PCAOB Inspection Reports and Shareholder Ratification of the Auditor

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Abstract

We examine the effect of unfavorable inspection reports, which contain audit deficiencies related to GAAS and/or GAAP violations, on shareholder voting for the management proposal regarding auditor ratification. We further investigate whether GAAP-related audit deficiencies differ from GAAS-related audit deficiencies, as reflected in the shareholders votes, given the argument that the former is more serious than the latter. Overall, we do not find the evidence that shareholders are more likely to vote against auditor ratification when the auditors of the firms receive inspection reports containing audit deficiencies. Moreover, we do not find the evidence that inspection reports containing GAAP departures differ from those containing GAAS deficiencies. Shareholders seem not care about inspection reports containing audit deficiencies. However, we find some evidence that shareholders are more likely to vote against the ratifications of the auditors receiving unfavorable inspection reports if their corporate governance is weak, proxied by CEO duality and low proportion of audit committee members with financial expertise.

Authors

• Hakjoon Song, The University of Akron

• Myungsoo Son, California State University, Fullerton