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The Corporate Governance (CG) theme has recently been the subject of significant measures to try to restore confidence among investors by encouraging information and communication transparency. The Italian Parliament approved Law 262 in 2005; and in 2006 the CG Committee of the Italian Stock Exchange approved the new Self-Regulatory Code for listed companies. This paper deals with control matters and moves on to causes and cases of their failures in relation to a sample of Italian companies. More precisely, it investigates, through an empirical survey, the main limits and areas for improvement in the working of company Internal Control (IC) system(s) and in the objectives of the role of the three main professional bodies currently in charge of it in Italy (i.e. Internal Auditing, Statutory Auditors and External Auditors). The results obtained show that the Italian situation is very unusual, due to a long tradition:the possibility to choose between different administration and control systems, often with coexisting and overlapping roles, creates problems in terms of responsibility and control. The first answers to the critical issues highlighted are given by the aforementioned laws, intended as the main catalysts for a review of the roles of all IC bodies. However, much work has still to be done. The final aim was to come up with suggestions about the possibility of finding areas for improvement within those companies’IC systems.3794
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Keywords: Internal control Auditing Corporate governance Italian context
1.Introduction
During 2005 and 2006, Italy witnessed the introduction of important changes concerning CG, especially for listed companies. In fact, in terms of law, following the reforms of 1998 (Combined Finance Act, “Testo Unico della Finanza”) and 2003 (Company Law Reform), Law 262, the so-called “savings protection law" was approved in 2005.
In terms of self-discipline, 2006 represented a key stage with the revision of the “Self-discipline Code” that was issued by a committee consisting of representatives of major listed companies, financial institutions and interested trade associations as well as experts under the aegis of the Italian Stock Exchange.
This study intends to investigate, through an empirical survey, the main limits and areas for improvement in the working of company IC system(s) and in the objectives of the role of the three main professional bodies currently in charge in Italy (i.e. Internal Auditors, Statutory Auditors and External Auditors).
The methodology used to reach these aims can be summarised as follows (details about methodology can be found in Sect. 3): first, a number of interviews (with partners of the so called “Big Four”, chief Internal Auditors and chairmen of board of statutory auditors) were conducted in order to verify how the themes of internal control and risk management are perceived by the main categories involved in the related activities. As a second methodological step, some research hypotheses were formulated. The third step was the preparation and mailing of a questionnaire to the three categories of auditors mentioned above (IA, SA and EA). The assumptions were verified /falsified thanks to the results of the questionnaires themselves.
Sections 14, 15 and 30 of the above mentioned Law 262/05 introduced important changes in terms of profile of responsibilities related to the drafting of company financial reports; more precisely, it refers to the power and responsibilities at a personal level (to which possible sanctions are connected), which find their inspiration in the key principles of the U.S. Sarbanes-Oxley Act.
In particular, Internal Auditing (IA) activity, if implemented according to the international standards with regard to the independence and objectivity profile of its operations, will turn out to be an element of significant assurance following the U.S. experience: both for top management as well as for the different stakeholders with positive returns in terms of company reputation (AIIA 2006; Payne 2006; Alkhafaji 2007; Khanchel 2007).