance Process is intended to be a means through

which the Board provides assurance as to the quality of the professional
work of warrant holders in public practice and firms and on the
maintenance of appropriate levels of professional standards thereby.’
Source: Section 9 of Directive 4 of the APA, Cap281 (2006)
However, the Directive fails to explicitly indicate the parameters of ‘quality of

professional work’ and ‘appropriate levels of professional standards’.
Taking this definition to European Union level, the scope of quality assurance
reviews have been defined by EU Statutory Audit Directive under Article 29 (1) (f)
to include; (i) compliance with applicable auditing standards; (ii) independence
requirements; (iii) quantity and quality of resources spent; (iv) audit fees charged;
and (iv) internal quality control system of the audit firm. Perhaps this is the first
ever definition that identifies the antecedents of audit quality dimension clearly
entrenched in law.
To conclude, having the necessary legislation in place does not automatically

mean that there is actual enforcement. Thus one may ask: what implementation
measures are being adopted by various countries to ensure audit quality?
2.6 Pillar IV - Quality Assurance Authorities Perspectives

An effective public oversight authority over the audit profession is a vital element
in the maintenance and enhancement of confidence in the audit function. The
current lack of confidence in some countries is partly based on a public
perception that a self-regulating profession runs a serious risk of conflicts of
interests in dealing with its shortcomings [Zang P, 1999]. It is thus worth noting,
the practical experience of authorities who already performed several quality
assurance review visits on practitioners and identify possible antecedents of audit
quality from their practical work. The experience of the United States [US] and
United Kingdom [UK] are discussed together with the Maltese model.

2.6.1 US experience - PCAOB

In the US, the designated public oversight authority is the Public Company
Accounting Oversight Board [PCAOB]. The PCAOB suggests that an effective
audit quality control system should need to have appropriate policies and
procedures to ensure sustainable audit quality. Exhibit-7 illustrates the key
antecedents of audit quality which relates to firm culture, governance,
compensation and rewards, quality control risk assessment, and monitoring
mechanisms.
Exhibit 7, Illustrative Quality Control System adopted by PCAOB
Source: http://www.pcaobus.org/inspections/
It is also the policy of the PCAOB to publicly disclose all the audit firms in default
(to ensure transparency) and to offer accreditation to those who demonstrate
audit quality in their procedures.

2.6.2 UK experience - POBA

A similar arrangement was set-up in the UK, appointing the Professional
Oversight Board [POBA] as the oversight body on the profession. The POBA
place prominence in its procedures by challenging partners’ judgments as well as
critically evaluating audit processes and internal controls adopted by these firms.
In doing so, POBA has developed and implemented an approach to audit
monitoring based on the following characteristics:-
• Wide-ranging reviews of firm wide procedures, including an assessment

of how the culture within firms impacts on audit quality;
• In-depth reviews of major audits, focusing on the quality of the group
audit, including critical assessment of the key audit judgments made and
a detailed review of compliance with UK Auditing Standards; and
• Review of the quality of reporting to the Audit Committee.
It is worth noting, that whilst in the US more emphasis is placed on transparency

and public accountability, the UK’s approach is focused on examining how culture
within audit firms impacts audit quality.
2.6.3 Maltese experience - QAOC

In Malta, the Quality Assurance Oversight Committee [QAOC] within the
Accountancy Board, and its duly appointed agents – the Quality Assurance Unit
[QAU] are the designated authorities responsible for ensuring audit quality.
Notwithstanding, the embryonic phase of the quality assurance system, the
implicit objectives relates:
• To evaluate whether warrant holders engaged in public practice have

established appropriate quality control policies and procedures and that
they are complying with those policies;
complied with relevant professional standards;
• To require warrant holders in public practice to make appropriate
improvements in their quality control policies and procedures; and
• To take appropriate corrective action, including educational or disciplinary
measures, as may be indicated by the circumstances.

It is anticipated that after the first cycle of reviews are conducted, standards will
increase and the business community is deemed to benefit from such reviews. It
is expected that the first reviews will be carried out in the second quarter of 2007.
Presently work is carried out in the preparation of these visits and it is applauded
to note that practitioners are being informed of proceedings to ensure
transparency. On the other hand, one may attest whether such communications
may also be presented to the Maltese business community to make them more
aware of this newly established set-up and their working methodologies. This
complies with the recommendations proposed by Diamantopouos, et al. in 1995
that to be successful auditors need to be more available to all key stakeholders.
2.7 Pillar V - Auditing Standards Perspective

The practitioner literature often defines audit quality relative to the degree to
which the audit conforms to applicable auditing standards [Cook, 1987]. The
leading international standard being also adopted by the EU is the International
Standards on Auditing [ISA]. Nonetheless, given the prominence of audit quality
issues on an international level, a new standard ISQC 1 - International Standard
on Quality Control, came into effect during 2006 establishing five critical
antecedents of audit quality relating to (i) leadership; (ii) human resources; (iii)
ethical policies; (iv) engagement performance and (v) monitoring [Vide Exhibit-8,
pp.23]. It is believed that by complying with this standard, audit firms attain
sufficient audit quality in their methodologies.

Exhibit 8, ISQC 1 Requirements
Source: http://www.ifac.org/IAASB/
2.8 Conclusion – The ‘Audit Quality Wheel Model’

Audit quality research has been prolific over the past two decades [Myers, 2003].
Although these authors and the practical field have created constructs which may
have elements in common, they have been used with little reference to one
another. In sum, the concept of audit quality is not exactly clear in terms of its
definitions, scope and operationalisation [Watkins A., 2004]. The lack of clear
constructs and specific operationalisations complicates interpretations and the
ability to replicate findings [Sekeran U, 2000]. This suggests that there is still much
to learn about relations between the various attributes of audit quality.

However, to summarise literature review and the broad number of issues of

importance and dimensions of audit quality derived, the main areas have been
structured in a model as shown in Exhibit-9. The model does not claim to provide
full justice to all issues on audit quality but offers an indication of the central
themes and a practical context of assessing the results of the field work
presented in the later sections.
Exhibit 9, The Audit Quality Wheel Model

The audit quality wheel model builds on six (6) fundamental spokes resulting from
technical, behavioural, regulatory, oversight bodies and auditing standards
perspectives. These fundamental elements are:-
(i) audit firm culture;

(ii) partner involvement;
(iii) audit team involvement;
(iv) quality on the field;
(v) stakeholders’ interest; and
(vi) customers’ satisfaction.
Furthermore, the author referred to the distinction used by Kotler’s [2002]

between core and augmented attributes. Issues related to audit independence,
competence, integrity and quality and openness of audit report are considered to
be core dimensions of audit quality. On the other hand, the augmented audit
quality contains elements that goes beyond these basic elements and possibly
enhance the audit quality of the firm through recruiting highest caliber of staff,
issues of empowerment, brand name, reputation and transparency of internal
communication process, amongst others. Based on the literature findings, to
become a sustainable audit quality audit firm, the conditions within the core audit
quality should expectedly be fulfilled before working on the augmented part of
audit quality. The rest of the dissertation will attempt to prove the extent of
applicability of this model to the Maltese situation and a discussion of the
findings.

Chapter 3
PART TWO – RESEARCH METHODOLOGY
In general, most of the previous studies undertake research into audit quality from the standpoint of
technical and behavioural schools of thought. However there are only a few studies that investigate
the perspectives of the stakeholders, who are in the closest contact with the external auditors in the
firm, on the issue of audit quality. This study investigates the views of audit firms and companies
(audit committees) about what constitutes audit quality and its implications on sustainable
competitive advantage.
Author, 2006

Henley Management College Part TWO, Research Methodology
3 PART TWO – RESEARCH METHODOLOGY

From the preceding discussion, this study concluded that there are limited studies
undertaken on the perceptions of audit partners and audit committee on the
factors that may influence the quality of an audit. This section examines ‘…the
procedural framework within which the research is conducted’ [Remenyi et al,
1998] by examining the perception of these stakeholders on audit quality issues in
Malta.
3.1 Research Theme

The objectives of the research are to challenge three initial hypotheses.
1st hypothesis
- the dimensions of audit quality are not something static or
universal. Instead it is a multi-dimension construct that evolves due to
continual changes in the environmental influences effecting the profession.
2nd hypothesis - the dimensions of audit quality, are not fully recognized within
the local auditing profession.
3rd hypothesis
- audit firms who manage audit quality, ensure long term
sustainable competitive advantage.
3.2 Area of focus

This study is undertaken to examine the potential factors that influence audit
quality from the perception of partners of audit firms (providers) and audit
committees of companies quoted on Malta Stock Exchange (audit clients). This
study investigates how much the audit partners’ perception significantly differs in
relation to audit committees whilst attesting their overall perception of the relevant
dimensions to the Maltese environment. Carcello et al. [1992] stated that:
‘in an increasingly competitive environment, it seems important to

understand the perceptions of both users and preparers as they relate to
audit quality. Any differences may allow for audit firms to deliver more
satisfaction to both groups and simultaneously improve their own audit
quality.’

3.3 Choice of Research Instrument

This research work includes the entire views of all accessible partners audit
committees through the use of a questionnaire for both subjects of study. This is
because the quest to identify key issues of audit quality perception is expected to
result from tentative answers to answer questions like ‘How many?’ or ‘How
much?’. The latter is the central premise of positivists research separating it from
the non-positivists research focusing on questions such as ‘what?’ ‘why?’ and
‘how?’ [Remenyi et al., 1998].
The questionnaire was intended to be submitted electronically to all audit firm

partners and audit committees. However from feedback gathered during the pilot
testing stage, it was considered difficult to reach a sufficient high number of
members of audit committees of companies quoted on MSE to provide valid data.
This is because much of the audit committees come into existence as from 2005
following the enactment of European Commission Recommendation of
15 February 2005 on the role of non-executive or supervisory directors of listed
companies and on the committees of the (supervisory) board1. Furthermore,
following comments received, the majority of these members do not hold their
office for more than an established period of time (usually one year), and thus
there exist a substantial level of turnover in this group.
To this effect, it was finally decided that for audit firms, a positivists quantitative
research be adopted so as to generalize the overall perceptions of the audit
partners in Malta. On the other hand, this approach was rejected for audit
committees, and instead an interview-based qualitative approach with the
chairperson of the committee was made. For comparison purposes, the same
questionnaire was used as an interview guide with the latter group.
3.4 Designing the Research Questionnaire

The same set of questions was developed for the purpose of this study for both
audit partners and audit committees. Initial versions of the questionnaire were
sent electronically to five (5) audit partners and to two (2) members of audit
committees. Following comments received, some minor adjustments were made
to the questionnaire. The final version of the questionnaire can be viewed in
1 EU Official Journal L 52, 25.2.2005, p. 51.

Appendix B [pp.85]. This questionnaire contains three (3) sections as follows:-
Section A: obtains basic information about respondents such as number

of employees, years in operation and type of organisation. This section
assist in segregating the information detailed in later sections in
accordance to size and experience in the industry.
Section B: details a series of statements based on the audit quality

attributes as identified in Chapter 2, Literature Review. Respondents were
asked to provide their assessment using a four (4) point Likert Scale
ranging from ‘no impact on audit quality’ to ‘extreme impact on audit
quality’. This scale was used throughout the reminder of this part. At the
end of each part, respondents were requested to rank two of these ten
statements which in their opinion are critical for audit quality, whilst also
giving them the opportunity to include any other attribute which in their
opinion could be included as a determinant of audit quality. The main
areas are shown in the Exhibit 10 together with corresponding literature
sources.
Exhibit 10, Contents in main body of the questionnaire
Areas represented in questionnaire Selected related literature sources

1. Audit Firm Culture Beattie & Fearnely (1995), DeAngelo (1981), ISQC 1,
Carcello et al (1992), A.Duff (2006), Davidson, R. A.
and D. Neu. (1993), Francis, J.R. et al, (1988) and
Simumic (1984).
2. Partner Involvement Parasuraman et al (1991), DeAngelo, (1981), ISQC 1,

Carcello et al, (1992), A. Duff (2006), Lee and Gu,
(1998) and Beattie, Farnley & Brant, (2001)
3.Audit Team Involvement Beattie & Feanrley, (1995), Francis, J.R. et al, (1988)
and ISQC 1
4.Quality on the Field Behn et al (1997), Parasuraman et al (1991), Duff A
(2006), Cook (1987), ISQC 1, Dopuch and Simunic,
(1982) and Carcello et al (1992)
5.Stakeholders’ Involvement Beattie & Fearnely (1995), Warming et al (2001), E.

