Audit Quality

Henley Management College
PERCEPTIONS OF AUDIT QUALITY IN A POST-ENRON WORLD

THE DIMENSIONS OF MALTESE FINANCIAL QUALITY AUDITS
by - Renzo Farrugia Dissertation submitted in partial fulfillment of the require
ments for the degree of Masters of Business Administration 2007
HENLEY MANAGEMET COLLEGE

ABSTRACT
This dissertation reviews and evaluates the theory and practical implications on
financial audit quality with relevance to the Maltese environment. Following th
e unheralded collapses of giant corporates like Parmalat, Enron and World.Com, t
he focus is on how the auditing profession is organising its activities to conve
y trust and credibility to users of financial information. In the midst of this
period of self-examination, various countries are rethinking their audit process
with a heightened zeal to ensure that such intricate plights do not happen in t
heir communities and Malta is no exception. The objective of this dissertation i
s to take stock of the large body of audit quality literature and assess the cur
rent understanding of this concept from a Maltese perspective in particular the
view point of audit partners and of audit committees of companies quoted on Malt
a Stock Exchange. These views are then compared, gaps are identified and recomme
ndations are provided. Consequently, a theoretical framework that treats audit q
uality as a construct with multiple and interrelated dimension is built. This co
nstitutes a well-defined space for locating existing research and future hypothe
sis formation. Three hypotheses are also presented to facilitate the constructio
n of research taxonomy. These hypotheses relate to the nature of audit quality,
awareness of this dimension and how audit quality can be the catalyst to ensure
long-term sustainable competitive advantage. At the end of this study, a model d
etailing the different typologies of audit firms in Malta is presented enabling
practitioners to gauge their level of audit quality based on their competitive f
ocus and posture correlation. It is hoped that these findings provide evidence f
or audit firms, not only to meet the satisfaction level of their client and othe
r stakeholders, but also to improve their own audit quality.
Table of Contents
1
PART ONE INTRODUCTION...........................................................
.................. 2 1.1 1.2 1.3 1.4 1.5 BACKGROUND ............................
......................................................................... 2 SCOP
E AND OBJECTIVE ................................................................
....................... 3 RESEARCH HYPOTHESIS...................................
................................................... 3 STRUCTURE OF DISSERTATION
........................................................................... 4 OR
GANISATIONAL ANALYSIS ..........................................................
................... 5
2
PART ONE - LITERATURE REVIEW....................................................
............. 8 2.1 2.2 2.3 2.3.1 2.3.2 2.3.3 2.4 2.4.1 2.4.2 2.4.3 2.4.4 2.5 2.
6 2.6.1 2.6.2 2.6.3 2.7 2.8 DEFINING AUDIT QUALITY .............................
.................................................... 8 EVOLUTION OF AUDIT QUALIT
Y ......................................................................... 9 PI
LLAR I - TECHNICAL APPROACH TO AUDIT QUALITY ...................................
. 10 Audit Quality and Fees Reliance ...........................................
..................... 10 Audit Quality and Agency Conflicts.....................
....................................... 11 Audit Quality and its relation to Bra
nd Name Auditors............................. 12 PILLAR II - BEHAVIORAL APPROACH
TO AUDIT QUALITY ............................... 14 Audit Quality and Client Sa
tisfaction ......................................................... 15 Audit Qu
ality and Stakeholders Perception ..............................................
15 Audit Quality and Service Quality AuditQual .................................
........ 16 Behavioural Theories and its implications in Malta .................
................. 17 PILLAR III - REGULATORY REGIME PERSPECTIVE ................
............................ 17 PILLAR IV - QUALITY ASSURANCE AUTHORITIES PERSPE
CTIVES ................... 19 US experience - PCAOB ............................
................................................. 20 UK experience - POBA ......
......................................................................... 21 Mal
tese experience - QAOC .........................................................
.............. 21 PILLAR V - AUDITING STANDARDS PERSPECTIVE ....................
........................ 22 CONCLUSION THE AUDIT QUALITY WHEEL MODEL .............
........................ 23
3
PART TWO RESEARCH METHODOLOGY ................................................ 2
7 3.1 3.2 3.3 3.4 3.4.1 3.5 3.5.1 3.5.2 3.6 RESEARCH THEME .....................
....................................................................... 27 AREA
OF FOCUS .......................................................................
.......................... 27 CHOICE OF RESEARCH INSTRUMENT ....................
............................................ 28 DESIGNING THE RESEARCH QUESTIONN
AIRE ................................................... 28 Addressing Questionn
aire Risks ................................................................. 30
TARGET AUDIENCE AND RESPONSE RATE...............................................
......... 31 Audit Partners ....................................................
......................................... 32 Audit Committee of Companies listed
on MSE........................................... 32 LIMITATIONS ON RESEARCH ME
THODOLOGY ................................................... 33
4
PART TWO FIELDWORK RESULTS......................................................
....... 35 4.1 SECTION A, DEMOGRAPHIC ANALYSIS..................................

........................... 35
4.1.1.1 Summary on Section A....................................................
.............................. 36
4.2 SECTION B, LITERATURE REVIEW ANALYSIS ......................................
............. 36 4.2.1 Comparison of Respondents Opinions.......................
................................. 40 4.2.2 Comparison of Respondents Opinions...
..................................................... 41
4.2.2.1 4.2.2.2 Audit Firm Culture..............................................
........................................... 41 Partner Involvement..............
......................................................................... 45
4.2.2.3 4.2.2.4 4.2.2.5 4.2.2.6 4.2.2.7

Audit Team Involvement..........................................................
..................... 48 Quality on the Field ..................................
..................................................... 50 Stakeholders Involvement
............................................................................ 53
Managing Customers Relationship................................................
................ 55 Summarizing the Results of Section B........................
.................................. 57
4.3 SECTION C, FREE-FORM COMMENTS ANALYSIS .....................................
......... 59 4.3.1 Audit Fees ..................................................
.................................................. 60 4.3.2 Self-Regulating Prof
ession..........................................................................
60 4.3.3 Term of Office Duration...............................................
............................... 61 4.3.4 Publicity of Defaulters................
................................................................. 61 4.3.5 Monit
oring by Government.............................................................
............ 62 4.3.6 Components of Audit Quality...............................
....................................... 62 4.3.7 Benefits of Audit Quality .....
........................................................................ 63 4.3.
8 Duration of audit quality.....................................................
........................ 63 4.3.9 Summary on Section C .........................
....................................................... 63 4.4 CONCLUSION ......
................................................................................
............... 64
5
PART THREE - DISCUSSION OF FINDINGS.............................................
..... 66 5.1 TESTING THE THREE HYPOTHESIS ......................................
.............................. 66 5.1.1 Hypothesis One Nature of Audit Quality .
................................................ 66 5.1.2 Hypothesis Two Recogni
tion of Audit Quality dimensions ..................... 68 5.1.3 Hypothesis Three
Competitive advantage through Audit Quality .......... 69 5.2 AUDIT QUALITY COM
PETITIVE MATRIX .......................................................... 69 5.
3 WIDER VALIDITY OF DISSERTATION ...............................................
................. 74 5.3.1 The Five Pillars of Audit Quality A guideline .......
.................................. 74 5.3.2 The Audit Quality Wheel Model.......
........................................................... 74 5.3.3 Audit Firm
Competitive Matrix..............................................................
..... 74
6
PART THREE, OVERALL CONCLUSIONS.................................................
.... 76 6.1 RECOMMENDATIONS ....................................................
..................................... 76 6.1.1 Enhancing the education of auditi
ng practitioners .................................... 76 6.1.2 Educating society
about the audit function and the work of the auditor ... 77 6.1.3 Installing a
mechanism to receive complaints on the internet ................... 77 6.1.4 Imp
roving the quality control in audit firms.......................................
........ 77 6.1.5 Summary of Implementation measures............................
........................... 78 6.2 AVENUES FOR FUTURE RESEARCH .................
................................................... 79 6.3 PERSONAL LEARNING AND
REFLECTION .......................................................... 80
7
APPENDICES .....................................................................
..................................... 83 APPENDIX A, SHORT NOTES ON ACCOUNTANCY

PROFESSION ACTS DIRECTIVES ........ 83 APPENDIX B, QUESTIONNAIRE.................
........................................................................ 85 APPE
NDIX C, LETTER TO CHAIRPERSONS OF AUDIT COMMITTEES..............................
... 96
8
BIBLIOGRAPHY ...................................................................
................................. 98
List of Exhibits
Exhibit Number Page
EXHIBIT 1, STRUCTURE OF DISSERTATION ...........................................
.................................. 4 EXHIBIT 2, QAOC OBJECTIVES ................
.............................................................................. 5
EXHIBIT 3, MALTESE ORGANISATIONAL SET-UP IN ENSURING AUDIT QUALITY ............
...... 6 EXHIBIT 4, FIVE MAJOR APPROACHES TO AUDIT QUALITY .....................
............................ 10 EXHIBIT 5, RESULTS OF BEHAVIOURAL AUDIT QUALITY
RESEARCH .................................. 14 EXHIBIT 6, THE AUDITQUAL MODEL ..
................................................................................
. 16 EXHIBIT 7, ILLUSTRATIVE QUALITY CONTROL SYSTEM ADOPTED BY PCAOB ...........
....... 20 EXHIBIT 8, ISQC 1 REQUIREMENTS.......................................
............................................... 23 EXHIBIT 9, THE AUDIT QUALITY
WHEEL MODEL ................................................................ 24
EXHIBIT 10, CONTENTS IN MAIN BODY OF THE QUESTIONNAIRE..........................
................ 29 EXHIBIT 11, ADDRESSING POTENTIAL QUESTIONNAIRE PITFALLS ....
.................................. 30 EXHIBIT 12, POPULATION OF AUDIT FIRMS AND
MSE COMPANIES .................................... 31 EXHIBIT 13, WORK EXPERIENC
E OF AUDIT PARTNERS BY GENDER .................................... 35 EXHIBIT 14
, DEMOGRAPHICS OF AUDIT PARTNERS AND CHAIRPERSONS OF COMMITTEES 36 EXHIBIT 15, T
EN MOST INFLUENTIAL FACTORS ON AUDIT QUALITY ...................................
. 37 EXHIBIT 16, TEN LEAST INFLUENTIAL FACTORS ON AUDIT QUALITY.................
.................. 39 EXHIBIT 17 INDEPENDENT SAMPLE TEST (T-TEST) ..............
................................................ 40 EXHIBIT 18, RESULTS OF AUDIT
FIRM CULTURE .................................................................
42 EXHIBIT 19, RANKINGS FROM AUDIT FIRM CULTURE.................................
......................... 44 EXHIBIT 20, RESULTS OF PARTNER INVOLVEMENT.........
..................................................... 45 EXHIBIT 21, RANKINGS FR
OM PARTNER INVOLVEMENT ...................................................... 47
EXHIBIT 22, RESULTS OF AUDIT TEAM INVOLVEMENT..................................
...................... 48 EXHIBIT 23, RANKINGS FROM AUDIT TEAM INVOLVEMENT .....
........................................... 50 EXHIBIT 24, RESULTS OF QUALITY ON
THE FIELD................................................................ 51 EX
HIBIT 25, RANKINGS FROM QUALITY ON FIELD .......................................
........................ 52 EXHIBIT 26, RESULTS OF STAKEHOLDERS INVOLVEMENT......
............................................ 53 EXHIBIT 27, RANKINGS FROM STAKEH
OLDERS INVOLVEMENT .......................................... 54 EXHIBIT 28, RESU
LTS OF STAKEHOLDERS INVOLVEMENT..................................................
55 EXHIBIT 29, RANKINGS FROM CUSTOMERS INVOLVEMENT..............................
.................. 56 EXHIBIT 30, MEAN SCORE FOR ATTRIBUTES AUDIT PARTNERS VIEW .
........................... 57 EXHIBIT 31, AUDIT QUALITY WHEEL MODEL ILLUSTRATIO
N OF MALTESE FINDINGS .... 58 EXHIBIT 32, SECTION C RESULTS ....................
..................................................................... 59 EXHIBIT
33, OBLIGATORY ELEMENTS OF AUDIT QUALITY ......................................
............ 67 EXHIBIT 34, AUDIT COMPETITIVE FOCUS-POSTURE MATRIX .............
................................. 69 EXHIBIT 35 CHARACTERISTICS OF A BASIC AUDIT
FIRM ..................................................... 70 EXHIBIT 36 CHARAC
TERISTICS OF A DARING AUDIT FIRM ...............................................
... 71 EXHIBIT 37 CHARACTERISTICS OF A CUSTODIAN AUDIT FIRM ....................
........................ 71 EXHIBIT 38 ADDING VALUE ............................
..................................................................... 72 EXHIBIT
39 CHARACTERISTICS OF AN ENVIED AUDIT FIRM ....................................
............ 73 EXHIBIT 40 GAANT CHART IMPLEMENTATION MEASURES .................
.............................. 78
Acknowledgments
This dissertation has been completed with the help and support from a number of
people. I would especially like to thank: Mr. David Murphy at Henley Management
College who helped me in the critical phase of the dissertation with good advice
and quick response on my questions. His expertise in academic and research matt
ers have provided me with generous and continual support. His proficiency has ta
ught me a great deal as we worked together to adapt audit quality thinking to th
e Maltese scenario. I am also indebt to Mr. Francis Farrugia who helped me with
his knowledge concerning the subject of audit quality, with the pilot test of th
e field research and with the revision of the field research question. I also wa
nt to acknowledge how much I have learned by working with colleagues at the Qual
ity Assurance Unit, the Accountancy Board, the Ministry of Finance and the Malta
Institute of Accountants. Such talented people all provided me with their pract
ical experiences related to their specific roles whilst contributing their exper
tise in building up this dissertation. My overriding debt is to my lovely expect
ant wife Bernice and my two kids Brandon and Gabriel, who provided me with the t
ime, support, and inspiration needed for the dissertation. It is truly our work.
Acronyms
The acronyms are presented in alphabetical order, for ease of reference.
AB AIU APA EGAOB EU FEE FRC IAASB IAS IFAC ISA ISQC1 MIA PCAOB POBA QA QAOC QAU
UK US
Accountancy Board (Malta) Audit Inspection Unit (UK) Accountancy Profession Act,
CAP 281 European Group of Auditors Oversight Bodies European Union Fdration des Ex
perts Comptables Europens Financial Reporting Council (UK) International Auditing
and Assurance Standards Board International Accounting Standards International
Federation of Accountants International Standards on Auditing International Stan
dard on Quality Control Malta Institute of Accountants Public Company Accounting
Oversight Board (US) Professional Oversight Board (UK) Quality Assurance Qualit
y Assurance Oversight Committee (Malta) Quality Assurance Unit (Malta) United Ki
ngdom United States
These acronyms are utilised very sparsely in the dissertation to ensure a holist
ic understanding of the matter in discussion.
Declaration
This Dissertation is submitted in partial fulfillment of the Masters in Business
Administration
(Henley Management College)
Unless otherwise stated, the findings, research methodology, analysis and result
s of this dissertation is my work. The following details the number of words for
each Part of the Dissertation. Abstract
Part One
288 words
5,342 words
Part One, Introduction (Chpt.1) Part One, Literature Review (Chpt.2)
Part Two
872 words 4,470 words
8,827 words
Part Two, Research Methodology (Chpt.3) Part Two, Fieldwork Results (Chpt.4)
Part Three
2,034 words 6,793 words
3,645 words
Part Three, Discussion of Findings (Chpt.5) Part Three, Overall Conclusions (Chp
t.6)
2,323 words 1,322 words
Total No of words (excl Abstract and Appendices) are 17,814 words
_______________________________
Mr. Renzo Farrugia CPAA, B.Accty(Hons)
Certified Public Accountant and Auditor
Student ID Number: 2059425 (MT)
Chapter 1
PART 0NE - INTRODUCTION
Audits serve a vital economic purpose and play an important role in serving the
public interest to strengthen accountability and reinforce trust and confidence
in financial reporting. As such, audits help enhance economic prosperity, expand
ing the variety, number and value of transactions that people are prepared to en
ter into. However, in recent years, and in the light of corporate scandals, the
profession witnessed ongoing global demands for improvements in audit quality. T
his raises questions about, what really constitutes audit quality and what are i
ts dimensions. Hussey et al. 2001

Part ONE, Introduction
1
PART ONE INTRODUCTION
This dissertation is submitted in part fulfillment of the requirements for the H
enley Management College degree of Masters of Business Administration and aims t
o meet the academic standards required of a rigorous and insightful research stu
dy, culminating in tangible recommendations for management practice. The subject
s investigated in this work are of great interest to the author because it trave
rses his career as an auditor and his current position with the Quality Assuranc
e Unit [QAU]. The objective of this dissertation is to identify the different pe
rceptions of audit quality within the Maltese1 context.
1.1
Background
Financial audit quality has attracted a great amount of interest from the accoun
tancy profession on an international basis. Enron s collapse, and the implicatio
ns of serious control issues that accompanied it, are having a profound impact o
n how the auditing profession view their control environments. Various countries
are rethinking their governance processes with a heightened zeal to ensure that
such intricate plights don t happen in their communities. On 14th December 2005
, the European Union [EU] established the European Group of Auditors Oversight Bo
dies [EGAOB] to ensure smooth and efficient cooperation amongst public oversight
systems within Member States and with third countries. Furthermore, the EU Stat
utory Audit Directive2 issued during March 2006, obligates Member State to estab
lish a regulatory authority with the remit to ensure effective quality, thereby
minimising threats of lack of credibility in the auditing profession.
1
The Maltese Archipelago consists of Malta, Gozo, Comino and two small uninhabite
d islands - all over the area of 316 sq km (122 sq miles). Being located south o
f the Italian island of Sicily the island lies virtually in the centre of the Me
diterranean Sea between Europe and North Africa. The Maltese population is 397,0
00 (UN, 2005) and the GNI is US $13,590 (World Bank, 2006). The EU Statutory Aud
it Directive is the short name for Directive of the European Parliament and of th
e Council on statutory audits of annual accounts and consolidated accounts, amen
ding Council Directives 78/660/EEC and 83/349/EEC and repealing Council Directiv
e 84/253/EEC.
2
Renzo Farrugia
Page 2
Student Id: 2059425 (MT)

