Auditor choice in Italian non-listed firms

Abstract

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. 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.

The Effect of Firm Size, Audit Committee, Leverage and Institutional Ownership on Earnings Quality

“…Based on research conducted by [7] that audit quality significantly influences income smoothing. However, different from the research conducted by [8] that the auditor's reputation has no effect but tends to be positive towards income smoothing. This shows that there is no guarantee that Big Four Audit Firm will reduce the practice of income smoothing.…”

Effect of Professional Ethics, Work Experience, and Emotional Intelligence on Auditor Opinion

“…This means that the longer an auditor works, this does not necessarily make it easy and correct according to the needs of the client in making a decision. Our result support [3] and [14], but opposite with [15] and [16].…”

Determinants of auditor choice: Review of the empirical literature

“…Matonti, Tucker, and Tommasetti () examined a broad range of agency theory variables, but only found board independence to be associated positively with the appointment of high‐quality auditors for a sample of 384 unlisted Italian firms in 2009. Similarly, Alfraih () suggested that Kuwaiti firms in 2013 were more likely to appoint high‐quality audit firms when they had a larger and more independent board of directors, the presence of a female in the board, and a separated chairperson and CEO.…”