We examine the effect of unfavorable PCAOB inspection reports, which contain audit deficiencies related to GAAS and/or GAAP violations, on shareholder voting for the auditor ratification. We further investigate whether shareholders likely vote against ratification for the auditors receiving deficiency reports in a weak corporate governance environment.

Overall, we do not find evidence that shareholders vote against auditor ratifications when their auditors receive unfavorable inspection reports. However, we find some evidence that shareholders cast their votes against the ratifications of auditors receiving unfavorable inspection reports when the corporate governance is weak, as proxied by CEO duality and a low level of board diligence.

Our results suggest that shareholders seem not to incorporate inspection reports as a potential proxy for auditor quality in their vote decisions on auditor ratification.

By: Myungsoo Son (California State University, Fullerton – Department of Accounting), HakJoon Song (California State University, Dominguez Hills), and Youngkyun Park (University of Idaho – College of Business & Economics)

See the entire paper from Accounting and the Public Interest, Vol. 17, No. 1, 2017 here