Companies, Auditors Parting More Often

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They say that breaking up is hard to do, but companies and auditors are parting at record rates this year, the Wall Street Journal reported.

By the end of July, more than 900 companies had either fired or ended relationships with their auditors, which is about the number of breakups that occurred in all of 2003.

"If the trend continues, it's going to be a bigger year than last year," Leah Townsend, a research analyst at Glass Lewis & Co. The San Francisco proxy advisory firm is tracking auditor turnover, told the Journal.

Because companies must disclose when they change auditors, investors are able to keep abreast of the changes. However, a breakup can signal that the company has disclosure issues so investors have to pay close attention to the changing of auditors.

It's no secret that companies don't like discussing why they part company with their auditors. The Journal reported that 75 percent of those surveyed by Glass Lewis gave no reason for the auditor's departure. In instances when SEC disclosure rules require more information about the parting, companies and their auditors can offer differing explanations that further muddy the waters for investors and analysts.

"Because a decision to change auditors is sensitive, there are incentives for making the public disclosure as innocuous as possible," Paul B. W. Miller, an accounting professor at the University of Colorado, told the Journal.

An auditor change can signal investors that they need to dig deeper into what's going on behind the scenes. And, while an auditor change may be puzzling to investors, some disclosure is usually better than none, former SEC Chairman Harvey Pitt told the Journal. If the auditor change relates to something substantive, Pitt said, "disclosure has to be quite forthcoming and give people a clear understanding of the ambient circumstances that led to the resignation or firing." And if it's something benign, like a disagreement about fees or that the team has just lost favor with its client, why not just come out and say it, Pitt suggested.

That nearly 700 out of 900 companies in Glass Lewis' survey didn't say a word about the circumstances surrounding their auditor change "is unfortunate," Pitt told the Journal. "I think better practice is to agree on some formulation that lets people know why this occurred."

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