Canadian SRI investor Qube makes unsuccessful SEC bid on US auditor rotation

Qube says rotation is necessary to prevent a conflict of interest – SEC disagrees

Canada’s Qube Investment Management has filed shareholder proposals at 10 leading US firms, among them 3M, Colgate-Palmolive and DuPont, calling on them to rotate their auditors every eight years to conflicts of interest.

The attempt was spearheaded by Ian Quigley, Qube’s Senior Portfolio Manager who sits on the Principles for Responsible Investment’s Investor Engagements Advisory Committee. He was a candidate for the PRI’s Advisory Council in 2013.

Based in Edmonton, Qube specialises in socially responsible investment (SRI) funds for high-net worth individuals. Its latest campaign for auditor rotation follows an observation that numerous US firms keep using the same firm to certify their financial accounts.

“While the concept of auditor rotation is less common in North America, the European Union has moved forward with audit rotation rules and regulations,” Qube notes in the correspondence.It says, “excessive tenure creates a potential conflict of interest that is not in the shareholder’s best interest”.

It reckons that, over time, there is risk that the auditor will become conflicted between maintaining a good relationship with its client and questioning corporate financial statements on behalf of shareholders.

It wants the targeted firms to hold a shareholder vote on its proposal that they conduct an auction for a new auditor every eight years.

But Qube’s 10 proposals were ultimately rejected. In answering so-called “no-action” requests from the companies, the Securities and Exchange Commission (SEC) agreed that they could be excluded from the proxy materials as they affected “ordinary business operations.” The relevant SEC Rule is 14a-8(i)(7).