If there’s such a thing as a serial auditor switcher, Jack Henrie could be it.
As CFO for a string of companies since 1990, and more recently in providing CEO and CFO support services as a outside consultant, he has been involved with no less than eight auditor replacements — a number “that’s close to unique,” he suspects. While each case of firm switching has been dictated by different circumstances, he believes his experiences offer some universal lessons, both about the reasons for changing accounting firms, and the way to do it effectively.
In a post-Sarbanes-Oxley environment, of course, audit committees are given a more important role in making auditor decisions vis a vis management. “Is the board more involved now? The answer is an underlined and boldfaced yes,” Henrie says, noting that the last two switches he’s been involved with were board-orchestrated. Still, the CFO has a major role.
The Wicked Witch and the Auditor
“The financial function of the company — the controller, the chief accounting officer, the head of internal audit — all of them need to be involved” if there’s a change of outside auditors, says J. Michael Cook, a former Deloitte & Touche CEO who now serves as audit-committee chair for Eli Lilly and Comcast. “They work with these people every single day. As audit-committee chair, I work with them a few times a year.”
And in terms of style, well, the way to approach switching auditors differs according to each case, Henrie says. But in every situation, he seems to subscribe to the approach taken by the Wicked Witch in The Wizard of Oz, who, in plotting Dorothy’s elimination, says: “These things must be done delicately — del-i-cate-ly.”
Delicately or otherwise, most companies are loath to replace accounting firms. Unless there’s a compelling reason — from eliminating conflicts of interest to reducing fees — “I’m not one who says let’s rotate auditors regularly,” notes Cook, who has never been involved with a company replacing an auditor. In most cases, “I’d be an advocate for finding a way to have continuity, working things out without a wholesale change of the entire firm.”
Beyond the financial cost involved with the replacement, there is the fear of the unknown in a new firm’s policies. “It would be very troublesome, for example, to have followed a method that was appropriate, and then to have the new auditor say, ‘Gee, I don’t agree with the way you do that.’ That would be very disturbing to me.” (See “Audit’s Cautious Watchdogs.”)
But if the deed must be done, a look at several of Jack Henrie’s experiences could offer something of a guide. Public company financial filings record switches as either a “resignation” or a “dismissal,” a characterization of an event that is rarely so black-and-white. And often, of course, the auditor will have a different view of why the change occurred. What follows below is Henrie’s account of each switch, the CFO’s side of the story. “The decision,” he says, for example, often “can be quantified into an expected net present value of the value of their services less their costs.”
Switch No. 1: The Tax Goof
Henrie is now CEO of consulting firm Executive Resources for Great Outcomes (ERGO) LLC. But the first auditor switch of his finance career came when he was a newly minted public-company CFO. After stints as assistant to the treasurer at a large New England utility and CFO at a wholesale nursery, he jumped in 1989 to a Farmington, Conn.-based provider of environmental and petroleum exploration services, Northeast Research Institute Inc.
After an IPO, it was employing a member of what was then the Big 8. “I went in on my first day as CFO to find that the Big-8 firm had failed to disclose that the company hadn’t filed its tax returns,” he tells CFO.com. “Not only had they failed to do it, but tax and audit was being done by the same firm,” so there seemed little excuse for the oversight.
He was able to learn later that a regional firm had been doing the company’s taxes, and missed communications were to blame. “But a modicum of due diligence would have disclosed that fact,” Henrie recalls. “So that was my first experience in moving from one Big 8 firm to another Big 8 firm.”
Switch No. 2: Geographical Undesirability
Joining Xitec Inc. as controller in 1995, helping the high-tech manufacturer with a turnaround situation, Henrie noticed the need for an auditor switch even before he took the job.
Its Big 8 auditor, Ernst & Young, had started focusing on Fortune 500 clients at the time, and had moved the Xitec engagement partner from nearby Hartford to White Plains, N.Y., two hours away. “At the time of my interview with the (Xitec) CEO I said that I knew they were being serviced by E&Y, and they’d made some changes.” Noting the partner’s move, “I said, That’s not local, and you get better service when there’s somebody who’s local.” I got the job, and we did make the move.”
