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Voting on Auditor Ratification by Shareholder Type: Impact of Institutional Shareholder Dissent on NAS Fees and Audit Quality

Voting on Auditor Ratification by Shareholder Type: Impact of Institutional Shareholder Dissent... Institutional investors have a better understanding of corporate performance than non-institutional investors, and their presence tends to improve the overall governance mechanism of a company and discipline top management against taking self-serving or myopic decisions. In this study, we examine shareholder voting patterns on auditor reappointments in Indian companies and examine whether institutional shareholder dissent on auditor reappointment acts as a disciplining mechanism on subsequent auditor actions and leads to improvement in audit quality. Our results indicate that institutional shareholder dissent on auditor reappointment is positively related to relative magnitude of non-audit services (NAS) fees in the previous year. More importantly, we observe that auditors are sensitive to institutional dissent and respond by charging a lower amount of NAS fees and providing superior audit quality in the subsequent year to signal increased independence and objectivity. Similar results are not observed in the case of retail shareholders. Our findings reinforce the role of institutional shareholders as important monitors in the corporate governance process and call for regulation to mandate the participation of shareholders in the auditor appointment process. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png "Journal of Accounting, Auditing & Finance" SAGE

Voting on Auditor Ratification by Shareholder Type: Impact of Institutional Shareholder Dissent on NAS Fees and Audit Quality

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References (41)

Publisher
SAGE
Copyright
© The Author(s) 2023
ISSN
0148-558X
eISSN
2160-4061
DOI
10.1177/0148558x221142798
Publisher site
See Article on Publisher Site

Abstract

Institutional investors have a better understanding of corporate performance than non-institutional investors, and their presence tends to improve the overall governance mechanism of a company and discipline top management against taking self-serving or myopic decisions. In this study, we examine shareholder voting patterns on auditor reappointments in Indian companies and examine whether institutional shareholder dissent on auditor reappointment acts as a disciplining mechanism on subsequent auditor actions and leads to improvement in audit quality. Our results indicate that institutional shareholder dissent on auditor reappointment is positively related to relative magnitude of non-audit services (NAS) fees in the previous year. More importantly, we observe that auditors are sensitive to institutional dissent and respond by charging a lower amount of NAS fees and providing superior audit quality in the subsequent year to signal increased independence and objectivity. Similar results are not observed in the case of retail shareholders. Our findings reinforce the role of institutional shareholders as important monitors in the corporate governance process and call for regulation to mandate the participation of shareholders in the auditor appointment process.

Journal

"Journal of Accounting, Auditing & Finance" – SAGE

Published: Jan 1, 2023

Keywords: shareholder voting; auditor ratification; institutional investors; non-audit services; audit quality; discretionary accruals

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