Part ONE, Literature Review
On a Maltese context, Directive 4 of the Accountancy Profession Act [CAP 281],
issued during 2006, established an independent Quality Assurance Oversight
Committee [QAOC] with the remit to assist firms to maintain and improve their qu
ality of their audit work, whilst co-operating with European counterparts. This
relatively new set-up is expected to undertake on-the-spot reviews of auditors o
n a case-by-case basis to enhance public faith in the profession.
1.2
Scope and Objective
The scope of this dissertation is to identify, possible critical antecedents of
audit quality within the Maltese auditing profession. The objective of this diss
ertation is to analyse how local practitioners actually manage their audit quali
ty and to suggest a model that might assist audit firms in attaining sustainable
competitive advantage through the rejuvenation of audit quality methodologies i
n their daily operations.
1.3
Research Hypothesis
To focus the research, the author is presenting the following set of hypothesis
that represent current problem areas as will be described in Chapter 3 [pp.26] o
f this dissertation. The prime hypothesis is that the dimensions of audit qualit
y are not something static or universal. Instead it is a multi-dimension constru
ct that evolves due to continual changes in the environmental influences effecti
ng the profession. A priori it is expected that managing audit quality is in an
emerging state, leading to the second hypothesis that; such dimensions, are not
fully recognised within the local auditing profession. Focusing on audit quality
can be the means through which firms gain competitive advantage. However, histo
ry has shown that even large, reputable audit firms imminently collapsed due to
negligent wrong-doing of some minor staff. This leads to the third hypothesis; a
udit firms who manage audit quality at all levels of its organisation, ensure lo
ng term sustainable competitive advantage.
Renzo Farrugia
Page 3

The objective is to confront these hypotheses by mirroring literature findings o
n antecedents of audit quality against present practices in the auditing profess
ion derived from a field research. Furthermore it is the objective of the resear
ch to debate literature findings and practical experiences from the field resear
ch and derive conclusions on the Maltese experiences.
1.4
Structure of Dissertation
The framework of the dissertation adheres to the guidelines issued by Henley Man
agement College [2004]. The general outline of the dissertation is divided into
three parts as illustrated in Exhibit-1.
Exhibit 1, Structure of Dissertation
Introduction
Aim, Hypothesis and Objectives
Part 1 - Literature Review
Conclusions from research related to audit quality
Part 2 Field Work
Evidence identifying antecedents of audit quality within Maltese context
Part 3 - Evaluation 4 Discussion
Findings and evaluation
5 Conclusions
Recommendations
Source: Henley, 2004. Study Guide for Undertaking a Research Project, Henley Man
agement College.
Renzo Farrugia
Page 4

1.5
Organisational Analysis
In Malta, the Accountancy Board owes its origin to the late seventies when the A
ccountancy Profession Act [CAP 281] was first enacted. Being an independent body
under the Ministry of Finance, the Board issues Directives to align local audit
firms with best practices, and with EU statutory requirements3. In fact, some o
f these EU requirements, have already been implemented by means of the Directive
s4 which have been issued by the Accountancy Board as follows: Directive 1, Conti
nued Professional Education; Directive 2, Code of Ethics; Directive 3, Annual Re
turn; and Directive 4, Audit Quality.
The latter Directive introduced during 2006 sets up the Quality Assurance Oversi
ght Committee [QAOC], as a committee of the Board. The remit of QAOC is illustra
ted in Exhibit-2. Exhibit 2, QAOC Objectives
establish the quality assurance system; supervise (planning and control) the qua
lity assurance system; evaluate the review results; and approve the public repor
ting of overall results of the running of the quality assurance system including
the results of inspections. Source: Directive 4 of Accountancy Profession Act,
2006
The QAOC delegates its day-to-day running to a new organisational set-up Quality
Assurance Unit [QAU]. The work of the QAU is focused to ensure quality assuranc
e on all audit firms and sole practitioners, by carrying out on-site visits and
writing reports to the QAOC recommending necessary action. The QAOC is responsib
le for monitoring practitioners thereby fulfilling their regulator role in the pro
fession.
3 4
Malta has become a Member State of the European Union in June 2004. Appendix A,
pp.83 details a summary of the salient issues of Directives 1,2,3 and 4 of the A
PA, Cap 281
Renzo Farrugia
Page 5

On the other hand, the educator role is carried out by an independent professional
institute - the Malta Institute of Accountants [MIA]. It is the remit of the MI
A to provide any technical assistance and support to practitioners to align thei
r present methodologies with best practices. Exhibit-3 illustrates the interplay
of relationship between these key players. Exhibit 3, Maltese Organisational Se
t-up in ensuring Audit Quality
Accountancy Board (AB)
Quality Assurance Oversight Committee (QAOC) Quality Assurance Unit (QAU)
MINISTRY OF FINANCE
Performs on-site visits on audit firms.
REGULATOR
Audit Firms & Practitioners in public practice
Malta Institute of Accountants (MIA)
EDUCATOR
Audit firm solicits support from the MIA.
Source: Author, 2006. Compiled from various sources.
Renzo Farrugia
Page 6
Chapter 2
LITERATURE REVIEW
Audit quality can be viewed in its broadest sense as encompassing all those acti
vities that are carried out to assure that audit services meet or exceed expecta
tions of quality. These audit quality activities are cross cutting in any busine
ss organization. They are concerned with the inputs, processes and outcomes of t
he business system, and they must involve, to some extent, every department and
every individual auditor. Lemont et al. 1987

2
PART ONE - LITERATURE REVIEW
This review begins with a brief explanation of the origins of audit quality resear
ch. This is followed by a detailed analysis of audit quality from the perspectiv
es of the technical and behavioural schools of thought. Reference is also made t
o the present legalistic turmoil and the adaptation of recently introduced profe
ssional auditing standards both of which are impacting the development of this t
erm into unexplored dimensions.
2.1
Defining Audit Quality
Though there is no one single definition of audit quality, DeAngelo, L. E. [1981
] provides a definition that is cited in much of the subsequent audit quality li
terature. She defines audit quality as:
the market assessed joint probability that a given auditor will both (a) discover
a breach in the clients accounting system, and (b) report the breach.
DeAngelos seminal work considers quality of an audit to be dependent on two facto
rs. First, audit quality relates to the auditors ability to examine the accounts
and identify errors or anomalies - i.e. their technical competence. Secondly, au
dit quality depends on the auditors objectivity - i.e. their independence. This c
lassical dual definition is necessarily a subjective one as it does not fully ca
pture the potentially conflicting roles of the various audit market participants
[Mansi et
al., 2004]. The latter participants (or stakeholders) can be grouped into three
categories: first; external statement users; second, audit clients and third, au
ditors [Sutton, 1993]. Consequently various researchers explored other elements
that constitute audit quality such as: the probability that an auditor will not
issue an unqualified report for statements containing material errors [e.g., Lee
et al., 1999]; auditors with low litigation services represents high quality su
ppliers [e.g.,
ZV. Palmrose, 1997]; and
a measure of the audit s ability to reduce noise and bias and improve fineness i
n accounting data [e.g., Wallace, 1980].
Renzo Farrugia
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2.2
Evolution of Audit Quality
alerts to the business community, provoking the immediate
Whilst way back in the 1980s and 1990s academics and researchers were sending
professionals attention to the importance of audit quality, it was not until rece
nt corporate scandals that the profession actually realised the importance of th
is term. In fact, following the exodus of these scandals - that were somewhat gr
ossly amplified by international media, both the United States [US] and the Euro
pean Union [EU] developed their own models to thwart industry corruption and boo
st their overall business credibility as a country. So in 2002 [for the US] and
in 2005 [for the EU], the business environment of the profession entered a relat
ively new area - the period of intensified government enforcement and regulation
s. Thus it is the intention of the author to critically analyse the different li
terature sources and practical implications in this turbulent environment, where
by various Governments are designing their regulatory measures, audit firms are
rethinking their methodologies and the business community is still somewhat conf
used on what the fuss is really about. Exhibit-4 [pp.10] illustrates the major a
pproaches to audit quality that will be discussed in this literature review. It
is believed that the analogy of the Greek Parthenon Temple offers valuable insight
s in this review. Firstly, audit quality definition is based on five pillars bei
ng (i) technical; (ii) behavioural; (iii) legalistic; (iv)oversight bodies; and
(v) professional standards perspectives. If one ignores any one of these pillars,
the exploration of audit quality dimensions cannot hold for long and it will eve
ntually collapse. Secondly, if the builder builds these pillars with unequal hei
ght, the temple will look really crooked and it will not succeed the test of tim
e. It is thus considered that each of these dimensions carry equal importance. F
inally, though these Greek pillars look the same, they are still different from
each other. In fact, each pillar can stand on its own right. However one cannot
call a pillar the Parthenon Temple. It is when the whole construction is collectiv
ely unified when the temple can actually be formed.
Renzo Farrugia
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Exhibit 4, Five Major Approaches to Audit Quality
AUDIT QUALITY
Technical Approach
Behavioural Approach
Legalistic Perspective
Oversight Bodies View
Prof. Stand. Perspective
ACADEMIC RESEARCH
PRACTICAL FIELD
2.3
Pillar I - Technical Approach to audit quality
Throughout the past decades, there were various academics and researchers who fo
cused on the technical dimension of audit quality. Perhaps the most notable work
relates to the relationships found to exist between audit quality and fees dete
rmination [DeAngelo, 1981], brand name auditors [Francis et al.1988] and stakeho
lders expectations [Davidson et al. 1993].
2.3.1
Audit Quality and Fees Reliance
DeAngelo [1981] provides an economic argument linking higher audit quality to la
rger audit firm size. She argues that initial start-up costs are so significant
for incumbent auditors that these eventually quit the market. This is because th
e environment of an audit firm is so taxing on its resources that these specific
quasi-rents are subject to loss if it is discovered that the auditor has provid
ed lower than expected monitoring strength. This serves to deter the auditor fro
m behaving opportunistically, whilst provides protection to existing audit firms
.
Renzo Farrugia
Page 10

Empirical research carried out by Krishnan G. [2003] have also established that
as larger audit firms have a wider spectrum and volume of clientele, these are l
ess likely to rely on a particular business for his/her major source of income h
ence questioning the independence of an auditor. All of this leads to the conclu
sion that the bigger the audit firm, the more assurance there is in providing hi
gher audit quality services a view also supported by empirical work carried out
by Watkins A. in 2004. The only way that remains for the small practitioner is t
o fight back in this oligopolistic market is through a reduction in audit fee ch
arged often referred to as low balling [Wallace, 1980]. Low-balling refers to pric
ing initial audits significantly below cost to tap in a new customer. Such a pra
ctice could lead to time and budget pressures as well as making it more difficul
t for auditors to refuse accounting concessions because of the threat of termina
tion. This could impair auditor independence and contribute to lower quality aud
its [Lee and Gu, 1998]. Although studies presenting theoretical arguments and an
alytical models have provided support for the existence of lowballing, these stu
dies have also demonstrated that such practices do not necessarily reduce audito
r independence, nor do they lower audit quality [Zang,
1999]. Empirical evidence relating to the affects of low-balling on auditor
independence is thus nonexistent. This, coupled with the various theoretical arg
uments for its existence, makes it difficult to assess the implications of lowba
lling on audit quality [Stice, 1991].
2.3.2
Audit Quality and Agency Conflicts
Francis, J. R. and E. R. Wilson [1988] examined the association between various
agency conflicts and audit quality using both levels and changes in specific age
ncy conflict proxies. Francis and Wilson proposed that clients with higher agenc
y conflict are more likely to switch to brand name auditors in order to reduce u
ncertainty relating to company value, and thus, increase management compensation
. They have found out two proxies for audit quality being: (1) a categorical var
iable, brand name (Big Audit firms/non-Big Audit firms) and, (2) a continuous si
ze variable, total client sales audited by the audit firm. Two representations o
f agency cost were also included in this study being: (1) the changes in agency
proxies over a three-year period preceding the auditor switch and (2) the levels
of agency cost proxies in the year prior to the auditor switch.
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These authors posit that auditors should not undertake any work other than audit
for their audit clients as this hefty impairs on their independence. However, t
his work fails to highlight the key determinants of such independence infringeme
nts
[Ahmed and Hopson, 1990].
Relating Francis et al. findings to the Maltese scenario, it is customary that t
he book-keeping processing and the actual performance of an audit are done by on
e and the same firm. This may have a direct bearing on the auditors ethical value
s to express an independent opinion on the financial statements. Yet, audit firm
s argue that they have put safeguards to ensure that auditing and accounting wor
k is done through separate departments - what is often referred to as the Chinese
walls concept. However though this set-up was acceptable during the late 1980s,
the new regulatory regime restricts this safeguard to the extent that one cannot a
ccept such client engagements. For instance in Ireland, Section 74 of Company La
w Enforcement Act [2001] puts the onus on the auditor to report any business ent
ity that has not kept adequate book of accounts to the Registrar of Companies. I
f this regulation is enforced in Malta, the auditor may find himself in a bizarr
e situation of the need to report himself to our authorities clearly a conflicts
of interest case.
2.3.3
Audit Quality and its relation to Brand Name Auditors
Davidson, R. A. and D. Neu. [1993] tested the relation between auditor reputatio
n, auditor monitoring strength, and a measure of information quality. Davidson a
nd Neu posit that managers have an incentive to minimize the difference between
forecasted income and reported income and will utilize accruals and other discre
tionary accounting practices to manipulate reported income to minimize that diff
erence. However, managers will be less able to manipulate earnings to achieve fo
recasted earnings when they hire brand name auditors as against other smaller fi
rms. Davidson and Neu caution that while this suggests that larger auditors may
do a better job of minimizing earnings management, it is also possible that the
same factors that drive clients not to engage in earnings management also drive
those clients to seek brand name auditors. These authors argue that larger audit
ors have more reputation collateral at risk and are, therefore, less likely to b
ehave opportunistically. In fact the reputation of a big audit firm is so signif
icant that if this is shattered, the entire clientele collapse.
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This research indicates that in the eyes of a client, audit quality tends to var
y with auditors reputation and brand. However it fails in identifying the extent
of such positive correlation and in asserting that high brand name auditors equa
tes higher quality [Myers et al, 2003]. From the 1990s, to date, we have witness
ed the downfall of one of the big audit firm giants Arthur Anderson, thereby emp
hasising the importance of Davidson and Neus emphasis on reputation and the impli
cations it has on the firm as a whole. On the other hand, in Malta small practit
ioners and middle-sized firms still blossom and carry out a substantial proporti
on of audit work. What still needs to be attested is whether the quality of a sm
all practitioner is of equal standard to that of a middle-sized or big audit fir
m. Perhaps whilst one reckons that due to economies of scale, larger audit firms
perform better quality audits from the technical point of view, small practitio
ners are more in proximity with their clientele. But being in close proximity wi
th constituency is often viewed as a threat to independence in the auditing busi
ness environment [Davis, 2002]. This shed concern on the debate as to whether th
e auditor should occupy a term of office for a fixed duration period of time ind
icated by law i.e. auditor rotation
[Husey and Lan, 2001]. The latter concept was well accepted within the European
Union authorities, though the Fdration des Experts Comptables Europens5 exerted pre
ssure to withhold such initiative to safeguard the interests of its members.
5
Fdration des Experts Comptables Europens is the representative organisation for the
accountancy profession in Europe. FEE s membership consists of 44 professional
institutes of accountants from 32 countries. FEE member bodies are present in al
l 25 member states of the European Union and three member countries of EFTA. FEE
member bodies represent more than 500,000 accountants in Europe.
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2.4
Pillar II - Behavioral Approach to Audit Quality
Despite the academic focus on technical aspects of audit quality, other empirica
l research focused on the humane side of the audit engagement what the author cl
assifies as behavioural approach. In fact, academics particularly in the US, have
encouraged auditing firms to cultivate a marketing culture [Ahmed & Hopson
1990], to consider developing a marketing positioning strategy [Ellis & Mosher,
1995], and to extend their portfolio of services [Diamantopouos, ODonahue, & Pete
rsen, 1995].
Exhibit-5
summarises
the
most
notable
results
and
methodologies adopted of such researches as from 1990s to date.
Exhibit 5, Results of Behavioural Audit Quality Research
Authors Sutton (1993) Research Method Nominal Group technique on experienced aud
itors to develop and validate a set of audit quality factors and measures Survey
of controllers in the US to evaluate existing auditor using 12-item questionnai
re to identify determinants of audit client satisfaction. Survey of shareholders
, financial journalists, auditors and managing directors perceptions of a quality
. Results Identified 19 quality factors which could be categorised into three gr
oups: planning, fieldwork and administration. Responsiveness to client needs, ex
ecutive involvement, effective and ongoing interaction with audit committee, ind
ustry expertise and prior experience of client all positively associated with cl
ient satisfaction. External users tend to perceive audit quality attributes as a
ttributes that inspire confidence in the auditor: six main quality dimensions id
entified; four groups rate quality dimensions differently. Identified 8 audit ga
ps and the antecedents of audit quality: nine main quality dimensions identified
; three groups rate quality dimensions rather homogeneously. Source: Adopted fro
m A. Duff, 2006
Behn et al. (1997)
Waming Rasmussen and Jensen (2001)
Angus Duff (2006)
UK Survey of auditors, auditees and stakeholders perceptions of a quality through
the use of the Servqual instrument developed by Zeithaml, et al.
This section gives an oversight of these studies and concludes by attesting thei
r applicability to the Maltese scenario.
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2.4.1
Audit Quality and Client Satisfaction
In 1997, Behn et al. carried out a research exercise to determine the relationsh
ip between audit quality and client satisfaction. Previous marketing literature
revealed that though these are related, such attributes exhibit unique character
istics [Cronin & Taylor, 1994]. Working on 12 audit quality attributes found by
Carcello et al. [1992], Behn identified that six of these had a positive relatio
nship with client satisfaction and with the audit team being:- (i) responsivenes
s to client needs; (ii) effective interaction with the audit committee; (iii) au
dit firm executives actively involved in the audit, (iv) appropriate conduct of
audit-fieldwork, (v) industry expertise and (vi) team and firm experience with c
lient. The only audit quality variable that was negatively associated with clien
t satisfaction was the audit team members maintained a skeptical attitude througho
ut the audit engagement. Perhaps this finding relates to the fact that the audito
r needs to balance out the need of satisfying his customer whilst at the same ti
me has a legal obligation towards stakeholders expectations. Behn et al. also sug
gest that there exists some evidence that client satisfaction is higher during t
he first few years after a change in auditors. However, though this research ass
ists in determining the key attributes of audit quality, it focuses only on the
relationship between client satisfaction and the audit team, ignoring other beha
vioural dimensions of audit quality [Krishnan, 2003].
2.4.2
Audit Quality and Stakeholders Perception
Warming-Rasmussen and Jensen [2001] studied the stakeholders perception of audit
quality, with the intention of developing an audit quality scale. WarmingRasmuss
en and Jensen found out that there are 6 major quality dimensions, focusing larg
ely on moral and ethical issues, which they labeled as: (i) personal credibility
; (ii) auditors independence of company management; (iii) openness in the report
; (iv) knowledge of the industry; (v) loyalty about minority shareholders; (vi)
auditors skeptical attitude to the auditee. These audit quality dimensions tend
to be ranked higher by stakeholders than auditors. Notwithstanding the moral and
ethical focus of this research, Warming-Rasmussen concluded that the effectiven
ess of maintaining good relationships with clients is quite often overlooked by
auditors.
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2.4.3
Audit Quality and Service Quality AuditQual
The Servqual questionnaire [Zeithaml, Parasuraman and Berry, 1990] is one of the
preeminent instruments for measuring the quality of services as perceived by th
e customer. This questionnaire was adopted by Duff A, [2006] to study the gaps b
etween auditors, clients and stakeholders expectations. The author identified that
the perceptions across the three sampled groups of auditors, auditees and extern
al users were relatively homogenous, though accounting firm partners tended to r
ate technical aspects of audit quality higher than the other two. Nonetheless, i
t is worthwhile noting that reputation and credibility received the highest rati
ng from the three samples. The researcher identified eight gaps (through Servqua
l) that could be duly filled in through nine distinct dimensions. These dimensio
ns relate to both technical quality and service quality, and are illustrated in
Exhibit-6. Exhibit 6, The AuditQual Model
Reputation Status Capability Independence Expertise Knowledge Experience Respons
iveness Non-Audit Services Empathy Understanding Client Service SERVICE QUALITY
TECHNICAL QUALITY
Source: Angus Duff, 2006.
This study also suggests that audit quality is very much dependent on the audit
firms ability to attract, train and develop staff of highest caliber with both te
chnical and interpersonal quality to provide the best possible service to client
s. However notwithstanding its recent issue, Auditqual may be criticised on the
same basis of Servqual, due to the problems associated with using different scor
es. This negatively impinges on the reliability, discriminant validity, converge
nt validity and predictive validity of the measure [Van Dyke et al, 1999].
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2.4.4
Behavioural Theories and its implications in Malta
There has been limited (if any) research on the attributes of audit quality with
in the Maltese environment. The communal perception is that the auditing profess
ion is obligatory by law and very limited value added is delivered to constituen
cy. The latter exhibit very limited interest in the profession, whilst authoriti
es seem to be quite hesitant to promote their initiatives. It is thus suggested
that few accounting firms have sufficient understanding of themselves or their c
lients, to improve the quality of service they provide to those clients [Ellis e
t al, 1995]. Furthermore, it is believed that an audit firm is not so market-ori
ented and instead it tends to focus more on technical issues rather than positio
ning strategy [Dopuch
et al, 1982]. Perhaps keeping a low-profile and doing the work ad verbatim, is s
till
rendering results in Malta. However the gashing winds of change from the legisla
tive side and international business community, are putting into question the su
stainability of such rudimentary audit firm strategies. These may be considered
to be ill-equipped to meet the taxing requirements of the new regulatory regime,
let alone compete in a constrained market.
2.5
Pillar III - Regulatory Regime Perspective
Way back in the eighties, Simunic et al. identified that as auditing has a direc
t bearing on public interest obligations, it should be viewed as an essential pa
rt of the regulatory infrastructure of the economy. It is thus deemed appropriat
e to solicit the regulatory regime perspective as such legislation is shaping ou
t the manner of audit conduct in the real world [Krishnan, G. V. 2003]. Though c
urrently various European countries have their own legislative frameworks, the e
nforcement of Directive 2006/43 of The European Parliament and of the Council on
Statutory Audits of Annual Accounts and Consolidated Accounts issued on 17 May
2006, obligates Member States to harmonise their legislative frameworks by not l
ater than 29th June 2008. This revamped legislation sets out various requirement
s including:Renzo Farrugia
Page 17


