From inside the profession, or even working closely besides it, it's sometimes hard to imagine that there's anyone who doesn't have at least a cursory understanding of what Sarbanes-Oxley meant for the profession, or why the debate over Section 404 continues years after its implementation.
The truth is, to even begin trying to offer up a cursory description of what the heck internal controls are all about, is usually more than enough to see the eyes of most audience members begin to glaze over.
That's part of the reason a recent report from San Francisco research firm Glass Lewis & Co. makes so much sense. The July 27 report, "Mum's the Word," examined auditor-turnover trends and focused on building a case for why both companies and auditors should reveal the reasons a company dismisses an auditor, or an auditor resigns from an engagement.
According to Glass Lewis, in 2005 more than 1,400 public companies changed their independent accounting firms, including 77 companies that changed auditors at least twice. And nearly three-quarters of the changes were by companies that did not provide a reason for making a switch. The report argues that the Securities and Exchange Commission would be doing investors a tremendous favor if it revised the current Form 8-K filing rules and required companies to disclose the specific reasons for auditor changes in all instances. And going a step further, former auditors should be required to tell investors whether they agree with the company's publicly disclosed reasons.
For a profession that wants to portray itself as all about transparency, there's really no choice but to agree. In recent months, Deloitte Touche Tohmatsu chief executive William G. Parrett and Grant Thornton LLP chief executive Ed Nusbaum have both spoken out loudly in favor of making the change.
Unlike the debate over the costs and benefits of imposing some form of mandatory auditor rotation, there's little reason not to support revealing the reasons behind an auditor change -- or at least, little chance of fighting such a change without looking like a company or accounting firm has something to hide. The Glass Lewis report draws a parallel between the murky legal entities that Enron Corp. used to hide its debts, and the scandal at Computer Associates International Inc., wherein bloated employee-stock-options plans brought down several executives at the company. In the case of CA, it took seven years after a Big Four firm, Ernst & Young, was dismissed from the engagement, before the public heard the details behind the change.
It only makes sense when hiring in the real world to check references and look into a candidate's background and work history. There's no reason investors shouldn't expect the same openness and honesty from public companies, or the auditors paid to keep watch over them. And at that most basic level, that's something that everyone inside, and outside, the auditing profession can grasp.
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