Shareholder Isolation and the Regulation of Auditors

Abstract

This article posits the relative weakness of shareholders over other stakeholder groups (particularly management) in choosing and monitoring the corporation's auditor. Specifically, it argues that shareholders' right to appoint an auditor is ineffective since management controls the appointment process. The paper further contends that shareholders have few defined remedies against auditors and that the scope of the auditor's duty to shareholders is unclear. Together, these factors render shareholders almost powerless in the corporation's relationship with its auditors. The paper argues that greater auditor independence can be achieved if shareholders have an enhanced role in the selection, retention and monitoring of the firm's auditor; if auditor changes are initiated only by shareholders; and, if periodic auditor change is mandatory unless shareholders decide otherwise.

Note: This is an early draft of a paper that has been revised and will appear in University of Toronto Law Journal, Vol. 54, No. 1, 2004

Keywords: auditors, shareholders, rights, election, monitoring, corporation

JEL Classification: K22, M49, G34