The setting up of an online public register detailing the details of auditors/au
dit firms (Chapter III); The obligation of auditors to observe the fundamental p
rinciples of professional ethics, independence, objectivity, confidentiality and
professional secrecy (Chapter IV); Obligation to comply with International Stand
ards on Auditing (ISA)
(Chapter V);
Obligation that each Member State should have institutions responsible for the n
ational public oversight system on the audit profession (Chapter
VI);

Co-operation
between
Public
oversight
bodies
and
regulatory
arrangements between Member States (Chapter VIII); and Obligation for auditor to
issue transparency report for public interest entities (Chapter X). All of the ab
ove indicate the measures adopted by the EU to ensure sustainable audit quality
within the Community level. However, no one single Member State has fully adopte
d all the provisions of this Directive yet. Though perhaps at the forefront, one
will find the United Kingdom and Germany, other Member States need to literally
revamp their legislative framework (eg. Slovenia, and Lithuania). Turning our f
ocus to the Maltese scenario, the framework regulating the auditing profession i
s governed by the Accountancy Profession Act, [Chapter 281]; Accountancy Profess
ion Regulations [Chapter 281.1]; Companies Act, [Chapter
386] and Directives issued by the Accountancy Board. The latter include
regulations for Continued Professional Education (Directive 1), the formulation
of a Code of Ethics for accountants and auditors (Directive 2), formulation of a
nnual return (Directive 3) and the setting up a system of Quality Assurance (Dir
ective 4). One can out rightly say that various mandatory Articles defined by Eu
ropean counterparts are included in Maltese Law. In fact, the fundamental articl
es like the setting up of a quality assurance system, that an audit needs to be
carried out in accordance with ISA and that there is a set of rigorous academic
and practical training to attain an auditors warrant are all duly integrated in
the Maltese legislative framework. However more work still needs to be done with
respect to other key areas like cooperation and exchange of information with ot
her EU countries and transparency reports.
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However it is interesting to note that Section 9 of Directive 4 of the Accountan
cy Profession Act attempts to hint to a definition of what constitutes audit qua
lity in the Maltese Context:
The Quality Assurance Process is intended to be a means through which the Board p
rovides assurance as to the quality of the professional work of warrant holders
in public practice and firms and on the maintenance of appropriate levels of pro
fessional standards thereby.
Source: Section 9 of Directive 4 of the APA, Cap281 (2006)
However, the Directive fails to explicitly indicate the parameters of quality of
professional work and appropriate levels of professional standards. Taking this def
inition to European Union level, the scope of quality assurance reviews have bee
n defined by EU Statutory Audit Directive under Article 29 (1) (f) to include; (
i) compliance with applicable auditing standards; (ii) independence requirements
; (iii) quantity and quality of resources spent; (iv) audit fees charged; and (i
v) internal quality control system of the audit firm. Perhaps this is the first
ever definition that identifies the antecedents of audit quality dimension clear
ly entrenched in law. To conclude, having the necessary legislation in place doe
s not automatically mean that there is actual enforcement. Thus one may ask: wha
t implementation measures are being adopted by various countries to ensure audit
quality?
2.6
Pillar IV - Quality Assurance Authorities Perspectives
An effective public oversight authority over the audit profession is a vital ele
ment in the maintenance and enhancement of confidence in the audit function. The
current lack of confidence in some countries is partly based on a public percep
tion that a self-regulating profession runs a serious risk of conflicts of inter
ests in dealing with its shortcomings [Zang P, 1999]. It is thus worth noting, t
he practical experience of authorities who already performed several quality ass
urance review visits on practitioners and identify possible antecedents of audit
quality from their practical work. The experience of the United States [US] and
United Kingdom [UK] are discussed together with the Maltese model.
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2.6.1
US experience - PCAOB
In the US, the designated public oversight authority is the Public Company Accou
nting Oversight Board [PCAOB]. The PCAOB suggests that an effective audit qualit
y control system should need to have appropriate policies and procedures to ensu
re sustainable audit quality. Exhibit-7 illustrates the key antecedents of audit
quality which relates to firm culture, governance, compensation and rewards, qu
ality control risk assessment, and monitoring mechanisms. Exhibit 7, Illustrativ
e Quality Control System adopted by PCAOB
Source: http://www.pcaobus.org/inspections/
It is also the policy of the PCAOB to publicly disclose all the audit firms in d
efault (to ensure transparency) and to offer accreditation to those who demonstr
ate audit quality in their procedures.
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2.6.2
UK experience - POBA
A similar arrangement was set-up in the UK, appointing the Professional Oversigh
t Board [POBA] as the oversight body on the profession. The POBA place prominenc
e in its procedures by challenging partners judgments as well as critically evalu
ating audit processes and internal controls adopted by these firms. In doing so,
POBA has developed and implemented an approach to audit monitoring based on the
following characteristics: Wide-ranging reviews of firm wide procedures, includi
ng an assessment of how the culture within firms impacts on audit quality; In-de
pth reviews of major audits, focusing on the quality of the group audit, includi
ng critical assessment of the key audit judgments made and a detailed review of
compliance with UK Auditing Standards; and Review of the quality of reporting to
the Audit Committee.
It is worth noting, that whilst in the US more emphasis is placed on transparenc
y and public accountability, the UKs approach is focused on examining how culture
within audit firms impacts audit quality.
2.6.3
Maltese experience - QAOC
In Malta, the Quality Assurance Oversight Committee [QAOC] within the Accountanc
y Board, and its duly appointed agents the Quality Assurance Unit
[QAU] are the designated authorities responsible for ensuring audit quality.
Notwithstanding, the embryonic phase of the quality assurance system, the implic
it objectives relates: To evaluate whether warrant holders engaged in public pra
ctice have established appropriate quality control policies and procedures and t
hat they are complying with those policies; To evaluate whether warrant holders
engaged in public practice have complied with relevant professional standards; T
o require warrant holders in public practice to make appropriate improvements in
their quality control policies and procedures; and To take appropriate correcti
ve action, including educational or disciplinary measures, as may be indicated b
y the circumstances.
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It is anticipated that after the first cycle of reviews are conducted, standards
will increase and the business community is deemed to benefit from such reviews
. It is expected that the first reviews will be carried out in the second quarte
r of 2007. Presently work is carried out in the preparation of these visits and
it is applauded to note that practitioners are being informed of proceedings to
ensure transparency. On the other hand, one may attest whether such communicatio
ns may also be presented to the Maltese business community to make them more awa
re of this newly established set-up and their working methodologies. This compli
es with the recommendations proposed by Diamantopouos, et al. in 1995 that to be
successful auditors need to be more available to all key stakeholders.
2.7
Pillar V - Auditing Standards Perspective
The practitioner literature often defines audit quality relative to the degree t
o which the audit conforms to applicable auditing standards [Cook, 1987]. The le
ading international standard being also adopted by the EU is the International S
tandards on Auditing [ISA]. Nonetheless, given the prominence of audit quality i
ssues on an international level, a new standard ISQC 1 - International Standard
on Quality Control, came into effect during 2006 establishing five critical ante
cedents of audit quality relating to (i) leadership; (ii) human resources; (iii)
ethical policies; (iv) engagement performance and (v) monitoring [Vide Exhibit8,
pp.23].
It is believed that by complying with this standard, audit firms attain
sufficient audit quality in their methodologies.
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Exhibit 8, ISQC 1 Requirements
Source: http://www.ifac.org/IAASB/
2.8
Conclusion The Audit Quality Wheel Model
Audit quality research has been prolific over the past two decades [Myers, 2003]
. Although these authors and the practical field have created constructs which m
ay have elements in common, they have been used with little reference to one ano
ther. In sum, the concept of audit quality is not exactly clear in terms of its
definitions, scope and operationalisation [Watkins A., 2004]. The lack of clear
constructs and specific operationalisations complicates interpretations and the
ability to replicate findings [Sekeran U, 2000]. This suggests that there is sti
ll much to learn about relations between the various attributes of audit quality
.
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However, to summarise literature review and the broad number of issues of import
ance and dimensions of audit quality derived, the main areas have been structure
d in a model as shown in Exhibit-9. The model does not claim to provide full jus
tice to all issues on audit quality but offers an indication of the central them
es and a practical context of assessing the results of the field work presented
in the later sections.
Exhibit 9, The Audit Quality Wheel Model
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The audit quality wheel model builds on six (6) fundamental spokes resulting fro
m technical, behavioural, regulatory, oversight bodies and auditing standards pe
rspectives. These fundamental elements are:(i) (ii) (iii) (iv) (v) (vi) audit fi
rm culture; partner involvement; audit team involvement; quality on the field; s
takeholders interest; and customers satisfaction.
Furthermore, the author referred to the distinction used by Kotlers [2002] betwee
n core and augmented attributes. Issues related to audit independence, competenc
e, integrity and quality and openness of audit report are considered to be core
dimensions of audit quality. On the other hand, the augmented audit quality cont
ains elements that goes beyond these basic elements and possibly enhance the aud
it quality of the firm through recruiting highest caliber of staff, issues of em
powerment, brand name, reputation and transparency of internal communication pro
cess, amongst others. Based on the literature findings, to become a sustainable
audit quality audit firm, the conditions within the core audit quality should ex
pectedly be fulfilled before working on the augmented part of audit quality. The
rest of the dissertation will attempt to prove the extent of applicability of t
his model to the Maltese situation and a discussion of the findings.
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Chapter 3
PART TWO RESEARCH METHODOLOGY
In general, most of the previous studies undertake research into audit quality f
rom the standpoint of technical and behavioural schools of thought. However ther
e are only a few studies that investigate the perspectives of the stakeholders,
who are in the closest contact with the external auditors in the firm, on the is
sue of audit quality. This study investigates the views of audit firms and compa
nies (audit committees) about what constitutes audit quality and its implication
s on sustainable competitive advantage. Author, 2006
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Part TWO, Research Methodology
3
PART TWO RESEARCH METHODOLOGY
From the preceding discussion, this study concluded that there are limited studi
es undertaken on the perceptions of audit partners and audit committee on the fa
ctors that may influence the quality of an audit. This section examines the proced
ural framework within which the research is conducted [Remenyi et al,
1998] by examining the perception of these stakeholders on audit quality issues
in
Malta.
3.1
Research Theme
The objectives of the research are to challenge three initial hypotheses. 1st
hypothesis
- the dimensions of audit quality are not something static or
universal. Instead it is a multi-dimension construct that evolves due to continu
al changes in the environmental influences effecting the profession. 2nd hypothe
sis - the dimensions of audit quality, are not fully recognized within the local
auditing profession. 3rd
hypothesis
- audit firms who manage audit quality, ensure long term
sustainable competitive advantage.
3.2
Area of focus
This study is undertaken to examine the potential factors that influence audit q
uality from the perception of partners of audit firms (providers) and audit comm
ittees of companies quoted on Malta Stock Exchange (audit clients). This study i
nvestigates how much the audit partners perception significantly differs in relat
ion to audit committees whilst attesting their overall perception of the relevan
t dimensions to the Maltese environment. Carcello et al. [1992] stated that:
in an increasingly competitive environment, it seems important to understand the
perceptions of both users and preparers as they relate to audit quality. Any dif
ferences may allow for audit firms to deliver more satisfaction to both groups a
nd simultaneously improve their own audit quality.
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3.3
Choice of Research Instrument
This research work includes the entire views of all accessible partners audit co
mmittees through the use of a questionnaire for both subjects of study. This is
because the quest to identify key issues of audit quality perception is expected
to result from tentative answers to answer questions like How many? or How much?. T
he latter is the central premise of positivists research separating it from the
non-positivists research focusing on questions such as what? why? and how? [Remenyi et
al., 1998]. The questionnaire was intended to be submitted electronically to al
l audit firm partners and audit committees. However from feedback gathered durin
g the pilot testing stage, it was considered difficult to reach a sufficient hig
h number of members of audit committees of companies quoted on MSE to provide va
lid data. This is because much of the audit committees come into existence as fr
om 2005 following the enactment of European Commission Recommendation of 15 Febr
uary 2005 on the role of non-executive or supervisory directors of listed compan
ies and on the committees of the (supervisory) board1. Furthermore, following co
mments received, the majority of these members do not hold their office for more
than an established period of time (usually one year), and thus there exist a s
ubstantial level of turnover in this group. To this effect, it was finally decid
ed that for audit firms, a positivists quantitative research be adopted so as to
generalize the overall perceptions of the audit partners in Malta. On the other
hand, this approach was rejected for audit committees, and instead an interview
-based qualitative approach with the chairperson of the committee was made. For
comparison purposes, the same questionnaire was used as an interview guide with
the latter group.
3.4
Designing the Research Questionnaire
The same set of questions was developed for the purpose of this study for both a
udit partners and audit committees. Initial versions of the questionnaire were s
ent electronically to five (5) audit partners and to two (2) members of audit co
mmittees. Following comments received, some minor adjustments were made to the q
uestionnaire. The final version of the questionnaire can be viewed in
1
EU Official Journal L 52, 25.2.2005, p. 51.
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Appendix B [pp.85]. This questionnaire contains three (3) sections as follows:Se
ction A: obtains basic information about respondents such as number of employees
, years in operation and type of organisation. This section assist in segregatin
g the information detailed in later sections in accordance to size and experienc
e in the industry. Section B: details a series of statements based on the audit
quality attributes as identified in Chapter 2, Literature Review. Respondents we
re asked to provide their assessment using a four (4) point Likert Scale ranging
from no impact on audit quality to extreme impact on audit quality. This scale was
used throughout the reminder of this part. At the end of each part, respondents
were requested to rank two of these ten statements which in their opinion are cr
itical for audit quality, whilst also giving them the opportunity to include any
other attribute which in their opinion could be included as a determinant of au
dit quality. The main areas are shown in the Exhibit 10 together with correspond
ing literature sources. Exhibit 10, Contents in main body of the questionnaire
Areas represented in questionnaire 1. Audit Firm Culture Selected related litera
ture sources Beattie & Fearnely (1995), DeAngelo (1981), ISQC 1, Carcello et al
(1992), A.Duff (2006), Davidson, R. A. and D. Neu. (1993), Francis, J.R. et al,
(1988) and Simumic (1984). Parasuraman et al (1991), DeAngelo, (1981), ISQC 1, C
arcello et al, (1992), A. Duff (2006), Lee and Gu, (1998) and Beattie, Farnley &
Brant, (2001) Beattie & Feanrley, (1995), Francis, J.R. et al, (1988) and ISQC
1 Behn et al (1997), Parasuraman et al (1991), Duff A (2006), Cook (1987), ISQC
1, Dopuch and Simunic, (1982) and Carcello et al (1992) Beattie & Fearnely (1995
), Warming et al (2001), E. Woolf (2005), Warming-Rasmussen et al (2001), Watkin
s et al (2004), A. Duff (2006) and PCAOB, US Beattie & Fearnely (1995), ISQC 1,
Carcello et al, (1992), Davidson, R. A. and D. Neu. (1993), A. Duff, (2006) and
Parasuraman et al, (1991) Source: Author, 2006. Compiled from various sources.
2. Partner Involvement
3.Audit Team Involvement 4.Quality on the Field
5.Stakeholders Involvement
6.Managing Customer Relationships
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Section C: requests respondents to put forward their views about audit quality a
nd attest their knowledge in this respect. Respondents were given the opportunit
y to comment on present hot issues within the profession impinging on audit qual
ity. The questionnaire concludes by providing freeform comments. Structuring the
questionnaire in sections based on literature findings simplified categorisatio
n of information to be used in seeking patterns and themes relevant to test hypo
thesis.
3.4.1
Addressing Questionnaire Risks
In designing the questionnaire great care was given to avoid a number of potenti
al pitfalls usually associated with the administration of a questionnaire. Such
pitfalls include interviewer bias, respondent bias, rigid bias sample bias and r
ace bias [Henley, 2004]. The latter is not seen as a potential risk in this rese
arch. Exhibit-11 details the necessary safeguards implemented to address these p
otential risk factors. Exhibit 11, Addressing Potential Questionnaire Pitfalls
Type of Bias Interviewer Potential Risk Questionnaire include leading questions
Safeguards Formulating all questions on theory and inspired by international sur
veys on audit quality
Respondent
Questionnaire not answered or answered from wishful thinking rather than facts N
arrow scope to provide justice to research
Using closed ended questions through the use of the Likert Scale
Rigid
Providing respondents with an opportunity to mark the possible importance of oth
er issues , not defined in the questionnaire
Sample
Whether choice of respondents is appropriate
By targeting the whole audit firms in Malta and companies quoted on MSE in addit
ion to randomly distributing the questionnaire to qualified auditors and other c
ompanies.
Source: Adopted from Henley, 2004. Study Guide for Undertaking a Research Projec
t, Henley Management College. Renzo Farrugia
Page 30

