U.S. Public Companies Changing Audit Firms at Record Pace

The Sarbanes-Oxley Act of 2002 did not require public companies to regularly change audit firms, but it seems many of them are doing so anyway.

The Wall Street Journal reported on a study released Wednesday by proxy-advisory firm Glass Lewis & Co. that showed more than 1,600 public companies left their audit firm last year, which represents a 78 percent increase over 2003.

Over the two-year period, 2,514 companies switched audit firms, which is nearly a quarter of all U.S. public companies, according to a database of public companies.

Smaller accounting and auditing companies are reaping the benefits of the revolving auditors and the Big Four firms are feeling the pinch. Second-tier firms gained a total of 117 new clients last year while the Big Four-Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP and PricewaterhouseCoopers LLP-had a net loss of 400 clients, the Journal reported.

BDO Seidman LLP gained the most new clients-109-and Ernst & Young lost the most clients with 200 dropping the firm last year, the Journal reported.

Smaller public companies were more likely to change auditors. Among the smaller firms that made a switch, 85 percent of them posted $100 million or less in revenue last year, the report said.

Companies switching auditors listed a number of reasons for the change, including auditors getting out of the business due to the new regulatory environment, corporate mergers and a better deal at the new firm, the Journal reported.

Since Sarbanes-Oxley was enacted in 2002, there has been significant debate about whether mandatory auditor rotation is necessary to protect investors. The law requires audit partners to rotate away from clients every five years. This week's report indicates that audit committees are taking it upon themselves to shake things up with their audit firms, even though the law does not require them to.

The increased changes are "inconsistent with the arguments put forth in the past by the accounting firms, that changing auditors reduced audit quality," research analyst Jason Williams said in the report.

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