Woolf (2005), Warming-Rasmussen et al (2001),
Watkins et al (2004), A. Duff (2006) and PCAOB, US
6.Managing Customer Relationships Beattie & Fearnely (1995), ISQC 1, Carcello et al,
(1992), Davidson, R. A. and D. Neu. (1993), A. Duff,
(2006) and Parasuraman et al, (1991)

Section C: requests respondents to put forward their views about audit

quality and attest their knowledge in this respect. Respondents were
given the opportunity to comment on present hot issues within the
profession impinging on audit quality. The questionnaire concludes by
providing freeform comments.
Structuring the questionnaire in sections based on literature findings simplified

categorisation of information to be used in seeking patterns and themes relevant
to test hypothesis.
3.4.1 Addressing Questionnaire Risks

In designing the questionnaire great care was given to avoid a number of
potential pitfalls usually associated with the administration of a questionnaire.
Such pitfalls include interviewer bias, respondent bias, rigid bias sample bias and
race bias [Henley, 2004]. The latter is not seen as a potential risk in this research.
Exhibit-11 details the necessary safeguards implemented to address these
potential risk factors.
Exhibit 11, Addressing Potential Questionnaire Pitfalls
Type of Bias Potential Risk Safeguards

Interviewer Questionnaire include Formulating all questions
leading questions on theory and inspired by
international surveys on
audit quality
Respondent Questionnaire not Using closed ended

answered or answered questions through the use
from wishful thinking of the Likert Scale
rather than facts
Rigid Narrow scope to Providing respondents with

provide justice to an opportunity to mark the
research possible importance of
other issues , not defined in
the questionnaire
Sample Whether choice of By targeting the whole audit

respondents is firms in Malta and
appropriate companies quoted on MSE
in addition to randomly
distributing the
questionnaire to qualified
auditors and other
companies.
Source: Adopted from Henley, 2004. Study Guide for Undertaking a Research Project, Henley Management College.

3.5 Target Audience and Response Rate

The questionnaire was electronically distributed to all the audit partners in Malta.
Furthermore, all chairpersons were primarily contacted by phone and a meeting
was arranged to set an appointment in their offices. Exhibit-12 illustrates the
names of the thirty-two (32) audit firms and the list of the twenty-seven (27)
companies quoted on Malta Stock Exchange (MSE), acting as the basis of the
entire population for this research.
Exhibit 12, Population of Audit Firms and MSE Companies
Population of (32)Audit Firms in Malta

Abdilla Fenech & Co Alliot Malta
Attard Giglio & Co. RSM Malta
Baker Tilly Sant BDO Attard, Buttigieg, Psaila & Co.
Bryant, Mayl & Co Busuttil & Micallef
Carm A Fenech & Co Degiorgio Scerri & Co
Deloitte & Touche DFK (Malta) Farrugia, Farrugia & Co
DG & Associates Ernst & Young
Gatt, Galea & Co MGI Malta
Grant Thornton Griffiths & Associates
HLB Falzon & Falzon Horwath (Malta)
KPMG MSI Craig Sammut & Co
Marmara Camilleri & Co PricewaterhouseCoopers
R S Attard & Co -Moore Stephens Malta Richard J Attard & Co
Robert Cassar & Co Schranz & Co
Spiteri Bailey & Co UHY Pace, Galea Musu & Co
Vincent Curmi & Associates Victor Schranz & Associates
Population of (27)Companies Quoted on Stock Exchange

Bank of Valletta plc Bay Street Finance plc
Big Bon Finance plc CareMalta Finance plc
CC Car Parks plc Corinthia Finance plc
Datatrak Holdings plc Dolmen Properties plc
Eden Finance plc FIMBank plc
Gasan Finance plc Global Financial Services Group plc
Hotel San Antonio plc HSBC Bank Malta plc
International Hotel Investments plc Lombard Bank Malta plc
Malta Government Privatisation plc Malta International Airport plc
Maltacom plc Mariner Finance plc
Middlesea Insurance plc Mizzi Organisation plc
Plaza Centres plc Simonds Farsons Cisk plc
Suncrest Hotels plc Tumas Investments plc
United Finance plc
Source: Adopted from Accountancy Board & Malta Stock Exchange Websites respectively

3.5.1 Audit Partners

The register of audit firms6 published in Malta Government Gazette during March
2006, lists down one-hundred and eight (108) audit firm partners within thirty-two
(32) registered audit firms licensed to practice in Malta. Out of these 108
partners, (5) five individuals indicated that they do not wish to participate due to
lack of management time, another two (2) said that the addressee had retired,
whilst another eleven (11) were not audit firm partners [lawyers or tax partners]
and refused to participate in this study. As a result, the number of accessible
audit partners for this study is ninety (90). Upon receipt of the e-mail, confirmation
was sought that the intended addressee was the actual person who filled in the
questionnaire.
The questionnaire was electronically distributed to all audit firms on 2nd October
2006 requesting their return by 13th October. Sixteen (16) responses had been
received by 13th October. A reminder e-mail was sent on 16th and a further 10
responses were received. In total, 26 completed questionnaires were received, a
response rate of more than 28%. Although the response rate may appear to be
relatively low, considering the questionnaire length and the somewhat unorthodox
nature of the subject, it provides sufficient sample size upon which conclusions
can be drawn and considered acceptable for an e-mail survey of this nature. In
fact, Green, Tull & Albaum, [1998] identified that such related studies usually
achieve a response rate of between 10% and 30%.
3.5.2 Audit Committee of Companies listed on MSE

Being the principal users of auditing information, during 2006, there were twenty-
seven (27) licensed companies quoted on the Malta Stock Exchange (MSE). The
author performed semi-structured interviews with ten (10) companies who were
willing to participate in this study. These respondents come from the banking
industry, manufacturing, hotel industry and other financial services. A short brief
was given in the letter inviting the interviewees to participate [vide Appendix C,
pp.96]. The interviews were conducted in Maltese and have been recorded with
the permission of the interviewees. Since comparison needed to be made
between the audit firm perception and that of the audit committee, the same
questionnaire was adopted to retain consistency whilst allowing more scope for
6 The register of audit firms and of all warrant holders holding a practicing certificate in auditing is published annually
by the Accountancy Board as required by the Accountancy Profession Act, CAP 281.

the respondent to express himself/herself at some length without loosing grip or

direction. This semi-structured interview took on average about one (1) hour and
was carried out in an open and honest dialogue. All interviews were carried out in
the participating companies, and the interviewed person was either the chairman
of the committee or another member appointed by the aforementioned
chairperson. It was recommended that if possible two individual members of the
committee participate to make this analysis as valid as possible and to minimize
individual feelings and opinions on specific statements. Furthermore, Kvale et al.
[1996] identified that the quality of an interview may be evaluated against the
extent to which spontaneous, rich, specific and relevant information is provided –
i.e. the shorter question and the longer the answer the better, and the extent to
which all relevant aspects are pursued and clarified. When evaluated against this
standard some variations appeared as many chairpersons were very enthusiastic
and communicative, while a few provided only the briefest of answers.
3.6 Limitations on research methodology

As the scope and aim of the dissertation in short is a limited study on what audit
firms and auditees consider as antecedents of audit quality, there are limitations
in the research wider validity. The research cannot be taken as representing a
general Maltese survey as it does not allow for a holistic assessment of audit
quality. In fact, the research only focuses on audit partners and audit committees’
view and can therefore not be said to be a full analysis of audit quality, which
should have included as assessment of other relevant present perceptions, like
sole practitioners and other companies. Furthermore, this study focused only on
the largest two segments ignoring other stakeholders involved like auditors
employed within the audit firms and finance managers employed by companies.
Additionally, as it is the first attempt on researching the quality antecedents within
the Maltese industry, the research is limited from conducting a longitudinal
analysis and thereby from capturing differences over time. Despite these
limitations, the findings of this study do provide a platform for future investigation
and diagnosis.

Chapter 4
PART TWO – FIELDWORK RESULTS
There is a perception that audit committees, investors and financial institutions appear, or have
appeared, to choose or demand Big 4 auditors for the largest listed companies. This could be for a
number of reasons, for example: the ‘deep pockets’ issue; a lack of information about shareholders’
views, a perception that smaller audit firms produce lower quality caused by their not being present
in the stock exchange; network issues; or merely being comfortable with well-known brands.
Fetham et al. ,1991

Henley Management College Part TWO, Fieldwork Results
4 PART TWO – FIELDWORK RESULTS

The content of the data analysis and the key findings from the fieldwork is
presented below. Subsection 4.1 relates to Section A of the questionnaire
providing information about the demographic data of respondents. Subsection 4.2
relates to Section B of the questionnaire extrapolating the six dimensions
identified in the attested ‘Audit Quality Wheel Model’, whilst Subsection 4.3
relates to Section C of the questionnaire provoking free-form comments.
4.1 Section A, Demographic Analysis

Analysis of demographic data reveals that from the 26 audit partners who
responded, 16 (62%) respondents were employed by the Big 4 audit firms, 6
(23%) respondents were employed in medium-sized firms (10 to 25 employees)
and another 4 (15%) respondents from smaller sized-firms (less than 10
employees). Meanwhile, 10 interviews representing 37% of the audit committee
listed on Malta Stock Exchange (MSE) were conducted by the author.
The analysis of the audit partners’ experience in the work reveals that 14 (53.8%)
have more than fifteen years experience, 8 (30.8%) have between five to fifteen
and only 4 (15.4%) have less than five in the current position. Exhibit-13 profiles
the work experience of audit partners by gender.
Exhibit 13, Work Experience of Audit Partners by gender
Work Experience Female Male Total

Less than 5 years 1 3 4 (15.4%)
From 5 to 15 years 2 6 8 (30.8%)
More than 15 years 3 11 14 (53.8%)
Total 6 20 26 (100%)
This is in stark contrast with the current work experience of the audit committees
all of which hold their office as a chairman for less than five years.

It is also worth noting the age groups of respondents for both groups. In both
cases a similarity was noted that much of the audit partners and members within
audit committees fall within the age of 40 to 49 years having 50% of audit
partners and 40% of audit committees. Exhibit-14 indicates the age group and
sexes of respondents in this study.
Exhibit 14, Demographics of Audit Partners and Chairpersons of Committees
Age Group Female Male Total Female Male Total

Audit Partners Audit Committees
30 to 39 years 1 5 6 (23.1%) 2 0 2 (20%)
40 to 49 years 4 9 13 (50%) 0 4 4 (40%)
50 to 59 years 1 4 5 (19.2%) 0 2 2 (20%)
Over 60 years 0 2 2 (7.7%) 0 2 2 (20%)
Total 6 20 26 (100%) 2 8 10 (100%)
4.1.1.1 Summary on Section A

On an overall basis, most respondents came from the 40 to 49 years age-group
having more than fifteen years of experience practicing as auditors. Given the
embryonic phase of audit committees, chairpersons occupied their office for
about five years. There is also dominance of male participants in this
questionnaire amounting to more than 73% of all respondents.
4.2 Section B, Literature Review Analysis

An analysis was made on the combined responses of all the two groups of
respondents. Exhibit-15 [pp.37] illustrates the ten factors with the highest means,
which indicate a considerable degree of importance in influencing the audit
quality. Each of the ten highest rated factors had an overall mean score of at
least 2.83.

Exhibit 15, Ten most influential factors on audit quality
Audit Audit
Overall Partner Committee
Mean Mean Mean
Question Statement Statistic Rank Statistic Statistic
1.4 Audit firm employs a robust internal procedure 3.00 1 3.00 3.00
compliant with the international standards
requirements and regulatory framework regime.
2.5 Engagement partner has sufficient knowledge 3.00 1 3.00 3.00
and understands what is happening within the
client’s organisation.
3.1 Audit team members are independent from the 3.00 1 3.00 3.00
client.
3.2 Audit team exercise discretion and professional 3.00 1 3.00 3.00
judgment whilst performing the audit.
3.4 Audit team adopts high ethical standards when 3.00 1 3.00 3.00
performing their work.
4.4 Audit team performs the audit in accordance 3.00 1 3.00 3.00
with International Standards on Auditing and
with appropriate and relevant legislations.
4.5 Audit team gathers sufficient and appropriate 3.00 1 3.00 3.00
documented evidence supporting audit
opinions.
1.5 Audit firm is knowledgeable about the clients’ industry. 2.94 2 2.92 3.00
4.8 Audit team files are reviewed by people with appropriate 2.93 3 2.86 3.00
experience who will encourage alertness, originality of
thought and a thorough investigation of anomalies.
2.3 Engagement partner dedicates resources to align the 2.92 4 2.88 3.00
audit firm’s strategy and internal communications with
recent developments in the profession.
3.3 Audit team keeps abreast of recent developments in the 2.91 5 2.93 2.89
profession.
1.6 Audit firm is able to attract, train and develop staff of 2.90 6 3.00 2.50
highest calibre with appropriate skills and qualifications.
4.7 Audit team evaluates appropriate judgments made by 2.89 7 2.83 3.00
their clients with rigour and professional scepticism.
4.9 Audit team on field works in accordance to the working 2.89 7 2.78 3.00
practices embedded within the audit firm’s internal control
procedure.
1.7 Audit firm consistently monitors its quality control policies 2.89 7 2.86 3.00
to align with recent best practice in the audit profession.
3.9 Audit team is motivated both personally and by their 2.88 8 2.86 3.00
working environment.
2.7 Engagement partner allocates more time and effort on 2.87 9 2.75 3.00
those areas that have the highest risk.
1.2 Audit firm is independent of the board of directors. 2.83 10 2.80 2.88
2.10 Engagement partner allocates necessary resources for all 2.83 10 2.70 3.00
its clients, irrespective of the audit fee charged.

