Auditor Ratification in Light of Shareholder Dissatisfaction with the Audit Committee—Evidence from Germany

Abstract

SYNOPSIS Auditor ratification gives shareholders a voice in the auditor selection process. Although votes against auditor ratification primarily relate to the auditor, they also signal shareholder dissatisfaction with the audit committee that is responsible for recommending the auditor. In Germany, shareholders are required to separately vote on auditor ratification and, in addition, ratify the acts of the supervisory board (including the audit committee), allowing us to separately consider whether shareholder dissatisfaction is directed toward the auditor or the audit committee. We find that votes against audit committees’ acts (rather than votes against auditor ratification) are associated with a higher likelihood of subsequent auditor dismissal, suggesting that audit committees particularly respond to shareholder dissatisfaction when their own reputation is at stake. In addition, subsequent audit outcomes (i.e., audit report lag and modified audit opinions) appear to also be affected by shareholder dissatisfaction with the audit committee. Data Availability: Data are available from the sources cited in Appendix A. JEL Classifications: M4; M42; M48; G3; G39.