3.5
Target Audience and Response Rate
The questionnaire was electronically distributed to all the audit partners in Ma
lta. Furthermore, all chairpersons were primarily contacted by phone and a meeti
ng was arranged to set an appointment in their offices. Exhibit-12 illustrates t
he names of the thirty-two (32) audit firms and the list of the twenty-seven (27
) companies quoted on Malta Stock Exchange (MSE), acting as the basis of the ent
ire population for this research.
Exhibit 12, Population of Audit Firms and MSE Companies
Population of (32)Audit Firms in Malta Abdilla Fenech & Co Alliot Malta Attard G
iglio & Co. RSM Malta Baker Tilly Sant BDO Attard, Buttigieg, Psaila & Co. Bryan
t, Mayl & Co Busuttil & Micallef Carm A Fenech & Co Degiorgio Scerri & Co Deloit
te & Touche DFK (Malta) Farrugia, Farrugia & Co DG & Associates Ernst & Young Ga
tt, Galea & Co MGI Malta Grant Thornton Griffiths & Associates HLB Falzon & Falz
on Horwath (Malta) KPMG MSI Craig Sammut & Co Marmara Camilleri & Co Pricewaterh
ouseCoopers R S Attard & Co -Moore Stephens Malta Richard J Attard & Co Robert C
assar & Co Schranz & Co Spiteri Bailey & Co UHY Pace, Galea Musu & Co Vincent Cu
rmi & Associates Victor Schranz & Associates
Population of (27)Companies Quoted on Stock Exchange Bank of Valletta plc Bay St
reet Finance plc Big Bon Finance plc CareMalta Finance plc CC Car Parks plc Cori
nthia Finance plc Datatrak Holdings plc Dolmen Properties plc Eden Finance plc F
IMBank plc Gasan Finance plc Global Financial Services Group plc Hotel San Anton
io plc HSBC Bank Malta plc International Hotel Investments plc Lombard Bank Malt
a plc Malta Government Privatisation plc Malta International Airport plc Maltaco
m plc Mariner Finance plc Middlesea Insurance plc Mizzi Organisation plc Plaza C
entres plc Simonds Farsons Cisk plc Suncrest Hotels plc Tumas Investments plc Un
ited Finance plc
Source: Adopted from Accountancy Board & Malta Stock Exchange Websites respectiv
ely
Renzo Farrugia
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3.5.1
Audit Partners
The register of audit firms6 published in Malta Government Gazette during March
2006, lists down one-hundred and eight (108) audit firm partners within thirty-t
wo (32) registered audit firms licensed to practice in Malta. Out of these 108 p
artners, (5) five individuals indicated that they do not wish to participate due
to lack of management time, another two (2) said that the addressee had retired
, whilst another eleven (11) were not audit firm partners [lawyers or tax partne
rs] and refused to participate in this study. As a result, the number of accessi
ble audit partners for this study is ninety (90). Upon receipt of the e-mail, co
nfirmation was sought that the intended addressee was the actual person who fill
ed in the questionnaire. The questionnaire was electronically distributed to all
audit firms on 2nd October 2006 requesting their return by 13th October. Sixtee
n (16) responses had been received by 13th October. A reminder e-mail was sent o
n 16th and a further 10 responses were received. In total, 26 completed question
naires were received, a response rate of more than 28%. Although the response ra
te may appear to be relatively low, considering the questionnaire length and the
somewhat unorthodox nature of the subject, it provides sufficient sample size u
pon which conclusions can be drawn and considered acceptable for an e-mail surve
y of this nature. In fact, Green, Tull & Albaum, [1998] identified that such rel
ated studies usually achieve a response rate of between 10% and 30%.
3.5.2
Audit Committee of Companies listed on MSE
Being the principal users of auditing information, during 2006, there were twent
yseven (27) licensed companies quoted on the Malta Stock Exchange (MSE). The aut
hor performed semi-structured interviews with ten (10) companies who were willin
g to participate in this study. These respondents come from the banking industry
, manufacturing, hotel industry and other financial services. A short brief was
given in the letter inviting the interviewees to participate [vide Appendix C,
pp.96]. The interviews were conducted in Maltese and have been recorded with
the permission of the interviewees. Since comparison needed to be made between t
he audit firm perception and that of the audit committee, the same questionnaire
was adopted to retain consistency whilst allowing more scope for
6
The register of audit firms and of all warrant holders holding a practicing cert
ificate in auditing is published annually by the Accountancy Board as required b
y the Accountancy Profession Act, CAP 281.
Renzo Farrugia
Page 32

the respondent to express himself/herself at some length without loosing grip or
direction. This semi-structured interview took on average about one (1) hour an
d was carried out in an open and honest dialogue. All interviews were carried ou
t in the participating companies, and the interviewed person was either the chai
rman of the committee or another member appointed by the aforementioned chairper
son. It was recommended that if possible two individual members of the committee
participate to make this analysis as valid as possible and to minimize individu
al feelings and opinions on specific statements. Furthermore, Kvale et al.
[1996] identified that the quality of an interview may be evaluated against the
extent to which spontaneous, rich, specific and relevant information is provided
i.e. the shorter question and the longer the answer the better, and the extent
to which all relevant aspects are pursued and clarified. When evaluated against
this standard some variations appeared as many chairpersons were very enthusiast
ic and communicative, while a few provided only the briefest of answers.
3.6
Limitations on research methodology
As the scope and aim of the dissertation in short is a limited study on what aud
it firms and auditees consider as antecedents of audit quality, there are limita
tions in the research wider validity. The research cannot be taken as representi
ng a general Maltese survey as it does not allow for a holistic assessment of au
dit quality. In fact, the research only focuses on audit partners and audit comm
ittees view and can therefore not be said to be a full analysis of audit quality,
which should have included as assessment of other relevant present perceptions,
like sole practitioners and other companies. Furthermore, this study focused on
ly on the largest two segments ignoring other stakeholders involved like auditor
s employed within the audit firms and finance managers employed by companies. Ad
ditionally, as it is the first attempt on researching the quality antecedents wi
thin the Maltese industry, the research is limited from conducting a longitudina
l analysis and thereby from capturing differences over time. Despite these limit
ations, the findings of this study do provide a platform for future investigatio
n and diagnosis.
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Page 33
Chapter 4
PART TWO FIELDWORK RESULTS
There is a perception that audit committees, investors and financial institution
s appear, or have appeared, to choose or demand Big 4 auditors for the largest l
isted companies. This could be for a number of reasons, for example: the deep poc
kets issue; a lack of information about shareholders views, a perception that smal
ler audit firms produce lower quality caused by their not being present in the s
tock exchange; network issues; or merely being comfortable with well-known brand
s. Fetham et al. ,1991
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Part TWO, Fieldwork Results
4
PART TWO FIELDWORK RESULTS
Subsection 4.1 relates to Section A of the questionnaire
The content of the data analysis and the key findings from the fieldwork is pres
ented below.
providing information about the demographic data of respondents. Subsection 4.2
relates to Section B of the questionnaire extrapolating the six dimensions ident
ified in the attested Audit Quality Wheel Model, whilst Subsection 4.3 relates to
Section C of the questionnaire provoking free-form comments.
4.1
Section A, Demographic Analysis
Analysis of demographic data reveals that from the 26 audit partners who respond
ed, 16 (62%) respondents were employed by the Big 4 audit firms, 6 (23%) respond
ents were employed in medium-sized firms (10 to 25 employees) and another 4 (15%
) respondents from smaller sized-firms (less than 10 employees). Meanwhile, 10 i
nterviews representing 37% of the audit committee listed on Malta Stock Exchange
(MSE) were conducted by the author. The analysis of the audit partners experienc
e in the work reveals that 14 (53.8%) have more than fifteen years experience, 8
(30.8%) have between five to fifteen and only 4 (15.4%) have less than five in
the current position. Exhibit-13 profiles the work experience of audit partners
by gender. Exhibit 13, Work Experience of Audit Partners by gender
Work Experience Less than 5 years From 5 to 15 years More than 15 years Total
Female 1 2 3 6
Male 3 6 11 20
Total 4 (15.4%) 8 (30.8%) 14 (53.8%) 26 (100%)
This is in stark contrast with the current work experience of the audit committe
es all of which hold their office as a chairman for less than five years.
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It is also worth noting the age groups of respondents for both groups. In both c
ases a similarity was noted that much of the audit partners and members within a
udit committees fall within the age of 40 to 49 years having 50% of audit partne
rs and 40% of audit committees. Exhibit-14 indicates the age group and sexes of
respondents in this study. Exhibit 14, Demographics of Audit Partners and Chairp
ersons of Committees
Age Group 30 to 39 years 40 to 49 years 50 to 59 years Over 60 years Total Femal
e 1 4 1 0 6 Male Total Audit Partners 6 (23.1%) 5 13 (50%) 9 5 (19.2%) 4 2 (7.7%
) 2 20 26 (100%) Female 2 0 0 0 2 Male Total Audit Committees 2 (20%) 0 4 (40%)
4 2 (20%) 2 2 (20%) 2 8 10 (100%)
4.1.1.1
Summary on Section A
On an overall basis, most respondents came from the 40 to 49 years age-group hav
ing more than fifteen years of experience practicing as auditors. Given the embr
yonic phase of audit committees, chairpersons occupied their office for about fi
ve years. There is also dominance of male participants in this questionnaire amo
unting to more than 73% of all respondents.
4.2
Section B, Literature Review Analysis
An analysis was made on the combined responses of all the two groups of responde
nts. Exhibit-15 [pp.37] illustrates the ten factors with the highest means, whic
h indicate a considerable degree of importance in influencing the audit quality.
Each of the ten highest rated factors had an overall mean score of at least 2.8
3.
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Exhibit 15, Ten most influential factors on audit quality
Question
Statement
Overall Mean Statistic
Rank
Audit Partner Mean Statistic
Audit Committee Mean Statistic
1.4
Audit firm employs a robust internal procedure compliant with the international
standards requirements and regulatory framework regime. Engagement partner has s
ufficient knowledge and understands what is happening within the clients organisa
tion. Audit team members are independent from the client. Audit team exercise di
scretion and professional judgment whilst performing the audit. Audit team adopt
s high ethical standards when performing their work. Audit team performs the aud
it in accordance with International Standards on Auditing and with appropriate a
nd relevant legislations. Audit team gathers sufficient and appropriate document
ed evidence supporting audit opinions.
Audit firm is knowledgeable about the clients industry. Audit team files are revi
ewed by people with appropriate experience who will encourage alertness, origina
lity of thought and a thorough investigation of anomalies. Engagement partner de
dicates resources to align the audit firms strategy and internal communications w
ith recent developments in the profession. Audit team keeps abreast of recent de
velopments in the profession. Audit firm is able to attract, train and develop s
taff of highest calibre with appropriate skills and qualifications. Audit team e
valuates appropriate judgments made by their clients with rigour and professiona
l scepticism. Audit team on field works in accordance to the working practices e
mbedded within the audit firms internal control procedure. Audit firm consistentl
y monitors its quality control policies to align with recent best practice in th
e audit profession. Audit team is motivated both personally and by their working
environment. Engagement partner allocates more time and effort on those areas t
hat have the highest risk. Audit firm is independent of the board of directors.
Engagement partner allocates necessary resources for all its clients, irrespecti
ve of the audit fee charged.
3.00
1
3.00
3.00
2.5
3.00
1
3.00
3.00
3.1 3.2 3.4 4.4
3.00 3.00 3.00 3.00
1 1 1 1
3.00 3.00 3.00 3.00
3.00 3.00 3.00 3.00
4.5
3.00
1
3.00
3.00
1.5 4.8
2.94 2.93
2 3
2.92 2.86
3.00 3.00
2.3
2.92
4
2.88
3.00
3.3 1.6 4.7 4.9
2.91 2.90 2.89 2.89
5 6 7 7
2.93 3.00 2.83 2.78
2.89 2.50 3.00 3.00
1.7 3.9 2.7 1.2 2.10
2.89 2.88 2.87 2.83 2.83
7 8 9 10 10
2.86 2.86 2.75 2.80 2.70

3.00 3.00 3.00 2.88 3.00
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Seven statements were ranked as the prime contributories of audit quality attain
ing the highest mean score of 3.00 each by both groups of respondents. Out of th
ese seven statements, three relate to audit team involvement, two relate to qual
ity on the field and the remaining two statements relate to audit firm culture a
nd partner involvement. This may indicate that the competency, knowledge and exp
erience of the audit team are more important for audit quality than other issues
.
It is also interesting to note that statements related to stakeholders involvemen
t and managing customers relationship did not gain the highest means. Instead muc
h of these statements are those that are perceived by both group of respondents
as the least factors that may influence audit quality. Exhibit-16
[pp.39] shows the ten factors with the lowest means, hence factors that are
perceived to least influence audit quality.
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Exhibit 16, Ten Least influential factors on audit quality
Audit Partner Mean Statistic Audit Committee Mean Statistic
Question
Statement
Overall Mean Statistic
Rank
3.10 4.6
5.1 6.6 2.8
Audit team benefits from competitive reward mechanisms. Audit team aims for earl
y communication with management when corrective action may be required. Audit fi
rm delivers consistent messages to all stakeholders. Audit firm is responsive by
giving advice to customers that add value. Engagement partner performs differen
t types of audits each year to enrich his/her spread of knowledge within various
industries. Audit firm charges appropriate fee to meet all legal, regulatory an
d professional obligation, without putting unnecessary pressure on audit staff t
o cut corners. Having the necessary set-up to lodge a complaint against an audit
or from the general public leads to higher levels of audit quality. Stakeholders
will feel more trust, if the list of audit firms clearly indicates, those that
are quality certified by an independent oversight authority. Audit firm operates t
o the highest standards of integrity. Increase in audit fees implies higher assu
rance to stakeholders. Audit firm provides additional services such as accountin
g/book-keeping, taxation and consultancy services to their audit clients. Engage
ment partner puts forward frequent advice to clients. Audit team provides immedi
ate and professional assistance to clients recommending possible action for impr
ovement. The interests of shareholders would be best served if audit firms remai
n in place for a fixed term (eg five years) - without any reappointment option.
2.52 2.52
28 28
2.53 2.72
2.50 2.11
2.50 2.50 2.48
29 29 30
2.41 2.47 2.52
3.00 2.67 2.25
6.10
2.48
30
2.67
2.13
5.9
2.46
31
2.53
2.33
5.10
2.45
32
2.47
2.33
1.1 5.7 6.3
2.40 2.38 2.36
33 34 35
3.00 2.53 2.47
2.14 2.11 2.13
2.6 3.7
2.35 2.33
36 37
2.41 2.42
2.22 2.13
5.6
2.29
38
2.50
2.00
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4.2.1
Comparison of Respondents Opinions
An independent t-test was conducted to analyse whether the audit committee and a
udit partners opinion on the factors that may the quality of an audit is signific
antly different or not. The results, presented in Exhibit-17 shows that audit pa
rtners and MSE audit committees had significantly different views on nine factor
s. Information in the column labeled Sig. (2-tailed) shows the means are signifi
cantly different (<0.05) for assumptions of either equal or unequal variances. E
xhibit 17 Independent Sample Test (T-test)
Ref Statement t-test for Equality of Means Mean t df Sig. (2-tailed) Difference
1.1
Audit firm operates to the highest standards of integrity. Being a big audit fir
m adds credibility to users of financial statements. Audit team provides the cli
ent with individual attention. Audit team creates the minimum disruption to the
client so far as practically possible. Audit team aims for early communication w
ith management when corrective action may be required. The interests of sharehol
ders would be best served if audit firms remain in place for a fixed term (eg fi
ve years) without any reappointment option. Increase in audit fees implies hig
her assurance to stakeholders. Audit firm provides assurance about its knowledge
, courtesy of employees and ability to convey trust. Audit firm charges appropri
ate fee to meet all legal, regulatory and professional obligation, without putti
ng unnecessary pressure on audit staff to cut corners.
Equal variances assumed Equal variances not assumed Equal variances assumed Equa
l variances not assumed Equal variances assumed Equal variances not assumed Equa
l variances assumed Equal variances not assumed
3.795 6.000 -2.360 -3.500 -2.510 -3.873 -2.295 -2.658
8.00 6.00 20.00 14.00 28.00 20.00 25.00 18.88
0.005 0.001 0.029 0.004 0.018 0.001 0.030 0.016
0.857 0.857 -0.467 -0.467 -0.429 -0.429 -0.454 -0.454
1.10
4.2
4.3
4.6
Equal variances assumed Equal variances not assumed
3.528 3.933
25.00 21.40
0.002 0.001
0.611 0.611
5.6
3.028 3.606
22.00 13.00
0.006 0.003
0.500 0.500
5.7
Equal variances assumed Equal variances not assumed Equal variances assumed Equa
l variances not assumed
2.196 2.504 -2.895 -4.359
24.00 22.78 27.00 19.00
0.038 0.020 0.007 0.000
0.418 0.418 -0.500 -0.500
6.7
6.10
2.764 3.052
21.00 18.76
0.012 0.007
0.542 0.542
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Greater importance was given by audit partners on issues related to audit firm i
ntegrity, early communication with management, audit firm rotation and audit fee
s computations all of these factors focusing on the technical side of the effect
ive conduct of an audit. Meanwhile, MSE audit committee placed higher importance
on audit firm size, individual attention, minimum disruption and the ability of
audit firm to convey trust. The latter factors being more oriented to ensure cu
stomer satisfaction. This is an expected finding, as external users of accountin
g information are less likely to be interested in technical quality issues betwe
en the auditor and the client. This finding is similar to the results of Warming
-Rasmussen & Jensens [2001] study conducted in Denmark, where Danish external use
rs (shareholders and financial journalists) rated audit quality (ie service qual
ity attributes) higher than auditors.
4.2.2
Comparison of Respondents Opinions
Having identified the generic similarities and differences of auditors and audit
committees perception on audit quality, this section shall investigate into great
er depth each classification of audit quality according to the literature review
findings, and summarised through the Audit Quality Wheel Model found on Exhibit-9
[pp.24].
4.2.2.1
Audit Firm Culture
Exhibit 18 [pp.42] shows the results of the 10 factors grouped under the first h
eading of this study Audit Firm Culture.
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Exhibit 18, Results of Audit Firm Culture
Question 1.1 1.2 1.3 1.4
Statement Audit firm operates to the highest standards of integrity. Audit firm
is independent of the board of directors. Audit firm enjoys good reputation. Aud
it firm employs a robust internal procedure compliant with the international sta
ndards requirements and regulatory framework regime. Audit firm is knowledgeable
about the clients industry. Audit firm is able to attract, train and develop sta
ff of highest calibre with appropriate skills and qualifications. Audit firm con
sistently monitors its quality control policies to align with recent best practi
ce in the audit profession. Audit firm uses avant-garde technology and knowledge
management systems to assist it in retaining knowledge gathered from its audits
. Audit firm provides other non-audit services to the audited firm, including ta
xation, consultancy and general advice. Being a big audit firm adds credibility
to users of financial statements.
Audit Partners Perception Mean Statistic 3.00 2.80 2.63 3.00
MSE Audit Committees
Perception Mean Statistic 2.14 2.88 2.33 3.00
Overall Mean Statistic 2.40 2.83 2.54 3.00

