How to Ax Your Auditor

Jack Henrie has switched auditors eight times during his 18-year finance career. Asked how to do it, he has one word: "Del-i-cate-ly."

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.”

Discuss

Your email address will not be published. Required fields are marked *