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    Shareholder Voting on Auditor Selection, Audit Fees, and...
    research summary posted September 12, 2013 by Jennifer M Mueller-Phillips, tagged 03.0 Auditor Selection and Auditor Changes, 13.0 Governance, 13.06 Board/Audit Committee Processes 
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    Title:
    Shareholder Voting on Auditor Selection, Audit Fees, and Audit Quality
    Practical Implications:

    The U.S. Department of the Treasury’s Advisory Committee on the Auditing Profession (ACAP) recently recommended that all publicly traded companies be required to have shareholder ratification of auditor selection. This study provides evidence of the potential implications of making a shareholder vote on auditor selection mandatory. The results of this study indicate that a shareholder vote on auditor selection is associated with higher audit quality and higher audit fees. These findings should be of interest to policy makers, auditors and public companies that might become subject to this policy change.


    For more information on this study, please contact Mai Dao.
     

    Citation:

    Dao, M., K. Raghunandan, and D. Rama. 2012. Shareholder Voting on Auditor Selection, Audit Fees, and Audit Quality. The Accounting Review 87 (1): 149-171.

    Keywords:
    auditor selection, shareholder voting, audit fees, audit quality.
    Purpose of the Study:

    The U.S. Department of the Treasury’s Advisory Committee on the Auditing Profession (ACAP) recommended in 2008 that all publicly traded companies be required to have shareholder ratification of auditor selection. ACAP justified this recommendation by citing the need for enhanced competition in the auditing industry. While the ACAP did not explicitly state what benefits increased competition may produce the authors espouse that the desired outcome would be reduced prices and increased quality. The authors point out that another potential benefit could come from a governance and accountability standpoint. They say that shareholder involvement may have a positive impact on the incentives of auditors and auditor independence. They argue that with shareholder voting there may be fewer opportunities for auditors to have a cozy relationship with management.
    This study informs this proposed policy choice. The authors look at audit fees and audit quality at firms that voluntarily engage in shareholder ratification of the auditor. By looking at these outcomes they hope to better understand the competitive and governance implications of making a shareholder vote on auditor selection mandatory.

     

    Design/Method/ Approach:

    The authors use data on publicly-traded companies in 2006 and compare audit fees and audit quality for companies that engage in shareholder ratification of auditors to those that do not. The authors also look at firms that switched from not having a shareholder vote on auditor selection in 2005 to having one in 2006 and compare them to firms that had a shareholder vote in 2005 and did not have one in 2006 to see if these firms had changes in audit fees relative to each other.

    Findings:
    • The authors find that within the 2006 sample shareholder involvement in auditor selection is associated with higher audit fees.
    • Additionally, they find that firms that switched from not having a shareholder vote on auditor selection in 2005 to having one in 2006 have, on average, higher audit fees than firms that stopped having a shareholder vote in 2006 but had one in 2005.
    • In their study of audit quality, the authors find that shareholder involvement in auditor selection is associated with a reduced probability of having a restatement that results in a negative effect on financial statements. 
    • Additionally, they document lower abnormal accruals for firms that have shareholder involvement in auditor selection.

    The authors claim that these findings are consistent with shareholder involvement in auditor selection being associated with higher audit quality and higher audit fees. They attribute these results to increased auditor effort requiring increased cost which is passed on to the client in the form of audit fees.

    Category:
    Auditor Selection and Auditor Changes, Governance
    Sub-category:
    Board/Audit Committee Processes