Costly firm supervision: the impact of statutory auditors on Italian firms

We study the costs and benefits of firm supervision on Italian private limited companies. Using a regression discontinuity design, we estimate that being just above the thresholds for the mandatory appointment of auditors increases the likelihood of appointing auditors by 13 percentage points. For firms just above these thresholds, auditors prompted a modest strengthening of firms' balance sheets, with the share of assets held as reserves and paid-in capital increasing marginally by 1.3 percent. Given their legal responsibility in case of insolvency, they also accelerated debt restructuring by nearly one year and temporarily reduced bankruptcies by 0.5 percentage points during the same period. However, these improvements did not translate into better access to credit or lower borrowing costs. The annual average cost of auditors per firm was 21-27 thousand euros, corresponding to around 3 percent of the labor cost for a firm with 20 employees. A cost-benefit analysis suggests that the aggregate costs of supervision outweigh its measurable benefits, particularly for smaller firms.