Seven statements were ranked as the prime contributories of audit quality

attaining the highest mean score of 3.00 each by both groups of respondents.
Out of these seven statements, three relate to audit team involvement, two relate
to quality on the field and the remaining two statements relate to audit firm culture
and partner involvement. This may indicate that the competency, knowledge and
experience of the audit team are more important for audit quality than other
issues.
It is also interesting to note that statements related to stakeholders’ involvement

and managing customers’ relationship did not gain the highest means. Instead
much of these statements are those that are perceived by both group of
respondents as the least factors that may influence audit quality. Exhibit-16
[pp.39] shows the ten factors with the lowest means, hence factors that are
perceived to least influence audit quality.

Exhibit 16, Ten Least influential factors on audit quality
Audit Audit
Overall Partner Committee
Mean Mean Mean
Question Statement Statistic Rank Statistic Statistic
3.10 Audit team benefits from competitive reward 2.52 28 2.53 2.50
mechanisms.
4.6 Audit team aims for early communication with 2.52 28 2.72 2.11
management when corrective action may be
required.
5.1 Audit firm delivers consistent messages to all 2.50 29 2.41 3.00
stakeholders.
6.6 Audit firm is responsive by giving advice to 2.50 29 2.47 2.67
customers that add value.
2.8 Engagement partner performs different types 2.48 30 2.52 2.25
of audits each year to enrich his/her spread of
knowledge within various industries.
6.10 Audit firm charges appropriate fee to meet all 2.48 30 2.67 2.13
legal, regulatory and professional obligation,
without putting unnecessary pressure on
audit staff to cut corners.
5.9 Having the necessary set-up to lodge a 2.46 31 2.53 2.33
complaint against an auditor from the general
public leads to higher levels of audit quality.
5.10 Stakeholders will feel more trust, if the list of 2.45 32 2.47 2.33
audit firms clearly indicates, those that are
‘quality certified’ by an independent oversight
authority.
1.1 Audit firm operates to the highest standards 2.40 33 3.00 2.14
of integrity.
5.7 Increase in audit fees implies higher 2.38 34 2.53 2.11
assurance to stakeholders.
6.3 Audit firm provides additional services such 2.36 35 2.47 2.13
as accounting/book-keeping, taxation and
consultancy services to their audit clients.
2.6 Engagement partner puts forward frequent 2.35 36 2.41 2.22
advice to clients.
3.7 Audit team provides immediate and 2.33 37 2.42 2.13
professional assistance to clients
recommending possible action for
improvement.
5.6 The interests of shareholders would be best 2.29 38 2.50 2.00
served if audit firms remain in place for a
fixed term (eg five years) - without any re-
appointment option.

4.2.1 Comparison of Respondents Opinions

An independent t-test was conducted to analyse whether the audit committee and
audit partners’ opinion on the factors that may the quality of an audit is
significantly different or not. The results, presented in Exhibit-17 shows that audit
partners and MSE audit committees had significantly different views on nine
factors. Information in the column labeled Sig. (2-tailed) shows the means are
significantly different (<0.05) for assumptions of either equal or unequal
variances.
Exhibit 17 Independent Sample Test (T-test)
Ref Statement t-test for Equality of Means

t df Sig. Mean
(2-tailed) Difference
1.1 Audit firm operates to the highest Equal variances assumed 3.795 8.00 0.005 0.857
standards of integrity. Equal variances not assumed 6.000 6.00 0.001 0.857
1.10 Being a big audit firm adds credibility Equal variances assumed -2.360 20.00 0.029 -0.467
to users of financial statements. Equal variances not assumed -3.500 14.00 0.004 -0.467
4.2 Audit team provides the client with Equal variances assumed -2.510 28.00 0.018 -0.429
individual attention. Equal variances not assumed -3.873 20.00 0.001 -0.429
4.3 Audit team creates the minimum Equal variances assumed -2.295 25.00 0.030 -0.454
disruption to the client so far as Equal variances not assumed -2.658 18.88 0.016 -0.454
practically possible.
4.6 Audit team aims for early Equal variances assumed 3.528 25.00 0.002 0.611
communication with management Equal variances not assumed 3.933 21.40 0.001 0.611
when corrective action may be
required.
5.6 The interests of shareholders would be Equal variances assumed 3.028 22.00 0.006 0.500
best served if audit firms remain in Equal variances not assumed 3.606 13.00 0.003 0.500
place for a fixed term (eg five years) -
without any re- appointment option.
5.7 Increase in audit fees implies higher Equal variances assumed 2.196 24.00 0.038 0.418
assurance to stakeholders. Equal variances not assumed 2.504 22.78 0.020 0.418
6.7 Audit firm provides assurance about its Equal variances assumed -2.895 27.00 0.007 -0.500
knowledge, courtesy of employees and Equal variances not assumed -4.359 19.00 0.000 -0.500
ability to convey trust.
6.10 Audit firm charges appropriate fee to Equal variances assumed 2.764 21.00 0.012 0.542
meet all legal, regulatory and Equal variances not assumed 3.052 18.76 0.007 0.542
professional obligation, without putting
unnecessary pressure on audit staff to
cut corners.

Greater importance was given by audit partners on issues related to audit firm
integrity, early communication with management, audit firm rotation and audit
fees computations – all of these factors focusing on the technical side of the
effective conduct of an audit. Meanwhile, MSE audit committee placed higher
importance on audit firm size, individual attention, minimum disruption and the
ability of audit firm to convey trust. The latter factors being more oriented to
ensure customer satisfaction. This is an expected finding, as external users of
accounting information are less likely to be interested in technical quality issues
between the auditor and the client. This finding is similar to the results of
Warming-Rasmussen & Jensen’s [2001] study conducted in Denmark, where
Danish external users (shareholders and financial journalists) rated audit quality
(ie service quality attributes) higher than auditors.
4.2.2 Comparison of Respondents Opinions

Having identified the generic similarities and differences of auditors’ and audit
committees’ perception on audit quality, this section shall investigate into greater
depth each classification of audit quality according to the literature review
findings, and summarised through the ‘Audit Quality Wheel Model’ found on
Exhibit-9 [pp.24].
4.2.2.1 Audit Firm Culture

Exhibit 18 [pp.42] shows the results of the 10 factors grouped under the first
heading of this study – Audit Firm Culture.

Exhibit 18, Results of Audit Firm Culture
Audit MSE Audit

Partners' Committees'
Perception Perception Overall
Question Statement Mean Mean Mean
Statistic Statistic Statistic
1.1 Audit firm operates to the highest standards of 3.00 2.14 2.40
integrity.
1.2 Audit firm is independent of the board of 2.80 2.88 2.83
directors.
1.3 Audit firm enjoys good reputation. 2.63 2.33 2.54
1.4 Audit firm employs a robust internal 3.00 3.00 3.00
procedure compliant with the international
standards requirements and regulatory
framework regime.
1.5 Audit firm is knowledgeable about the clients’ 2.92 3.00 2.94
industry.
1.6 Audit firm is able to attract, train and develop 3.00 2.50 2.90
staff of highest calibre with appropriate skills
and qualifications.
1.7 Audit firm consistently monitors its quality 2.86 3.00 2.89
control policies to align with recent best
practice in the audit profession.
1.8 Audit firm uses avant-garde technology and 2.71 2.75 2.72
knowledge management systems to assist it in
retaining knowledge gathered from its audits.
1.9 Audit firm provides other non-audit services to 2.75 2.86 2.78
the audited firm, including taxation,
consultancy and general advice.
1.10 Being a big audit firm adds credibility to users 2.53 3.00 2.68
of financial statements.
Out of these ten statements, the most influential factor on audit quality perceived
by both groups relates to the adaptation of a robust internal procedure compliant
with the international standards requirements and regulatory framework regime.
Attaining a mean score of 3.00 for each group, the perception is that audit quality
is strongly effected by the internal system and procedures adopted by the audit
firm to duly fulfill its obligations. This finding is in line with auditing literature that
very often defines audit quality relative to the degree to which the audit firm
applies necessary procedures to conform to applicable auditing standards and
regulations [Krishnan and Schauer, 2001]. For example, Dopuch and Simunic [1982]
made the argument that audit quality is a function of the number and extent of
audit procedures performed by the auditor. It thus seems that this finding is
replicated to the Maltese auditing industry where emphasis is being placed on the
internal control structure of an audit firm as the medium perceived to drive audit
quality. However this is a continuous endeavor as both group of respondents

identified that to ensure sustainable audit quality, an audit firm should

consistently monitor its quality control policies to align with recent best practice in
the audit profession.
Audit partners also view other aspects of audit firm culture as highly critical in
their work. Issues related to audit firm integrity and retaining key staff, are also
considered to be fundamental elements that influence audit quality – all attaining
a high mean score of 3.00. This view is not so particularly shared by their clients.
In fact, whilst audit firms place particular emphasis on their integrity, perhaps
quite surprisingly, their clients only gave 2.14 to this attribute. This score is not
only the lowest score attributed to this dimension by this group but even one of
the lowest overall score in this study attaining an overall mean of 2.4. The issue
then becomes why audit committees do not perceive integrity as being a vital
component of audit quality. Following recent financial scandals, the downfall of
corporate international giants and the demise of Arthur Anderson, it was
expected that this attribute will be featured in the top ten ranked statements – not
as one of the lowest mean scores. To this effect, more should be done by the
auditor to make constituency aware of the role of an auditor and his responsibility
towards society. Perhaps Government should also partake in raising such
awareness, thereby contributing to an increase in the expectations of audit work.
On the other hand, MSE audit committees identified the fact that being one of the
big audit firms adds credibility to users of financial statements. This compliments
the findings of several demand-side studies that theorized that high-risk clients or
clients with other motivations might attempt to credibly signal company-value
information by selecting brand name auditors [Stice, 1991; Palmrose, 1988; Kellogg,
1984; St. Pierre and Anderson, 1984].This perception is not duly shared by audit
partners whereby a lower mean score of 2.53 was given. Quoting a comment
received by one of the audit partners ‘an audit is always an audit … and should
be carried out in accordance to the rules of the game irrespective of the audit firm
size’.
Furthermore, constituents’ belief that being knowledgeable about the clients’

industry enhances audit quality is also shared by audit partners’ view attributing a
mean score of 2.92. However such industry specialization is a costly endeavor. In
fact this finding relates to Craswell et al. research, who in 1995 identified that
auditors who specialise in a particular industry earns a 34% fee premium over

other auditors who are not industry specialists.
To conclude this analysis of audit firm culture, both groups of respondents

perceive that the adaptation of a sound internal control system within an audit
firm is the underlying engine that drives audit quality from within the firm itself.
However whilst auditors gave higher ranking to technical elements like audit
firms’ integrity and recruiting highest caliber staff, members on audit committees
ranked other factors like brand name and industry specialization, which relate to
a more market or customer-oriented dimensions. This perception was even
shared when respondents were asked to rank two of the most important
statements in order of priority, as can be viewed from Exhibit-19.
Exhibit 19, Rankings from Audit Firm Culture
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1 2 3 4 5 6 7 8 9 10
Statement Number
Audit Firm MSE Audit Committee

4.2.2.2 Partner Involvement

Exhibit-20 shows the results of the 10 factors grouped under the second
classification of audit quality – Partner Involvement.
Exhibit 20, Results of Partner Involvement
Audit MSE Audit Overall

Perception Perception
2.1 Engagement partner adopts high 2.67 2.50 2.60
ethical standards.
2.2 Engagement partner is independent of 2.50 3.00 2.57
the board of directors.
2.3 Engagement partner dedicates 2.88 3.00 2.92
resources to align the audit firm’s
strategy and internal communications
with recent developments in the
profession.
2.4 Engagement partner actively involves 2.75 2.86 2.80
himself/herself in the engagement
beginning from the initial planning
throughout the audit process and
completion.
2.5 Engagement partner has sufficient 3.00 3.00 3.00
knowledge and understands what is
happening within the client’s
organisation.
2.6 Engagement partner puts forward 2.41 2.22 2.35
frequent advice to clients.
2.7 Engagement partner allocates more 2.75 3.00 2.87
time and effort on those areas that have
the highest risk.
2.8 Engagement partner performs different 2.52 2.25 2.48
types of audits each year to enrich
his/her spread of knowledge within
various industries.
2.9 Engagement partner is subject to 2.63 2.25 2.57
internal review during the audit by other
partners of the audit firm.
2.10 Engagement partner allocates 2.70 3.00 2.83
necessary resources for all its clients,
irrespective of the audit fee charged.
Statement 2.5 attained the highest mean score of 3.00 by both audit partners and
MSE committees alike whereby it is perceived that the engagement partner’s
knowledge and understanding of the client is considered to be critical
components in audit quality. As previous research identified [Palmrose, 1988 and

Anderson, 1984], each individual business transaction takes place within a broader
context, and the skilled auditor should maintain a view which includes seemingly
insignificant details and their place in relation to the mainstream of the client’s
business activity. Emile Wolf [1997] argued that it could justifiably be said, albeit
loosely, that the auditor should audit the client, not just the financial statements.
Meanwhile whilst both groups reckoned the pivotal role of the audit partner by
staying close to the customer, audit committees identified another four
statements scoring the highest mean score of 3.00. The other perceived
elements of audit quality by MSE committee relate to (St2.2) audit partner
independence from the board of directors, (St2.3) appropriate allocation of
resources, (St2.5) keeping up-to-date with the organization’s pace, (St2.7)
concern towards risk and (St2.10) issues related to audit fee charged.
On the lower spectrum of this classification, the impact of partner rotation on

audit quality was perceived to be one of the least important influences on this
dimension attaining an overall score of 2.48. This finding compliments the
previous finding that audit committee looks for long-term relationships with the
audit partner. This reduces the time and resources needed to start a new
acquaintance from scratch. This raison d'être is also found in contemporary
studies. For instance, Myers et al. [2003] concluded that longer auditor tenure
constraints managerial discretion with accrual accounting, which suggests higher
audit quality. These findings were again accentuated a year later by Mansi et al.
[2004] who found that the cost of debt declines with longer tenure, which suggests
that bondholders perceive audit quality as improving with extended tenure.
Nonetheless, this contrasts with the findings of Davis et al. [2002] who concluded
that audit quality declines with extended tenure because as tenure increases,
client firms have greater reporting flexibility and earnings forecast error decline.
This view is also supported by the EU Directive, which encourages audit partners
rotation. This Law also establishes that where a Member State considers it
appropriate a change of audit firm may also be required to preserve
independence issues. This indicates that it is no longer an option for Malta to
engage in partner rotation, but it is now obligatory that audit partner rotation is
pursued.

