Shareholders’ Perception of Auditor Type and Timing of Auditor Engagement: Evidence from Auditor Ratification

Abstract

Many companies present their selected auditor to shareholders for ratification. In this study, we use auditor ratification voting results to examine whether shareholders view the type of auditor and the timing of the engagement as indicative of audit quality. The auditor ratification literature has yet to explicitly examine these research questions. Our study is unique in that we focus on the auditor switch setting and test how shareholders view a newly hired auditor. We find that shareholders are less likely to approve a non‐Big N auditor than a Big N auditor. We also document that shareholders view late auditor engagements (i.e., during or after the fourth quarter) more negatively, consistent with the argument that late appointment of new auditors should be viewed with caution. The timing effect is particularly acute for non‐Big N firms; however, shareholders do not seem to mind late engagements of Big N auditors.

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“…Over the years, researchers have addressed the issue of audit quality in numerous articles. Howard et al (2023) offer a fresh perspective by examining shareholder ratifications of newly appointed auditors. They show that Big N auditors are perceived favourably, even when their appointment is at the end of the year, whereas non-Big N auditors are not perceived favourably at any time, and even less so as the end of the year approaches.…”