During proxy season, shareholders vote on a variety of proposals to be accepted or rejected. ESG proposals have garnered increased attention in recent years. But one proposal remains a constant decision for shareholders year-over-year: Should the auditor of record be retained for another year?
Audit Analytics looks at trends in how shareholders answer this question every year.
Frequency of Shareholder Votes Against Ratification
An analysis of shareholder votes filed between January 1, 2019, and December 31, 2021, shows that, on average, roughly 98% of total votes were cast in favor of auditor ratification.1 Votes against auditor ratification comprised 2.0% of the total votes; abstained votes account for the remaining 0.4% of shareholder votes cast.
The percentage of votes against auditor ratification has remained stable since our last analysis of auditor ratification votes.
This year, however, we found that 96 out of 100 times, fewer than 5% of shareholder votes were cast against the auditor. The table to the right is a frequency distribution analysis of percentage votes against auditor ratification. The table shows given bins with the percentage of votes cast against ratification, and it shows the number of auditor ratification proposals that fall into each bin.
For example, there were 7,129 ratification proposals in which the votes cast against ratification were between 0% and 1.00% of the total shareholder votes cast. In all, roughly 96% of auditor ratification proposals had 5% or less of the votes cast against ratification. At the other end of the spectrum, there were 31 instances since 2019 when more than 25% of shareholders voted against ratifying the auditor. Notably, 2 votes in 2021 saw more than 40% of shareholders cast votes against ratification, an exceedingly rare occurrence. (See tables below.)
To put it in a different perspective, see the histogram below. This graph, showing the same data as the table above, displays how frequently and resoundingly the auditor is ratified. This suggests that it is worth taking a closer look at the rare cases in which shareholders voice significant disapproval.
Highest Shareholder Votes Against the Auditor
Since 2017, there have been 5 instances when more than 40% of a company’s shareholders voted against ratification; 2 of those votes occurred in 2021 and 3 occurred in 2020.
The circumstances differ drastically between companies, highlighting the unique nature of these shareholder votes. For example:
- Barnwell Industries had 7 significant votes against auditor ratification between 2014 and 2021. The shareholders continued to express dissatisfaction with the auditor, even after the company changed auditors following 2020.
- The shareholders of Dean Foods voted against ratifying their long-tenured Big Four auditor in 2018 and 2019. The auditor had been engaged since 1927. The company subsequently declared bankruptcy at the end of 2019.
- Out of 25 million shareholders of Amber Road, roughly 1 million voted against the ratification of their Big Four auditor in 2015, 2016, and 2017. This number increased ten-fold in 2018, amounting to 40.2% of shareholders voting against the ratification.
Votes Against in 2021
In 2021, there were 12 entities with more than 20% of shareholder votes cast against ratification.
Scopus BioPharma [SCPS], Nephros [NEPH], and Apellis Pharmaceuticals [APLS] top this list, all with more than 30% of votes against auditor ratification. Notably, Scopus BioPharma and Nephros both subsequently changed auditors.
S&P 500
Looking at the highest votes against auditor ratification among the S&P 500 in 2021, we see lower percentages. However, these amounts are certainly enough to trigger a red flag – especially among this group of companies.
What does a large vote against auditor ratification mean for a company?
Findings in academic research suggest that greater shareholder dissatisfaction with an audit firm, as measured by votes cast against auditor ratification, is associated with higher audit quality, including fewer accounting misstatements and lower abnormal accruals. 2
While shareholders’ votes carry advisory power, the Board of Directors has no mandatory obligation to take voting results into consideration. While some research does suggest auditor dismissals increase as the proportion of shareholder votes against ratifying the auditor goes up, it is important to note that ratification votes are non-binding and auditor changes can occur for reasons other than shareholder votes.
With that said, of the companies with the top 10 highest votes against since 2017, 4 disclosed a subsequent auditor change: Scopus BioPharma, Nephros, Barnwell Industries, and Impinj.
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1. Data in this analysis came from the Audit Analytics Auditor Ratification database and is based on shareholder voting results for the ratification of independent auditors as disclosed in SEC filing 8-K’s Item 5.07 between January 1, 2017 and December 31, 2021. ↩
2. For more information, see our in-depth discussion of this research paper in a previous blog, Academic Spotlight: Auditor Ratification’s Impact on Audit Quality. ↩