Non-Audit Services and Shareholder Ratification of Auditors
Posted: 30 Sep 2002
The SEC changed its rules recently and required companies to disclose information about audit and non-audit fees. The Commission asserted that such data would be useful for shareholders in making their investment and voting decisions. An analysis of shareholder votes at 172 of the Fortune 1,000 companies indicates that the proportion of shareholders voting against or abstaining from ratification of the external auditor is positively associated with the level of the non-audit fee ratio. The change in shareholder votes (from the period before the required disclosure) also is positively associated with the relative magnitude of non-audit fees. These results provide empirical support to the SEC's assertion that disclosure of fees paid to the auditor can influence shareholders' voting decisions. However, even in companies with non-audit fee ratios exceeding four, the average shareholder ratification rate was about 97 percent. This suggests that a large majority of shareholders do not perceive auditor independence to be impaired, even in the presence of relatively high non-audit fees.
JEL Classification: M49, G38
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