To conclude on partner involvement, both groups of respondents perceive that

the knowledge of the audit partner vis-à-vis the organisation being audited is
considered to have undisputed impact on audit quality. Nonetheless, audit
committees place more emphasis on the inter-personal relationship with the
partner as contributing further to this audit quality dimension. Meanwhile such
inter-personal attributes were very modestly ranked by auditors. This perception
was even shared when respondents were asked to rank two of the most
important statements in order of priority, as can be viewed from Exhibit-21.
Exhibit 21, Rankings from Partner Involvement
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1 2 3 4 5 6 7 8 9 10
Statement Number

4.2.2.3 Audit Team Involvement

Exhibit-22 shows the results of the 10 factors grouped under the third
classification of audit quality – Audit Team Involvement.
Exhibit 22, Results of Audit Team Involvement

3.1 Audit team members are independent 3.00 3.00 3.00
from the client.
3.2 Audit team exercise discretion and 3.00 3.00 3.00
professional judgment whilst
performing the audit.
3.3 Audit team keeps abreast of recent 2.93 2.89 2.91
developments in the profession.
3.4 Audit team adopts high ethical 3.00 3.00 3.00
standards when performing their work.
3.5 Audit team genuinely believe in the public 2.75 2.67 2.73
interest purpose of the audit.
3.6 Audit team shares the same values of the 2.77 2.78 2.77
audit firm, having a sense of
belongingness and stewardship to their
organisation.
3.7 Audit team provides immediate and 2.42 2.13 2.33
professional assistance to clients
recommending possible action for
improvement.
3.8 Audit team has a clear understanding of 2.73 2.80 2.76
roles of partners and staff on audits and
that they are properly qualified to perform
them.
3.9 Audit team is motivated both personally 2.86 3.00 2.88
and by their working environment.
3.10 Audit team benefits from competitive 2.53 2.50 2.52
reward mechanisms.
There is consensus by both groups of respondents on the three most important

attributes of audit team involvement with respect to (St3.1) independence from
the client, (St3.2) discretion and professional judgment and (St3.4) adopting
ethical standards when performing their work. This finding is a replica of the
research done by Lemont et. al. (1987) who identified that audit teams should
stay away from any conflict of interest, avoid any manipulation that may affect
their unbiasedness and acknowledge their views, which they reach as the

consequence of their work, without directly or indirectly considering the benefits

of other parties. In turn, Lemont even sustained the correlation of “auditor
independence” to ethical issues. This supports the findings found in Malta
whereby both groups of respondents reckoned the importance of being both
independent and ethical in performing an audit assignment.
Other than the above mentioned statements, audit committees perceived that
audit quality of the team augments when each individual member is motivated
both personally and by their working environment. This attribute was also
relatively highly ranked by audit partners scoring a mean of 2.86. This finding
confirms the study carried out by Craswell et al. [1995] where he identified a
relationship between the performance of auditors, their competence and their
motivation. He argued that even highly skilled and knowledgeable people will not
achieve audit quality unless they are determined (motivated) to do so. Such
motivation factors broadly fall into three groups – (i) firms’ values, (ii) self-belief &
consultation and (iii) rewarding appropriate behaviour. Unless an audit firm
motivates its staff, its audit quality is deemed to suffer.
Another highly ranked statement by both groups of respondents relates to

continuous professional education (St3.3). Attaining an overall mean of 2.91, both
groups agreed that if an audit firm continually keeps abreast with developments
in the profession, than audit quality should be improved.
Meanwhile, the least perceived influential factor on audit quality relates to (St3.7)
wherein an overall mean score of 2.33 was given. Perhaps quite surprisingly this
statement relates to the provision of immediate and professional assistance by
the audit team. It thus seems that whilst audit committees are willing to receive
feedback and suggestions from their audit partner (vide St2.4), they tend to keep
at a distance from the actual team members performing the audit. The reason
submitted by one of the chairperson was that they want the audit team to critically
evaluate the judgments made by their organisation without any undue influence
from the committee. Audit committee feels that the appropriate timing to settle
any issues, should be done at the closure of the audit by the audit partner.
To summarise the findings of audit team involvement, both groups of

respondents perceive that the audit team independence and having people with
the right aptitude are key elements of audit quality. It was further perceived by

audit committees that motivating staff also enhance such audit quality dimension.
This perception was also supported by auditors considering the ability to have the
people with the appropriate personal values whilst ensuring training and on-the-
job learning to reinforce such values consistently. This perception was even
Exhibit 23, Rankings from Audit Team Involvement
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1 2 3 4 5 6 7 8 9 10
Statement Number
4.2.2.4 Quality on the Field

Exhibit-24 [pp.51] shows the results of the 10 factors grouped under the fourth
classification of audit quality – Quality on the Field.

Exhibit 24, Results of Quality on the Field


4.1 There is a ‘good fit’ between the audit team, 2.83 2.78 2.81
engagement partner and the finance director.
4.2 Audit team provides the client with individual 2.57 3.00 2.70
attention.
4.3 Audit team creates the minimum disruption to the 2.42 2.88 2.56
client so far as practically possible.
4.4 Audit team performs the audit in accordance 3.00 3.00 3.00
with International Standards on Auditing and
with appropriate and relevant legislations.
4.5 Audit team gathers sufficient and appropriate 3.00 3.00 3.00
documented evidence supporting audit opinions.
4.6 Audit team aims for early communication with 2.72 2.11 2.52
management when corrective action may be
required.
4.7 Audit team evaluates appropriate judgments made 2.83 3.00 2.89
by their clients with rigour and professional
skepticism.
4.8 Audit team files are reviewed by people with 2.86 3.00 2.93
appropriate experience who will encourage
alertness, originality of thought and a thorough
investigation of anomalies.
4.9 Audit team on field works in accordance to the 2.78 3.00 2.89
working practices embedded within the audit firm’s
internal control procedure.
4.10 Audit team uses information technology to liaise and 2.57 2.90 2.68
obtain second opinions from the lead engagement
partner.
The findings of this section echo the previous findings outlined in Statement 1.4
and Statement 3.4 related to the performance of an audit in accordance with
International Standards on Auditing and legislations (St4.4) and the gathering of
sufficient and appropriate documented evidence supporting audit opinions (St4.5)
respectively. One should also note that out of these 10 statements, MSE highest
mean of 3.00 was also given to another four statements related to (St4.2) clients’
individual attention, (St4.7) evaluation of judgments with rigour and professional
skepticism, (St4.8) audit files are reviewed by experienced people and (St4.9)
team works in accordance to the working practices embedded within the audit
firm’s internal control procedure. This section was the highest ranked section by

the audit committees scoring a mean of 3.00 for six statements. It is thus
worthwhile noting the difference in perception of both groups of respondents in
this particular classification of audit quality. Whilst audit committees scored high
mean values, auditors attributed modest means to this dimension. To take an
example, audit partners gave only 2.57 marks for the statement that audit quality
is improved when the audit team provides the client with individual attention.
Similar to this finding, whilst audit committees reckon that audit quality may be
effected if there is disruption to their modus operandi only a low score of 2.42
was actually given by audit partners. This finding compliments the research
carried out by Walker et al. [2001] suggesting that the effectiveness of maintaining
good relationship with clients is often overlooked by auditors, wherein the latter
place more emphasis on the technical component of audit quality.
To conclude, both groups of respondents perceive that quality on the field as

being fundamental. On a general basis, audit committees tend to rate such
classification on a much higher basis then auditors. Nonetheless, partners do
reckon that this requires effective implementation through a combination of
people with motivation, skills and working practices. This perception was even
Exhibit 25, Rankings from Quality on Field
45.00%
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1 2 3 4 5 6 7 8 9 10
Statement Number

4.2.2.5 Stakeholders’ Involvement

Exhibit-26 shows the results of the 10 factors grouped under the fifth
classification of audit quality – Stakeholders’ Involvement.
Exhibit 26, Results of Stakeholders’ Involvement

5.1 Audit firm delivers consistent messages to all 2.41 3.00 2.50
stakeholders.
5.2 Audit firm provides the directors and officers 2.60 2.00 2.57
constructive observations arising from the audit
process.
5.3 Audit firm acts in the interest of shareholders 2.73 2.50 2.69
while having regard to the wider public interests.
5.4 Audit firm with a strong reputation may imply 2.76 3.00 2.80
higher credibility to users of audited financial
statements.
5.5 Audit firms issuing audit reports with matters of 2.65 2.89 2.73
interest to creditors and shareholders provide
more assurance to stakeholders.
5.6 The interests of shareholders would be best 2.50 2.00 2.29
served if audit firms remain in place for a fixed
term (eg five years) - without any re- appointment
option.
5.7 Increase in audit fees implies higher assurance to 2.53 2.11 2.38
stakeholders.
5.8 Employees of the companies are more willing to 2.59 2.00 2.57
co-operate with auditors with good inter-personal
and intra-personal skills.
5.9 Having the necessary set-up to lodge a complaint 2.53 2.33 2.46
against an auditor from the general public leads to
higher levels of audit quality.
5.10 Stakeholders will feel more trust, if the list of audit 2.47 2.33 2.45
firms clearly indicates, those that are ‘quality
certified’ by an independent oversight authority.
There has always been a debate in the auditing profession as to whether the
responsibility of the auditor is solely towards shareholders or to the public at
large. Current standards and regulations establish that the prime responsibility is
towards the shareholders or owners of the company. Even the format of the audit
report supports this approach. Perhaps the idea that the auditors’ remit be
extended to cover other stakeholders is still at a very early stage not only in
Malta, but even within several EU countries. Although all audits have precisely

the same objective, namely to report to the interested parties on the results of the
audit review undertaken, the remit of an auditor should be extended to cover
wider public interests. It is thus no surprise that this category received the lowest
scores from both groups of respondents.
The highest means score for this dimension comes from St5.4 wherein it is stated
that audit firms with a strong reputation may imply higher credibility to users of
audited financial statements. Upon closer examination, of who these users of
financial statements really are, a relatively high score was put forward by audit
committees. Scoring 2.89 for Statement 5.5, audit firms issuing audit reports with
matters of interest to creditors and shareholders are viewed to provide more
assurance to stakeholders by audit committees.
Moreover, it is interesting to note that whilst audit committees considers it critical

that an audit firm should deliver consistent messages to all stakeholders (St5.1),
only a modest score of 2.41 was given by audit partners. At the bottom end of
this list one will find that the rotation of audit firms is not applauded by both audit
partners and their clients alike. Attaining an overall means score of 2.29, this
statement was the least scored in this study.
To conclude, both groups of respondents perceive that stakeholder involvement

does not have any particular bearing on the audit quality of the firm, though in the
near future, such dimension should attain further importance. This perception
was even shared when respondents were asked to rank two of the most
important statements in order of priority, as can be viewed from Exhibit-27.
Exhibit 27, Rankings from Stakeholders’ Involvement
40.00%
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1 2 3 4 5 6 7 8 9 10
Statement Number

4.2.2.6 Managing Customers Relationship

Exhibit-28 shows the results of the 10 factors grouped under the sixth
classification of audit quality – Managing Customers’ Relationships.
Exhibit 28, Results of Stakeholders’ Involvement

