**Abstract**

Family Small and Medium-sized Enterprises (Family SMEs) in Italy have been asked by the new Insolvency and Crisis Code (IC-Code) to establish organizational, management and accounting bodies and tools appropriate to their nature and size. They need to be able to face early warning of company's crisis and potential loss of going concern and to be able to implement strategies provided by the law to recover viability. The peculiarity of the Italian System is the joint existence of two levels of controls. A "downstream" one carried out by Auditors in charge of the accounting control and an "upstream" one carried out by the Supervisory Board in charge for the surveillance of directors' behaviour. The board of statutory auditors (*Collegio Sindacale*), which has been defined as the watchdog distinguishing Italian corporate governance system, plays a fundamental role in reaching the goal. Its supervisory activities are played *ex-ante* over directors and are set with independence and competence. Auditors, instead, operate when everything has already been decided or even implemented concentrating on the accounting issues. The IC-Code sets up new corporate governance rules for a huge number of Family SMEs requiring the appointment of independent control bodies, Board of Statutory Auditors and Auditors and demanding therefore for more attention to risk monitoring and managing.

**Keywords:** viability, going concern, corporate governance, board of statutory auditors (*Collegio Sindacale*), auditors, internal audit, ERM, ESG risks, overlapping, insolvency directive (Directive EU 2019/1023), IC-code, Italy, early warning system, SMEs, family firm

## **1. Introduction**

In the current scenario Covid-19 pandemic has undermined many Family Small and Medium-sized Enterprises (Family SMEs) viability. Those entities are characterised by few formalisms and important decisions are mainly in the family hands. This can represent an important element of weakness and can lead to situations of serious difficulty both for the family, which increasingly finds itself having to guarantee company commitments with its personal assets, and for the workers who risk being overwhelmed by the consequences of an unmanaged crisis [1, 2]. The work focuses on factors crucial to preserve going concern and to be able to intercept the signs of the crisis well in advance presenting the "*italian way*". Companies urge to be able to face early warning of financial distress and to implement strategies provided by the law to recover viability [3, 4]. The new Italian Insolvency and Crisis Code (IC-Code) tries to answer those needs requiring Family SMEs to implement

external and independent control systems that make it possible to identify the major risks and to deal with them in time and in a more rational way.

Some of these tools are known internationally – such as the introduction of compulsory audits - while others are typical of the Italian national Corporate Governance system. The peculiarity of the Italian System is the joint existence of two levels of controls. A "downstream" one carried out by Auditors in charge of the accounting control and an "upstream" one carried out by the Supervisory Board in charge for the surveillance of directors' behaviour. The last is the Board of Statutory Auditors (*Collegio Sindacale*) which has been defined as the watchdog distinguishing Italian corporate governance system. It plays a fundamental role in reaching the goal as its supervisory activities are played *ex-ante* over directors and are set with independence and competence. Auditors, instead, operate when everything has already been decided or even implemented concentrating on the accounting issues. The relevance of these two different roles is the subject of further study in the first part of the work, where, after having better defined SMEs viability, the two levels of controls are analysed and compared.

The appointment of independent control bodies required by the IC-Code entails the need for companies to pay greater attention to identifying risks and to monitoring and managing them. This is particularly true for family SMEs in which we often navigate on sight and strategies selection is based more on the entrepreneurial instinct of the founder and the family than on a structured analysis of what exists and possible options for the future. The second part of the work explores the theme on the Internal Control (IC) and Risk Management System (ERM). In this context a focus on ESG risk is proposed.

#### **2. SMEs viability**

Suitable corporate governance is a fundamental prerequisite for maintaining business viability as it allows mapping and a greater awareness of risk management which structurally characterise the corporate context, so they can be understood at an early stage to seek to prevent and if necessary deal with crisis factors [5]. It is important to note that the concept of business viability is formulated and central to Directive (EU) 2019/1023, most commonly known as the Insolvency Directive, and is specified as a distinctive concept (there is an explicit introduction to the concept of a "viability test") to define and rank companies in order to assess their resilience and ability to deal with issues while also finding sustainable solutions to them [6].

The issue of setting up appropriate organisational structures, i.e. the implementation of a corporate governance model which is consistent and proportionate to the business reality, is a particularly sensitive one in the case of family SMEs [7]. In these companies, the formalisation of decision-making processes is often seen as dispossession and a way to reduce the family's decision-making powers [8–12]. In the world of SMEs, there is a widespread belief that the idea of control systems and the professional contribution of administrative- and control-type skills is only a cost and not, on the contrary, an important support to achieve objectives [13]. The widespread style of entrepreneurship that characterises the Italian productive sector, but also of many other countries, leads to the existence of a very high number of small businesses typically run by one or a small number of people who over time identify completely with the company they founded, thus becoming themselves the absolute centre of their entrepreneurial creature. It's a business governance model that often struggles to change even when the business gains market recognition and thus the size of the company grows at the same pace as the complexity which is to be managed [14]. The fear of opening up their management model and listening to

instructions from others who introduce new and different skills in many cases wins out, despite the numerous external stimuli [15].

With the introduction in the Italian legislation of the Insolvency and Crisis Code (IC-Code) [16], which will coincide with the timelines indicated in the Insolvency Directive, but which precedes it in terms of its conception, the issue of "organisational structures" is highlighted for all companies including SMEs [17]. It introduces in particular a modification of the law which "requires entrepreneurs to establish an appropriate organisational, management and accounting structure proportionate to the nature and size of the company, which would also pursue the timely detection of a company crisis and the loss of going concern, as well as to take immediate action to adopt and implement one of the instruments provided for by the law to overcome the crisis and recover viability".

The legislation underlines and strengthens the tasks and duties which already existed in the Italian Civil Code and codes of conduct issued by professional organisations. But the most significant feature in the legislation is the obligation to appoint supervisory and audit bodies in SMEs, which to date had only been touched on marginally on the issue of governance. In particular, the acknowledgment of the control role of the Board of Statutory Auditors – a characteristic figure in the Italian context - and that of Auditors through the significant widening of the range of companies required to appoint them, is undoubtedly revolutionary. The compulsory introduction of independent professionals should lead, as a consequence, especially in family businesses, as most Italian companies are, on the one hand to a greater focus on processes and on the other hand to a more regular reporting of company figures and a more formal implementation of budgeting and planning systems.
