It's time for public companies to begin disclosing the reasons behind an auditor change, a new report from Glass Lewis & Co. argues.
The research firm, which works with money managers and other large investors, issued a report last week, "Mum's the Word," which examines auditor-turnover trends. According to the firm, in 2005 more than 1,400 public companies changed their independent accounting firms, including 77 companies that changed auditors at least twice. Nearly three-quarters of the changes were by companies that did not provide a reason for making a switch.
"We believe the [Securities and Exchange Commission] would do investor will be revising its Form 8-K filing rules to require companies to disclose the specific reasons for auditor changes in all instances," wrote financial research editor Jonathan Weil, in the paper's introduction, which focuses on a number of scandals that better auditor-swap disclosures might have revealed earlier. Weil also suggested that former auditors should be required to tell investors whether they agree with the company's reasons.
The top three reasons companies did cite for changing auditors in 2005, were: management changes (6.3 percent), Sarbanes-Oxley requirements (4 percent), and fee discrepancies or company reductions (3.2 percent). Companies were most likely to provide no reasons for auditor changes when they left one of the Big Four.
The report also makes a case for mandatory auditor rotation, noting that between 2003 and 2005, about 4,000 companies -- roughly one-third -- changed accounting firms, with the majority of the work being picked up by non-Big Four firms. About 40 percent of the time, it was an auditor resigning that led to a switch.
"There's nothing in the rules that prevents companies and auditors from doing these things now," Weil said. "The reality ... is that many companies try to get by with only the minimum requirements when it comes to financial reporting."
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