1.5 1.6
2.92 3.00
3.00 2.50
2.94 2.90
1.7
2.86
3.00
2.89
1.8
2.71
2.75
2.72
1.9
2.75
2.86
2.78
1.10
2.53
3.00
2.68
Out of these ten statements, the most influential factor on audit quality percei
ved by both groups relates to the adaptation of a robust internal procedure comp
liant with the international standards requirements and regulatory framework reg
ime. Attaining a mean score of 3.00 for each group, the perception is that audit
quality is strongly effected by the internal system and procedures adopted by t
he audit firm to duly fulfill its obligations. This finding is in line with audi
ting literature that very often defines audit quality relative to the degree to
which the audit firm applies necessary procedures to conform to applicable audit
ing standards and regulations [Krishnan and Schauer, 2001]. For example, Dopuch
and Simunic [1982] made the argument that audit quality is a function of the num
ber and extent of audit procedures performed by the auditor. It thus seems that
this finding is replicated to the Maltese auditing industry where emphasis is be
ing placed on the internal control structure of an audit firm as the medium perc
eived to drive audit quality. However this is a continuous endeavor as both grou
p of respondents
Renzo Farrugia
Page 42

identified that to ensure sustainable audit quality, an audit firm should consis
tently monitor its quality control policies to align with recent best practice i
n the audit profession. Audit partners also view other aspects of audit firm cul
ture as highly critical in their work. Issues related to audit firm integrity an
d retaining key staff, are also considered to be fundamental elements that influ
ence audit quality all attaining a high mean score of 3.00. This view is not so
particularly shared by their clients. In fact, whilst audit firms place particul
ar emphasis on their integrity, perhaps quite surprisingly, their clients only g
ave 2.14 to this attribute. This score is not only the lowest score attributed t
o this dimension by this group but even one of the lowest overall score in this
study attaining an overall mean of 2.4. The issue then becomes why audit committ
ees do not perceive integrity as being a vital component of audit quality. Follo
wing recent financial scandals, the downfall of corporate international giants a
nd the demise of Arthur Anderson, it was expected that this attribute will be fe
atured in the top ten ranked statements not as one of the lowest mean scores. To
this effect, more should be done by the auditor to make constituency aware of t
he role of an auditor and his responsibility towards society. Perhaps Government
should also partake in raising such awareness, thereby contributing to an incre
ase in the expectations of audit work. On the other hand, MSE audit committees i
dentified the fact that being one of the big audit firms adds credibility to use
rs of financial statements. This compliments the findings of several demand-side
studies that theorized that high-risk clients or clients with other motivations
might attempt to credibly signal company-value information by selecting brand n
ame auditors [Stice, 1991; Palmrose, 1988; Kellogg,
1984; St. Pierre and Anderson, 1984].This perception is not duly shared by audit
partners whereby a lower mean score of 2.53 was given. Quoting a comment receive
d by one of the audit partners an audit is always an audit and should be carried
out in accordance to the rules of the game irrespective of the audit firm size. F
urthermore, constituents belief that being knowledgeable about the clients industr
y enhances audit quality is also shared by audit partners view attributing a mean
score of 2.92. However such industry specialization is a costly endeavor. In fa
ct this finding relates to Craswell et al. research, who in 1995 identified that
auditors who specialise in a particular industry earns a 34% fee premium over
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other auditors who are not industry specialists. To conclude this analysis of au
dit firm culture, both groups of respondents perceive that the adaptation of a s
ound internal control system within an audit firm is the underlying engine that
drives audit quality from within the firm itself. However whilst auditors gave h
igher ranking to technical elements like audit firms integrity and recruiting hig
hest caliber staff, members on audit committees ranked other factors like brand
name and industry specialization, which relate to a more market or customer-orie
nted dimensions. This perception was even shared when respondents were asked to
rank two of the most important statements in order of priority, as can be viewed
from Exhibit-19. Exhibit 19, Rankings from Audit Firm Culture
40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1 2 3 4 5 6 7 8 9 1
0 Statement Number Audit Firm MSE Audit Committee
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4.2.2.2
Partner Involvement
Exhibit-20 shows the results of the 10 factors grouped under the second classifi
cation of audit quality Partner Involvement. Exhibit 20, Results of Partner Invo
lvement
Audit Partners Perception Mean Statistic 2.67 2.50 2.88 MSE Audit Committees P
erception Mean Statistic 2.50 3.00 3.00 Overall
Question 2.1 2.2 2.3
Statement Engagement partner adopts high ethical standards. Engagement partner i
s independent of the board of directors. Engagement partner dedicates resources
to align the audit firms strategy and internal communications with recent develop
ments in the profession. Engagement partner actively involves himself/herself in
the engagement beginning from the initial planning throughout the audit process
and completion. Engagement partner has sufficient knowledge and understands wha
t is happening within the clients organisation. Engagement partner puts forward f
requent advice to clients. Engagement partner allocates more time and effort on
those areas that have the highest risk. Engagement partner performs different ty
pes of audits each year to enrich his/her spread of knowledge within various ind
ustries. Engagement partner is subject to internal review during the audit by ot
her partners of the audit firm. Engagement partner allocates necessary resources
for all its clients, irrespective of the audit fee charged.
Mean Statistic 2.60 2.57 2.92
2.4
2.75
2.86
2.80
2.5
3.00
3.00
3.00
2.6 2.7
2.41 2.75
2.22 3.00
2.35 2.87
2.8
2.52
2.25
2.48
2.9
2.63
2.25
2.57
2.10
2.70
3.00
2.83
Statement 2.5 attained the highest mean score of 3.00 by both audit partners and
MSE committees alike whereby it is perceived that the engagement partners knowle
dge and understanding of the client is considered to be critical components in a
udit quality. As previous research identified [Palmrose, 1988 and
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Anderson, 1984], each individual business transaction takes place within a broad
er
context, and the skilled auditor should maintain a view which includes seemingly
insignificant details and their place in relation to the mainstream of the clie
nts business activity. Emile Wolf [1997] argued that it could justifiably be said
, albeit loosely, that the auditor should audit the client, not just the financi
al statements. Meanwhile whilst both groups reckoned the pivotal role of the aud
it partner by staying close to the customer, audit committees identified another
four statements scoring the highest mean score of 3.00. The other perceived ele
ments of audit quality by MSE committee relate to (St2.2) audit partner independ
ence from the board of directors, (St2.3) appropriate allocation of resources, (
St2.5) keeping up-to-date with the organizations pace, (St2.7) concern towards ri
sk and (St2.10) issues related to audit fee charged. On the lower spectrum of th
is classification, the impact of partner rotation on audit quality was perceived
to be one of the least important influences on this dimension attaining an over
all score of 2.48. This finding compliments the previous finding that audit comm
ittee looks for long-term relationships with the audit partner. This reduces the
time and resources needed to start a new acquaintance from scratch. This raison
d tre is also found in contemporary studies. For instance, Myers et al. [2003] c
oncluded that longer auditor tenure constraints managerial discretion with accru
al accounting, which suggests higher audit quality. These findings were again ac
centuated a year later by Mansi et al.
[2004] who found that the cost of debt declines with longer tenure, which sugges
ts
that bondholders perceive audit quality as improving with extended tenure. Nonet
heless, this contrasts with the findings of Davis et al. [2002] who concluded th
at audit quality declines with extended tenure because as tenure increases, clie
nt firms have greater reporting flexibility and earnings forecast error decline.
This view is also supported by the EU Directive, which encourages audit partner
s rotation. This Law also establishes that where a Member State considers it app
ropriate a change of audit firm may also be required to preserve independence is
sues. This indicates that it is no longer an option for Malta to engage in partn
er rotation, but it is now obligatory that audit partner rotation is pursued.
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To conclude on partner involvement, both groups of respondents perceive that the
knowledge of the audit partner vis--vis the organisation being audited is consid
ered to have undisputed impact on audit quality. Nonetheless, audit committees p
lace more emphasis on the inter-personal relationship with the partner as contri
buting further to this audit quality dimension. Meanwhile such inter-personal at
tributes were very modestly ranked by auditors. This perception was even shared
when respondents were asked to rank two of the most important statements in orde
r of priority, as can be viewed from Exhibit-21.
Exhibit 21, Rankings from Partner Involvement
40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1 2 3 4 5 6 7 8 9 1
0 Statement Number Audit Firm MSE Audit Committee
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4.2.2.3
Audit Team Involvement
Exhibit-22 shows the results of the 10 factors grouped under the third classific
ation of audit quality Audit Team Involvement. Exhibit 22, Results of Audit Team
Involvement
Audit Partners Perception Question 3.1 3.2 Statement Audit team members are ind
ependent from the client. Audit team exercise discretion and professional judgme
nt whilst performing the audit. Audit team keeps abreast of recent developments
in the profession. Audit team adopts high ethical standards when performing thei
r work. Audit team genuinely believe in the public interest purpose of the audit
. Audit team shares the same values of the audit firm, having a sense of belongi
ngness and stewardship to their organisation. Audit team provides immediate and
professional assistance to clients recommending possible action for improvement.
Audit team has a clear understanding of roles of partners and staff on audits a
nd that they are properly qualified to perform them. Audit team is motivated bot
h personally and by their working environment. Audit team benefits from competit
ive reward mechanisms. Mean Statistic 3.00 3.00 MSE Audit Committees Perception
Mean Statistic 3.00 3.00 Overall
Mean Statistic 3.00 3.00
3.3 3.4 3.5 3.6
2.93 3.00 2.75 2.77
2.89 3.00 2.67 2.78
2.91 3.00 2.73 2.77
3.7
2.42
2.13
2.33
3.8
2.73
2.80
2.76
3.9 3.10
2.86 2.53
3.00 2.50
2.88 2.52
There is consensus by both groups of respondents on the three most important att
ributes of audit team involvement with respect to (St3.1) independence from the
client, (St3.2) discretion and professional judgment and (St3.4) adopting ethica
l standards when performing their work. This finding is a replica of the researc
h done by Lemont et. al. (1987) who identified that audit teams should stay away
from any conflict of interest, avoid any manipulation that may affect their unb
iasedness and acknowledge their views, which they reach as the
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consequence of their work, without directly or indirectly considering the benefi
ts of other parties. In turn, Lemont even sustained the correlation of auditor in
dependence to ethical issues. This supports the findings found in Malta whereby b
oth groups of respondents reckoned the importance of being both independent and
ethical in performing an audit assignment. Other than the above mentioned statem
ents, audit committees perceived that audit quality of the team augments when ea
ch individual member is motivated both personally and by their working environme
nt. This attribute was also relatively highly ranked by audit partners scoring a
mean of 2.86. This finding confirms the study carried out by Craswell et al. [1
995] where he identified a relationship between the performance of auditors, the
ir competence and their motivation. He argued that even highly skilled and knowl
edgeable people will not achieve audit quality unless they are determined (motiv
ated) to do so. Such motivation factors broadly fall into three groups (i) firms
values, (ii) self-belief & consultation and (iii) rewarding appropriate behaviou
r. Unless an audit firm motivates its staff, its audit quality is deemed to suff
er. Another highly ranked statement by both groups of respondents relates to con
tinuous professional education (St3.3). Attaining an overall mean of 2.91, both
groups agreed that if an audit firm continually keeps abreast with developments
in the profession, than audit quality should be improved. Meanwhile, the least p
erceived influential factor on audit quality relates to (St3.7) wherein an overa
ll mean score of 2.33 was given. Perhaps quite surprisingly this statement relat
es to the provision of immediate and professional assistance by the audit team.
It thus seems that whilst audit committees are willing to receive feedback and s
uggestions from their audit partner (vide St2.4), they tend to keep at a distanc
e from the actual team members performing the audit. The reason submitted by one
of the chairperson was that they want the audit team to critically evaluate the
judgments made by their organisation without any undue influence from the commi
ttee. Audit committee feels that the appropriate timing to settle any issues, sh
ould be done at the closure of the audit by the audit partner. To summarise the
findings of audit team involvement, both groups of respondents perceive that the
audit team independence and having people with the right aptitude are key eleme
nts of audit quality. It was further perceived by
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audit committees that motivating staff also enhance such audit quality dimension
. This perception was also supported by auditors considering the ability to have
the people with the appropriate personal values whilst ensuring training and on
-thejob learning to reinforce such values consistently. This perception was even
shared when respondents were asked to rank two of the most important statements
in order of priority, as can be viewed from Exhibit-23.
Exhibit 23, Rankings from Audit Team Involvement
45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1 2 3 4 5 6
7 8 9 10 Statement Number Audit Firm MSE Audit Committee
4.2.2.4
Quality on the Field
Exhibit-24 [pp.51] shows the results of the 10 factors grouped under the fourth
classification of audit quality Quality on the Field.
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Exhibit 24, Results of Quality on the Field
Audit Partners Perception Question 4.1 4.2 4.3 4.4 Statement There is a good fit
between the audit team, engagement partner and the finance director. Audit team
provides the client with individual attention. Audit team creates the minimum di
sruption to the client so far as practically possible. Audit team performs the a
udit in accordance with International Standards on Auditing and with appropriate
and relevant legislations. Audit team gathers sufficient and appropriate docume
nted evidence supporting audit opinions. Audit team aims for early communication
with management when corrective action may be required. Audit team evaluates ap
propriate judgments made by their clients with rigour and professional skepticis
m. Audit team files are reviewed by people with appropriate experience who will
encourage alertness, originality of thought and a thorough investigation of anom
alies. Audit team on field works in accordance to the working practices embedded
within the audit firms internal control procedure. Audit team uses information t
echnology to liaise and obtain second opinions from the lead engagement partner.
Mean Statistic 2.83 2.57 2.42 3.00
MSE Audit Committees
Perception Mean Statistic 2.78 3.00 2.88 3.00
Overall
Mean Statistic 2.81 2.70 2.56 3.00
4.5 4.6
3.00 2.72
3.00 2.11
3.00 2.52
4.7
2.83
3.00
2.89
4.8
2.86
3.00
2.93
4.9
2.78
3.00
2.89
4.10
2.57
2.90
2.68
The findings of this section echo the previous findings outlined in Statement 1.
4 and Statement 3.4 related to the performance of an audit in accordance with In
ternational Standards on Auditing and legislations (St4.4) and the gathering of
sufficient and appropriate documented evidence supporting audit opinions (St4.5)
respectively. One should also note that out of these 10 statements, MSE highest
mean of 3.00 was also given to another four statements related to (St4.2) clien
ts individual attention, (St4.7) evaluation of judgments with rigour and professi
onal skepticism, (St4.8) audit files are reviewed by experienced people and (St4
.9) team works in accordance to the working practices embedded within the audit
firms internal control procedure. This section was the highest ranked section by
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the audit committees scoring a mean of 3.00 for six statements. It is thus worth
while noting the difference in perception of both groups of respondents in this
particular classification of audit quality. Whilst audit committees scored high
mean values, auditors attributed modest means to this dimension. To take an exam
ple, audit partners gave only 2.57 marks for the statement that audit quality is
improved when the audit team provides the client with individual attention. Sim
ilar to this finding, whilst audit committees reckon that audit quality may be e
ffected if there is disruption to their modus operandi only a low score of 2.42
was actually given by audit partners. This finding compliments the research carr
ied out by Walker et al. [2001] suggesting that the effectiveness of maintaining
good relationship with clients is often overlooked by auditors, wherein the lat
ter place more emphasis on the technical component of audit quality. To conclude
, both groups of respondents perceive that quality on the field as being fundame
ntal. On a general basis, audit committees tend to rate such classification on a
much higher basis then auditors. Nonetheless, partners do reckon that this requ
ires effective implementation through a combination of people with motivation, s
kills and working practices. This perception was even shared when respondents we
re asked to rank two of the most important statements in order of priority, as c
an be viewed from Exhibit-25.
Exhibit 25, Rankings from Quality on Field
45.00% 40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1 2 3 4 5 6
7 8 9 10 Statement Number Audit Firm MSE Audit Committee
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4.2.2.5
Stakeholders Involvement
Exhibit-26 shows the results of the 10 factors grouped under the fifth classific
ation of audit quality Stakeholders Involvement. Exhibit 26, Results of Stakehold
ers Involvement
Audit Partners Perception Question 5.1 5.2 Statement Audit firm delivers consis
tent messages to all stakeholders. Audit firm provides the directors and officer
s constructive observations arising from the audit process. Audit firm acts in t
he interest of shareholders while having regard to the wider public interests. A
udit firm with a strong reputation may imply higher credibility to users of audi
ted financial statements. Audit firms issuing audit reports with matters of inte
rest to creditors and shareholders provide more assurance to stakeholders. The i
nterests of shareholders would be best served if audit firms remain in place for
a fixed term (eg five years) - without any reappointment option. Increase in
audit fees implies higher assurance to stakeholders. Employees of the companies
are more willing to co-operate with auditors with good inter-personal and intrapersonal skills. Having the necessary set-up to lodge a complaint against an aud
itor from the general public leads to higher levels of audit quality. Stakeholde
rs will feel more trust, if the list of audit firms clearly indicates, those tha
t are quality certified by an independent oversight authority. Mean Statistic 2.41
2.60 MSE Audit Committees Perception Mean Statistic 3.00 2.00 Overall
Mean Statistic 2.50 2.57
5.3 5.4
2.73 2.76
2.50 3.00
2.69 2.80
5.5
2.65
2.89
2.73
5.6
2.50
2.00
2.29
5.7 5.8
2.53 2.59
2.11 2.00
2.38 2.57
5.9
2.53
2.33
2.46
5.10
2.47
2.33
2.45
There has always been a debate in the auditing profession as to whether the resp
onsibility of the auditor is solely towards shareholders or to the public at lar
ge. Current standards and regulations establish that the prime responsibility is
towards the shareholders or owners of the company. Even the format of the audit
report supports this approach. Perhaps the idea that the auditors remit be
extended to cover other stakeholders is still at a very early stage not only in
Malta, but even within several EU countries. Although all audits have precisely
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the same objective, namely to report to the interested parties on the results of
the audit review undertaken, the remit of an auditor should be extended to cove
r wider public interests. It is thus no surprise that this category received the
lowest scores from both groups of respondents. The highest means score for this
dimension comes from St5.4 wherein it is stated that audit firms with a strong
reputation may imply higher credibility to users of audited financial statements
. Upon closer examination, of who these users of financial statements really are
, a relatively high score was put forward by audit committees. Scoring 2.89 for
Statement 5.5, audit firms issuing audit reports with matters of interest to cre
ditors and shareholders are viewed to provide more assurance to stakeholders by
audit committees. Moreover, it is interesting to note that whilst audit committe
es considers it critical that an audit firm should deliver consistent messages t
o all stakeholders (St5.1), only a modest score of 2.41 was given by audit partn
ers. At the bottom end of this list one will find that the rotation of audit fir
ms is not applauded by both audit partners and their clients alike. Attaining an
overall means score of 2.29, this statement was the least scored in this study.
To conclude, both groups of respondents perceive that stakeholder involvement d
oes not have any particular bearing on the audit quality of the firm, though in
the near future, such dimension should attain further importance. This perceptio
n was even shared when respondents were asked to rank two of the most important
statements in order of priority, as can be viewed from Exhibit-27. Exhibit 27, R
ankings from Stakeholders Involvement
40.00% 35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1 2 3 4 5 6 7 8 9 1
0 Statement Number Audit Firm
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4.2.2.6
Managing Customers Relationship
Exhibit-28 shows the results of the 10 factors grouped under the sixth classific
ation of audit quality Managing Customers Relationships. Exhibit 28, Results of S
takeholders Involvement
Audit Partners Perception Question 6.1 Statement Audit team communicates regula
rly and appropriately with executive management and/or audit committee. Audit fi
rm communicates regularly and appropriately with client management and directors
. Audit firm provides additional services such as accounting/bookkeeping, taxati
on and consultancy services to their audit clients. Audit firm is easily contact
able (eg by email, internet, phone). Audit firm is reliable in performing the pr
omised service dependably and accurately. Audit firm is responsive by giving adv
ice to customers that add value. Audit firm provides assurance about its knowled
ge, courtesy of employees and ability to convey trust. Audit firm provides indiv
idual attention to customers. Audit firm has a good image and communication mate
rial. Audit firm charges appropriate fee to meet all legal, regulatory and profe
ssional obligation, without putting unnecessary pressure on audit staff to cut c
orners. Mean Statistic 2.77 MSE Audit Committees Perception Mean Statistic 3.00
Overall
Mean Statistic 2.80
6.2
2.73
2.89
2.79
6.3
2.47
2.13
2.36
6.4 6.5
2.80 2.77
2.75 3.00
2.79 2.81
6.6 6.7
2.47 2.50
2.67 3.00
2.50 2.66
6.8 6.9 6.10

