Tell the Public Why the Auditor Split
21 Corporate Crime Reporter 22, May 22, 2007

If a company gets rid of its auditor, should the company be required to tell the public why?


It should be required.

But under current law, it is not required.

Last year, 1,322 U.S. public companies changed their independent accounting firms – including 66 companies that changed auditors at least twice. There was no explanation for the auditor split in more than 1,000 of those cases.

That’s according to a report – Speak No Evil – released this week by Glass Lewis.

One of the nation’s largest accounting firms, Grant Thornton, has urged the Securities and Exchange Commission (SEC) to require companies to provide reasons for all auditor changes.

“Without such a change, companies and auditors will continue to remain mum,” the report found.

Since Arthur Andersen LLP’s demise in 2002, at least 6,543 companies have changed their auditors, the report found.
Glass Lewis also wants federal officials to require mandatory audit firm rotation every five to ten years.

“We view the ‘fresh-eyes’ effect as a big benefit to switching auditors, especially in cases of corporate accounting frauds,” the authors wrote. “Auditor changes often are linked to financial restatements and discoveries of weak accounting controls. Restatements and material-weakness disclosures occur almost three times as often within one year of auditor changes than they do for all companies.”

The report also recommends no limits on the liability of outside auditors.

“But it’s becoming more difficult for companies to avoid auditor-liability caps, due to the audit firms’ insistence on the inclusion of such provisions in their contracts.”


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