Gaia Narciso - Auditors’ Independence: Does Random Selection Work?

Ensuring auditors’ independence is crucial for the accuracy of financial reporting. However,
auditors are typically selected by the audited party, potentially creating a conflict of interest.
In this study, we examine the impact of randomly selecting auditors. By analyzing a reform
implemented in Italian municipalities and employing a difference-in-differences
identification strategy, we show that financial distress rises under the new system, primarily
driven by changes in discretionary balance sheet items. Additionally, we observe a
deterioration in deficit and debt. Supplementary evidence indicates that the worsening of
public finances is attributed to the uncovering of existing poor financial standing.