The management of risks in the provosion of non-audit services to PLCs by Maltese audit firms

Abstract

The services provided by audit firms often extend beyond the audit of financial statements. Audit firms provide other services, termed “non‐audit services”, which may be categorised under three headings, namely accounting, taxation and advisory services. The increase in compliance requirements, technical standards and scrutiny by the general public has made risk management critical for audit firms.

In this study, an assessment of the risks involved in the provision of non‐audit services to public companies by Maltese audit firms was carried out. The procedures adopted to mitigate these risks were also evaluated. Moreover, another aim of this dissertation was to evaluate the effect of features in the local environment on audit firm risk exposure.

Maltese audit firm risk exposure is essentially different from that of foreign firms, due to a high frequency of litigation cases against audit firms which is not present in the local scenario. However, the local small scale business environment does not imply that Maltese audit firms are insulated from risk. Risk exposure in Malta is shaped by reputation factors, which are even more significant when considering the provision of services to entities of a public nature.

The provision of non‐audit services exposes firms to risk under three aspects; the client, engagement and performance aspect. Clients may expose audit firms to reputation risks through association with entities who lack integrity. The acceptance of a non-audit engagement involves the issue of independence. The provision of non-audit services to audit clients may impair the firm’s objectivity whilst carrying out the audit. Furthermore, the necessary skills and experience to carry out engagements is relevant to the provision of non‐audit services, since these services are wide ranging. The lack of structure in the performance of non-audit engagements makes it difficult for firms to identify their risks prior to the engagement and often leads to the scope of the work being carried out extending itself beyond the initial agreement. Client expectations are often not in alignment with the objectives of non‐audit engagements. Audit firms are highly aware of the significance of the risks involved in the provision of non‐audit services to PLCs, with Big Four Firms adopting the formal risk management policies of their international firm, and Non‐Big Four Firms applying more informal methods and internal discipline with regards to risk identification and risk assessment.