Auditor Switches SF pub

Auditor Switches SF pub - FA R S T U DY Shedding New Light...

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January 2011 I STRATEGIC FINANCE 49 FAR STUDY Shedding New Light on Auditor Switching This article is based on a study supported by the IMA® Foundation for Applied Research (FAR). By Joseph F. Brazel and Marianne Bradford, CPA The demise of Arthur Andersen and the subsequent passage of the Sarbanes-Oxley Act of 2002 (SOX) had the inevitable result of prompting a large number of public and private companies to find new auditors. Some, of course, had no choice: They were clients of Arthur Andersen. Others decided they no longer needed the capabilities of a large firm, were dissatisfied with their auditor’s service, or felt that the firm’s fees were too high.
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Not to be outdone, a good number of auditors decided to dump their clients, deeming them too risky, difficult to service, or not capable of meeting SOX Section 404 and Securities & Exchange Commission (SEC) accelerated fil- ing deadlines. An auditor “resignation” can be especially problematic for a company that had depended on the firm’s grasp of its business, accounting issues, controls, and systems. It can take years for the new auditor to gain a full understanding of the company. Despite the possible effects of these upheavals, the post- SOX trend has continued. One aspect that has received substantial attention is the high number of switches from Big 4 firms to non-Big 4 firms. For example, a 2008 study from researchers at Lehigh University and Virginia Com- monwealth University reported that Big 4 public account- ing firms had a net loss of 400 public clients in 2004 compared to 201 in 2003. Meanwhile, non-Big 4 firms had a net gain of 117 public clients in 2004, 87 more than in 2003. The study also noted that, on average, the Big 4 shed or lost larger clients. Audit fees rose substantially during this period, and the number of companies that switched auditors because of costs doubled. Many experts have said that, in addition to fee increases, SOX has harmed the client-auditor relationship. Consider the scenario in which a manager wants to discuss an accounting issue with his or her auditor. Post-SOX, the manager must now be concerned that such a request may signal a lack of accounting competence or training within the company, giving the auditor a reason to become uneasy and drop the company as a client. From the auditor’s per- spective, he or she must be careful not to provide consulta- tion that may violate SOX Section 201. Moreover, the extra audit work required for compliance with SOX has stretched accounting teams at many audit firms very thin. Companies are responding by switching auditors to obtain more attention or higher quality of service. What We Know about Auditor Switches In the pre-SOX era, companies sometimes switched audi- tors to gain a fresh opinion on their financial statements. A 2002 study estimated that “opinion shopping” was
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Auditor Switches SF pub - FA R S T U DY Shedding New Light...

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