Changing auditors can often be done for very valid reasons. But it can also result in negative publicity. Battered healthcare software group iSoft, which is currently under investigation from the Accountancy Investigation & Discipline Board and the Financial Services Authority, switched from RSM Robson Rhodes to Deloitte this summer, while in April struggling music company Sanctuary Group sacked its auditor Baker Tilly in favour of KPMG.

Both auditor changes have since received significant media coverage and shareholder comment. What is clear from these examples is that changing auditors is no longer a mundane procedure in which stakeholders take no interest. It is a decision that attracts intense scrutiny from the press and investors, and requires detailed explanations from audit committees and management.

Patricia Peter, head of corporate governance at the Institute of Directors, explains that changing an auditor has important governance implications – whatever the reason for the decision. ‘Changing an auditor is always a governance question, no matter what the reason for the change might be. Companies have to be clear and transparent because shareholders need to be convinced that auditors will disclose the issues,’ Peter says.

The reasons for changing an auditor vary from company to company but, according to experts, conflicts of interest, price and service, and a change of company ownership, are the main factors to trigger an auditor change. Still, it is rare for a company to change auditors. ICAEW guidance requires engagement partners and audit teams to rotate every five years to avoid becoming too familiar with clients. Companies prefer this to changing firms.

So when should a company take the leap and change firms? KPMG’s UK head of audit, Richard Bennison, says one of the key factors a business must consider is how it has developed, and whether its auditor is still appropriate. ‘Businesses grow through different phases. A business goes from a startup through an organic growth phase and then it grows through acquisition before possibly listing. As a company develops it needs to assess its auditor. It might need an auditor with more industry experience, or an auditor that is more used to a publicly listed environment,’ Bennison says.

Tony Upson, national assurance and advisory director at PKF, says the balance between audit and non-audit services is another factor that companies should monitor constantly. He says small and medium-size businesses, in particular, don’t just appoint an auditor based on quality alone. These companies want an auditor that is able to provide tax and consultancy services as well.

These companies should look to make an audit change, however, if the balance between non-audit and audit services becomes skewed, or they grow and need a strong audit opinion. ‘A company needs to consider whether it is appointing an auditor purely for the quality of the audit or for a package of services,’ Upson says.

‘If a company is growing, it will either have to bring in a new auditor and allow the current auditor to continue doing non-audit work, or keep on its auditor and bring in a separate firm to provide advisory services,’ explains Upton.

Businesses should also constantly assess the openness and strength of their relationship with an auditor. The management and auditors should aim to work together to produce a robust set of financials, and a strong relationship is essential for this to happen.

If the partnership between auditor and management sours or becomes stale, companies would do well to consider making an auditor change. ‘The best audits are the ones where the relationship between a company and its auditor is based on trust and a constructive approach,’ says Steve Maslin, head of external professional affairs at Grant Thornton. ‘It is difficult to conduct a good audit when a relationship breaks down. If a company is not happy with service levels, or an auditor feels it is not receiving the information needed to form an opinion, then it is time to put the audit out to tender.’

Bringing in a new firm to conduct an audit can put fresh energy into a company and improve the robustness of an audit. When a new auditor steps in, risk areas are reassessed and fresh questions are asked as the new firm gets to grips with the company. A new firm will question things the previous firm has taken for granted because it has been in place for so long. It can look at a business differently, reassess risk areas and bring fresh energy and input to a company.

There are many drawbacks, however, to changing firms. For example, an incumbent firm will have to build up the expertise and knowledge of a new business, which may take many years. Bennison says this is particularly the case with large and complex businesses that are difficult to penetrate because the new auditors may not have any previous knowledge of the business.

Changing an auditor in these circumstances inevitably means that, during the first year the new auditor is at the helm, the company will have to invest more resources and time in its audit. ‘It takes quite a bit of time to get up to speed with a complex business – to identify the risk areas and familiarise yourself with how the finances work,’ Bennison says. ‘Rotating partners and audit teams can provide continuity and protect independence without requiring a total change.’

Perhaps the most risky reason for a firm to switch auditors is when it has an open clash with its adviser over how figures are presented and so decides it wants to get rid of them. Such a decision immediately prompts speculation about the reasons behind the disagreement and places management under pressure to explain their decision. It can also place the replacement firm under pressure to justify its audit opinion and convince investors and analysts of its independence. ‘There are a few occasions when a company believes its auditors are asking for unreasonable treatments and, in that case, it might decide it wants another auditor. It is a tricky situation to be in, and it doesn’t happen often,’ says Upson.

Bennison says the increased scrutiny on changing auditors means relationships between audit committees and auditors, especially in controversial circumstances, not only have to meet the highest standards of governance and independence, they also have to secure public confidence. ‘Client-auditor relationships must be seen as appropriate. Shareholders must have confidence in the relationship, and so transparency is crucial,’ he says.