Why do firms seek shareholders ratification of the independent audit function? The case of foreign cross‐listed companies in the United States

Abstract

Many factors influence why companies require routine auditor ratifications. In this study, we seek to examine factors that increase or decrease the likelihood of shareholders’ involvement in the ratification of the independent auditor's appointment for foreign cross‐listed companies in the United States. Foreign cross‐listed companies provide a unique opportunity to observe how country‐specific factors impact the auditor ratification vote decision and outcome. Our analysis shows that bank financing, the location of the cross‐listed firm's independent auditor (U.S.‐based vs. non‐U.S.‐based audit office), and non‐audit fee ratio as having the highest marginal effects on the probability of companies requiring their shareholders to ratify the auditor's appointment. We also examine how these factors influence the outcome of the vote. We find that several engagement and country‐specific factors also influence the outcome of the vote.