An exploratory study into audit independence issues in small audit firms

Abstract

Purpose: The concept of auditor independence requires the auditor to carry out the audit in an integral and objective way and hence why independence is the cornerstone of the profession. The main objectives of this study are to identify any audit independence issues encountered by small audit firms when carrying out an audit in a small country like Malta as well as to explore how these threats are being addressed within small audit firms. Design: Semi-structured interviews were conducted with partners and managers of ten different small audit firms. Managers or partners were interviewed since they should have a wide range of experience and could therefore provide a better insight on the issues affecting independence in their audit firm. Findings: The study finds that larger audit firms have more resources and therefore they can employ the best people and use the best technology. Small audit firms are less able to resist management pressures since they depend on few clients while auditors believe that offering a personalised service seems to be the major issue in a small country like Malta due to close relationships between the client and the auditor. Finally auditors believe that maintaining independence depends on both the audit firm as well as the individual auditor. Conclusions: Large audit firms such as the Big Four are more independent than small and medium sized audit firms and sole practitioners respectively since issues that can impair independence affect small audit firms harder due to availability of resources, pressures by management and personalised service offered by smaller audit firms. Implications: Similar to studies carried out abroad, it seems that smaller audit firms have a lot of issues that can impair independence and more safeguards should be in place to protect these small audit firms.