Study Backs Shareholder Ratification of Audit Firms

A new academic study finds that when public companies give their shareholders a vote on the selection of an external auditing firm, they are less likely to make financial restatements than those that don’t.

The study, which appears in the latest issue of The Accounting Review, published by the American Accounting Association, found that only 5.1 percent of companies that give shareholders a say in auditor selection have to restate their results, compared to 8.1 percent who don’t allow a shareholder vote. The difference is even more dramatic—3.5 percent compared to 6.1 percent—for restatements that are serious enough to lower the price of the company’s stock, as measured by the five-day cumulative abnormal return surrounding the restatement announcement date.

Firms that forego shareholder ratification are nearly 75 percent more likely than others to have to issue restatements serious enough to have a negative effect on their stock price.

Read : “Study Backs Shareholder Ratification of Audit Firms” by Michael Cohn

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