Two years ago, when my town was mulling a moratorium to suspend its rampant development, one outspoken resident (no, for once it was not me) urged that the job of drafting building and regulatory guidelines be put out to bid, in lieu of assigning it to a consulting firm that had been on retainer to the town for over 20 years.Incredibly, our supervisor said that in order to do that, the town, under some antiquated bylaw, would have had to publicly disclose why it was soliciting proposals. To me, that mandate didn't seem such a terrible ordeal, and it would lend a fresh coat of paint, so to speak, to a business relationship that, in my opinion, bordered on cronyism.
To abbreviate the story, the consulting firm, in its report, made a number of egregious errors when calculating the effect of overdevelopment on school and property taxes, subsequently sparking threats of litigation from developers and construction lobbyists.
I regale readers with this story because its foundation (no pun intended) mirrors the theme of a recent report released by proxy researcher Glass Lewis & Co., which urged public companies to begin to disclose the reasons behind changes in their independent accountants.
In a report titled "Mum's the Word," the San Francisco-based concern, which works with money managers and investors, put auditor turnover trends under a microscope and found that in 2005, more than 1,400 public issuers changed independent accountants and, of that number, 77 filers changed their auditors at least twice.
But what surprised me is that roughly three quarters of those who reported an auditor change did not, in their required regulatory filings, provide a reason for the change. If my math is correct, that's more than 1,000 companies.
As one who has pored over many 8-K filing summaries, I can attest to the fact that most filers don't share much information beyond disclosing the fact that the change in independent accountants was approved by their audit committee. If filers do disclose reasons behind an auditor switch, they usually stem from a change in top management at the company, client services prohibitions as a result of Sarbanes-Oxley, or audit fees.
Glass Lewis also dredges up the issue of mandatory auditor rotation, which was one of the original provisions in the corporate reform bill initially put forth by Sen. Paul Sarbanes, D-Md., before it was dropped as a point of compromise before being integrated with legislation drafted by Rep. Michael Oxley, D-Ohio. Currently, Section 203 of SOX requires a five-year rotation cycle for the external lead and reviewing audit partners.
The issue of auditor rotation has been kicked around for roughly 30 years, following the 1976 Metcalf Report, which was issued by the Senate and which criticized competition levels and recommended regular rotation. In 1994, the Senate Finance Committee considered and later passed on legislation that would have required auditor rotation.
Now, the pros and cons of auditor rotation are certainly fodder for future columns, but it veers slightly off the topic of enhanced disclosure regarding an auditor change. The truth is, under current reporting and filing guidelines, companies don't have to list the reasons behind a change of audit firms. But perhaps changing the current rules is something that should be looked into.
And sooner rather than later.