Switch No. 3: The Municipal Specialty
While taking the post of audit committee chair for the Connecticut town of Suffield, Henrie in 1996 uncovered the next case of an auditor that needed changing. He saw a chance to replace the small regional firm that was already in place, bringing in instead a larger firm that had an engagement partner with special experience in working with towns, especially “how to get town grants.” Several other firms, all with more municipal expertise, were interviewed in a competition, but the firm with the grant expertise got the job.
Switch No. 4: Trying to Hold Back Arthur Andersen
Joining Omniglow Corp. in 1997 as finance chief, controller and treasurer, Henrie found himself trying to stop an auditor change — a switch to Arthur Andersen from E&Y that the board wanted “for reasons of familiarity” that they had with the Andersen people. “I was trying to put the brakes on the move,” he says, because Arthur Andersen had been embroiled with a real-estate industry client that had entered a nasty bankruptcy.
While failing to halt the shift, he made sure “the board knew (about Andersen’s involvement) and was comfortable with it. I wasn’t comfortable, but I raised my discomfort with the board.”
Switch No. 5: A Controller Conflict
Consulting in a Deloitte & Touche-related job for a biotech company, Henrie was involved with changing out one Big 6 firm for another. A conflict of interest existed between the new controller at the biotech and its Big 6 accouting firm that represented it, so the move was made.
Switch No. 6: The Need to Grow
Starting as CFO of Tymetrix Inc. in 2001, Henrie was part of one of Connecticut’s fastest growing tech companies. But there was no audit at the time, and its numbers were merely being compiled by a one-person CPA firm. “When I interviewed with the CEO, I said that clearly at some point you’re going to want an exit strategy, whether you’re thinking about it now or not.”
The strategy, he knew, would involve moving to a real audit firm, where the company could record three years of audited financials. “I moved it from the one-person CPA firm to Ernst & Young,” after getting proposals from all five other members of what had become the Big 6.
Switch No. 7: “Come-on” Pricing
An appealing facet of the E&Y bid for the Tymetrix account had been a low fee, one-third the rate of competing bids in the first year of a three-year deal, in fact. “I saw that they were trying to buy their way in,” says Henrie. And he negotiated with E&Y to keep fees relatively low in successive years to reflect the need for a “relationship” between auditor and client.
When, in the second year, E&Y tried to reinstall the higher fees, he backed away and chose UHY as auditor, resulting in a 40-plus-percent reduction from the higher fee Ernst was proposing to charge. In addition, the UHY engagement partner who was assigned the Tymetrix client had formerly represented it for E&Y. “So I was actually getting better continuity through UHY,” even at the sharply lower fee.
Switch No. 8: Preparation for a Deal
The last auditor switch was also at Tymetrix. But it was initiated, in the post-Sarbox era, by the board. “As a result of my pushing for the exit strategy, the audit committee came on-board with this, and that accelerated the move to be acquired.” But that required a new auditing approach, one that seemed to dictate representation by the Netherlands-based company’s own firm, KPMG. So UHY, too, was replaced, with Henrie’s input.
Things have come a long way from the days when, as Henrie remembers it, a CEO might turn the auditing work over to “a golfing buddy at one of the other accounting firms.” (Such unfounded auditor replacement is something that “peripherally I’ve seen,” he says, through his years in finance.)
“I’m not a big fan of Sarbanes-Oxley; the minuses outweigh the plusses,” Henrie says. But in the realm of making audit decisions more professional and more useful to corporate strategy, “this has been a big plus.”
Says the veteran of so much auditor switching, “Bringing on a new accounting firm is not unlike hiring a CFO in many ways. One needs to know that they have the capabilities and the personalities to promote working with all the company teams with whom they may be expected to interact.”
He adds, “That’s another part of being a good strategic CFO: being able to expand the senior management team and board by bringing the best people in to provide their insights, as well as their services.”