More Investors Are Voting Against Big Companies’ Auditors

The votes are not binding and the numbers are small. But shareholders are pushing back against what they see as shoddy accounting and the possibility that lucrative extra work is eroding the independence of the audit

In April, about 24% of investor votes at Moderna were cast against Ernst & Young as its auditor. That rejection rate was less than the 35% of General Electric investor votes to dump auditor KPMG at the 2018 shareholders meeting. GE subsequently hired Deloitte.

Photo: philippe lopez/Agence France-Presse/Getty Images

A growing number of investors are voting against companies’ auditors, possibly signalling dissatisfaction with their services and concern over conflicts of interest.

Shareholders vote annually on major company matters such as executive compensation, the selection of board directors and whether to confirm an auditor for another year. While nonbinding, the votes are an important gauge of investor sentiment.

Opposition to the choice of auditor at big businesses has been creeping up in recent years, though from a low level. Still, the votes suggest a rising distaste among investors over the quality and independence of audit work.

About 3.8% of investors voted against the ratification of S&P 500 companies’ auditors this year through May 19, almost triple the proportion of a decade earlier, according to research firm Audit Analytics, and up from 3.1% last year.

Drugmaker Moderna Inc., which this month ousted its new chief financial officer after one day on the job, in April met shareholder opposition to Ernst & Young, its auditor since 2014. About 24% of votes were cast against EY, the highest rejection rate of an auditor at an S&P 500 company since 2018. The year before, only 1.6% of votes were cast against EY.

Other companies, such as tool maker Stanley Black & Decker Inc. and software firm PTC Inc. in recent months also faced resistance from shareholders, with 11.8% and 10.7% of votes going against their auditors of choice, EY and PricewaterhouseCoopers respectively.

SBD didn’t respond to requests for comment, while PTC, EY and PwC declined.

The recent changes in shareholder sentiment will likely cause companies and their audit committees to consider switching auditors, said Jonathan Shipman, associate professor of accounting at the University of Arkansas.

“If historically there’s been 1% against the auditor and all of a sudden it jumps up to 7% or 8%, that’s a big change,” Mr. Shipman said.

The growing opposition comes at a time of rising investor engagement and pressure on companies to address environmental, social and governance issues. More investors this year have protested big companies’ executive-compensation packages than last.

Proxy-advisory firms Glass, Lewis & Co. and Institutional Shareholder Services Inc. recommend voting against auditor ratification in cases when audit firms charge excessive fees for nonaudit services or provide poor accounting practices, among other reasons. ISS defines nonaudit fees as excessive if they surpass audit fees, audit-related fees and tax compliance fees combined.

Companies in the S&P 500 paid an average of $10.4 million in audit fees last year, up 0.8% from the prior year and up 35.9% from 2011, Audit Analytics said.

A lack of support from large institutional investors and proxy advisers is a “pretty serious warning sign” regardless of the percentage, said Paul Rose, a corporate law professor at Ohio State University.

ISS and Glass, Lewis advised shareholders to vote against Moderna’s proposal to ratify EY because of the amount Moderna spent on nonaudit fees, indicating a possible conflict of interest.

The amount EY has charged Moderna for tax and other consulting work has climbed steeply in recent years: Fees hit $4.1 million last year, compared with $1.99 million in 2020 and just under $300,000 in 2019, filings show. For 2021, these fees surpassed audit fees of $2.7 million, which were up from $2.1 million in 2020 and $1.7 million in 2019.

Audit firms are prohibited by the Securities and Exchange Commission from performing services for clients that could impair their objectivity. Many companies buy advisory or other nonaudit services from their audit firms, raising concern that the additional income could lessen the auditor’s impartiality in reviewing the company’s financial statements.

There is also no U.S. requirement for companies to change audit firms after a certain number of years. The average tenure for auditors at S&P 500 companies is 32.7 years, Audit Analytics said.

“When management and the auditor enter into significant financial relationships unrelated to the audit, the independence of the auditor and the integrity of the company’s financial statements can be compromised,” said Brianna Castro, a senior director of research at Glass, Lewis. In those situations, an audit firm might be less likely to ask tough questions for fear of losing business, she said.

Asked whether Moderna would consider changing its auditor, a spokesman said its audit committee is confident EY remains independent and has taken steps to limit future spending on nonaudit services. These measures include hiring additional personnel and engaging alternative service providers, the spokesman said. EY declined to comment.

The increase in spending on nonaudit services was tied to the expansion of the company’s business in response to the pandemic. Moderna concluded the auditor’s independence wouldn’t be adversely affected, the spokesman said. “Spending at this level will not be repeated,” he added, declining to comment further.

Amy Borrus, executive director of the Council of Institutional Investors, in a 2019 photo.

Photo: Ralph Alswang for The Wall Street Journal

High consulting fees are a red flag for some institutional investors, said Amy Borrus, executive director of the Council of Institutional Investors, which represents pension funds and other large money managers.

“If an audit firm is raking in considerable consulting revenues from a company it audits, that could impair the firm’s impartial judgment on the audit,” Ms. Borrus said.

Other Moderna investors, including BlackRock Inc., T. Rowe Price Group Inc. and nonprofit Oxfam America, declined to comment on the company’s auditor.

Auditor independence is also coming under more scrutiny from U.S. regulators, with the SEC investigating potential conflicts of interest at the Big Four accounting firms Deloitte, EY, KPMG and PwC and several midtier firms. The probe is looking at whether consulting and other nonaudit services sold by the firms undermine their ability to independently assess their clients’ financials.

EY is weighing a global split of its audit and advisory businesses, the WSJ reported on Thursday.

The SEC declined to comment. Deloitte is a sponsor of CFO Journal.

General Electric’s office in Boston.

Photo: gunther/EPA/Shutterstock

In 2018, 34.9% of General Electric Co. ’s investor votes went against KPMG, its auditor for over 100 years, the highest level of opposition among S&P 500 companies in the past decade.

In 2020, GE replaced KPMG over concerns on its accounting practices, which were being investigated by the SEC. That same year, the Boston-based conglomerate agreed to a $200 million settlement after the securities regulator probed GE’s need for increased reserves in its insurance operations and its accounting for long-term service agreements.

Deloitte, its new auditor, was supported by 99.5% of investors at its shareholders’ meeting on May 4. GE declined to comment beyond its filings.

If votes against auditors continue to rise, more companies will likely make a switch, Mr. Shipman said.

“Companies don’t like being in the news for bad reasons, and if it’s as simple as changing the auditor and that makes a bunch of people happier, they would probably do that,” he said.

Write to Mark Maurer at

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