10 Questions Shareholders Should Ask at Annual Meetings (Sorry, CFOs)


It’s once again “proxy season,” which means it’s time for annual shareholder meetings. Most attention these days is focused on matters relating to shareholder proposals, but the annual shareholder meeting represents a unique opportunity for shareholders to ask questions directly of board members, management, and external auditors. (Yes, external audit partners are usually at the meeting, sitting low in their chairs hoping that nobody notices their presence — and usually, no one does. That’s unfortunate; this is a rare opportunity for shareholders to interact directly with the auditors.)

Management generally attempts to maintain a strictly controlled agenda designed to make the entire event a rapidly paced blur, starting and ending before the attendees get settled in their seats and have an opportunity to actually participate. But I’m suggesting some questions that shareholders might ask after throwing a red flag on the floor to interrupt this tightly written script. Each question below will likely draw a quick frown from the CFO on the podium — a signal that you’re asking the right question.

Questions for the Auditors:

1. “Are there any items on your unadjusted error schedule because you thought the accounting was wrong but management disagreed with you? If so, please describe these items in detail and explain why you didn’t make the company correct the errors.”

Many people aren’t aware of this, but virtually every audit results in a list of errors in the accounting records that weren’t fixed by management in their public financial statements (generally based on the conclusion that the errors were not “material” to investors). If you want to identify the tough discussions and disagreements between management and the auditors, ask this one.

2. “Did you report any internal control ‘significant deficiencies’ to the audit committee this year? If so, please describe the deficiencies in detail and tell us why they weren’t called ‘material weaknesses’? Oh, by the way, did you initially conclude any were ‘material weaknesses’ and then later change your mind?”

The key here is that “material weaknesses” in internal controls must be reported to the public, but “significant deficiencies” do not have to be. How do management and the auditor decide which label to apply? Only by applying judgment. This is a tough call for the auditors, but if you want to know where the agonizing occurred, this question will provide the answer.

3. “Did you discuss any matters with the audit committee related to internal investigations of whistleblower matters? If so, what did the matter relate to, and what was the result of the investigation?”

There just might be a potentially nasty Foreign Corrupt Practices Act fine coming you don’t know about.

4. “Does the audit committee chair really understand complex accounting matters and internal controls? What are specific examples that support your answer?”

This will induce a number of sideways glances, but at least you might get some insight into any real qualifications for the job — or not.

5. “When you asked the CEO ‘what keeps you awake at night,’ what did he really say?”

This is a standard annual auditor question, and sometimes the CEO will actually give the auditors a straightforward answer.

Questions for the Audit Committee Chair:

1. “Did the audit partner call you directly to discuss any matters? I mean, other than in connection with normal, ongoing meetings. If so, what did the partner call you to discuss?”

That call only gets made if there is trouble coming for the company — likely an investigation into an accounting fraud.

2. “Who conducted the majority of fee discussions with the auditors this year — you or management?”

This might give you an opportunity to remind audit committee members about their responsibilities under the Sarbanes-Oxley Act. Many audit chairs could use it.

3. “Why is your audit committee report so boilerplate?”

In case you don’t know, this report is included in the proxy statement you received informing you about the shareholders meeting. Traditionally, these reports haven’t been very informative. That seems to be starting to change, with a lot of focus on audit committee disclosure and transparency these days. Is your audit committee paying attention?

4. “What does ‘COSO’ stand for?”

OK, kind of a trick question. But it goes to the issue of basic qualifications. (By the way, it stands for the Committee of Sponsoring Organizations of the Treadway Commission. This committee makes the rules for internal control structures.)

Questions for the CEO:

1. “Did you call the audit partner directly this year? If so, why? What did you discuss?”

This call only gets made to apply pressure to the audit partner for some reason. If it happened, find out why.

If shareholders have the courage to ask these questions, they might actually learn something meaningful about the company and turn the annual shareholders meeting into a useful investment of time.


About The Author

Jeff Johanns

Jeff Johanns is an accounting lecturer at the McCombs School of Business. He is a former U.S. Assurance Risk Management Leader...

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