Question

apply your research. use resources if needed to support the answer.

the periodic selection of a new auditing firm by a company is not an uncommon practice. write a report discussing auditors changes why do companies change auditors? what kinds of disclosures are required when a company changes auditors? are companies allowed to merely shop around for audit opinions they desire? does this seem ethical to you?

Answer 1

Changing the auditor by the company is common phenomenon. But, once the company decides to change its Auditor, the Stakeholders of the company raise their eyebrows, raising severe question on the management’s decision to change the auditor. Since the company’s hold investors and people’s money, it is very much important that considerable question needs to raised and explanation should be sought from the management for their decision.

Though there can be various reasons for the changes of the Auditor, few of the reasons are given below:

1. Size of the company, one of the reasons of change of the auditor is size of the company, companies make all their efforts in increasing their revenue and wealth maximization, which certainly increases the overall work for the Auditors, which the old auditor may or may not deliver this, could be one of the reasons for change in Auditor.
2. Requirement of Law, the law of the land also may require the change of Auditor. The Sarbanes-Oxley (SOX) Act, 2002, requires the companies for rotation of Auditor every five years, further has SEC has various norms to ensure effective conduct of audit and auditors.
3. Disqualification, disqualification of Auditor due to the Action of the Auditor such as related party transaction, Independence of auditor being compromised, default under Law.
4. Death, though death does not creates havoc as such, but is a genuine reason for changing the Auditor.

Disclosure requirement for Changing Auditor:

On the Auditors resignation, removal or death, the Company will need to file Form 8-K within four days of removal or resignation.

The Form shall be filed along with

1. The date of resignation or removal of Auditor, or reason for re-appointment
2. Details on whether any qualification of opinion or adverse opinion has been given by the auditor in the preceding two years’ time.
3. Disclose whether Audit Committees opinion was sought, or any recommendations were considered.
4. Details on dissent between the company and the auditors during the preceding two years’ time.
5. Provide with the disclosures as detailed above to the Auditor on or before the date of filing of Form 8-K filing
6. Seeking a written response from the Auditor, whether or not the auditor agrees with the details of removal or resignation in a letter addressed to the SEC. and
7. File along with the Form 8K, the auditor’s letter with the SEC or not later than 10 business days from the date of filing.

Are companies allowed to merely shop around for audit opinions they desire? Does this seem ethical to you?

Opinion shopping is a practice of seeking a Favorable audit opinion on the financial position of the company from an outside auditor. An auditor’s opinion is an opinion on the financial statement whether or not they reveal true and fair view and comply with the generally accepted accounting principles.

Changing the auditor frequently can be construed as opinion shopping. The SEC specifically prohibits any sort of opinion shopping. For the purpose of curbing, the opinion shopping, Sarbanes Oxley Act, 2002, further requires rotation of auditors every five years.

Though, there are measures to curb any sort of opinion shopping, still it cannot be avoided fully.

As far as, ethics is concerned, it is the unethical in all form. The moment the company seeks for opinion shopping, the vary spirit of ethics is compromised. Therefore, any form of mismanagement cannot be ruled in the favor ethical practice.