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Should Investors Pick the Auditor?

Having investors vote on outside auditors may lead to a higher-quality outcome

A report from the American Accounting Association sought to determine whether having shareholders have a say when picking an auditor actually had any impact on the cost and quality of the audit.

 

The group notes that the Sarbanes-Oxley Act addresses the topic of corporate governance and accountability, arguing that the chances of an auditor's assessment being swayed by the company's wishes if management "is responsible for hiring or firing the auditor and negotiating the audit fee."

In its investigation, the AAA determined that if shareholders hold a ratification vote to choose an auditor, the quality and price will both be higher.

This topic of conversation is not new. CFO magazine reported in June 2010 that the rate of shareholders sounding off about bringing in external accounting firms had increased this year, in response to a seemingly unrelated Securities and Exchange Commission rule.

As the source explains, that ruling actually addressed broker participation in director elections, banning their involvement unless their customers had a say in the decision.

"After the SEC approved the rule last summer, lawyers and proxy advisory firms predicted that companies would see a lower retail-vote turnout, prompting them to add routine matters to their ballots to reach a quorum," the magazine adds.