Financial Accounting Blog

Wednesday, September 24, 2003

This is from the Wall Street Journal Online, which requires a subscription, so I won't post a link, but the article is pretty short. It relates to an oversight board formed under the Sarbanes-Oxley Act, which states that it will be scrutinizing situations in which corporations fire their auditors very closely. As we discussed in class on Tuesday relative to the Chambers Development case, firing the auditor often means the corporation is up to no good. SWH
Acctg Regulator To Inspect Auditor Firings,Says Bd Member


(This article was originally published Monday.)

NEW YORK -- The newly created accounting industry regulator will scrutinize situations where companies fire their auditors, a top official warned on Monday.

"Whenever you see a change in auditor, the Public Company Accounting Oversight Board is going to look into it," said board member Charles D. Niemeier, speaking on a panel here at the "first annual" Directors' Institute on Corporate Governance.

Niemeier urged board audit committees to ask tough questions when management moves to change auditors. At issue are situations where companies dump auditors because they are reluctant to go along with management when the company wants to improperly push the accounting envelope.

In the past, audit committees were too willing to go along with such mid-stream auditor switches, he indicated.

While it's true that sometimes there is a disagreement over technical issues, "there are plenty of times (companies) wanted to change auditors because they weren't being given the answer they wanted," he said.

The sweeping 2002 Sarbanes-Oxley Act gave birth to the PCAOB , which is just beginning inspections of Big Four accounting firms.

The Sarbanes-Oxley Act also requires audit committees to have direct responsibility for the appointment, compensation and oversight of the independent auditors who must report directly to the audit committee.

Despite regulatory encouragement for audit committees to have at least one financial expert, it doesn't take a financial expert to ask auditors the kind of questions that could catch some of the earnings management problems that corporate America has seen in recent years.

For example, he said if various divisions at a company aren't performing well, but top corporate management "did some top-level adjustments" that make earnings look rosy, that is something that should grab an audit panel's attention. "All you have to do is ask the auditors have they looked into those transactions," he said.

If the audit panel finds problems, they must "think and act independently" and resist any attempt by management to take a "less painful" alternative that doesn't deal head on with the problem, he said.

Many of the glaring frauds of the past couple of years have started as attempts at earnings management, Niemeier said.

"Be very, very careful when you hear that," he said. "It may not be painful to anyone but you. The most important thing is to actually deal with it and confront it. Don't let it be buried."