6.1 Audit team communicates 2.77 3.00 2.80
regularly and appropriately with
executive management and/or
audit committee.
6.2 Audit firm communicates regularly 2.73 2.89 2.79
and appropriately with client
management and directors.
6.3 Audit firm provides additional 2.47 2.13 2.36
services such as accounting/book-
keeping, taxation and consultancy
services to their audit clients.
6.4 Audit firm is easily contactable (eg by 2.80 2.75 2.79
email, internet, phone).
6.5 Audit firm is reliable in performing 2.77 3.00 2.81
the promised service dependably
and accurately.
6.6 Audit firm is responsive by giving 2.47 2.67 2.50
advice to customers that add value.
6.7 Audit firm provides assurance about 2.50 3.00 2.66
its knowledge, courtesy of employees
and ability to convey trust.
6.8 Audit firm provides individual 2.69 3.00 2.72
attention to customers.
6.9 Audit firm has a good image and 2.78 2.33 2.63
communication material.
6.10 Audit firm charges appropriate fee to 2.67 2.13 2.48
meet all legal, regulatory and
professional obligation, without
putting unnecessary pressure on
audit staff to cut corners.
On an overall basis, MSE ranked 4 statements as being highly critical in

influencing the audit quality, each attaining a mean score of 3.00. The statements
are (St 6.1) audit team communicates regularly and appropriately with executive
management and/or audit committee, (St6.5) audit firm is reliable in performing
the promised service dependably and accurately, (St6.7) audit firm provides

assurance about its knowledge, courtesy of employees and ability to convey trust
and (St6.8) audit firm provides individual attention to customers.
It is interesting to note that audit partners, did not consider even one of these
statements as being really fundamental in audit quality. Another interesting point
is that whilst audit partners perceived that the provision of additional services
such as accounting/book-keeping, taxation and consultancy services to their
audit clients could enhance audit quality, this view was not equally shared by
audit committees. Instead only a low score of 2.13 was given to such an attribute.
This indicates that audit committees may be concerned that local audit firms
perform an array of financial services to the detriment of the auditor’s
independence. If one had to look at the experience of other countries, various
nations have put forward legislation to augment the independence of auditors.
Audit firms in the UK and Australia have to inform their government about the
amount of their revenues that they receive from non-audit works so that their
independence can be more precisely evaluated [Harma and Sidhu, 2001]. From
this, it can be seen that auditor independence is considered to be a crucial factor
for the efficiency of the capital markets as well – and Malta is no exception.
Juggling with too many services, may be a threat to independence – which can at
any time strike at the grass root of the audit function. This perception was even
Exhibit 29, Rankings from Customers’ Involvement
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
1 2 3 4 5 6 7 8 9 10
Statement Number

4.2.2.7 Summarizing the Results of Section B

After identifying the particular means for each of the statements identified in this
study, an important research question is what categories are perceived to
contribute to enhance audit quality by both groups of respondents. Exhibit-30
summarises the average overall mean scores across these two groups.
Exhibit 30, Mean Score for Attributes – Audit Partners’ View
Attribute Mean Ranking Mean Ranking

Score Score
Audit Partner’s View Companies’ View
Audit firm Culture 3.265 2 3.160 2
Partner Involvement 3.300 1 3.300 1
Audit Team Involvement 3.169 3 3.140 3
Quality on Field 3.131 4 3.160 2
Stakeholder’s involvement 2.577 6 2.900 5
Managing Customer Relationships 2.819 5 2.980 4
In general terms, auditors and audit committees mean scores across the six
dimensions are broadly similar with both groups of respondents putting partner
involvement as the category that received the highest scores followed by audit
firm culture. It is interesting to note that audit committees also gave high scores
to attributes related to quality on the field, sharing the second place audit firm
culture. Meanwhile, auditors placed this category in the fourth place. At the lower
end of the results, Stakeholders’ Involvement and Customer Relationships were
regarded as less important.
One may also attest these findings diagrammatically as can be seen from Exhibit-
31 [pp.58], which relates to the Maltese perception of the ‘Audit Quality Wheel
Model’ presented in Exhibit-9 [pp24]. This model highlights those statements
whose mean score is equal to 3.00.

Exhibit 31, Audit Quality Wheel Model – Illustration of Maltese Findings
Key
Black, refers to issues identified by audit partners
Blue, refers to issues identified by Audit Committees Source: Author, 2006. Compiled from various sources.
Red, refers to issues identified by both parties

4.3 Section C, Free-form Comments Analysis

Exhibit-32 puts forward an overall summary about the perception of audit
partners and audit committees on topical auditing issues. This part addresses the
extent of awareness that both respondents have on topical issues whilst
providing reference to the perception of the Maltese system.
Exhibit 32, Section C Results
Audit MSE audit Total

Firm committee Respondents
7.1 Higher fees charged reflect higher agree 13 (50%) 2 (20%) 15 (42%)
quality of audit services. disagree 13 (50%) 8 (80%) 21 (58%)
7.2 Self-regulating profession runs a agree 8(31%) 7 (70%) 15 (42%)

serious risk of conflicts of interests. An disagree 18 (69%) 3 (30%) 21 (58%)
auditor can never be truly independent
of those who have the power to sack
you.
7.3 An audit firm should occupy a term of agree 6 (23%) 8 (80%) 14(39%)
office for a fixed duration period of time disagree 20(77%) 2 (20%) 22(61%)
indicated by law.
7.4 Audit firms who are not performing to agree 19 (73%) 6 (60%) 25 (69%)
the standards of quality are to be disagree 7(27%) 4 (40%) 11(31%)
publicly disclosed by the relevant
authorities.
7.5 Having an independent unit performing agree 16(62%) 6 (60%) 22 (61%)

on-the-spot visits on all audit firms and disagree 10(38%) 4 (40%) 14 (39%)
practitioners performing audit work
enhance audit quality.
7.6 The various components constituting agree 5(19%) 2 (20%) 7(19%)

audit quality is fully known in Malta disagree 21(81%) 8 (80%) 29(81%)
7.7 Audit quality yield more costs than agree 11(42%) 3 (30%) 14(39%)
benefits for an audit firm to adopt and disagree 15(58%) 7 (70%) 22(61%)
maintain.
7.8 Audit quality is a one-time effort by the agree 3(12%) 3 (30%) 6(17%)
firm to align its internal control disagree 23(88%) 7 (70%) 30(83%)
procedures with best practices.

4.3.1 Audit Fees

One motivation for audit fee studies is the concern that larger audit firms are able
to charge higher audit fees due to market (monopolistic) powers. This has
implications for audit quality because it has been found that auditor monopoly
reduces the quantity demanded of external auditing and results in lower quality,
higher-cost financial reporting systems [Simunic, 1980]. Whilst there are mixed
perceptions between audit partners about whether higher audit fees imply higher
quality of service, 80% of MSE respondents identified that this may not be
necessarily the case. Talking from their own personal experiences they have
argued that at times an audit fee is usually set to a minimum competitive level to
attract other related services like consultancy and tax advise. Generally,
however, a positive relation is assumed to exist between audit quality and audit
fees with audit partners identifying that if larger firms are charging higher fees it
reflects the higher quality of their audit services.
4.3.2 Self-Regulating Profession

Very convergent views were again found from both groups on the second
statement which identified that a self-regulating profession runs a serious risk of
conflicts of interests. 69% of audit partners disagreed with this statement putting
forward arguments that this set-up increase rather than decrease audit quality as
people with inappropriate expertise could be running the regulative aspect of the
profession. Contrary to this perception 70% of MSE audit committee agreed with
this statement. This seems to be sustained by various contemporary audit
researchers who identified the need of having the regulative side of the auditing
profession outside the hands of majority of practitioners. For instance, Husey and
Lan [2001] found in their study that auditing should not be developed and
regulated by the accounting profession. A practical move towards this end has
already been made by the enactment of the EU Statutory Audit Directive which
request that the public oversight system should be governed by non-practitioners
who are knowledgeable in the areas relevant to statutory audit. This Directive
necessitate that these non-practitioners may be specialists who have never been
linked with the audit profession or former practitioners who have left the
profession. Member States may, however, allow a minority of practitioners to be
involved in the governance of the public oversight system. However it seems that

audit firms in Malta are still very much inclined to be in control of what is
happening in the profession.
4.3.3 Term of Office Duration

80% of MSE audit committee identified that they agree that an audit firm should
occupy a term of office for a fixed duration period of time indicated by law. On the
other hand audit partners had different perception on this matter wherein 70%
disagreed with this set-up suggesting that only competitive forces should decide
whether an auditor is to retain his office or not and not legal imposition. In fact,
very few auditors in Malta belief that auditing should be restricted to a fixed
period and subject to a rotation. However, the study of Beattie et al. [2004] shows
that as the relationship between the auditor and their clients becomes less
distant, the belief that there must be a compulsory rotation for the auditors
becomes more apparent. The latter suggested that the law should restrict the
audit service to the same firm to a certain period or by subjecting them to a
rotation on a fixed period between 5 and 12 years.
4.3.4 Publicity of Defaulters

73% of audit partners and 60% of Audit Committees agreed that audit firms who
are not performing to the standards of quality are to be publicly disclosed by the
relevant authorities. In the US this set-up of transparency and accountability was
imminently put into place after the Enron case. It is applauded to note that there
exists consensus amongst the two groups that this measure can be applied to
Malta. Perhaps not going into the peculiar details and making available each
audit firm review report on the internet, but sure enough the enactment of
Directive 4 of the Accountancy Profession Act, ensures that a report summarizing
the findings of audit firms is to be made available to the public on an annual
basis.

4.3.5 Monitoring by Government

Consensus was also reached between the two groups of respondents related to
the setting up of a new unit to perform on-the-spot visits on audit firms to ensure
audit quality. 62% of audit partners and 60% of audit committees identified that
this Unit is expected to increase standards of audit quality. This system is no
longer an option for Malta but is mandatory by virtue of the enactment of the 4th
Directive wherein these reviewers are expected to perform on-the-site
inspections on audit firms to ensure audit quality. For instance in the UK, the
Audit Inspection Unit (AIU) was set up following the Government’s post-Enron
review of the regulation of the UK accountancy profession which reported in
January 2003. The Government’s report recommended enhancing the monitoring
of the audits of listed and other major public interest entities through a new
independent inspection unit (the AIU) reporting to a professional oversight board
within an integrated independent regulator (the FRC). The AIU monitors the
auditors of all listed and other major public interest entities and reports its findings
to the Audit Registration Committee (ARC).
4.3.6 Components of Audit Quality

Only 5 audit partners and 2 chairpersons of audit committees feel that the various
components constituting audit quality are fully known in Malta. Instead the
majority of both groups of respondents identified that there is a lack of knowledge
in this regard. Perhaps this gap may be the result of a rather passive attitude
taken by both auditors themselves and their regulators in ensuring that they align
their knowledge with recent developments in the profession. This further confirms
the educational role that the auditor and the regulator should pursue to ensure
the spread of knowledge of what audit quality is really about and what the
regulator is really after. In fact recently an initiative has been taken by the
Government to launch some educational seminars for auditors to identify how the
proposed system is going to be implemented.

4.3.7 Benefits of Audit Quality

Whilst 70% of audit committee agrees that audit quality yield more benefits than
costs for an audit firm to adopt and maintain, a relatively high percentage of
auditor feel otherwise. In fact, 42% disagree with this assertion and think that
there is a high cost to be recouped in implementing a highly qualitative audit.
Their argument is that the present legislation and professional standards are
imposing very stringent requirements far beyond the audit fee charged. In fact,
the implementation of an audit quality assurance system is expected to raise the
audit fee charged. The auditors’ concern is whether or not their clientele can
actually identify which audit is of a certain standard of quality and thus merit the
increase in price and other non qualitative audit assignments. The fear is that
their clients are unable to make this comparison. Here again, one must underline
the importance of that the educational role of the auditor and regulator. Quoting
one auditors’ response, “we do not have the complete picture from Government
as to what constitutes audit quality, so the implication is that we cannot really
establish the feasibility or otherwise of this initiative”.
4.3.8 Duration of audit quality

The majority of both audit partners and audit committee reckon the importance
that the implementation of an audit quality system is not a one-time effort, but is a
continual endeavor to align the firm with best practices. This idea that one must
keep abreast of recent developments, further sustains the importance of the
supporting and educational role that each audit firm needs to pursue during its
entire lifecycle.
4.3.9 Summary on Section C

Though there is consensus amongst the two groups about issues related to
publicity of defaulters, monitoring by Government, extent, benefits and duration of
audit quality, there are contrasting views about the matters relating to self-
regulating profession and rotation of audit firms. On the other hand, auditors
seem to share their opinions about whether or not a high audit fee reflects higher
audit quality, whereas the majority of audit committee disagrees with this
assertion.

4.4 Conclusion
To conclude this study aims to examine the potential factors that influence the
quality of audit from the perception of two selected parties in auditing: partners of
audit firms and audit committees. The result of the study appeared to suggest
that seven major factors that may influence audit quality. These seven traits of
the audit quality in Malta are:-
1. the sustainability of an audit firm’s internal control system;

2. engagement’s partner knowledge about the clients’ industry;
3. independence of audit team members from client;
4. audit team’s ability to exercise professional discretion and judgment;
5. auditors obligation to follow ethical standards;
6. conduct of audit should be done within the rules of the game; and
7. auditors should be able to document all necessary findings to support
their opinion.

