Why Some Companies Seek Shareholder Ratification on Auditor Selection

Posted: 31 Oct 2005

See all articles by Jagan Krishnan

Jagan Krishnan

Temple University - Department of Accounting

Zhongxia Shelly Ye

The University of Texas at San Antonio

Abstract

Federal and state laws do not currently require companies to seek ratification from shareholders on auditor selection, but some companies do so. Previous studies document the determinants of voting behavior when such voting is solicited by the management, but do not examine why some companies seek shareholder approval on auditor selection while others do not. We examine whether companies avoid seeking ratification when they are likely to face non-ratification. We find no strong evidence that this is the case. In fact, companies that pay higher total fees to auditors are more likely to ask shareholders to vote on auditor selection. Andersen clients are less likely to seek ratification, which we attribute to the fact that our sample time period coincides with the Enron-Andersen crisis. The only other indication that companies may shy away from shareholder ratification is a negative association between shareholder dissatisfaction with the board and the likelihood of seeking ratification. Finally, we find that financial expertise of audit committees is positively associated with the likelihood of seeking ratification, supporting results in other studies that show audit committee financial expertise has positive monitoring effects.

Keywords: Shareholder Ratification, Auditor Selection

JEL Classification: M49, G34, G38

Suggested Citation

Krishnan, Jagan and Ye, Zhongxia Shelly, Why Some Companies Seek Shareholder Ratification on Auditor Selection. Accounting Horizons, Forthcoming, Available at SSRN: https://ssrn.com/abstract=827804

Jagan Krishnan (Contact Author)

Temple University - Department of Accounting ( email )

Fox School of Business & Management
1801 Liacorous Walk
Philadelphia, PA 19122
United States
215-204-8126 (Phone)
215-204-5587 (Fax)

Zhongxia Shelly Ye

The University of Texas at San Antonio

ONE UTSA Circle
San Antonio, TX 78249
United States

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