Background: In the last decade the interest in the “knowledge economy”has grown both in the popular press and in academia. Peter Drucker is arguing that today ”knowledge is the only meaningful resource…”. Professional Service Firms (PSF) is a group of heterogeneous companies more knowledge intensive than most organizations.

Problem: Even though all PSFs are dependent on knowledge as their main factor of production, this dependence varies with firm type. In pursuit of higher margins amid strong competition and increasing regulation many audit firms in Malta are moving away from procedure based services towards expertise-based.

Purpose: The purpose of this thesis is to investigate and describe how practitioners in procedure- based professional service firms in Malta perceive knowledge. An attempt will be made to interpret how this perception may affect the firm’s ability to diversify away from procedure based offerings.

Method: This thesis uses a qualitative method focused on interviews to collect the empirical data. The analysis of the empirical material has been inspired by the hermeneutic school of thought.

Conclusions: Unsurprisingly the interviewees perceived knowledge as the tool they need to perform their job. Knowledge was said to be considered important, but the empirical results reveal a surprisingly low sophistication in the understanding of the concept. The dramatically increasing complexity in the audit firms’ operating environment, caused by rapid changes in regulation and standards, is putting pressure on the firms. Many audit firms respond by attempting to diversify into less regulated areas such as consulting. Since the importance and usage of knowledge is different between a procedure-based operation such as an audit firm and an expertise-based operation such as a consulting firm, diversification from one type to the other will prove difficult.