Chapter 5
PART THREE - DISCUSSION OF FINDINGS
Criticism of auditors, and litigation against them may result from auditors failing to meet society ’ s
expectations of them. It may be that society ’ s expectations are unreasonable, or that society ’ s
expectations are reasonable but that auditors ’ existing legal and professional requirements do not
fulfil these expectations. Alternatively, it may be that auditors do not perform their existing
responsibilities to a satisfactory standard. Whatever the cause of the gap between society ’ s
expectations of auditors and its perception of auditors ’ performance (termed ‘ the audit
expectation-performance gap ’ ), the resultant dissatisfaction with auditors’ performance serves to
undermine confidence in the auditing profession and the external audit function.
DeFond et al., 2002

Henley Management College Part THREE, Discussion of Findings
5 PART THREE - DISCUSSION OF FINDINGS

Following the presentation of results, this part of the dissertation challenges the
hypothesis by testing them against the research findings. In the second part of
this Section the wider validity of this dissertation is also discussed.
5.1 Testing the Three Hypothesis

5.1.1 Hypothesis One – Nature of Audit Quality
The prime hypothesis of the dissertation is that;
‘the dimensions of audit quality are not something static or universal.

Instead it is a multi-dimension construct that evolves due to continual
changes in the environmental influences effecting the profession.’
This study revealed that owing to the dynamism of the environment of the
auditing profession, particularly that related with legislative frameworks (both
emanating from European Union and local Maltese variants) and auditing
standards issued by the professional bodies, there exist no such terminology as
being static in the auditor’s modus operandi. For instance, until very recently the
continuation of self-regulation in the profession appeared virtually unassailable.
There have, of course, been rumblings about the profession’s need to ‘get its
house in order’, and similar, but equally glib, expressions of dissatisfaction over
the seeming disparity, in the public perception, between the profession’s
performance and the expectations laid upon it. The government, therefore, seized
the opportunity presented by the EU Directive to enforce a completely new
regulatory regime on the profession, and its novel features, such as formal on-
the-spot reviews of audit firms, which is creating understandable anxiety amongst
practitioners.
All of this leads to further substantiate the recurring finding in this study that audit
quality standards cannot be duly increased through legalistic enforcement unless
appropriate self-development – or what the profession usually refers to CPE
(continuous profession education) fuel this process of continuous alignment. The
key to keep auditors abreast of recent developments is through practical training.
Meanwhile, increasing development and complexity in the economic world forces
firms to be more responsible to society. Therefore, it is a duty for firms to disclose

information about themselves through financial reporting to stakeholders,

creditors and legislative institutions. However, this information can enable these
groups to make accurate decisions as long as they are reliable and unbiased.
Therefore the importance of the independence of auditor is highlighted. In fact
this study also revealed that whilst there are various dynamic forces shaping the
auditing profession, there exist some fundamental factors that are obligatory
‘rules of the game’.
Perception of independence is still viewed to be the critical by both groups of

respondents. New measures are being introduced both by law and even by
International Standards to refine this concept further. Some of the mandatory
safeguards relates to the rotation of the lead engagement audit partner and in
cases whereby the supervisory authority thinks fit, the rotation of the audit firm
itself. E Woolf [1997] identified that the concept of the audit and the concept of
independence are the twin sides of the same coin. The auditor who has lost his
independence, has lost his raison d’ệtre, he becomes ‘dependent’, and a
dependent auditor is a contradiction in terms. Other essential elements of audit
quality highly ranked by both groups of respondents are summarized in the
Exhibit-33.
Exhibit 33, Obligatory Elements of Audit Quality
Audit Audit
Firm Committee
1.4 Audit firm employs a robust internal procedure compliant
with the international standards requirements and
regulatory framework regime.
3.1 Audit team members are independent from the client.
3.4 Audit team adopts high ethical standards when performing
their work.
4.4 Audit team performs the audit in accordance with
International Standards on Auditing and with appropriate
and relevant legislations.
4.5 Audit team gathers sufficient and appropriate documented
evidence supporting audit opinions.
To summarise, whilst it is true that the audit environment is continually changing,

the core rules of the game still remain the same - that of providing an
independent audit opinion on the financial statements. The findings in the study
confirm the first hypothesis that audit quality is a multi-dimension construct that

evolves due to continual changes in the environmental influences effecting the

profession.
5.1.2 Hypothesis Two – Recognition of Audit Quality dimensions

The second hypothesis of the dissertation is that;
‘the dimensions of audit quality, are not fully recognised within the local
auditing profession.’
Having a direct question in Section C of the questionnaire, there is consensus

amongst the two groups of respondents that this assertion is also valid in the
Maltese scenario. Furthermore, this finding was further substantiated when
carrying out interviews with audit committees who at times were oblivious to the
queries raised and felt suspicious that there could be some tricky question hidden
somewhere. During the interviews eye brows were raised and comments like, this
is a ‘far-fetched idea’ and ‘oblivious to our organisation’ were also noted. In fact,
this quote from one of the chairpersons seems to summarise the overall
perception and attitude of audit committees,
‘our interest is that of complying with the law and recognised accounting
standards… our concern is of engaging competent audit firms that add
credibility to our financial statements… we welcome any initiative to
augment the quality standard of the audit, though we reckon that we are
pleased with the overall work done by our auditors…’
Furthermore and perhaps quite surprisingly even audit partners, have shown
peculiar responses to issues that are within their remit. A typical example relates
to the low ranking of statements related to rotation of audit partners, which is no
longer best practice but is mandatory by EU law! Though one must reckon that
this legislation will be duly enforced in 2008, it is no surprise that auditors do not
exhibit a positive preference to this clause. Even preliminary discussion held
prior to the enactment of this law, this clause was out rightly refused by EU
representatives of audit firms. It is here once again accentuated that there is an
urgent need that interested parties be informed of what this audit quality is all
about, not only in the light of what the law necessitates but tackling the public
interest dimension of an audit.
To summarise the second hypothesis testing, it is ascertained that the

dimensions of audit quality are not fully known in Malta.

5.1.3 Hypothesis Three – Competitive advantage through Audit Quality

The third hypothesis of the dissertation is that;
audit firms who manage audit quality at all levels of its organisation, ensure
long term sustainable competitive advantage.
As reported by Bernstein [1978] and Kotler et al [1984], the growing competition

within the profession forces auditing firms to becoming more cognizant of the
need to market their services. The question is how the auditing firm should
differentiate themselves from each other in order to be more competitive.
Carcello et al [1992] suggested that one of the dimensions on which firms have
attempted to differentiate themselves is the quality of services provided. Section
5.2 –Audit Quality Competitive Matrix explores this hypothesis in further depth.
5.2 Audit Quality Competitive Matrix

Having identified what elements of audit quality are considered to be critical in the
eyes of auditors and audit committees, a proposed model is illustrated in Exhibit-
34 classifying the dimensions of audit quality according to their competitive
posture and competitive focus. The audit focus-posture matrix is divided into four
cells, each indicating a different type of audit firm.
Exhibit 34, Audit Competitive Focus-Posture Matrix
Competitive Posture
Obligatory Adds Value
Technical
issues
BASIC AUDIT FIRM
Competitive Focus
CUSTODIAN AUDIT FIRM
DARING AUDIT FIRM ENVIED AUDIT FIRM
Service
issues

1. Basic Audit Firm: Audit firms who stick to legislation and tick-marks,
focusing exclusively on getting the job done within the parameters of
professional standards. These firms add little value to their constituency
let alone putting the public interest first and foremost. Attaining the most
ranked statements, it transpires that this audit firm style still enjoys quite
some popularity in Malta, vide Exhibit-35.
Exhibit 35 Characteristics of a Basic Audit Firm
Question Statement
1.1 Audit firm operates to the highest standards of integrity.
1.4 Audit firm employs a robust internal procedure compliant with the
international standards requirements and regulatory framework regime.
3.4 Audit team adopts high ethical standards when performing their work.
4.4 Audit team performs the audit in accordance with International Standards on
Auditing and with appropriate and relevant legislations.
4.5 Audit team gathers sufficient and appropriate documented evidence
supporting audit opinions.
2.2 Engagement partner is independent of the board of directors.
4.7 Audit team evaluates appropriate judgments made by their clients with rigour
and professional skepticism.
4.8 Audit team files are reviewed by people with appropriate experience who will
encourage alertness, originality of thought and a thorough investigation of
anomalies.
4.9 Audit team on field works in accordance to the working practices embedded
within the audit firm’s internal control procedure.
However, having this competitive posture is not sustainable in the long-

term as other audit firms are redesigning their procedures and systems to
add value to the public in general. So whilst it is essential that all audit
firms operate within the rules of the game, they need to differentiate their
service to ensure long-term sustainable advantage.
2. Daring Audit Firm: Audit firm methodology is still very much inclined
towards the legalistic regime, yet auditors do try and put some effort to
introduce their constituency in the picture. Exhibit-36 [pp.71] defines some
characteristics of this type of firm. In Malta it seems that this style does
not enjoy a high level of popularity.

Exhibit 36 Characteristics of a Daring Audit Firm
2.7 Engagement partner allocates more time and effort on those areas that
have the highest risk.
2.10 Engagement partner allocates necessary resources for all its clients,
irrespective of the audit fee charged.
6.1 Audit team communicates regularly and appropriately with executive
management and/or audit committee.
3. Custodian Audit Firm: Audit firm that have strong technical background
but search whilst searching for new ways to add value to constituency.
Exhibit-37 defines some characteristics of this type of firm. In Malta it
seems that this style is perhaps the most popular one.
Exhibit 37 Characteristics of a Custodian Audit Firm
2.5 Engagement partner has sufficient knowledge and understands what is

happening within the client’s organisation.
3.2 Audit team exercise discretion and professional judgment whilst performing
the audit.
1.6 Audit firm is able to attract, train and develop staff of highest calibre with
appropriate skills and qualifications.
1.5 Audit firm is knowledgeable about the clients’ industry.
1.7 Audit firm consistently monitors its quality control policies to align with recent
best practice in the audit profession.
2.3 Engagement partner dedicates resources to align the audit firm’s strategy
and internal communications with recent developments in the profession.
P.P. Russell [2004] indicated some potential elements how the audit-function
can actually add value to its constituency. These are summarized in Exhibit-
38 [pp.72].

Exhibit 38 Adding Value
4. Envied Audit Firm: Audit firm that seeks to add value and put constituency
as the prime focus of their methodology-vide Exhibit-39 [pp73]. Though
this style can be seen to be more popular with clientele, it may be
dangerous if taken to extreme as independence may be severely
jeopardized. However this style can proof to be the most successful to
sustain competitive advantage.

Exhibit 39 Characteristics of an Envied Audit Firm
1.10 Being a big audit firm adds credibility to users of financial statements.
3.9 Audit team is motivated both personally and by their working environment.
4.2 Audit team provides the client with individual attention.
5.1 Audit firm delivers consistent messages to all stakeholders.
5.4 Audit firm with a strong reputation may imply higher credibility to users of
audited financial statements.
6.5 Audit firm is reliable in performing the promised service dependably and
accurately.
6.7 Audit firm provides assurance about its knowledge, courtesy of employees
and ability to convey trust.
6.8 Audit firm provides individual attention to customers.
As time passes, successful audit firms change their position in the focus-posture
matrix. Successful audit firms have a lifecycle. These start as a basic firm,
become custodian, then daring and finally envied firm. For this reason audit firms
should examine not only their current positions in this matrix but even their
moving positions throughout their lifecycle.
If the auditing profession were willing to broaden its responsibilities to embrace

these duties that can reasonably be expected of auditors, the overall audit quality
would improve significantly. However as DeFond et al. [2002] noted, it seems
that the willingness of the profession to accept any extended responsibilities is
hampered by concerns about the perceived potential increase in exposure to
legal liability rather than encouraged by the potential benefits to be gained from
better meeting society’ s expectations and be thereby enhancing the value of the
audit function in society.

5.3 Wider Validity of Dissertation

It is hoped that this study developed a conceptual framework to assist academics
and practitioners in understanding what are the dimensions of audit quality, how
discrepancies can arise and how these can be managed. This section contains a
description of the wider validity on the topic of audit quality that can be drawn
from this study.
5.3.1 The Five Pillars of Audit Quality – A guideline

This dissertation adds value to the practical management of audit quality by
establishing a model, presented through a Greek representation of the
‘Parthenon Temple’. By combing the academic research with the practical issues,
it is believed that the dimensions of audit quality are explored into greater
dimensions.
5.3.2 The Audit Quality Wheel Model

Dividing the literature review into six major headings provides a holistic analysis
of the dimensions of audit quality not only from the technical and clients point of
view but even from the view of the public interest and stakeholder analysis.
Though the latter are not considered yet being critical key players in audit quality,
as social responsibility of auditors augments, the latter are gaining more and
more importance. To this effect this six classification approach can assist an audit
firm as a checklist to establish the areas that it needs to address further to ensure
sustainable audit quality when conducting a self-review audit.
5.3.3 Audit Firm Competitive Matrix

Another model proposed by this dissertation relates to the different
characteristics of an audit firm in relation to its competitive focus and posture.
This model can be used by audit firms to identify their extent of focus and
whether this is in line with their own culture and strategy. This model can also be
used to detail the lifecycle of an audit firm proposing the sequence
Basic→Daring→Custodian→Envied as the less risky with highest returns.

