Do Shareholder Ratification Votes Impact Subsequent Audit Outcomes?

Abstract

The Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) have justified audit-related disclosure rules by asserting that such information would be relevant for shareholders in auditor ratification voting decisions. The underlying assumption, stated more explicitly by activists and others, is that such voting can influence auditors’ subsequent actions. A recent study by Tanyi, Rama, Raghunandan, and Martin, (2020, TRRM), tests this assumption. Using data from 10,326 auditor ratification votes, TRRM (2020) find that higher than expected shareholder dissatisfaction of their external auditors is associated with higher audit quality and higher audit fees in the subsequent period. The results suggest that auditors should pro-actively engage with audit committees if there is higher than expected shareholder dissatisfaction. Auditors can also expect regulators to use such evidence in future rule proposals by the SEC and PCAOB, given past actions by regulators.