A closer look at shareholder votes against auditor ratification – 2022
Among a variety of proposals, shareholder votes on auditor ratification remains a topic year-over-year during proxy season. The auditor ratification vote organized during the annual general meeting provides shareholders an opportunity to express their opinion about the external auditor of the company. Ideagen Audit Analytics analyzes trends in how shareholders vote every year.
Frequency of shareholder votes against ratification
Throughout the last four years, our analysis on shareholder votes reveals that, on average, nearly 98% of total votes are cast in favor of auditor ratification. Shareholder votes filed between January 1, 2020 and December 31, 2022, continued that trend for a fifth consecutive year. Votes against auditor ratification comprised nearly 2% of the total votes; abstained votes account for the remaining 0.4% of total shareholder votes cast.
We found that fewer than 5% of shareholder votes were cast against the auditor, 93% of the time for proposals made during 2020-2022. In comparison to last years analysis, this represents a three percentage-point decrease. In result, this means that the frequency of more than 5% of shareholder votes cast against auditor ratification has increased.
Between 2020-2022, there were 7,648 ratification proposals in which 0-1% of total shareholder votes were cast against auditor ratification. On the other hand, there were a total of 29 instances where more than 25% of total shareholder votes moved against ratifying the auditor.
Notably, two votes in 2022 saw more than 50% of shareholders cast votes against ratification, a very rare occurrence.
Highest shareholder votes against the auditor
Since 2018, there have been eight instances where more than 40% of a company’s shareholders voted against auditor ratification.
In 2022, there was an influx of high amounts of votes against auditor ratifications. Of the top 10 proposals with the highest rates of votes against auditor ratification since 2018, four were from 2022. Interestingly, Allied Gaming & Entertainment, Scopus BioPharma, Vicro MFG Corporation, and Barnwell Industries all subsequently changed auditors after the vote.
While shareholder votes only carry advisory power, academic research suggests that greater shareholder dissatisfaction with an audit firm is associated with higher audit quality, including fewer accounting misstatements and lower abnormal accruals. However, it is important to note that ratification votes are non-binding and auditor changes can occur for reasons other than shareholder votes.
Votes against in 2022
In 2022, there were 25 entities with more than 20% of shareholder votes cast against ratification. This is a 108% increase from 2021.
Circumstances differ drastically between companies, highlighting the unique nature of these shareholder votes. For example:
- Allied Gaming & Entertainment Inc had various issues including three CEO changes, going concern opinions and financial restatements, all within four years. The shareholders continued to express dissatisfaction with the auditor, even after the company changed auditors in 2022.
- In 2019, 2020 and 2022, at least 30% of shareholder votes were cast against auditor ratification during SPAR Group’s annual general meeting. Compared to 2019, the number of shareholder votes has doubled in 2022, amounting to 52% of shareholders votes against ratification. However, they have yet to change auditors.
- In 2022, roughly five million shareholder votes were cast against Virco MFG Corporation‘s Big Four auditor. In 2023, the company engaged a smaller auditing firm, Moss Adams.
S&P 500
Looking at the highest votes against auditor ratification among the Standard and Poor's 500 (S&P 500) in 2022, we see much lower rates. However, these amounts are certainly enough to trigger a red flag – especially among this group of large companies.
Moderna and Vertex Pharmaceuticals top the list, both with more than 20% of votes against auditor ratification. This coincides with a significant change in non-audit fees by their Big Four audit firm. Although these percentages are at a lower scale than the overall population, more than 20% of votes against auditor ratification is a significant metric for a large company.
A seasoned finance professional and CPA, Marie brings thirty years of extensive experience in accounting and auditing to her role as Accounting Research Manager at Ideagen. At Ideagen, Marie leads the research team, develops content and is a subject matter expert for the Ideagen Audit Analytics and Ideagen Disclose product lines.
Marie specialized in transforming acquisitions of private companies into public company entities. She developed accounting teams, financial reporting, controls, financial modeling, Lean based process optimization and led ERP implementations after acquisition. As a member of divisional management teams, she was integral in strategic and operational decision making for the business lines. Having led not only the accounting teams, but diverse areas such as Information Technology, Actuarial Risk Management and Human Resources, Marie has a unique perspective. Notably, early in her career she spent ten years in the audit practice of PwC, where she managed audits of SEC registrants, international subsidiaries and closely held private entities in manufacturing, software, consumer products and services.