Chapter 6
PART THREE-OVERALL CONCLUSIONS
The auditing service emerged from the requirements of stakeholders for the detection of the extent
to which managers fulfill their responsibilities. If auditors can not sustain their independence, the
parties of the contract will not value the service. Any definition of ethics involves moral tasks and
obligations that make out how should the behaviour of a person be. For an auditor to be ethical, it is
essential that they should be independent by maintaining their objectivity and stay away from any
possible conflicts of interest while fulfilling their responsibilities.
Krishnan et al.,2001

Henley Management College Part THREE, Overall Conclusions
6 PART THREE, OVERALL CONCLUSIONS
6.1 Recommendations
Limperg Instituut [1985] observed that auditors have a dual responsibility: Firstly,
not to arouse ‘in the sensible layman’ greater expectations than can be fulfilled by
the work done, and secondly to carry out the work in a manner that does not
betray the expectations evoked. Limperg’s analysis highlights the fact that, if
auditors fail to identify society’s expectations of them, or to recognise the extent
to which they meet (or, more pertinently, fail to meet) those expectations, then
not only will they be subject to criticism but also, if the failure persists, society’s
confidence in the audit function will be undermined and the audit function, and
the auditing profession, will be perceived to have no value. To this effect a set of
recommendations have been proposed to ensure that the audit quality is duly
understood by the key parties involved and action is taken not to let another
Enron happen in our Maltese community.
6.1.1 Enhancing the education of auditing practitioners

The research findings suggest that the enhanced education of auditors is
required. It was noted that auditors were found to have a ‘knowledge gap’ in
respect of their existing responsibilities. These CPE activities should be
organised on a practical approach rather than merely being informative in their
nature. It is therefore suggested that further practical education be carried out to
inform practitioners about what is expected of them with regards to audit quality,
possibly through compulsory professional development sessions. Obviously
these courses should be mandatory for all the professional people wishing to
maintain their auditors’ warrant.

6.1.2 Educating society about the audit function and the work of the auditor
From the research findings, it is evident that the Maltese business community
needs education about the audit function and what auditors can reasonably be
expected to achieve. One possible means is to use the opportunity afforded by
an infamous fraud and/or unexpected corporate failure that reaches the media
headlines to explain the audit function and the work of auditors. Such occasions
could be used to explain, in a non-technical, easily understandable language, the
auditors’ role in those particular circumstances – and placing those
circumstances in the broader context of the audit function and the role and
responsibilities of auditors in general. An alternative, and perhaps more effective
way to educate such community, is to seek opportunities to educate influential
journalists, formally and informally, about the audit function and the work of
auditors.
6.1.3 Installing a mechanism to receive complaints on the internet

The use of the internet has gained massive popularity in Malta wherein the
majority of business communities and the general public have access to this
medium of communication. To this effect, a mechanism should be implemented
to capture any queries or complaints about the conduct of an auditor to the
relevant authorities, whilst preserving the confidentiality of the individual.
6.1.4 Improving the quality control in audit firms

The monitoring of auditors’ quality is expected to augment standards of auditing
in the local profession. The Quality Assurance Unit is expected to conduct its first
reviews during the second quarter of the year 2007. There is great anxiety
amongst auditors as to what these reviews will really entail. It is recommended
that an educational role be primarily launched to establish the practical remit of
this Unit, to avoid unnecessary misconceptions whilst contributing to enhance the
overall audit quality of audit firms in Malta.

6.1.5 Summary of Implementation measures

A clear understanding of what constitutes audit quality is highly applauded by
both practitioners and auditees alike. It is thus consider of fundamental
importance that awareness campaigns and training initiatives be primarily
targeted to these key stakeholders. Several media can be used to reach this
objective including articles on newspapers, professional magazines and the
interactive use of the Accountancy Baord’s web portal. Having the right
atmosphere and attention to receive audit quality reviews, the first on-the-spot
visits can be conducted, as hopefully people will recognize that this process will
increase the overall quality standards in the local auditing profession. Exhibit 40
provides an overall summary of such implementation measures and time frames
through the use of a Gaant Chart.
Exhibit 40 Gaant Chart – Implementation Measures

Euros
(€) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Analysis of Expected Expenditure for 2007
1. Educating Practitioners
Design practical training course 400
Launching practical training two-day seminar 2,000
Promote practical training initiative 1,500
Deliver training courses once every quarter 6,000
Total - Educating the Practitioners 9,900
2. Educating Society
Design awareness campaign 500
Perform feasibility of what type of media best-fit consituency 200
Launching awareness campaign two-day seminar with auditees 2,000
Keep in touch with public 1,500
(eg. Articles on papers, professional publications & internet)
Total - Educating Society 4,200
3. Install Complaints Mechanism at Ministry of Finance

Design feasibility of having a interactive web portal 800
Develop a new web portal catering for complaints 7,000
Recruit staff providing assistance to consituency through phone-calls 30,000
Total - Installing Complaints Mechanism 37,800
4. Perform on-the-spot reviews

Recruit additional staff at Ministry 65,000
Launching on-the-spot visits 2,500
Obtain feedback from practitioners after each visit 500
Total - Perfroming on-the-spot visits 68,000
TOTAL COSTS FORECASTED FOR THE YEAR 2007 (A) 119,900
Analysis of Expected Income for 2007

TOTAL REVENUE EXPECTED FROM FEES LEVIED FOR 2007 51,000
TOTAL SUBSIDIES RECEIVED FROM GOVERNMENT 70,000
TOTAL REVENUE FORECASTED FOR THE YEAR 2007 (B) 121,000
EXPECTED SURPLUS FOR PERIOD (B-A) 1,100

6.2 Avenues for future research

Part of the strength of any research projects lies in the recognition of its
limitations. This will identify potential issues that merit future work.
Primarily this study focused exclusively on audit partners to proxy for auditors
and audit committees as representatives of auditees. Future work that reveals
whether the results could be generalized across other groups of auditors and
external users would be interesting.
Secondly all attributes of audit quality were measured at one point in time, from a
static perspective. Recent corporate accounting scandals which have almost
certainly damaged the auditing profession may have altered the dynamics of
audit quality. It is interesting to note how such perception change over time.
Thirdly, this research project has identified the important role of audit staff and
teams play in delivering audit quality. Future work may wish to conceptualize a
personality profile and subject it to empirical testing. The development of such a
profile might assist audit firms to screen individuals seeking employment as
auditors.

6.3 Personal Learning and Reflection

Reflecting on the last six (6) months has been extremely difficult and tough to get
through this final dissertation. Having two sons and an expectant wife, made it
rather more difficult. But now as the finish line has been crossed, it is extremely
satisfying and a great relief to me and my family.
The process of writing a dissertation is a huge learning process and I have

gained a lot of knowledge in a subject which I do believe that can be used by
audit firms and sole practitioners alike. Being one of the persons performing on-
the-spot visits on audit firms, I am quite pleased with this study as I think that it
met my objectives of identifying a ‘generic’ set of success criteria in examining
financial audit quality. In fact the identification of these audit quality antecedents
will surely assist me when conducting the first reviews expected to be carried out
next year.
There were even some changes in the policy implementation at my place of work
following the exodus of this dissertation. In fact, original plans were that the Unit
performs on-the-spot visits with little regard to the educational aspect. However,
plans were altered to put awareness campaigns and practical development
initiatives as the foundations of audit quality in Malta. On an even more practical
note, this dissertation has also helped me to come into contact with the majority
of audit partners and audit committees, whom I really wish to thank for their kind
collaboration and sincerity expressed in this study.
From a personal point of view, the research has been challenging and rewarding
in so far as it has demonstrated how useful both interviews and questionnaires
are to reach an in-depth understanding of a theme, but also how difficult to
master. The attitude of the interviews was mostly positive and chairpersons were
very helpful in their participation. I had not realised how much time it takes to
handle an interview with subsequent transcribing and analysis and the process
could have been better planned. In hindsight, I would have planned the
interviews at a later stage as I discovered that it can be a problem if these are
carried too early in the process. I felt it as a constraint that the group of audit
committee was relatively small and as they revealed many similarities in their
attitudes to audit quality, it did not provide the rich varied material that I had
hoped for.

From a development perspective this study challenged my ability to apply and

critically appraise the latest theories and concepts to the real live situation, test
and assess their validity for myself and develop my own thinking as a result. On
one hand I am pleased that the hypotheses of this dissertation have been
confirmed, but on the other hand it is disappointing to see that some audit firms
are ill equipped to meet the taxing environment that we are living in.
Sincerely I do hope that such practical training recommendations actually

instigate enthusiasm in Maltese firms to revisit their methodologies and reckon
the importance of this professional cliché –‘audit quality’ that really has become
the nightmare of many. I wish to end this study by inaugurating all audit firms
success in their work and a brighter future in their day-to-day professional
demanding tasks.
- The End -

Henley Management College Appendices
Chapter 7
APPENDICES
For the wise man looks into space and he knows there is no limited dimensions.
Lao-Tse, 1977

7 APPENDICES
Appendix A, Short Notes on Accountancy Profession Act’s Directives
Directive 1 - CPE
The first Directive - Continued Professional Education (CPE), establishes the

minimum thresholds that each and every warrant holder should abide with to keep
abreast of recent developments in the profession.
Directive 2 – Code of Ethics
The subject of the second Directive is the Code of Ethics applicable to all warrant
holders. This code incorporates three important elements namely the IFAC Code, the
EU Eighth Directive and the realities of the Maltese profession. It gives detailed
guidance to the practising accountant but is essentially a principles-based document
that, amongst others, sets out a number of situations that can threaten the integrity of
the accountant and the suggested safeguards that should be in place before
embarking on a course of action or engagement.
Directive 3 – Annual Return and Registration Fee
The Third Directive obliges accountants to send in a yearly return concerning certain
details about their firm or practice. The objective is to:-
• enable the Board to maintain a complete and updated register of warrant

holders including key data and information;
• obtain confirmation that warrant holders are abiding by relevant rules and
regulations;
• enable the Board to obtain information relating to those members engaged

in public practice together with a profile of their activities;
• assist the Board or its representative in the planning of quality assurance

reviews.

Directive 4 – Audit Quality
The Fourth Directive deals with ‘audit quality’. This Directive is aimed at improving
standards and wherever possible the system will be implemented to provide
assistance to practitioners who are found to lack sufficient command of and
adherence to, ethical, regulatory and technical compliance. It will lay particular
emphasis where the practitioner is delivering services to entities of particular interest
to the public such as financial and credit institutions, companies with publicly traded
securities and others that the Board may from time to time consider appropriate to
include in the list of public interest companies. The objectives of the quality
assurance system are listed below:
• To set out the minimum quality control standards to be adopted by warrant

holders engaged in public practice;

established appropriate quality control policies and procedures and that they
are complying with those policies;

complied with relevant professional standards for assurance engagements;
• To require warrant holders in public practice to make appropriate
improvements in their quality control policies and procedures, or in their
compliance with those policies and procedures, when the need for such
improvement is identified;
• Where warrant holders in public practice fail to comply with relevant

professional standards, to take appropriate corrective action, including
educational or disciplinary measures, as may be indicated by the
circumstances.

