The Continuity of the Board of Statutory Auditors Across Social, Economic and Political Institutional Changes

Posted by Andrea Melis - Jun 15, 2020

Mike Jones (University of Bristol) and Andrea Melis (University of Cagliari)

How and why does an accounting institution continue over time, without any substantial change in its nature and role, despite the fundamental changes in the economic, political and social institutional environment?

Our study contributed to answer this question by examining the history of the board of statutory auditors (Collegio sindacale or Collegio dei sindaci). Established in 1882 in Italy the board of statutory auditors predates well-known internationally internal oversight mechanisms, such as the audit committee or the internal audit. It was established 58 years before the New York Stock Exchange (1940) first endorsed the audit committee, a similar accounting institution; 95 years before the New York Stock Exchange (1977) adopted a listing requirement that audit committees be composed entirely of independent directors; and 110 years before the Cadbury report (1992) recommended UK listed companies appoint an independent audit committee.

This study reveals that this long-lived accounting institution has continued to operate, with no material change in its nature, across different historical blocs, such as monarchy, fascism, post-war socio-democratic republic, neoliberal republic, and major changes in Italian politics and economy. This is despite the fundamental changes that have occurred in the Italian social, economic and political environment.

Despite important pitfalls in its functional role and societal changes, continuity was allowed by the existing Gramscian ‘system of alliances’ of societal groups. This system of alliances has included not only the corporate (major shareholders, company directors, and statutory auditors) and social elites (e.g., lawyers, nobles), but also elite members of the academia, who as intellectuals provided ideological support, and members of Parliament, who influenced regulation. Hegemonic power was exercised with the consensual legitimacy of civil society, thanks to the gradual ‘absorption’ of emerging social groups (e.g., the accountants) and the use of Gramscian ‘common sense’ to persuade society of the benefits of the board of statutory auditors’ existence and role.

Although continuity, rather than change, has characterised the history of the board of statutory auditors, this accounting institution has also faced a series of potentially significant sources of change, which appeared dramatic at first sight, but had no significant far-reaching historical impact. As hegemony was unaffected, potential organic crises were turned into conjuctural ones.

Our study reveals that its social role seems to be much more important than its functional role. The specific function of this board has always been to serve as a nominally independent oversight body. Directly appointed by the shareholders, the board of statutory auditors has always been composed of formally independent individuals, expected to monitor the decisions (and the decision-making process) of company directors through participation at the board of directors’ meetings. Even though the major functional weaknesses of the board of statutory auditors (independence and lack of effectiveness) were never successfully overcome, the board of statutory auditors has continued given its important social role. In Italian society, this accounting institution has provided a reassurance role (company directors were monitored, and thus believed to be complying with societal rules, regulations and expectations), a role which is perceived to benefit all society. However, in practice, this institution has provided a legitimating, rather than a substantive monitoring mechanism. It has helped to exercise a hegemonic control for the ruling class, whose power was diffused across society, through civil institutions.

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