Auditor Ratification: Shareholders Appear Content

Since a change in regulation came about in 2010, it has become significantly more common for shareholders to vote on the company’s independent auditor. That change, first implemented by the NYSE and then approved by the SEC, limited a broker’s ability to vote on certain non-routine matters without the direct input from the ultimate shareholder. Since the vast majority of shares in U.S. public companies are managed by brokers, one consequence of this rule change was a potential difficulty in obtaining a quorum in shareholder votes. In order to make it easier, companies have since begun:

to ensure that there is at least one proposal on the company’s proxy card that is still “routine” under new NYSE Rule 452, such as the ratification of auditors. So long as there is at least one routine proposal on the proxy card, broker non-votes, or an indication from a broker that they have not received instructions from a client on a routine matter, are generally counted for purposes of establishing a quorum for the annual meeting under Delaware law.

Votes Against Chart

Although these auditor votes are typically non-binding and are not required by regulation, they have nevertheless come to be considered best practice.1  Companies that give shareholders a vote on the auditor are much less likely to have restatements than those that don’t.

Audit Analytics recently announced the release of our latest product offering: Accounting + Oversight. One of the exciting features of this new module is a database of results for auditor ratification votes.

As mentioned above, the shareholder vote on auditor ratification is generally seen as a kind of formality: non-binding and routine. A recent analysis of the 6,373 shareholder votes filed between January 2012 and September 2013 seems to bear this out. On average, almost 98% of votes were cast in favor of auditor ratification.

To further illustrate this fact, we performed a frequency distribution (histogram) analysis of percentage votes against auditor ratification. One can see, for instance, that the percentage votes against auditor ratification in 1,757 votes was between 0.00% and 0.25% of the total votes cast. In other words, in nearly 30% of auditor ratification votes, the auditor was approved with less than half a percent of the votes going against ratification.

This table also shows other interesting results. 71% of filings analyzed had votes against ratification between 0% and 1.25%, inclusive. 95% of all ratification votes had votes against between 0% and 5%, and 99.8% fell between 0% and 25% of percentage votes against.

In other words, in only 1 out of 20 ratifications were more than 5% of the votes cast against the auditor, and in fewer than 1 out of 100 votes were more than 25% against ratification.

The next figure is a histogram chart of the same distribution analysis, which gives a pictorial view of the same data.

Histogram of Votes Against

This graph shows quite clearly how frequently and resoundingly the auditor is ratified. This suggests, then, that in the rare cases in which the shareholders voice significant disapproval of the auditor, further investigation might be in order. There is evidence in the accounting literature, for example, that votes against ratification are positively correlated with auditor tenure, implying that shareholders are skeptical of long auditor tenure.

In future posts, we hope to continue digging into this auditor ratification data. It would be interesting to see what the correlation is between strong shareholder disapproval and subsequent auditor changes.

1. For a thorough look into the history and context of shareholder approval of auditors, refer to this series of posts at The Race to the Bottom.