Auditor Changes – More Common Than You Think

Since 2002, more than 6,500 public companies have changed auditors.  Of these, 79 percent were public companies with a market cap under $75.0 million.  The CPA Journal recently revealed a study that looked at the impact of these changes to determine whether the historical stigma surrounding them has disappeared.
 
Over the past two years, more than 1,000 companies who changed auditors did not disclose a reason for the change (the SEC does not mandate disclosure for this type of event).  The two most common reasons cited, when companies did disclose the reason for the change, were audit firms’ mergers and the public company’s change in control.
 
Not surprisingly, it was found that the biggest switch has been to smaller accounting firms, given their lower cost and often better fit with the issuer.  However, it was also discovered that in 2006, companies audited by smaller firms had a restatement rate of 13 percent versus 9 percent for those audited by the Big Four.
 
What does this all mean for investors?  Changing auditors can provide investors with a fresh look at the company by a new set of eyes.  In 2006, 27 percent of the issuers that changed auditors restated their financials within one year, compared with 10 percent of all public companies that restated their financial results.
 
Whatever the reason or outcome, transparency should be the ultimate goal of all public companies.  So, when changing auditors, consider telling investors why you made the switch.

— Laurie Berman, Senior Vice President, lberman@pondel.com