Purpose: This explorative study investigates the determinants of auditor choice in small private firms, leveraging an Italian regulatory change from 2023 mandating audits while allowing selection among different auditor types. It examines how auditee characteristics influence small entities’ choice between individual auditors, audit firms, and Big4 firms.
Design/methodology/approach: Using a large cross-sectional data set of Italian small private firms subjected for the first time to mandatory audit, this study esti- mates a set of regression models to identify the client firm-level drivers of auditor selection.
Findings: The results show that auditee characteristics such as firm size and com- plexity increase the likelihood of appointing an audit firm, particularly a Big4 one. At the same time, some governance-related variables (i.e., managerial ownership, ownership dispersion, external financing) are associated with selecting an audit firm. Most auditees opt for individual auditors, even in contexts where stronger external monitoring would seem more necessary.
Originality: This study offers novel evidence on auditor choice in a setting where the appointment is mandatory, but firms can choose among different auditor types, highlighting how firm-specific characteristics and governance dynamics particular to private firms shape auditor choices.
Practical implications: Oversight bodies may benefit from these results. The clear preference for individual auditors, even in contexts where stronger monitoring mechanisms could help in coping with agency problems, suggests that maintaining consistent quality standards across the market is important. Robust public oversight mechanisms applying uniformly to all auditors are essential to ensure audit quality and strengthen stakeholder confidence.
Keywords: auditor choice, private firms, mandatory audit, corporate governance, audit quality
