Abstract
Purpose This paper aims to investigate auditor choice in those Italian non-listed firms adopting the “traditional” model of corporate governance. In Italy, non-listed firms can choose between two types of auditor: the Board of Statutory Auditors (BSA), that is the statutory auditors, or an “external” auditor. At the same time, a BSA conducts the administrative auditing for all companies with equity exceeding €120,000. Design/methodology/approach The paper estimates a logistic regression model of firm auditor choice between an external auditor and the BSA, which incorporates variables proxying for both agency conflict and organizational complexity effects. Findings The results show that of the potential agency factors, only board independence drives auditor choice, whereas organizational complexity and risk factors including firm size, investment in inventories, subsidiary status and complexity drive auditor choice. These results may be explained in the administrative audit role of the BSA, which monitors both day-by-day firm operations and the financial statements preparation “project”. Stakeholders as a result are reassured that, in general, their interests are protected. Finally, it was found that legal form and voluntary International Financial Reporting Standards compliance exert an impact on auditor choice. Originality/value The paper provides support for an internal yet independent auditing body such as the Italian BSA as a wider model for corporate governance in European non-listed firms (OECD, 2004 and 2015). The BSA as an administrative and financial auditing body made up solely of independent highly qualified professionals can work within the firm on an operational basis, and in so doing can increase stakeholder protection.
Highlights
In the academic literature, we can identify two main approaches to explaining the drivers of auditor choice
We commence our analysis by examining the factors related to agency conflicts first and considering the factors which proxy for the size and the organizational complexity of the firm. 64% of the firms audited by a Board of Statutory Auditors (BSA) have close ownership (OWN), a pattern which contrasts with firms audited by an external auditor, 82% of which have dispersed ownership
10% of firms which engage a BSA have foreign shareholders (FOWN), whereas a much higher 45% of firms engaging an external auditor have foreign shareholders. 66% of firms audited by a BSA are characterised by low board independence (BOARD), while 82% of firms audited by an external auditor have largely independent boards
Summary
We can identify two main approaches to explaining the drivers of auditor choice. 4) highlights that proper and efficient governance is valuable for non-listed companies, especially taking into account the economic importance of such firms. 10) highlights that a “credible corporate governance framework, supported by effective supervision and enforcement mechanisms, will help improve the confidence of domestic investors, reduce the cost of capital, underpin the good functioning of financial markets, and induce more stable sources of financing”. Despite their abundance and economic importance, the governance of non-listed firms is an often neglected area in corporate governance studies
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