2.69 2.78 2.67
3.00 2.33 2.13
2.72 2.63 2.48
On an overall basis, MSE ranked 4 statements as being highly critical in influen
cing the audit quality, each attaining a mean score of 3.00. The statements are
(St 6.1) audit team communicates regularly and appropriately with executive mana
gement and/or audit committee, (St6.5) audit firm is reliable in performing the
promised service dependably and accurately, (St6.7) audit firm provides
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assurance about its knowledge, courtesy of employees and ability to convey trust
and (St6.8) audit firm provides individual attention to customers. It is intere
sting to note that audit partners, did not consider even one of these statements
as being really fundamental in audit quality. Another interesting point is that
whilst audit partners perceived that the provision of additional services such
as accounting/book-keeping, taxation and consultancy services to their audit cli
ents could enhance audit quality, this view was not equally shared by audit comm
ittees. Instead only a low score of 2.13 was given to such an attribute. This in
dicates that audit committees may be concerned that local audit firms perform an
array of financial services to the detriment of the auditors independence. If on
e had to look at the experience of other countries, various nations have put for
ward legislation to augment the independence of auditors. Audit firms in the UK
and Australia have to inform their government about the amount of their revenues
that they receive from non-audit works so that their independence can be more p
recisely evaluated [Harma and Sidhu, 2001]. From this, it can be seen that audit
or independence is considered to be a crucial factor for the efficiency of the c
apital markets as well and Malta is no exception. Juggling with too many service
s, may be a threat to independence which can at any time strike at the grass roo
t of the audit function. This perception was even shared when respondents were a
sked to rank two of the most important statements in order of priority, as can b
e viewed from Exhibit-29. Exhibit 29, Rankings from Customers Involvement
35.00% 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% 1 2 3 4 5 6 7 8 9 10 State
ment Number Audit Firm MSE Audit Committee
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4.2.2.7
Summarizing the Results of Section B
After identifying the particular means for each of the statements identified in
this study, an important research question is what categories are perceived to c
ontribute to enhance audit quality by both groups of respondents. Exhibit-30 sum
marises the average overall mean scores across these two groups. Exhibit 30, Mea
n Score for Attributes Audit Partners View
Attribute Ranking Mean Score Audit Partners View 3.265 2 3.300 1 3.169 3 3.131 4
2.577 6 2.819 5 Ranking Mean Score Companies View 3.160 2 3.300 1 3.140 3 3.160 2
2.900 5 2.980 4
Audit firm Culture Partner Involvement Audit Team Involvement Quality on Field S
takeholders involvement Managing Customer Relationships
In general terms, auditors and audit committees mean scores across the six dimen
sions are broadly similar with both groups of respondents putting partner involv
ement as the category that received the highest scores followed by audit firm cu
lture. It is interesting to note that audit committees also gave high scores to
attributes related to quality on the field, sharing the second place audit firm
culture. Meanwhile, auditors placed this category in the fourth place. At the lo
wer end of the results, Stakeholders Involvement and Customer Relationships were
regarded as less important. One may also attest these findings diagrammatically
as can be seen from Exhibit31 [pp.58], which relates to the Maltese perception o
f the Audit Quality Wheel Model presented in Exhibit-9 [pp24]. This model highligh
ts those statements whose mean score is equal to 3.00.
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Exhibit 31, Audit Quality Wheel Model Illustration of Maltese Findings
Key
Black, refers to issues identified by audit partners Blue, refers to issues iden
tified by Audit Committees Red, refers to issues identified by both parties
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4.3
Section C, Free-form Comments Analysis
Exhibit-32 puts forward an overall summary about the perception of audit partner
s and audit committees on topical auditing issues. This part addresses the exten
t of awareness that both respondents have on topical issues whilst providing ref
erence to the perception of the Maltese system.
Exhibit 32, Section C Results
Audit Firm 7.1 Higher fees charged reflect higher quality of audit services. Sel
f-regulating profession runs a serious risk of conflicts of interests. An audito
r can never be truly independent of those who have the power to sack you. An aud
it firm should occupy a term of office for a fixed duration period of time indic
ated by law. Audit firms who are not performing to the standards of quality are
to be publicly disclosed by the relevant authorities. Having an independent unit
performing on-the-spot visits on all audit firms and practitioners performing a
udit work enhance audit quality. agree disagree agree disagree 13 (50%) 13 (50%)
8(31%) 18 (69%)
MSE audit committee 2 (20%) 8 (80%) 7 (70%) 3 (30%)
Total Respondents 15 (42%) 21 (58%) 15 (42%) 21 (58%)
7.2
7.3
agree disagree
6 (23%) 20(77%)
8 (80%) 2 (20%)
14(39%) 22(61%)
7.4
agree disagree
19 (73%) 7(27%)
6 (60%) 4 (40%)
25 (69%) 11(31%)
7.5
agree disagree
16(62%) 10(38%)
6 (60%) 4 (40%)
22 (61%) 14 (39%)
7.6
The various components constituting audit quality is fully known in Malta Audit
quality yield more costs than benefits for an audit firm to adopt and maintain.
Audit quality is a one-time effort by the firm to align its internal control pro
cedures with best practices.
agree disagree agree disagree
5(19%) 21(81%) 11(42%) 15(58%)
2 (20%) 8 (80%) 3 (30%) 7 (70%)
7(19%) 29(81%) 14(39%) 22(61%)
7.7
7.8
agree disagree
3(12%) 23(88%)
3 (30%) 7 (70%)
6(17%) 30(83%)
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4.3.1
Audit Fees
One motivation for audit fee studies is the concern that larger audit firms are
able to charge higher audit fees due to market (monopolistic) powers. This has i
mplications for audit quality because it has been found that auditor monopoly re
duces the quantity demanded of external auditing and results in lower quality, h
igher-cost financial reporting systems [Simunic, 1980]. Whilst there are mixed p
erceptions between audit partners about whether higher audit fees imply higher q
uality of service, 80% of MSE respondents identified that this may not be necess
arily the case. Talking from their own personal experiences they have argued tha
t at times an audit fee is usually set to a minimum competitive level to attract
other related services like consultancy and tax advise. Generally, however, a p
ositive relation is assumed to exist between audit quality and audit fees with a
udit partners identifying that if larger firms are charging higher fees it refle
cts the higher quality of their audit services.
4.3.2
Self-Regulating Profession
Very convergent views were again found from both groups on the second statement
which identified that a self-regulating profession runs a serious risk of confli
cts of interests. 69% of audit partners disagreed with this statement putting fo
rward arguments that this set-up increase rather than decrease audit quality as
people with inappropriate expertise could be running the regulative aspect of th
e profession. Contrary to this perception 70% of MSE audit committee agreed with
this statement. This seems to be sustained by various contemporary audit resear
chers who identified the need of having the regulative side of the auditing prof
ession outside the hands of majority of practitioners. For instance, Husey and L
an [2001] found in their study that auditing should not be developed and regulat
ed by the accounting profession. A practical move towards this end has already b
een made by the enactment of the EU Statutory Audit Directive which request that
the public oversight system should be governed by non-practitioners who are kno
wledgeable in the areas relevant to statutory audit. This Directive necessitate
that these non-practitioners may be specialists who have never been linked with
the audit profession or former practitioners who have left the profession. Membe
r States may, however, allow a minority of practitioners to be involved in the g
overnance of the public oversight system. However it seems that
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audit firms in Malta are still very much inclined to be in control of what is ha
ppening in the profession.
4.3.3
Term of Office Duration
80% of MSE audit committee identified that they agree that an audit firm should
occupy a term of office for a fixed duration period of time indicated by law. On
the other hand audit partners had different perception on this matter wherein 7
0% disagreed with this set-up suggesting that only competitive forces should dec
ide whether an auditor is to retain his office or not and not legal imposition.
In fact, very few auditors in Malta belief that auditing should be restricted to
a fixed period and subject to a rotation. However, the study of Beattie et al.
[2004] shows that as the relationship between the auditor and their clients beco
mes less distant, the belief that there must be a compulsory rotation for the au
ditors becomes more apparent. The latter suggested that the law should restrict
the audit service to the same firm to a certain period or by subjecting them to
a rotation on a fixed period between 5 and 12 years.
4.3.4
Publicity of Defaulters
73% of audit partners and 60% of Audit Committees agreed that audit firms who ar
e not performing to the standards of quality are to be publicly disclosed by the
relevant authorities. In the US this set-up of transparency and accountability
was imminently put into place after the Enron case. It is applauded to note that
there exists consensus amongst the two groups that this measure can be applied
to Malta. Perhaps not going into the peculiar details and making available each
audit firm review report on the internet, but sure enough the enactment of Direc
tive 4 of the Accountancy Profession Act, ensures that a report summarizing the
findings of audit firms is to be made available to the public on an annual basis
.
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4.3.5
Monitoring by Government
Consensus was also reached between the two groups of respondents related to the
setting up of a new unit to perform on-the-spot visits on audit firms to ensure
audit quality. 62% of audit partners and 60% of audit committees identified that
this Unit is expected to increase standards of audit quality. This system is no
longer an option for Malta but is mandatory by virtue of the enactment of the 4
th Directive wherein these reviewers are expected to perform on-the-site inspect
ions on audit firms to ensure audit quality. For instance in the UK, the Audit I
nspection Unit (AIU) was set up following the Governments post-Enron review of th
e regulation of the UK accountancy profession which reported in January 2003. Th
e Governments report recommended enhancing the monitoring of the audits of listed
and other major public interest entities through a new independent inspection u
nit (the AIU) reporting to a professional oversight board within an integrated i
ndependent regulator (the FRC). The AIU monitors the auditors of all listed and
other major public interest entities and reports its findings to the Audit Regis
tration Committee (ARC).
4.3.6
Components of Audit Quality
Only 5 audit partners and 2 chairpersons of audit committees feel that the vario
us components constituting audit quality are fully known in Malta. Instead the m
ajority of both groups of respondents identified that there is a lack of knowled
ge in this regard. Perhaps this gap may be the result of a rather passive attitu
de taken by both auditors themselves and their regulators in ensuring that they
align their knowledge with recent developments in the profession. This further c
onfirms the educational role that the auditor and the regulator should pursue to
ensure the spread of knowledge of what audit quality is really about and what t
he regulator is really after. In fact recently an initiative has been taken by t
he Government to launch some educational seminars for auditors to identify how t
he proposed system is going to be implemented.
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4.3.7
Benefits of Audit Quality
Whilst 70% of audit committee agrees that audit quality yield more benefits than
costs for an audit firm to adopt and maintain, a relatively high percentage of
auditor feel otherwise. In fact, 42% disagree with this assertion and think that
there is a high cost to be recouped in implementing a highly qualitative audit.
Their argument is that the present legislation and professional standards are i
mposing very stringent requirements far beyond the audit fee charged. In fact, t
he implementation of an audit quality assurance system is expected to raise the
audit fee charged. The auditors concern is whether or not their clientele can act
ually identify which audit is of a certain standard of quality and thus merit th
e increase in price and other non qualitative audit assignments. The fear is tha
t their clients are unable to make this comparison. Here again, one must underli
ne the importance of that the educational role of the auditor and regulator. Quo
ting one auditors response, we do not have the complete picture from Government as
to what constitutes audit quality, so the implication is that we cannot really
establish the feasibility or otherwise of this initiative.
4.3.8
Duration of audit quality
The majority of both audit partners and audit committee reckon the importance th
at the implementation of an audit quality system is not a one-time effort, but i
s a continual endeavor to align the firm with best practices. This idea that one
must keep abreast of recent developments, further sustains the importance of th
e supporting and educational role that each audit firm needs to pursue during it
s entire lifecycle.
4.3.9
Summary on Section C
Though there is consensus amongst the two groups about issues related to publici
ty of defaulters, monitoring by Government, extent, benefits and duration of aud
it quality, there are contrasting views about the matters relating to selfregula
ting profession and rotation of audit firms. On the other hand, auditors seem to
share their opinions about whether or not a high audit fee reflects higher audi
t quality, whereas the majority of audit committee disagrees with this assertion
.
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4.4
Conclusion
To conclude this study aims to examine the potential factors that influence the
quality of audit from the perception of two selected parties in auditing: partne
rs of audit firms and audit committees. The result of the study appeared to sugg
est that seven major factors that may influence audit quality. These seven trait
s of the audit quality in Malta are:1. the sustainability of an audit firms inter
nal control system; 2. engagements partner knowledge about the clients industry; 3
. independence of audit team members from client; 4. audit teams ability to exerc
ise professional discretion and judgment; 5. auditors obligation to follow ethic
al standards; 6. conduct of audit should be done within the rules of the game; a
nd 7. auditors should be able to document all necessary findings to support thei
r opinion.
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Chapter 5
PART THREE - DISCUSSION OF FINDINGS
Criticism of auditors, and litigation against them may result from auditors fail
ing to meet society s expectations of them. It may be that society s expectation
s are unreasonable, or that society s expectations are reasonable but that audit
ors existing legal and professional requirements do not fulfil these expectation
s. Alternatively, it may be that auditors do not perform their existing responsi
bilities to a satisfactory standard. Whatever the cause of the gap between socie
ty s expectations of auditors and its perception of auditors performance (termed
the audit expectation-performance gap ), the resultant dissatisfaction with aud
itors performance serves to undermine confidence in the auditing profession and t
he external audit function. DeFond et al., 2002
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Part THREE, Discussion of Findings
5
PART THREE - DISCUSSION OF FINDINGS
Following the presentation of results, this part of the dissertation challenges
the hypothesis by testing them against the research findings. In the second part
of this Section the wider validity of this dissertation is also discussed.
5.1 5.1.1
Testing the Three Hypothesis Hypothesis One Nature of Audit Quality
The prime hypothesis of the dissertation is that; the dimensions of audit quality
are not something static or universal. Instead it is a multi-dimension construc
t that evolves due to continual changes in the environmental influences effectin
g the profession. This study revealed that owing to the dynamism of the environme
nt of the auditing profession, particularly that related with legislative framew
orks (both emanating from European Union and local Maltese variants) and auditin
g standards issued by the professional bodies, there exist no such terminology a
s being static in the auditors modus operandi. For instance, until very recently
the continuation of self-regulation in the profession appeared virtually unassai
lable. There have, of course, been rumblings about the professions need to get its
house in order, and similar, but equally glib, expressions of dissatisfaction ov
er the seeming disparity, in the public perception, between the professions perfo
rmance and the expectations laid upon it. The government, therefore, seized the
opportunity presented by the EU Directive to enforce a completely new regulatory
regime on the profession, and its novel features, such as formal onthe-spot rev
iews of audit firms, which is creating understandable anxiety amongst practition
ers. All of this leads to further substantiate the recurring finding in this stu
dy that audit quality standards cannot be duly increased through legalistic enfo
rcement unless appropriate self-development or what the profession usually refer
s to CPE (continuous profession education) fuel this process of continuous align
ment. The key to keep auditors abreast of recent developments is through practic
al training. Meanwhile, increasing development and complexity in the economic wo
rld forces firms to be more responsible to society. Therefore, it is a duty for
firms to disclose
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information about themselves through financial reporting to stakeholders, credit
ors and legislative institutions. However, this information can enable these gro
ups to make accurate decisions as long as they are reliable and unbiased. Theref
ore the importance of the independence of auditor is highlighted. In fact this s
tudy also revealed that whilst there are various dynamic forces shaping the audi
ting profession, there exist some fundamental factors that are obligatory rules o
f the game. Perception of independence is still viewed to be the critical by both
groups of respondents. New measures are being introduced both by law and even b
y International Standards to refine this concept further. Some of the mandatory
safeguards relates to the rotation of the lead engagement audit partner and in c
ases whereby the supervisory authority thinks fit, the rotation of the audit fir
m itself. E Woolf [1997] identified that the concept of the audit and the concep
t of independence are the twin sides of the same coin. The auditor who has lost
his independence, has lost his raison d tre, he becomes dependent, and a dependent
auditor is a contradiction in terms. Other essential elements of audit quality h
ighly ranked by both groups of respondents are summarized in the Exhibit-33. Exh
ibit 33, Obligatory Elements of Audit Quality
Audit Firm 1.4 Audit firm employs a robust internal procedure compliant with the
international standards requirements and regulatory framework regime. Audit tea
m members are independent from the client. Audit team adopts high ethical standa
rds when performing their work. Audit team performs the audit in accordance with
International Standards on Auditing and with appropriate and relevant legislati
ons. Audit team gathers sufficient and appropriate documented evidence supportin
g audit opinions. Audit Committee
3.1 3.4 4.4
4.5
To summarise, whilst it is true that the audit environment is continually changi
ng, the core rules of the game still remain the same - that of providing an inde
pendent audit opinion on the financial statements. The findings in the study con
firm the first hypothesis that audit quality is a multi-dimension construct that
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evolves due to continual changes in the environmental influences effecting the p
rofession.
5.1.2
Hypothesis Two Recognition of Audit Quality dimensions
The second hypothesis of the dissertation is that; the dimensions of audit qualit
y, are not fully recognised within the local auditing profession. Having a direct
question in Section C of the questionnaire, there is consensus amongst the two
groups of respondents that this assertion is also valid in the Maltese scenario.
Furthermore, this finding was further substantiated when carrying out interview
s with audit committees who at times were oblivious to the queries raised and fe
lt suspicious that there could be some tricky question hidden somewhere. During
the interviews eye brows were raised and comments like, this is a far-fetched ide
a and oblivious to our organisation were also noted. In fact, this quote from one o
f the chairpersons seems to summarise the overall perception and attitude of aud
it committees, our interest is that of complying with the law and recognised acco
unting standards our concern is of engaging competent audit firms that add credib
ility to our financial statements we welcome any initiative to augment the qualit
y standard of the audit, though we reckon that we are pleased with the overall w
ork done by our auditors Furthermore and perhaps quite surprisingly even audit par
tners, have shown peculiar responses to issues that are within their remit. A ty
pical example relates to the low ranking of statements related to rotation of au
dit partners, which is no longer best practice but is mandatory by EU law! Thoug
h one must reckon that this legislation will be duly enforced in 2008, it is no
surprise that auditors do not exhibit a positive preference to this clause. Even
preliminary discussion held prior to the enactment of this law, this clause was
out rightly refused by EU representatives of audit firms. It is here once again
accentuated that there is an urgent need that interested parties be informed of
what this audit quality is all about, not only in the light of what the law nec
essitates but tackling the public interest dimension of an audit. To summarise t
he second hypothesis testing, it is ascertained that the dimensions of audit qua
lity are not fully known in Malta.
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5.1.3
Hypothesis Three Competitive advantage through Audit Quality
The third hypothesis of the dissertation is that; audit firms who manage audit q
uality at all levels of its organisation, ensure long term sustainable competiti
ve advantage. As reported by Bernstein [1978] and Kotler et al [1984], the growi
ng competition within the profession forces auditing firms to becoming more cogn
izant of the need to market their services. The question is how the auditing fir
m should differentiate themselves from each other in order to be more competitiv
e. Carcello et al [1992] suggested that one of the dimensions on which firms hav
e attempted to differentiate themselves is the quality of services provided. Sec
tion 5.2 Audit Quality Competitive Matrix explores this hypothesis in further dep
th.
5.2
Audit Quality Competitive Matrix
Having identified what elements of audit quality are considered to be critical i
n the eyes of auditors and audit committees, a proposed model is illustrated in
Exhibit34 classifying the dimensions of audit quality according to their competi
tive posture and competitive focus. The audit focus-posture matrix is divided in
to four cells, each indicating a different type of audit firm. Exhibit 34, Audit
Competitive Focus-Posture Matrix Competitive Posture
Obligatory Technical issues Adds Value
Competitive Focus
BASIC AUDIT FIRM
CUSTODIAN AUDIT FIRM
DARING AUDIT FIRM Service issues
ENVIED AUDIT FIRM
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Audit firms who stick to legislation and tick-marks,
1. Basic Audit Firm:
focusing exclusively on getting the job done within the parameters of profession
al standards. These firms add little value to their constituency let alone putti
ng the public interest first and foremost. Attaining the most ranked statements,
it transpires that this audit firm style still enjoys quite some popularity in
Malta, vide Exhibit-35. Exhibit 35 Characteristics of a Basic Audit Firm
Question 1.1 1.4 3.1 3.4 4.4 4.5 2.2 4.7 4.8 Statement Audit firm operates to th
e highest standards of integrity. Audit firm employs a robust internal procedure
compliant with the international standards requirements and regulatory framewor
k regime. Audit team members are independent from the client. Audit team adopts
high ethical standards when performing their work. Audit team performs the audit
in accordance with International Standards on Auditing and with appropriate and
relevant legislations. Audit team gathers sufficient and appropriate documented
evidence supporting audit opinions. Engagement partner is independent of the bo
ard of directors. Audit team evaluates appropriate judgments made by their clien
ts with rigour and professional skepticism. Audit team files are reviewed by peo
ple with appropriate experience who will encourage alertness, originality of tho
ught and a thorough investigation of anomalies. Audit team on field works in acc
ordance to the working practices embedded within the audit firms internal control
procedure.
4.9
However, having this competitive posture is not sustainable in the longterm as o
ther audit firms are redesigning their procedures and systems to add value to th
e public in general. So whilst it is essential that all audit firms operate with
in the rules of the game, they need to differentiate their service to ensure lon
g-term sustainable advantage. 2. Daring Audit Firm: Audit firm methodology is st
ill very much inclined towards the legalistic regime, yet auditors do try and pu
t some effort to introduce their constituency in the picture. Exhibit-36 [pp.71]
defines some characteristics of this type of firm. In Malta it seems that this
style does not enjoy a high level of popularity.
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Exhibit 36 Characteristics of a Daring Audit Firm
2.7 2.10 6.1 Engagement partner allocates more time and effort on those areas th
at have the highest risk. Engagement partner allocates necessary resources for a
ll its clients, irrespective of the audit fee charged. Audit team communicates r
egularly and appropriately with executive management and/or audit committee.
3. Custodian Audit Firm: Audit firm that have strong technical background but se
arch whilst searching for new ways to add value to constituency. Exhibit-37 defi
nes some characteristics of this type of firm. In Malta it seems that this style
is perhaps the most popular one. Exhibit 37 Characteristics of a Custodian Audi
t Firm
2.5 3.2 1.6 1.5 1.7 2.3 Engagement partner has sufficient knowledge and understa
nds what is happening within the clients organisation. Audit team exercise discre
tion and professional judgment whilst performing the audit. Audit firm is able t
o attract, train and develop staff of highest calibre with appropriate skills an
d qualifications. Audit firm is knowledgeable about the clients industry. Audit f
irm consistently monitors its quality control policies to align with recent best
practice in the audit profession. Engagement partner dedicates resources to ali
gn the audit firms strategy and internal communications with recent developments
in the profession.
P.P. Russell [2004] indicated some potential elements how the audit-function can
actually add value to its constituency. These are summarized in Exhibit38 [pp.7
2].
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Exhibit 38 Adding Value
4. Envied Audit Firm: Audit firm that seeks to add value and put constituency as
the prime focus of their methodology-vide Exhibit-39 [pp73]. Though this style
can be seen to be more popular with clientele, it may be dangerous if taken to e
xtreme as independence may be severely jeopardized. However this style can proof
to be the most successful to sustain competitive advantage.
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Exhibit 39 Characteristics of an Envied Audit Firm
1.10 3.9 4.2 5.1 5.4 6.5 6.7 6.8 Being a big audit firm adds credibility to user
s of financial statements. Audit team is motivated both personally and by their
working environment. Audit team provides the client with individual attention. A
udit firm delivers consistent messages to all stakeholders. Audit firm with a st
rong reputation may imply higher credibility to users of audited financial state
ments. Audit firm is reliable in performing the promised service dependably and
accurately. Audit firm provides assurance about its knowledge, courtesy of emplo
yees and ability to convey trust. Audit firm provides individual attention to cu
stomers.
As time passes, successful audit firms change their position in the focus-postur
e matrix. Successful audit firms have a lifecycle. These start as a basic firm,
become custodian, then daring and finally envied firm. For this reason audit fir
ms should examine not only their current positions in this matrix but even their
moving positions throughout their lifecycle. If the auditing profession were wi
lling to broaden its responsibilities to embrace these duties that can reasonabl
y be expected of auditors, the overall audit quality would improve significantly
. However as DeFond et al. [2002] noted, it seems
that the willingness of the profession to accept any extended responsibilities i
s hampered by concerns about the perceived potential increase in exposure to leg
al liability rather than encouraged by the potential benefits to be gained from
better meeting society s expectations and be thereby enhancing the value of the a
udit function in society.
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5.3
Wider Validity of Dissertation
It is hoped that this study developed a conceptual framework to assist academics
and practitioners in understanding what are the dimensions of audit quality, ho
w discrepancies can arise and how these can be managed. This section contains a
description of the wider validity on the topic of audit quality that can be draw
n from this study.
5.3.1
The Five Pillars of Audit Quality A guideline
This dissertation adds value to the practical management of audit quality by est
ablishing a model, presented through a Greek representation of the Parthenon Temp
le. By combing the academic research with the practical issues, it is believed th
at the dimensions of audit quality are explored into greater dimensions.
5.3.2
The Audit Quality Wheel Model
Dividing the literature review into six major headings provides a holistic analy
sis of the dimensions of audit quality not only from the technical and clients p
oint of view but even from the view of the public interest and stakeholder analy
sis. Though the latter are not considered yet being critical key players in audi
t quality, as social responsibility of auditors augments, the latter are gaining
more and more importance. To this effect this six classification approach can a
ssist an audit firm as a checklist to establish the areas that it needs to addre
ss further to ensure sustainable audit quality when conducting a self-review aud
it.
5.3.3
Audit Firm Competitive Matrix
model proposed by this dissertation relates to the different
Another
characteristics of an audit firm in relation to its competitive focus and postur
e. This model can be used by audit firms to identify their extent of focus and w
hether this is in line with their own culture and strategy. This model can also
be used to detail the lifecycle of an audit firm proposing the sequence BasicDari
ngCustodianEnvied as the less risky with highest returns.
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Chapter 6
PART THREE-OVERALL CONCLUSIONS
The auditing service emerged from the requirements of stakeholders for the detec
tion of the extent to which managers fulfill their responsibilities. If auditors
can not sustain their independence, the parties of the contract will not value
the service. Any definition of ethics involves moral tasks and obligations that
make out how should the behaviour of a person be. For an auditor to be ethical,
it is essential that they should be independent by maintaining their objectivity
and stay away from any possible conflicts of interest while fulfilling their re
sponsibilities. Krishnan et al.,2001
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Part THREE, Overall Conclusions
6
PART THREE, OVERALL CONCLUSIONS
6.1
Recommendations
Limperg Instituut [1985] observed that auditors have a dual responsibility: Firs
tly, not to arouse in the sensible layman greater expectations than can be fulfill
ed by the work done, and secondly to carry out the work in a manner that does no
t betray the expectations evoked. Limpergs analysis highlights the fact that, if
auditors fail to identify societys expectations of them, or to recognise the exte
nt to which they meet (or, more pertinently, fail to meet) those expectations, t
hen not only will they be subject to criticism but also, if the failure persists
, societys confidence in the audit function will be undermined and the audit func
tion, and the auditing profession, will be perceived to have no value. To this e
ffect a set of recommendations have been proposed to ensure that the audit quali
ty is duly understood by the key parties involved and action is taken not to let
another Enron happen in our Maltese community.
6.1.1
Enhancing the education of auditing practitioners
It was noted that auditors were found to have a knowledge gap in These CPE activit
ies should be
The research findings suggest that the enhanced education of auditors is require
d.
respect of their existing responsibilities.
organised on a practical approach rather than merely being informative in their
nature. It is therefore suggested that further practical education be carried ou
t to inform practitioners about what is expected of them with regards to audit q
uality, possibly through compulsory professional development sessions. Obviously
these courses should be mandatory for all the professional people wishing to ma
intain their auditors warrant.
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6.1.2
Educating society about the audit function and the work of the auditor
From the research findings, it is evident that the Maltese business community ne
eds education about the audit function and what auditors can reasonably be expec
ted to achieve. One possible means is to use the opportunity afforded by an infa
mous fraud and/or unexpected corporate failure that reaches the media headlines
to explain the audit function and the work of auditors. Such occasions could be
used to explain, in a non-technical, easily understandable language, the auditor
s role in those particular circumstances and placing those
circumstances in the broader context
onsibilities of auditors in general.
way to educate such community, is to
ournalists, formally and informally,
ditors.
of the audit function and the role and resp

