Do Auditors Pay Too High a Price for Honesty?

The Dallas Morning News did some digging into the reasons why auditors are dismissed. It found that auditors often risk dismissal when they force a company to restate its earnings. And auditors who determine a company probably won't stay in business have an even better chance of being dismissed. Based on this evidence, the News concludes that the reforms proposed to date aren't likely to change an underlying truth: that auditors can sometimes be summarily fired for standing up to management.

Among the examples cited by the Dallas Morning News are KPMG's dismissal from Xerox Corporation after criticizing Xerox's accounting practices, Andersen's dismissal from River Holding Corp., after disagreeing with the company on a number of issues, Ernst & Young's dismissal from Excite@Home after it raised "substantial doubt" about the company's viability, and PricewaterhouseCoopers’ dismissal from Xybernaut Corp and CD Radio after the firm raised doubts about the continued solvency of each company.

The News said Professor Kannan Raghunandan, who teaches accounting at Texas A&M International University, did a study in 2001 that shows auditors who issue going-concern opinions are fired about three times more often than the auditors of companies who are just in financial trouble.

Some speculate the reason for the changes in auditors in these situations is a practice known to accountants as "opinion shopping." But Steve Kachelmeier, professor of accounting at the University of Texas McCombs School of Business, said his research shows that opinion shopping doesn't work. "The companies that switch auditors are no more likely to get a more favorable opinion than do the ones that don't switch," he said. "Companies are not generally successful in getting the going-concern modification lifted. You can shop around, but you don't get what you want."

-Rosemary Schlank

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