A closer look at shareholder votes against auditor ratification

Sarah Keohane Date published: Jun 17, 24

Among a variety of proposals, shareholder votes on auditor ratification remains an important 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 six 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, 2021 and December 31, 2023, continued that trend for a sixth consecutive year. Votes against auditor ratification comprised 1.7% of the total votes; abstained votes account for the remaining 0.4% of total shareholder votes cast.

We found that in 92% of proposals made during 2021-2023, less than 5% of votes were cast against auditor ratification. In comparison to last year’s analysis, this represents a one percentage-point decrease. This means that the frequency of more than 5% of shareholder votes cast against auditor ratification has increased.

Between 2021-2023, there were 7,954 ratification proposals in which 0-1% of total shareholder votes were cast against auditor ratification, constituting 61% of all proposals. On the other hand, there were a total of 25 instances where more than 25% of total shareholder votes moved against ratifying the auditor.

Proposals made between 2021-2023 saw increases of 13% or more in every frequency category with greater than 5% of votes cast against auditor ratification compared to 2020-2022. Proposals with 5-10% votes against had the biggest frequency increase, jumping from 688 proposals between 2020-2022 to 833 between 2021-2023.

Highest shareholder votes against the auditor

Since 2019, there have been 10 instances where more than 40% of a company’s shareholders voted against auditor ratification.

Two of the top 10 highest votes against auditor ratification over the past five years occurred in 2023. Biote, a medical training and certification business focused on hormone optimization, went public in May 2022 after merging with Haymaker Acquisition Corp. Deloitte was the auditor of Biote prior to the acquisition and replaced Marcum, Haymaker’s external auditor at the time, as a result of the merger. Since going public, Biote has reported a financial restatement as well as ineffective internal controls. In May 2023, over half of shareholder votes were cast against ratifying Deloitte as the company’s independent auditor for the fiscal year (FY) 2023. However, Deloitte is still the company’s auditor as of today.

Wheeler Real Estate Investment Trust also made the top 10 list for their vote to ratify Cherry Bekaert as the company’s independent auditor in May 2023. For that proposal, 40% of shareholder votes were cast against ratifying the auditor. Interestingly, the company also had a significant portion of votes cast against ratifying Cherry Bekaert the previous year in June 2022 with 36% of votes cast against the proposal. Cherry Bekaert is still the company’s auditor today and has been since 2011.

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 2023

In 2023, there were 17 companies with more than 20% of shareholder votes cast against ratification. This is a 32% decrease from 2022.

Circumstances differ between companies, highlighting the unique nature of these shareholder votes. For example:

• Cuentas Inc. had various issues including multiple executive changes, going concern opinions, internal control issues and late filings, all within four years. The shareholders continued to express dissatisfaction with the auditor, even after the company changed auditors in early 2023.
• After multiple years of nearly unanimous votes in favor of ratifying Deloitte as the company’s auditor, Creative Realties Inc. saw nearly 36% of shareholder votes cast against ratifying Deloitte in June 2023. After the vote, the company received a going concern opinion for FY2023 and consequently changed their auditor to Grant Thorton in March 2024.
• Since November 2022, Welsbach Technology Metals Acquisition Corp. has had three late filings due to the company’s auditor needing additional time to review the financial statements. The company has only voted on auditor ratification one time in March 2023 with 23.6% of votes cast against ratifying UHY as the company’s auditor.
  
  

S&P 500

Looking at the highest votes against auditor ratification among the Standard and Poor's 500 (S&P 500) in 2023, we see much lower rates. However, these amounts are certainly enough to trigger a red flag – especially among this group of large companies.

Stanley Black & Decker and PTC top the list, both with 12% of votes cast against auditor ratification. This is not the first year Stanely Black & Decker has seen significant votes against ratifying Ernst & Young (EY) as their independent auditor. In 2020 and 2021, more than 5% of shareholder votes were cast against auditor ratification. That figure jumped up to 11.8% in 2022 and increased again to 12.2% in 2023. Shareholder dissatisfaction with EY continues with 12.3% of votes being cast against ratifying EY as the company’s auditor during their vote in April 2024. Although shareholders seem to be increasingly dissatisfied with EY, they are still the company’s auditor today.

PTC Inc., a Massachusetts-based computer software and services company, has also seen multiple years of auditor dissatisfaction among shareholders.  In 2021, nearly 6% of shareholder votes were cast against ratifying their independent auditor, PricewaterhouseCoopers (PwC). The percentage of votes against ratifying PwC increased to 10.7% in 2022 and again in 2023 to 12%. PwC remains as PTC’s auditor even after receiving another 10.1% of votes against auditor ratification for their February 2024 proposal.

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