Do Auditor Ratification Results Matter to Auditors? First Evidence from a Mandatory Ratification Setting

Abstract

This paper empirically examines the impact of shareholder ratification of auditors (SRA) voting results on audit fees in a mandatory and binding ratification setting (i.e., Germany). Motivation for our study comes from the widespread implementation of SRA in Europe. Furthermore, it addresses calls for research on the effect of mandatory SRA voting results and on SRA outside the US. We obtain three main findings: (i) Big 4 and Non-Big 4 auditors respond differently to large shareholder dissent, (ii) Big 4 audit fees are approximately 15 percent higher following an economically significant magnitude of negative votes on auditor ratification and (iii) respective audit fee increases are associated with higher audit report lag. Based on these results, we conclude that (i) the different response of Big 4 and Non-Big 4 auditors can be attributed to the relevance of shareholder dissent, (ii) Big 4 auditors try to remedy unfavorable SRA voting results by engaging in additional audit effort and (iii) this additional audit effort most likely relates to additional endeavors in audit service quality in order to meet the needs of the audit committee. Our study is, to the best of our knowledge, the first to examine how auditors respond to SRA voting results in a mandatory and binding ratification setting.