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

Outside of companies that have had a large accounting scandal, auditor reappointment proposals can generally rely on 95% or more support from shareholders.

Data drawn from Insightia’s Voting module shows that so far this year, some 29 auditor ratification proposals have received less than 90% support from shareholders at annual meetings in the U.S. These 29 auditor proposals received an average of 82.9% support from shareholders.

In comparison, the whole of 2021 saw 22 auditor ratification proposals receive less than 90% support.

Investors have backed S&P 500 auditors just 80% of the time this year, down from 94% a decade ago according to Insightia Voting data.

Independence concerns

On June 7, biotech company MeiraGTx Holdings met 38.3% opposition to the reappointment of Ernst & Young (EY), its auditor since 2016. The year before, 29.1% of votes were cast against EY, and in 2020 just 0.8%.

Proxy voting advisors Glass Lewis and Institutional Shareholder Services (ISS) recommend voting against an auditor when it charges excessive fees for non-audit services.

Legal & General Investment Management (LGIM) also holds this view, and voted against the reelection of EY as MeiraGTx’s auditor. The investor noted in its voting rationale that “excessive” non-audit work is likely to “bring into question the independence of their judgment.”

There were also major audit ratification voting rebellions at funeral organizer Carriage Services and investment company Firsthand Technology Value Fund, where 31.9% and 27.7% of shareholders opposed Grant Thornton and Tait, Weller & Baker, respectively.

Regulator involvement

An existing Securities and Exchange Commission (SEC) investigation is looking into the increasing reliance by the big accounting firms on sales of consulting and tax services, which offer higher margins and greater growth potential than their core audit business.

According to data provider Monadnock Research, the big four – Deloitte, EY, KPMG, and PricewaterhouseCoopers (PwC) – earned a combined $115 billion from consulting and tax services in 2021, more than double their $53 billion from audits.

Furthermore, between 2011 and 2021, the four firms grew their combined global revenues from consulting and tax work by 96% compared to just 17% growth in audit-fees over the same period. As part of the investigation, the SEC is examining several auditors including BDO USA, which had helped two top executives of electric-vehicle startup Electric Last Mile Solutions to “create and structure” share purchases at a significant discount to the market value at the time.

The car maker said it took an internal probe to reveal that BDO was advising its Chairman Jason Luo and CEO James Taylor, both of whom later resigned under separate investigation by the SEC.

Senior SEC officials have publicly warned accounting firms not to “creatively apply the [independence]” rules,” and said sanctions may need to increase to deter rule breaking.

Not just an American problem

In the U.K., similar concerns about poor audit quality have resulted in a number of reforms. For example, the big four firms are considering splitting their audit operations from the rest of their activities in the region. The breakups were proposed in response to demands by U.K. regulators following a string of accounting scandals at construction company Carillion and retailer BHS.

In May, KPMG was ordered to pay a 14.4 million pound ($17.7 million) settlement after former staff forged documents and misled the Financial Reporting Council (FRC) over audits for companies including Carillion.

Similarly, the auditors BHS, PwC, were fined 6.5 million pounds ($8 million) after signing off accounts the FRC called “incomplete, inaccurate, and misleading.”