The implications of mandatory audit firm rotation in Maltese PLCs

Abstract

PURPOSE: The objectives of this study involved determining the implications of mandatory audit firm rotation (MAFR) on Maltese Public Limited Companies (PLCs) by examining the perspectives of listed PLCs and external auditors (EAs) regarding this regulatory measure. Moreover, it aimed to identify the specific audit factors influenced by audit firm rotation, evaluating whether MAFR exerted a positive or negative influence on these factors. DESIGN: A qualitative research methodology was employed through twenty-five semi-structured interviews. These comprised fifteen representatives from listed Maltese PLCs, five EAs from Big-Four firms and five EAs from mid-tier firms. FINDINGS: While PLCs demonstrate a predominantly favourable view of MAFR, there remains a nuanced perspective regarding its necessity. EAs also exhibit a positive sentiment towards MAFR, perceiving it as vital for PLCs, despite resource challenges for mid-tier firms. Both respondent groups attributed the enhancement of client-auditor relationships, the disruption to knowledge continuity and the increase in audit fees to MAFR. This regulation is perceived to minimally affect audit quality and independence but positively influence scepticism and competition, particularly among Big-Four firms. Lastly, financial transparency and audit supervision and coordination are deemed unaffected. CONCLUSIONS: While the European Union (EU) Audit Reform sought to implement MAFR to ameliorate auditor independence, audit quality and audit market competition, only the latter factor appears to be strengthened in the local scenario, as independence and quality are already inherent. VALUE: This study seeks to raise awareness on the implications of MAFR in the local scenario. It also explores whether particular objectives of the EU Audit Reform (which mandates firm rotation for PLCs) are being achieved in Malta.