It’s easy to find news accounts of auditor changes. Sometimes the auditor resigns after losing confidence in management’s representations. Other times, the client has a legitimate complaint about the auditor’s services or fees. Many times, the explanation of the auditor change disclosed in the 8K is ambiguous.
I like to discuss Floyd Norris’s New York Times article in class because it raises the issue of “opinion shopping.” Allegedly, Surebeam sought Deloitte’s approval of its revenue recognition methods before deciding to hire Deloitte, and then felt betrayed when a different partner objected to Surebeam’s accounting.
“Auditor-Client Breakups Rise, While Disclosure Often Lags,” P. Plitch & L. Wei, Wall Street Journal (August 3, 2004): C3. Few clients reveal their reasons for changing auditors in their regulatory filings.
“Accounting Regulator Vows to Scrutinize Firings of Auditors,” Wall Street Journal (September 23, 2003). The PCAOB says it will examine auditor changes more closely. Charles Niemeier worries that too many companies switch auditors because they don’t like the answers they are getting.
Examples of Auditor-Client Disagreements:
“Grant Thornton Drops Chinese Chicken Company,” WebCPA (March 12, 2010). GT resigned Yuhe International audit after discovering control weakness and prohibited related party transactions.
“Overstock Hires New Auditor, Disses Previous One,” WebCPA (December 30, 2009). Overstock fired Grant Thornton claiming GT changed its mind when asking Overstock to restate its 2008 financial statements.
“They Fired Two Auditing Firms. Anyone Want to Be No. 3?” Floyd Norris, New York Times (August 22, 2003): C1. Surebeam fired Deloitte because of disagreement over revenue recognition. Surebeam claims Deloitte approved Surebeam’s accounting before accepting the engagement, but then changed its mind.
“Callaway Golf Fires KPMG as Auditor,” R. Frammolino, Los Angeles Times (December 17, 2002): Section 3, Page 2. Callaway Golf fired KPMG after a disagreement over whether a reduction in Callaway’s warranty reserve should be recorded as a change in estimate or a restatement of prior year earnings.
“Deloitte Parts With SEC Over Audit of Company,” Jonathan Glater & Floyd Norris, New York Times, (August 2, 2001): C4. Prepaid Legal Services obeyed SEC instructions to restate its earnings. Deloitte then resigned the audit claiming the original accounting was correct and the restated earnings were wrong.
“Negotiation Research in Auditing,” Helen Brown & Arnie Wright, Accounting Horizons (March 2008): 91-109. Recognition is growing that the financial statements ultimately result from a resolution or negotiation process between the auditor and management. This article provides a synthesis of the research on auditor-client negotiations.
“Behind the Audit Report: A Descriptive Study of Discussions and Negotiations Between Auditors and Directors,” Vivien Beattie, Stella Fearnley & Richard Brandt, International Journal of Auditing (2000): 177-202. Results from a survey of CFOs and audit partners regarding discussions and negotiations.