Why Some Companies Seek Shareholder Ratification on Auditor Selection

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