What Does “Say on Pay” Say about Audit Risk?

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Abstract

In the first round of Dodd-Frank mandated “say-on-pay” voting in 2011, a majority of the shareholder votes in 36 firms rejected CEO compensation packages. Thirty-one of the 36 firms had negative proxy advisor recommendations. Relative to a control group, the 36 firms tend to perform poorly and have high CEO pay in the pre-vote period, and especially in 2010. We find that about 20 percent of the rejected firms also had income-decreasing restatements that impact the five-year period before the vote, compared to only three percent for a control group. The rejected firm sample also has weaker internal controls, as well as greater increases in audit fees in the year before the vote. Thus, the first round of voting highlights how audit risk can grow with the increased pressure to justify CEO pay.

Authors

• Terry Grant, University of South Alabama

• Jasmine Bordere, The University of Alabama

• Conrad Ciccotello, Georgia State University