The economic dependence of Maltese auditors on PIEs : an analysis

Abstract

PURPOSE: This research examined the concept and applicability of economic dependence within Maltese PIE auditors. This study also sought to determine whether economic dependence is a threat to Maltese PIE auditors. DESIGN: In order to address the research objectives, a qualitative research method was adopted. Semi-structured interviews were carried out with all 10 Maltese PIE auditors. This was further corroborated with documentary research on the economic dependence of the same 10 Maltese PIE auditors. FINDINGS: Auditors suggest that material and significant client fees may contribute to economic dependence. Furthermore, auditors do not perceive NAS, market competition, and audit firm size as being detrimental to auditor independence. Findings indicate that the best measure to capture economic dependence is the relative fee measure at firm level, thus total client fees expressed as a percentage of the audit firm’s total revenue. In addition, auditors do not perceive the disclosure of financial relationship as vital for their independence. They argue that the fee is secondary to their reputation and, irrespective of the fee magnitude, they are well indoctrinated to maintain their objectivity. In fact, results suggest that PIE auditors are more concerned with retaining large clients such as PIEs for advertising purposes, rather than for financial gains. CONCLUSIONS: This study concludes that all PIE auditors are in compliance with the economic dependence threshold. That said, economic dependence should be a matter of judgment and not a quantifiable amount. Finally, maintaining economic dependence at an acceptable low level will not only preserve auditor independence but also safeguard the existence of the audit profession. IMPLICATIONS: Being the first of its kind in the local scenario, this study aims to provide a thorough understanding on the economic dependence of an auditor on an assurance client. It is also expected that PIE auditors will benefit from the conclusions and recommendations of this study so as to remain objective.