The application of the Chinese Wall in Maltese audit firms : an investigation

Abstract

This study provides an insight on the application of the Chinese Wall by Maltese audit firms. The auditor's independence is fundamental for the profession and so it needs to be constantly ensured. Chinese Walls are a means so that the auditor works in complete independence. These walls are constructed between departments in firms that provide various services. They aid in the preventions of any conflicts of interest of warrant holders. Chinese Walls can exist in various forms, from the physical separation of departments to the use of passwords. Following recent :financial scandals, such as Enron, issues regarding conflicts of interest are given utmost importance by the profession and regulatory bodies. The audit profession has also to reinstate its positive image in the eyes of the general public, and implementing Chinese Walls can aid in this issue. It is clear that certain services conflict with each other and cannot be provided by the same personnel. An audit practitioner was consulted so as to see the feasibility of such a study and to ascertain if the information needed was obtainable from audit firms. Interviews were conducted with selected audit firms and a questionnaire was sent to other audit firms. The questionnaire contained both close-ended questions and open-ended questions and was kept at a reasonable length so not to have a negative effect on the response rate. Open-ended questions are important because the respondents can raise issues not contained in the questionnaire. Internet was the main source of information. It provided up-to-date information, as well as real life situations where the Chinese Wall was effectively applied. The study concludes that all medium-sized firms have the resources to separate the various departments. These firms have also built up strict internal rules and regulations for constantly ensuring integrity and independence. Generally, smaller audit firms do not have strict rules about conflicts of interest and Chinese Walls are seldom applied. This is because they are too small to implement such a concept and for them it could not be feasible to divide their organization into different departments. From the results, it also emerged that auditing is used as a loss leader and the actual profit is made from the other services that an audit firm offers.