An alternative, and perhaps more effective
seek opportunities to educate influential j
about the audit function and the work of au
6.1.3
Installing a mechanism to receive complaints on the internet
The use of the internet has gained massive popularity in Malta wherein the major
ity of business communities and the general public have access to this medium of
communication. To this effect, a mechanism should be implemented to capture any
queries or complaints about the conduct of an auditor to the relevant authoriti
es, whilst preserving the confidentiality of the individual.
6.1.4
Improving the quality control in audit firms
The monitoring of auditors quality is expected to augment standards of auditing i
n the local profession. The Quality Assurance Unit is expected to conduct its fi
rst reviews during the second quarter of the year 2007. There is great anxiety a
mongst auditors as to what these reviews will really entail. It is recommended t
hat an educational role be primarily launched to establish the practical remit o
f this Unit, to avoid unnecessary misconceptions whilst contributing to enhance
the overall audit quality of audit firms in Malta.
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6.1.5
Summary of Implementation measures
A clear understanding of what constitutes audit quality is highly applauded by b
oth practitioners and auditees alike. It is thus consider of fundamental importa
nce that awareness campaigns and training initiatives be primarily targeted to t
hese key stakeholders. Several media can be used to reach this objective includi
ng articles on newspapers, professional magazines and the interactive use of the
Accountancy Baords web portal. Having the right atmosphere and attention to rece
ive audit quality reviews, the first on-the-spot visits can be conducted, as hop
efully people will recognize that this process will increase the overall quality
standards in the local auditing profession. Exhibit 40 provides an overall summ
ary of such implementation measures and time frames through the use of a Gaant C
hart. Exhibit 40 Gaant Chart Implementation Measures
Euros () Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Analysis of Expected Exp
enditure for 2007 1. Educating Practitioners Design practical training course La
unching practical training two-day seminar Promote practical training initiative
Deliver training courses once every quarter Total - Educating the Practitioners
2. Educating Society Design awareness campaign Perform feasibility of what type
of media best-fit consituency Launching awareness campaign two-day seminar with
auditees Keep in touch with public
(eg. Articles on papers, professional publications & internet)
400 2,000 1,500 6,000 9,900
500 200 2,000 1,500 4,200
Total - Educating Society 3. Install Complaints Mechanism at Ministry of Finance
Design feasibility of having a interactive web portal Develop a new web portal
catering for complaints Recruit staff providing assistance to consituency throug
h phone-calls Total - Installing Complaints Mechanism 4. Perform on-the-spot rev
iews Recruit additional staff at Ministry Launching on-the-spot visits Obtain fe
edback from practitioners after each visit Total - Perfroming on-the-spot visits
800 7,000 30,000 37,800
65,000 2,500 500 68,000
TOTAL COSTS FORECASTED FOR THE YEAR 2007 (A)
Analysis of Expected Income for 2007 TOTAL REVENUE EXPECTED FROM FEES LEVIED FOR
2007 TOTAL SUBSIDIES RECEIVED FROM GOVERNMENT
119,900
51,000 70,000
TOTAL REVENUE FORECASTED FOR THE YEAR 2007 (B) EXPECTED SURPLUS FOR PERIOD (B-A)
121,000 1,100
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6.2
Avenues for future research
Part of the strength of any research projects lies in the recognition of its lim
itations. This will identify potential issues that merit future work. Primarily
this study focused exclusively on audit partners to proxy for auditors and audit
committees as representatives of auditees. Future work that reveals whether the
results could be generalized across other groups of auditors and external users
would be interesting. Secondly all attributes of audit quality were measured at
one point in time, from a static perspective. Recent corporate accounting scand
als which have almost certainly damaged the auditing profession may have altered
the dynamics of audit quality. It is interesting to note how such perception ch
ange over time. Thirdly, this research project has identified the important role
of audit staff and teams play in delivering audit quality. Future work may wish
to conceptualize a personality profile and subject it to empirical testing. The
development of such a profile might assist audit firms to screen individuals se
eking employment as auditors.
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6.3
Personal Learning and Reflection
Reflecting on the last six (6) months has been extremely difficult and tough to
get through this final dissertation. Having two sons and an expectant wife, made
it rather more difficult. But now as the finish line has been crossed, it is ex
tremely satisfying and a great relief to me and my family. The process of writin
g a dissertation is a huge learning process and I have gained a lot of knowledge
in a subject which I do believe that can be used by audit firms and sole practi
tioners alike. Being one of the persons performing onthe-spot visits on audit fi
rms, I am quite pleased with this study as I think that it met my objectives of
identifying a generic set of success criteria in examining financial audit quality
. In fact the identification of these audit quality antecedents will surely assi
st me when conducting the first reviews expected to be carried out next year. Th
ere were even some changes in the policy implementation at my place of work foll
owing the exodus of this dissertation. In fact, original plans were that the Uni
t performs on-the-spot visits with little regard to the educational aspect. Howe
ver, plans were altered to put awareness campaigns and practical development ini
tiatives as the foundations of audit quality in Malta. On an even more practical
note, this dissertation has also helped me to come into contact with the majori
ty of audit partners and audit committees, whom I really wish to thank for their
kind collaboration and sincerity expressed in this study. From a personal point
of view, the research has been challenging and rewarding in so far as it has de
monstrated how useful both interviews and questionnaires are to reach an in-dept
h understanding of a theme, but also how difficult to master. The attitude of th
e interviews was mostly positive and chairpersons were very helpful in their par
ticipation. I had not realised how much time it takes to handle an interview wit
h subsequent transcribing and analysis and the process could have been better pl
anned. In hindsight, I would have planned the
interviews at a later stage as I discovered that it can be a problem if these ar
e carried too early in the process. I felt it as a constraint that the group of
audit committee was relatively small and as they revealed many similarities in t
heir attitudes to audit quality, it did not provide the rich varied material tha
t I had hoped for.
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From a development perspective this study challenged my ability to apply and cri
tically appraise the latest theories and concepts to the real live situation, te
st and assess their validity for myself and develop my own thinking as a result.
On one hand I am pleased that the hypotheses of this dissertation have been con
firmed, but on the other hand it is disappointing to see that some audit firms a
re ill equipped to meet the taxing environment that we are living in. Sincerely
I do hope that such practical training recommendations actually instigate enthus
iasm in Maltese firms to revisit their methodologies and reckon the importance o
f this professional clich audit quality that really has become the nightmare of many
. I wish to end this study by inaugurating all audit firms success in their work
and a brighter future in their day-to-day professional demanding tasks.
- The End Renzo Farrugia
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Appendices
Chapter 7
APPENDICES
For the wise man looks into space and he knows there is no limited dimensions. L
ao-Tse, 1977
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Appendices
7
APPENDICES
Appendix A, Short Notes on Accountancy Profession Acts Directives
Directive 1 - CPE The first Directive - Continued Professional Education (CPE),
establishes the minimum thresholds that each and every warrant holder should abi
de with to keep abreast of recent developments in the profession.
Directive 2 Code of Ethics The subject of the second Directive is the Code of Et
hics applicable to all warrant holders. This code incorporates three important e
lements namely the IFAC Code, the EU Eighth Directive and the realities of the M
altese profession. It gives detailed guidance to the practising accountant but i
s essentially a principles-based document that, amongst others, sets out a numbe
r of situations that can threaten the integrity of the accountant and the sugges
ted safeguards that should be in place before embarking on a course of action or
engagement.
Directive 3 Annual Return and Registration Fee The Third Directive obliges accou
ntants to send in a yearly return concerning certain details about their firm or
practice. The objective is to: enable the Board to maintain a complete and updat
ed register of warrant holders including key data and information; obtain confir
mation that warrant holders are abiding by relevant rules and regulations; enabl
e the Board to obtain information relating to those members engaged in public pr
actice together with a profile of their activities; assist the Board or its repr
esentative in the planning of quality assurance reviews.
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Appendices
Directive 4 Audit Quality The Fourth Directive deals with audit quality. This Dire
ctive is aimed at improving standards and wherever possible the system will be i
mplemented to provide assistance to practitioners who are found to lack sufficie
nt command of and adherence to, ethical, regulatory and technical compliance. It
will lay particular emphasis where the practitioner is delivering services to e
ntities of particular interest to the public such as financial and credit instit
utions, companies with publicly traded securities and others that the Board may
from time to time consider appropriate to include in the list of public interest
companies. The objectives of the quality assurance system are listed below: To
set out the minimum quality control standards to be adopted by warrant holders e
ngaged in public practice; To evaluate whether warrant holders engaged in public
practice have established appropriate quality control policies and procedures a
nd that they are complying with those policies; To evaluate whether warrant hold
ers engaged in public practice have complied with relevant professional standard
s for assurance engagements; To require warrant holders in public practice to ma
ke appropriate improvements in their quality control policies and procedures, or
in their compliance with those policies and procedures, when the need for such
improvement is identified; Where warrant holders in public practice fail to comp
ly with relevant professional standards, to take appropriate corrective action,
including educational or disciplinary measures, as may be indicated by the circu
mstances.
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Appendices
Appendix B, Questionnaire
Audit Quality (AQ) in Malta Thank you for spending some of your precious time wi
th this questionnaire. I am writing my dissertation with Henley Management Colle
ge, and thus close to the end of my studies, but I need your help to come to the
rest of the way. The dissertation is about the dimension of audit quality withi
n the local Maltese context. This questionnaire will take approximately 15-20 mi
nutes. Your answers will be treated confidentially and used for the purpose of t
his study. Please indicate in your reply whether you would like to receive a con
centrated version of the results from the survey. Your e-mail and your answers t
o the questionnaire will not in any way be linked. I would also like to underlin
e that although the questions are inspired heavily by international audit qualit
y questionnaires and literature, they are my responsibility and any inconvenienc
e related to the questionnaire rests solely on my shoulders. I am very grateful
for your assistance. This same questionnaire has been e-mailed to all other part
ners within 36 registered audit firms in Malta, and to all audit committees of t
he 27 companies quoted on the Malta Stock Exchange. Please do not hesitate to co
ntact me if there are any questions on the questionnaire or you need any further
clarifications.
Submission of Questionnaire Please return your completed questionnaire to follow
ing e-mail address: renzo.farrugia@hotmail.com I hope to receive your answers pr
eferably before the 9th November 2006.
Once again, thank you for spending time on the questionnaire, and wishing you su
ccess in your work. Yours Faithfully,
Renzo Farrugia
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Appendices
SECTION A - GENERAL INFORMATION
Kindly complete the following table by filling in EITHER Column A if you are a p
artner within an audit firm OR Column B if you are a member of an audit committe
e of a company quoted on MSE. Please DO NOT fill in both columns.
COLUMN Type
A
COLUMN
B
Audit Partner
Member of an Audit Committee of Company quoted on Malta Stock Exchange (MSE)
Who is filling this questionnaire? Sex Age Male Female Male Female
Less than 29 years from 30 to 39 years from 40 to 49 years from 50 to 59 years o
ver 60 years Not applicable
Less than 29 years from 30 to 39 years from 40 to 49 years from 50 to 59 years o
ver 60 years
Industry Size of your organisation
(number of full-time employees)
(e.g. Consumer product industry, Hotel industry, etc)
Less than 10 employees from 10 to 25 employees More than 25 employees Less than
5 years from 5 to 15 years More than 15 years
Less than 10 employees from 10 to 25 employees More than 25 employees Less than
5 years from 5 to 15 years More than 15 years
Years working for organisation
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Appendices
SECTION B AUDIT QUALITY (AQ)
This section has been structured into 6 main parts of 10 statements each as foll
ows:1. Audit Firm Culture 2. Partner Involvement
This relates to factors associated with general culture and values of an audit f
irm. This relates to factors that are directly attributable to the engagement pa
rtner involvement and enthusiasm. This relates to factors that build up the comp
etencies of the individual auditor and the team. This relates to factors that ar
e directly attributable to the audit team competence when performing audit work.
This relates to factors of interest to users of audited financial statements. T
his relates to satisfying the need of companies and managing directors.
3. Audit Team Involvement 4. Quality on the Field
5. Stakeholders Involvement 6. Managing Customer Relationships
On the basis of your general views about auditing, please rate the importance of
each statement to audit quality, by ticking the number on the scale on the righ
t. If you think that such statements do not have any impact on audit quality, pl
ease tick number 1. If you feel that a statement is very important for high audi
t quality, please select number 4. If your feelings are less strong, please tick
one of the numbers in the middle. At the end of each part, you are requested to
indicate which two of these ten statements are critical statements for audit qu
ality in order of importance. Please do not spend too long thinking about each i
tem give the first nature answer that occurs to you. But at the same time, do no
t rush your responses or respond without giving due consideration to each item.
Be honest and truthful with yourself and do not just say what you think good or
acceptable. Do not miss any item, and select only ONE response for each statemen
t given.
Renzo Farrugia
Page 87

