Audit committee composition and shareholder actions: Evidence from voting on auditor ratification

Recent actions related to audit committees by the Securities and Exchange Commission (SEC) reflect the Commission's belief that the composition of audit committees can influence the monitoring of auditor-client relationships, and thereby influence shareholder perceptions about auditor independence and overall audit performance. The SEC has also suggested that shareholder perceptions about the auditor will influence shareholder actions, including voting on ratifying the auditor selected by management. This paper examines the association between audit committee composition and shareholder actions, using auditor ratification data from 199 companies. The results indicate that, in companies with high nonaudit fee ratios, shareholders are less likely to vote against auditor ratification if the audit committee has solely independent directors. These results provide empirical support to the assertions of the SEC and others that audit committee composition can impact investors' perceptions and actions. However, the low percent of votes against auditor ratification indicates that the results must be interpreted with caution.