Statutory audit fees during initial engagements of Maltese PIEs : an analysis

Abstract

PURPOSE: The study’s main objective is to determine whether Maltese public interest entities (PIEs) are likely to be charged a lower initial audit fee upon appointing a new auditor. It also tests the extent of lowballing across different audit firm sizes. Lastly, subsequent years effects are also investigated, considering the impact of non-audit services. DESIGN: Four GLM regressions are developed to examine the effect of multiple independent variables on the initial audit fee of PIEs along with the differentiation in the market segments and subsequent years effects. This method is further corroborated by ten semi-structured interviews held with audit executives and client representatives. FINDINGS: Results show that upon a change in auditor for all PIEs, the audit fee remains unchanged. However, it was reported that for listed entities, the audit fee increases with a new auditor. Moreover, it resulted that an ‘upgrade’ does not affect the audit fee, whilst a ‘downgrade’ and a lateral change between Big 4 firms bring about a minimal change. Conversely, a lateral change amongst nonBig 4 firms causes a much larger percentage decrease, proving that competition in that segment is starker. The study also reports that in subsequent years the audit fee for PIEs remains stable. However, for listed entities, a significant increase was noted for the next three years. Lastly, when non-audit fees were introduced, only listed entities (excluding Collective Investment Schemes) showed a significant change in the fee when switching auditor. CONCLUSIONS: The study concludes that, unlike internationally, lowballing does not apply to Malta. Furthermore, there is confirmation that a change in audit fee is more susceptible to mid-tier and smaller-sized auditors. Lastly, the initial audit fee sets the precedent for the future and tends to remain stable, even when considering non-audit services. VALUE: The strength of this research lies in its originality to explore audit fee pricing for initial engagements in the Maltese market.