The application of the incorporated firm concept in Maltese statutory auditing : an analysis

Abstract

PURPOSE: The objectives of this research study were to evaluate the legal provisions that relate to the process of incorporation of audit firms, to identify any implications of this concept on local audit firms and the professional indemnity insurance policy offered by insurance companies, and to suggest any improvements to this regulatory framework. DESIGN: The objectives were achieved by carrying out a thorough analysis of the existing literature and the Maltese legislation, as well as by conducting 16 semi-structured interviews with professionals working in audit firms, insurance companies, law firms, and a representative from the Accountancy Board. The findings were then presented and discussed. FINDINGS: The findings indicate that auditors’ liability is expounded in the law and so all professionals have to follow the Maltese legislation. Moreover, it is highly important to distinguish between the three different categories of negligence. According to the results of this study, a limited liability company, does offer some form of protection to the individual auditors, but it is certainly not a means to avoid duties. Additionally, it was found that it is unquestionably beneficial to transform the legal structure to a limited liability company for various reasons as explained throughout the study. CONCLUSION: This study concludes that the Maltese legislation, in particular, the legal provisions that regulate the incorporation concept, are adequate and comprehensive. Furthermore, it is also concluded that upon the initiation of the incorporation concept, there have been no major implications on local audit firms and the professional indemnity insurance policy. VALUE: It is hoped that this study promotes the need to evaluate and enhance the Maltese legislation with regards to the limitation of auditors’ liability. In addition, changes to the Accountancy Profession Regulations with respect to the limits of indemnity cover, will likely contribute to a better and a uniform indemnity cover between all local audit firms. Amongst its major recommendations, the study also suggests the introduction of the limited liability partnership as an alternative legal structure to all local audit firms.