Changing auditors: switch hitch

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

‘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

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

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.

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