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Weak Internal Controls, Auditor Fees, and Shareholder Dissatisfaction
Zhongxia (Shelly) Ye,
Kennesaw State University
Jagan Krishnan, Temple University
ABSTRACT. SOX Section 404 requires companies to include managements' assessment of and the auditor’s opinion on the effectiveness of the internal control in their annual reports. We examine whether these disclosures affect shareholders' voting decisions in director elections. We find that an adverse auditor's opinion on internal control is positively associated with shareholders' dissatisfaction toward the manager directors, but not toward the board of directors or the audit committee. However, shareholders react more strongly in the election of directors when the weaknesses are accompanied by higher total auditor fees, when the weaknesses were not previously reported under Section 302, or when the auditor's report is delayed. Also, regardless of the presence of material weaknesses, nonaudit services, total auditor fees, and lack of independence of directors are positively related to shareholders' dissatisfaction toward at least two groups of directors.
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