Seeking Good Governance, Investor Pushes Auditor Rotation

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By Che Odom

Feb. 3 — A Canada-based investment manager would like to see public companies rotate external audit firms periodically, arguing that it is an essential governance measure that would lead to positive financial results.

“Governance is key to the protection of shareholder value, and the annual audit is a key process intended to protect shareholder interests,” Ian Quigley, portfolio manager and lead consultant at Qube Investment Management Inc., told Bloomberg BNA in a Feb. 3 interview.

This is the first year that Qube has pushed the issue of auditor engagement, submitting proposals with 28 companies. That initiative may be the largest effort in recent years to use shareholder proposals in an attempt to force companies to consider switching audit firms periodically, according to a search of Securities and Exchange Commission filings.

Other investors, including the United Brotherhood of Carpenters Pension Fund, have submitted related proposals in prior years.

PCAOB Effort

Qube's resolution comes a year after the Public Company Accounting Oversight Board said it would no longer pursue rulemaking on a proposal that would set limits on the number of years an audit firm may engage with an issuer.

The fate of a number of Qube's proposals is already known.

The SEC's Division of Corporation Finance last month granted no-action relief to 3M, ACE Ltd., DuPont, Intel and other companies on Qube's audit firm proposals.

That means the companies can exclude the measure from their proxy materials without the division recommending enforcement action against them.

Attempts to reach the companies for comment Feb. 3 were not successful.

Technical Objections

Quigley said the companies countered his firm's proposals with “scathing” technical objections, questioning, among other matters, Qube's proof of stock ownership and its eligibility to “represent investors in this manner.”

“It is shameful that an investor needs to hire a legal specialist to prove $2,000 of ownership has been held for one year, or to fight the often dizzying pushback that comes with a simple request for consideration,” he said.

When it comes to engagement with an external auditor, shareholders rarely challenge management, Quigley continued.

“Shareholders are asked to elect an auditor each year who will independently review and report on the results and activities of the corporation,” he said. “It is the board that places the audit firm on the proxy for the vote, but each time, year after year, decade after decade, it is often the exact auditor.”

While the PCAOB appeared to be leaning toward mandatory term limits for auditors, Qube's resolution would have called on directors to put up for bid the company's contract with the external audit firm every eight years.

Quigley said he was striving for “compromise and practical change” in developing an auditor-engagement resolution.

When deciding which companies to target, Qube looked at those in its portfolio that hadn't changed or formally reviewed the audit-firm engagement in the past 10 years or since inception, he said.

“Objections aside, results are positive when the audit rotates,” he added.

Proxy Access

Last year, Qube engaged with companies such as 3M, Accenture and United Technologies on a number of topics, including proxy access, Quigley said.

3M and United Technologies adopted proxy access last year.

Accenture's shareholders met Feb. 3, and proxy access was on the ballot. The board recommended voting for the measure, but results were not immediately available Feb. 3.

To contact the reporter on this story: Che Odom in Washington at

To contact the editor responsible for this story: Yin Wilczek at

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