Shareholder Ratification of Auditors After PCAOB Censures

Abstract

Prior research provides inconsistent evidence about the effect of PCAOB censures of US Big 4 audit firms on investors’ reactions. In this study, we use shareholder ratifications of the auditor as a direct measure of investor perceptions about audit quality. We find that first-time censures of Deloitte, Ernst & Young, and PwC by the PCAOB are associated with greater shareholder dissatisfaction, as measured by the percent of shareholders not voting to ratify the auditor after the censure. However, the repeat censures of Deloitte do not elicit significant reactions from shareholders. Further, shareholders are more likely to vote against audit committee directors when the censured audit firm continues as the client’s auditor. Thus, the results suggest that investors view PCAOB censures of audit firms as indicators of (negative) audit quality in some instances and, hence, are of potential interest to regulators, audit committees, and investors.

Keywords: PCAOB Censures, Auditor Ratifications, Audit Committee Elections

JEL Classification: M41, M42