An evaluation of transparency report disclosures by Maltese audit firms

Abstract

PURPOSE: The shortcomings in the audit market brought about by the Global Financial Crisis highlighted the need for regulators to intervene by increasing transparency in the audit market. In particular, the EU Audit Reform introduced additional requirements to Transparency Reports. Thus, this study aims to assess how Transparency Reports by Maltese audit firms carrying out the statutory audit of public interest entities comply with the applicable regulatory requirements. Additionally, this study seeks to understand whether users and preparers have different perceptions on the usefulness of Transparency Reports in general, or on certain sections in particular, as well as to understand their process of preparation. DESIGN: In order to satisfy all the research objectives of the study, a qualitative approach was adopted in two stages. A content analysis of thirteen Transparency Reports issued by Maltese audit firms was first conducted. Secondly, a total of seventeen semi-structured interviews were carried out with representatives of audit firms and public interest entities. FINDINGS: No substantial differences were highlighted between the contents of different Transparency Reports in Malta. A discrepancy between disclosures highly favoured by the users and those highly detailed in these reports was however identified. Additionally, despite acknowledging their importance, users hardly make use of Transparency Reports, neither for audit firm selection purposes, nor as a general reference point. Furthermore, in the course of preparation, Maltese audit firms refer to a template provided by their global network and are disincentivised to work on making the report more attractive to its potential users. On the other hand, users and preparers have a different judgement on voluntary disclosures, and on whether the use of Transparency Reports as marketing tools is capable of enhancing transparency. CONCLUSIONS: This study concluded that Maltese audit firms over rely on templates provided by their global network as strong similarities between the contents in their Transparency Reports was noted. Thus, given that no substantial differences were highlighted, Transparency Reports in Malta are unsuccessful in increasing audit competition and since their target audience does not mainly consist of public interest entity representatives, their relevance is minimal. VALUE: This study contributes to the lack of local literature whilst providing insight to preparers of Transparency Reports on their target audience and their users’ preferences. In this regard, a number of recommendations have been presented.