Appendix B, Questionnaire
Audit Quality (AQ) in Malta
Thank you for spending some of your precious time with this questionnaire.
I am writing my dissertation with Henley Management College, and thus close to the
end of my studies, but I need your help to come to the rest of the way.
The dissertation is about the dimension of audit quality within the local Maltese
context. This questionnaire will take approximately 15-20 minutes.
Your answers will be treated confidentially and used for the purpose of this study.
Please indicate in your reply whether you would like to receive a concentrated
version of the results from the survey. Your e-mail and your answers to the
questionnaire will not in any way be linked.
I would also like to underline that although the questions are inspired heavily by
international audit quality questionnaires and literature, they are my responsibility and
any inconvenience related to the questionnaire rests solely on my shoulders.
I am very grateful for your assistance. This same questionnaire has been e-mailed to
all other partners within 36 registered audit firms in Malta, and to all audit
committees of the 27 companies quoted on the Malta Stock Exchange. Please do
not hesitate to contact me if there are any questions on the questionnaire or you
need any further clarifications.
Submission of Questionnaire
Please return your completed questionnaire to following e-mail address:
renzo.farrugia@hotmail.com
I hope to receive your answers preferably before the 9th November 2006.
Once again, thank you for spending time on the questionnaire, and wishing you
success in your work.
Yours Faithfully,

SECTION A - GENERAL INFORMATION
Kindly complete the following table by filling in EITHER

• Column A if you are a partner within an audit firm OR
• Column B if you are a member of an audit committee of a company quoted on MSE.
Please DO NOT fill in both columns.
COLUMN A COLUMN B
Type Audit Partner Member of an Audit Committee of Company
quoted on Malta Stock Exchange (MSE)
Who is filling this questionnaire?
Sex Male Female Male Female
Age Less than 29 years Less than 29 years

from 30 to 39 years from 30 to 39 years
over 60 years over 60 years
Industry Not applicable

(e.g. Consumer product industry, Hotel industry, etc)
Size of your organisation Less than 10 employees Less than 10 employees
(number of full-time employees) from 10 to 25 employees from 10 to 25 employees
More than 25 employees More than 25 employees
Years working for organisation Less than 5 years Less than 5 years
More than 15 years More than 15 years

SECTION B – AUDIT QUALITY (AQ)
This section has been structured into 6 main parts of 10 statements each as follows:-
1. Audit Firm Culture This relates to factors associated with general culture and values of an audit firm.
2. Partner Involvement This relates to factors that are directly attributable to the engagement partner involvement and
enthusiasm.
3. Audit Team Involvement This relates to factors that build up the competencies of the individual auditor and the team.
4. Quality on the Field This relates to factors that are directly attributable to the audit team competence when performing
audit work.
5. Stakeholders’ Involvement This relates to factors of interest to users of audited financial statements.
6. Managing Customer Relationships This relates to satisfying the need of companies and managing directors.
On the basis of your general views about auditing, please rate the importance of each statement to audit quality, by ticking the number on the scale on the right.
• If you think that such statements do not have any impact on audit quality, please tick number 1.
• If you feel that a statement is very important for high audit quality, please select number 4.
• If your feelings are less strong, please tick one of the numbers in the middle.
At the end of each part, you are requested to indicate which two of these ten statements are critical statements for audit quality in order of importance.
Please do not spend too long thinking about each item – give the first nature answer that occurs to you. But at the same time, do not rush your responses or
respond without giving due consideration to each item. Be honest and truthful with yourself and do not just say what you think good or acceptable. Do not miss
any item, and select only ONE response for each statement given.

1) Audit Firm Culture
Ref. Statements No impact Slight Impacts AQ Extreme

on AQ impact on impact on
AQ (3) AQ
(1) (2) (4)
1.1 Audit firm operates to the highest standards of integrity.
1.2 Audit firm is independent of the board of directors.
1.3 Audit firm enjoys good reputation.
1.4 Audit firm employs a robust internal procedure compliant with the international
standards requirements and regulatory framework regime.
1.5 Audit firm is knowledgeable about the clients’ industry.
1.6 Audit firm is able to attract, train and develop staff of highest calibre with
appropriate skills and qualifications.
1.7 Audit firm consistently monitors its quality control policies to align with recent best
practice in the audit profession.
1.8 Audit firm uses avant-garde technology and knowledge management systems to
assist it in retaining knowledge gathered from its audits.
1.9 Audit firm provides other non-audit services to the audited firm, including taxation,
consultancy and general advice.
1.10 Being a big audit firm adds credibility to users of financial statements.
Kindly identify which are the (2) two most important statements in order of priority that have the largest impact on audit quality from the above.
st
1 important statement: 1 2 3 4 5 6 7 8 9 10
Select One
nd
Select One

2) Partner Involvement

AQ (3) AQ
(1) (2) (4)
2.1 Engagement partner adopts high ethical standards.
2.2 Engagement partner is independent of the board of directors.
2.3 Engagement partner dedicates resources to align the audit firm’s strategy and
internal communications with recent developments in the profession.
2.4 Engagement partner actively involves himself/herself in the engagement beginning
from the initial planning throughout the audit process and completion.
2.5 Engagement partner has sufficient knowledge and understands what is happening
within the client’s organisation.
2.6 Engagement partner puts forward frequent advice to clients.
2.7 Engagement partner allocates more time and effort on those areas that have the
highest risk.
2.8 Engagement partner performs different types of audits each year to enrich his/her
spread of knowledge within various industries.
2.9 Engagement partner is subject to internal review during the audit by other partners
of the audit firm.
2.10 Engagement partner allocates necessary resources for all its clients, irrespective
of the audit fee charged.
st
Select One
nd
Select One

3) Audit Team Involvement

AQ (3) AQ
(1) (2) (4)
3.2 Audit team exercise discretion and professional judgment whilst performing the
audit.
3.3 Audit team keeps abreast of recent developments in the profession.
3.4 Audit team adopts high ethical standards when performing their work.
3.5 Audit team genuinely believe in the public interest purpose of the audit.
3.6 Audit team shares the same values of the audit firm, having a sense of
belongingness and stewardship to their organisation.
3.7 Audit team provides immediate and professional assistance to clients
recommending possible action for improvement.
3.8 Audit team has a clear understanding of roles of partners and staff on audits and
that they are properly qualified to perform them.
3.9 Audit team is motivated both personally and by their working environment.
3.10 Audit team benefits from competitive reward mechanisms.
st
Select One
nd
Select One

4) Quality on the Field

AQ (3) AQ
(1) (2) (4)
4.1 There is a ‘good fit’ between the audit team, engagement partner and the finance
director.
4.2 Audit team provides the client with individual attention.
4.3 Audit team creates the minimum disruption to the client so far as practically
possible.
4.4 Audit team performs the audit in accordance with International Standards on
Auditing and with appropriate and relevant legislations.
4.5 Audit team gathers sufficient and appropriate documented evidence supporting
audit opinions.
4.6 Audit team aims for early communication with management when corrective action
may be required.
4.7 Audit team evaluates appropriate judgments made by their clients with rigour and
professional scepticism.
4.8 Audit team files are reviewed by people with appropriate experience who will
encourage alertness, originality of thought and a thorough investigation of
anomalies.
4.9 Audit team on field works in accordance to the working practices embedded within
the audit firm’s internal control procedure.
4.10 Audit team uses information technology to liaise and obtain second opinions from
the lead engagement partner directly on the audit fee.
st
Select One
nd
Select One

5) Stakeholder’s Involvement

AQ (3) AQ
(1) (2) (4)
5.1 Audit firm delivers consistent messages to all stakeholders.
5.2 Audit firm provides the directors and officers constructive observations arising from
the audit process.
5.3 Audit firm acts in the interest of shareholders while having regard to the wider
public interests.
5.4 Audit firm with a strong reputation may imply higher credibility to users of audited
financial statements.
5.5 Audit firms issuing audit reports with matters of interest to creditors and
shareholders provide more assurance to stakeholders.
5.6 The interests of shareholders would be best served if audit firms remain in place
for a fixed term (eg five years) - without any re- appointment option.
5.7 Increase in audit fees implies higher assurance to stakeholders.
5.8 Employees of the companies are more willing to co-operate with auditors with
good inter-personal and intra-personal skills.
5.9 Having the necessary set-up to lodge a complaint against an auditor from the
general public leads to higher levels of audit quality.
5.10 Stakeholders will feel more trust, if the list of audit firms clearly indicates, those
that are ‘quality certified’ by an independent oversight authority.
st
Select One
nd
Select One

6) Managing Customer Relationships

AQ (3) AQ
(1) (2) (4)
6.1 Audit team communicates regularly and appropriately with executive management
and/or audit committee.
6.2 Audit firm communicates regularly and appropriately with client management and
directors.
6.3 Audit firm provides additional services such as accounting/book-keeping, taxation
and consultancy services to their audit clients.
6.4 Audit firm is easily contactable (eg by email, internet, phone).
6.5 Audit firm is reliable in performing the promised service dependably and
accurately.
6.6 Audit firm is responsive by giving advice to customers that add value.
6.7 Audit firm provides assurance about its knowledge, courtesy of employees and
ability to convey trust.
6.8 Audit firm provides individual attention to customers.
6.9 Audit firm has a good image and communication material.
6.10 Audit firm charges appropriate fee to meet all legal, regulatory and professional
obligation, without putting unnecessary pressure on audit staff to cut corners.
st
Select One
nd
Select One

SECTION C - YOUR OPINION COUNTS
This part contains 9 questions relating to your perception of the current context within the auditing profession. On the basis of your general views, please identify
whether you agree or not with these statements, providing also your brief comments (if any).
Ref. Statements Agree Do Not Agree Comments

1. Higher fees charged reflect higher quality of audit services.
2. Self-regulating profession runs a serious risk of conflicts of interests. An auditor

can never be truly independent of those who have the power to sack you.
3. An audit firm should occupy a term of office for a fixed duration period of time
indicated by law.
4. Audit firms who are not performing to the standards of quality are to be publicly
disclosed by the relevant authorities.
5. Having an independent unit performing on-the-spot visits on all audit firms and
practitioners performing audit work enhance audit quality.
6. The various components constituting audit quality is fully known in Malta.
7. Audit quality yield more costs than benefits for an audit firm to adopt and maintain.
8. Audit quality is a one-time effort by the firm to align its internal control procedures
with best practices.

9. In the space below, please provide any other comments which you think are relevant to audit quality in the Maltese context.
You have reached the end!
Thank you in assisting me with your answers.
Write ‘Interested’ in the e-mail if you

would like to receive a concentrated version of the results from the survey,
clearly indicating your preferred e-mail address.
Renzo Farrugia
October 2006

Appendix C, Letter to Chairpersons of Audit Committees
Assistance in Preparation of Dissertation about Audit Quality
Date:
Messrs.,
As I am completing my dissertation on the MBA-Program with Henley

Management College, I am in need of assistance from your Audit Committee and
I hope for your obligingness and assistance in this study.
My dissertation is based on a qualitative approach using in-depth research

interviews and I thus need to have an interview preferably with two members of
the Board. I therefore kindly ask you for your participation in an interview of
approximately one hour together with another member of the same board. The
interview will be subsequently transcribed and used for the sole purpose of this
dissertation. In the dissertation it will not be possible to link any statements or
results to any audit committee.
To this effect, if you are able to schedule an interview during this month, you are
welcome to suggest a time that will suit you. Otherwise, I will contact you on
telephone to make an appointment.
Should you have any further queries, please do not hesitate to contact me.
Yours Sincerely,
Renzo Farrugia
October 2006

Henley Management College Bibliography
Chapter 8
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John M. Kaynes, 1992

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[www.pcaobus.org/inspections/].


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Henley Management College

PERCEPTIONS OF AUDIT QUALITY IN A

THE DIMENSIONS OF MALTESE FINANCIAL

Dissertation submitted in partial fulfillment

Consequently, a theoretical framework that treats audit quality as a construct with

1 PART ONE – INTRODUCTION............................................................................. 2

2 PART ONE - LITERATURE REVIEW................................................................. 8

3 PART TWO – RESEARCH METHODOLOGY ................................................ 27

4 PART TWO – FIELDWORK RESULTS............................................................. 35

5 PART THREE - DISCUSSION OF FINDINGS.................................................. 66

6 PART THREE, OVERALL CONCLUSIONS..................................................... 76

Exhibit Number Page

Mr. David Murphy at Henley Management College who helped me in the

I am also indebt to Mr. Francis Farrugia who helped me with his

I also want to acknowledge how much I have learned by working with

My overriding debt is to my lovely expectant wife Bernice and my two kids

The acronyms are presented in alphabetical order, for ease of reference.

AB Accountancy Board (Malta)

These acronyms are utilised very sparsely in the dissertation to ensure a

This Dissertation is submitted in partial fulfillment of the

Unless otherwise stated, the findings, research methodology, analysis and

Abstract 288 words

Part One 5,342 words

Part Two 8,827 words

Part Three 3,645 words

Total No of words (excl Abstract and Appendices) are 17,814 words

Student ID Number: 2059425 (MT)

PART 0NE - INTRODUCTION

Hussey et al. 2001

1 PART ONE – INTRODUCTION

Renzo Farrugia Page 2

On a Maltese context, Directive 4 of the Accountancy Profession Act [CAP 281],

1.2 Scope and Objective

The objective of this dissertation is to analyse how local practitioners actually

1.3 Research Hypothesis

A priori it is expected that managing audit quality is in an emerging state, leading

Renzo Farrugia Page 3

The objective is to confront these hypotheses by mirroring literature findings on

1.4 Structure of Dissertation

Exhibit 1, Structure of Dissertation

Aim, Hypothesis and

Part 1 - Literature Part 2 – Field Work

Renzo Farrugia Page 4

1.5 Organisational Analysis

• Directive 1, Continued Professional Education;

Exhibit 2, QAOC Objectives

• establish the quality assurance system;

Source: Directive 4 of Accountancy Profession Act, 2006

The QAOC delegates its day-to-day running to a new organisational set-up –

Renzo Farrugia Page 5

On the other hand, the ‘educator role’ is carried out by an independent

Exhibit 3, Maltese Organisational Set-up in ensuring Audit Quality

Audit Firms &

Audit firm solicits

Source: Author, 2006. Compiled from various sources.

Renzo Farrugia Page 6

2 PART ONE - LITERATURE REVIEW

2.1 Defining Audit Quality

DeAngelo’s seminal work considers quality of an audit to be dependent on two

2.2 Evolution of Audit Quality

Renzo Farrugia Page 9

Exhibit 4, Five Major Approaches to Audit Quality