SEC Questions Auditor Turnover

The commission wants increased voluntary disclosure of why auditors and clients part ways.
Craig SchneiderAugust 23, 2004

The Securities and Exchange Commission reportedly wants companies to make greater voluntary disclosure about why they part ways with their external auditors.

The commission’s interest in auditor turnover comes in the wake of a recent report that shows an increased number of companies splitting with their auditors, but only a minority revealing the circumstances behind their separation.

Glass Lewis & Co., a proxy advisory firm, found more than 900 businesses split with their auditors through July, about the same number as all of the turnovers in 2003, according to The Wall Street Journal, as cited on The study found that 700 of the companies gave no reason at all for the change so far this year.

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It’s not entirely surprising that companies go mum on any specifics. Currently, while companies must only disclose a change of auditors in SEC filings, providing further detail is entirely up to management. The commission, however, is reportedly asking companies to volunteer better explanations in lieu of another SEC regulation.

“Providing investors in plain English the real story behind why there is a change in auditors I think will alert investors earlier on to potential problems and concerns,” former SEC chief accountant Lynn Turner, now director of research at Glass Lewis, told The Journal.

A company, of course, can fire its auditor for good reason, such as when the audit partner isn’t doing an effective job or the company regularly rotates the firm for a more independent auditor. But auditor turnover can also signal problems with weak internal controls, The Journal notes.

Investor activists have been clamoring for a more stringent policy on disclosure. “If auditors are more willing to resign from audits where companies aren’t cooperating, that’s an important advance,” said Barbara Roper, Consumer Federation of America’s director of investor protection, who was quoted in a Journal article earlier this month. “If you can’t find that out because disclosure is opaque, you’ve lost a lot of the benefits.”

“It certainly seems like an area we can benefit from a little SEC motivation to get companies doing a better job of disclosing what is going on,” added Roper, who also serves on an advisory committee to the Public Company Accounting Oversight Board (PCAOB).

Turner agrees. “When you talk about 900 changes, you have the good, the bad and the ugly,” The Journal quoted him as saying. “It’s important for investors to understand which are the good changes, which are the bad changes, and which are absolutely ugly and are going to raise a large red flag for investors – and they need to know that at the earliest possible date,” he said.