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    Shareholder Votes on Auditor Ratification and Subsequent...
    research summary posted April 19, 2017 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 03.02 Dismissal Decisions – impact of restatements, disagreements, fees, mergers 
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    Title:
    Shareholder Votes on Auditor Ratification and Subsequent Auditor Dismissals
    Practical Implications:

    The results of this study are important for audit firms to consider given interest from regulators on the role of shareholder ratification on auditor selection.  The evidence indicates that while shareholders, through auditor ratification voting, are not responsible for the acceptance or dismissal of a firm’s auditor, subsequent auditor dismissals do appear to be influenced by increased shareholder resistance.  A one percent increase in shareholder votes against auditor ratification is associated with a four percent increase in the likelihood of auditor dismissal within the following year.

    Citation:

    Abhijit Barua, K. Raghunandan, and Dasaratha V. Rama (2017) Shareholder Votes on Auditor Ratification and Subsequent Auditor Dismissals. Accounting Horizons: March 2017, Vol. 31, No. 1, pp. 129-139.

    Keywords:
    shareholder voting; auditor ratification; auditor dismissal
    Purpose of the Study:

    The role of shareholders in the process of auditor selection is of great interest to regulators, investors, activists, and audit firms.  Corporate governance activists as well as the U.S Treasury’s Advisory Committee on the Auditing Profession have recommended the adoption of an annual ratification of a firm’s independent auditors, since the primary responsibility of auditors is to the shareholders of their clients.  This study looks at whether shareholder voting on auditor ratification is associated with the likelihood of subsequent auditor dismissal.  As many of these votes are non-binding and on average an auditor ratification vote receives over 98% approval, the role of shareholder ratification in the auditor selection process remains an empirical question.

    Design/Method/ Approach:

    The authors use company-year observations from public U.S. companies with shareholder voting on auditor ratification from 2011 to 2014.  Auditor dismissal within one year of a shareholder ratification vote occurred in 3.3% of the sample.

    Findings:

    The authors find that:

    • Shareholder votes against auditor ratification are significantly associated with the likelihood of subsequent auditor dismissal (within a year as well as within 3-months and 6-months from the time of shareholder voting).
    • The successor auditor is significantly more likely to be a non-Big 4 firm, indicating that Big 4 auditors may view shareholder ratification votes as a client-related risk factor and may be reluctant to accept a new client with higher resistance from shareholders.
    Category:
    Auditor Selection and Auditor Changes
    Sub-category:
    Dismissal Decisions – impact of restatements - disagreements - fees - mergers etc