Appendices
1) Audit Firm Culture
Ref. Statements No impact on AQ (1) 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 Sli
ght impact on AQ (2) Impacts AQ (3) Extreme impact on AQ (4)
Audit firm operates to the highest standards of integrity. Audit firm is indepen
dent of the board of directors. Audit firm enjoys good reputation. Audit firm em
ploys a robust internal procedure compliant with the international standards req
uirements and regulatory framework regime. Audit firm is knowledgeable about the
clients industry. Audit firm is able to attract, train and develop staff of high
est calibre with appropriate skills and qualifications. Audit firm consistently
monitors its quality control policies to align with recent best practice in the
audit profession. Audit firm uses avant-garde technology and knowledge managemen
t systems to assist it in retaining knowledge gathered from its audits. Audit fi
rm provides other non-audit services to the audited firm, including taxation, co
nsultancy and general advice. Being a big audit firm adds credibility to users o
f financial statements.
Kindly identify which are the (2) two most important statements in order of prio
rity that have the largest impact on audit quality from the above. 1
st
important statement:
1
2
3
4
5
6
7
8
9
10
Select One
2 important statement:
Select One
nd
1
2
3
4
5
6
7
8
9
10
Renzo Farrugia
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Appendices
2) Partner Involvement
Engagement partner adopts high ethical standards. Engagement partner is independ
ent of the board of directors. Engagement partner dedicates resources to align t
he audit firms strategy and internal communications with recent developments in t
he profession. Engagement partner actively involves himself/herself in the engag
ement beginning from the initial planning throughout the audit process and compl
etion. Engagement partner has sufficient knowledge and understands what is happe
ning within the clients organisation. Engagement partner puts forward frequent ad
vice to clients. Engagement partner allocates more time and effort on those area
s that have the highest risk. Engagement partner performs different types of aud
its each year to enrich his/her spread of knowledge within various industries. E
ngagement partner is subject to internal review during the audit by other partne
rs of the audit firm. Engagement partner allocates necessary resources for all i
ts clients, irrespective of the audit fee charged.
st
1
2
3
4
5
6
7
8
9
10
Select One
Select One
nd
1
2
3
4
5
6
7
8
9
10
Renzo Farrugia
Page 89

Appendices
3) Audit Team Involvement
Audit team members are independent from the client. Audit team exercise discreti
on and professional judgment whilst performing the audit. Audit team keeps abrea
st of recent developments in the profession. Audit team adopts high ethical stan
dards when performing their work. Audit team genuinely believe in the public int
erest purpose of the audit. Audit team shares the same values of the audit firm,
having a sense of belongingness and stewardship to their organisation. Audit te
am provides immediate and professional assistance to clients recommending possib
le action for improvement. Audit team has a clear understanding of roles of part
ners and staff on audits and that they are properly qualified to perform them. A
udit team is motivated both personally and by their working environment. Audit t
eam benefits from competitive reward mechanisms.
st
1
2
3
4
5
6
7
8
9
10
Select One
Select One
nd
1
2
3
4
5
6
7
8
9
10
Renzo Farrugia
Page 90

Appendices
4) Quality on the Field
Ref. Statements No impact on AQ (1) 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 Slight impac
t on AQ (2) Impacts AQ (3) Extreme impact on AQ (4)
There is a good fit between the audit team, engagement partner and the finance dir
ector. Audit team provides the client with individual attention. Audit team crea
tes the minimum disruption to the client so far as practically possible. Audit t
eam performs the audit in accordance with International Standards on Auditing an
d with appropriate and relevant legislations. Audit team gathers sufficient and
appropriate documented evidence supporting audit opinions. Audit team aims for e
arly communication with management when corrective action may be required. Audit
team evaluates appropriate judgments made by their clients with rigour and prof
essional scepticism. Audit team files are reviewed by people with appropriate ex
perience who will encourage alertness, originality of thought and a thorough inv
estigation of anomalies. Audit team on field works in accordance to the working
practices embedded within the audit firms internal control procedure. Audit team
uses information technology to liaise and obtain second opinions from the lead e
ngagement partner directly on the audit fee.
4.9 4.10
st
1
2
3
4
5
6
7
8
9
10
Select One
Select One
nd
1
2
3
4
5
6
7
8
9
10
Renzo Farrugia
Page 91

Appendices
5) Stakeholders Involvement
Audit firm delivers consistent messages to all stakeholders. Audit firm provides
the directors and officers constructive observations arising from the audit pro
cess. Audit firm acts in the interest of shareholders while having regard to the
wider public interests. Audit firm with a strong reputation may imply higher cr
edibility to users of audited financial statements. Audit firms issuing audit re
ports with matters of interest to creditors and shareholders provide more assura
nce to stakeholders. The interests of shareholders would be best served if audit
firms remain in place for a fixed term (eg five years) - without any re- appoin
tment option. Increase in audit fees implies higher assurance to stakeholders. E
mployees of the companies are more willing to co-operate with auditors with good
inter-personal and intra-personal skills. Having the necessary set-up to lodge
a complaint against an auditor from the general public leads to higher levels of
audit quality. Stakeholders will feel more trust, if the list of audit firms cl
early indicates, those that are quality certified by an independent oversight auth
ority.
st
1
2
3
4
5
6
7
8
9
10
Select One
Select One
nd
1
2
3
4
5
6
7
8
9
10
Renzo Farrugia
Page 92

Appendices
6) Managing Customer Relationships
Audit team communicates regularly and appropriately with executive management an
d/or audit committee. Audit firm communicates regularly and appropriately with c
lient management and directors. Audit firm provides additional services such as
accounting/book-keeping, taxation and consultancy services to their audit client
s. Audit firm is easily contactable (eg by email, internet, phone). Audit firm i
s reliable in performing the promised service dependably and accurately. Audit f
irm is responsive by giving advice to customers that add value. Audit firm provi
des assurance about its knowledge, courtesy of employees and ability to convey t
rust. Audit firm provides individual attention to customers. Audit firm has a go
od image and communication material. Audit firm charges appropriate fee to meet
all legal, regulatory and professional obligation, without putting unnecessary p
ressure on audit staff to cut corners.
st
1
2
3
4
5
6
7
8
9
10
Select One
Select One
nd
1
2
3
4
5
6
7
8
9
10
Renzo Farrugia
Page 93

Appendices
SECTION C
- YOUR OPINION COUNTS
This part contains 9 questions relating to your perception of the current contex
t within the auditing profession. On the basis of your general views, please ide
ntify whether you agree or not with these statements, providing also your brief
comments (if any).
Ref. 1. Statements
Agree
Do Not Agree
Comments
Higher fees charged reflect higher quality of audit services.
2.
Self-regulating profession runs a serious risk of conflicts of interests. An aud
itor can never be truly independent of those who have the power to sack you. An
audit firm should occupy a term of office for a fixed duration period of time in
dicated by law. Audit firms who are not performing to the standards of quality a
re to be publicly disclosed by the relevant authorities. Having an independent u
nit performing on-the-spot visits on all audit firms and practitioners performin
g audit work enhance audit quality. The various components constituting audit qu
ality is fully known in Malta.
3.
4.
5.
6.
7.
Audit quality yield more costs than benefits for an audit firm to adopt and main
tain.
8.
Audit quality is a one-time effort by the firm to align its internal control pro
cedures with best practices.
Renzo Farrugia
Page 94

Appendices
9. In the space below, please provide any other comments which you think are rel
evant to audit quality in the Maltese context.
You have reached the end! Thank you in assisting me with your answers. Write Inte
rested in the e-mail if you would like to receive a concentrated version of the r
esults from the survey, clearly indicating your preferred e-mail address.
Renzo Farrugia October 2006
Renzo Farrugia
Page 95

Appendices
Appendix C, Letter to Chairpersons of Audit Committees
Assistance in Preparation of Dissertation about Audit Quality
Date:
Messrs., As I am completing my dissertation on the MBA-Program with Henley Manag
ement College, I am in need of assistance from your Audit Committee and I hope f
or your obligingness and assistance in this study. My dissertation is based on a
qualitative approach using in-depth research interviews and I thus need to have
an interview preferably with two members of the Board. I therefore kindly ask y
ou for your participation in an interview of approximately one hour together wit
h another member of the same board. The interview will be subsequently transcrib
ed and used for the sole purpose of this dissertation. In the dissertation it wi
ll not be possible to link any statements or results to any audit committee. To
this effect, if you are able to schedule an interview during this month, you are
welcome to suggest a time that will suit you. Otherwise, I will contact you on
telephone to make an appointment. Should you have any further queries, please do
not hesitate to contact me.
Yours Sincerely,
Renzo Farrugia October 2006
Renzo Farrugia
Page 96

Bibliography
Chapter 8
BIBLIOGRAPHY
Words ought to be a little wild, for they are the assaults of thoughts on the un
thinking.
John M. Kaynes, 1992
Renzo Farrugia
Page 97

Bibliography
8
BIBLIOGRAPHY
Ahmed & Hopson, 1990. After The Quality Audit: Closing the Loop on the Audit Pro
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DeFond, M. L., K. Raghunandan, and K. R. Subramanyam, 2002. Do non-audit service
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nd practice within the audit profession: does formalization make a difference? H
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ing: An assessment. Fourth Symposium on Auditing Research, University of Illinoi
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Hussey, R., Lan, G., 2001. An Examination of Auditor Independence Issues from th
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Palmrose, Z., 1984. The demand for quality-differentiated audit services in an a
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Watkins A. ,2004. Audit Quality: A Synthesis of Theory, Journal of Accounting Li
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L.L.,1990. Delivering quality service: Balancing customer perceptions and expect
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Legislation Accountancy Profession Act, Chapter 281 of the Republic of Malta. Ac
countancy Profession Regulations, Subsidiary Legislation 281.01 of the Accountan
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of the Republic of Malta. Directive Number 1 (CPE) issued in terms of the Accoun
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6 (As Amended) of the Republic of Malta. Directive Number 2 (Code Of Ethics) iss
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Profession Regulations 1986 (As Amended) of the Republic of Malta. Directive Num
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rofession Act (Cap 281) and of the Accountancy Profession Regulations 1986 (As A
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in terms of the Accountancy Profession Act (Cap 281) and of the Accountancy Prof
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Renzo Farrugia
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Other Sources of Information Accountancy Board, [AB] Malta [www.accountancyboard
.gov.mt]. Fdration des Experts Comptables Europens, [FEE] Belgium [www.fee.be]. Fin
ancial Reporting Council, [FRC] United Kingdom, [www.frc.org.uk/poba/index.cfm].
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[www.icaew.co.uk].
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borzamalta.com.mt]. Ministry of Finance,[MFIN] Malta [www.mfin.gov.mt]. Public C
ompany Accounting Oversight Board, [PCAOB] United States,
[www.pcaobus.org/inspections/].
Renzo Farrugia
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Henley Management College

PERCEPTIONS OF AUDIT QUALITY IN A POST-ENRON WORLD

HENLEY MANAGEMET COLLEGE

....... 35 4.1 SECTION A, DEMOGRAPHIC ANALYSIS..................................

4.2.2.3 4.2.2.4 4.2.2.5 4.2.2.6 4.2.2.7

..................................... 83 APPENDIX A, SHORT NOTES ON ACCOUNTANCY

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

2.86 2.86 2.75 2.80 2.70

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Perception Mean Statistic 2.14 2.88 2.33 3.00

Overall Mean Statistic 2.40 2.83 2.54 3.00

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Henley Management College

Perception Mean Statistic 2.78 3.00 2.88 3.00

Henley Management College

Henley Management College

Henley Management College

Henley Management College

6.8 6.9 6.10

Henley Management College