Auditor Choice in Italian Non-Listed Firms

Purpose: This paper investigates 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 euros. 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: Our 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 both monitors 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, we find that legal form and voluntary IFRS 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.