June 29, 2021

Auditor Ratification: “No” Votes On The Rise

According to this Audit Analytics blog, “no” votes on auditor ratification proposals rose in 2020. Now, before we get carried away here, let’s start with the fact that support for these proposals is generally overwhelming – from January 1, 2018 to December 31, 2020, an average of 98% of votes were cast in favor of ratification.  Still, these excerpts from the blog indicate that’s not the whole story:

– The occurrence of shareholders voting in large numbers against auditor ratification has been increasing. Over the last three years, there have been four instances when more than 40% of a company’s shareholders voted against ratification; three of those votes occurred in 2020.

– In 2020, there were 13 entities with more than 20% of shareholder votes cast against ratification. SPAR Group [SGRP], LM Funding America [LMFA], and Barnwell Industries [BRN] top this list, with more than 42% of votes against auditor ratification.

– Both SPAR Group and Barnwell Industries had previous votes where shareholders voted in large quantities against the company’s auditor. In 2019, 30.85% of SPAR Group’s shareholders voted against ratification. For Barnwell Industries, over 5% of shareholders voted against the company’s longstanding auditor in six of the last seven years. Worth noting, Barnwell Industries opted to change auditors in 2020.

Among the S&P 500, the blog says that incidence of no votes on ratification proposals is much lower. The blog includes a list of the 10 highest votes against ratification among the S&P 500, and notes that UDR (14%) and GE (11%) topped the list this year. UDR and GE were the only members of the S&P 500 with greater than 10% negative votes, and the 10th company on the list, Masco Corporation, received only a 7% vote against ratification.

Those numbers may seem low, but given the traditional levels of support for auditor ratification proposals, the blog says they are enough to “trigger a red flag.” So what do companies do in response to this “red flag”? While it is still rare for companies to change auditors in response to a large negative vote, that doesn’t necessarily mean that companies and their auditors don’t take notice. For instance, in an earlier blog, Audit Analytics cites academic research indicating that a high level of shareholder dissatisfaction with auditors leads to better audit quality.

John Jenkins