Nonaudit services and shareholder ratification of auditors

The SEC changed its rules recently and required companies to disclose information about audit and nonaudit fees, asserting that such data would be useful for shareholders in making their investment and voting decisions. An analysis of shareholder votes at 172 of the Fortune 1000 companies indicates that the proportion of shareholders voting against or abstaining from ratification of the external auditor is positively associated with the level of the nonaudit fee ratio. The results provide empirical support to the SEC's assertion that disclosure of fees paid to the auditor can influence shareholders' voting decisions. However, even in companies with very large nonaudit fee ratios (exceeding 4.0), the average shareholder ratification rate was about 97 percent. This suggests that a large majority of shareholders did not perceive auditor independence to be impaired, even in the presence of relatively high nonaudit fees.