Planning to Change Auditors? Sooner is Better Than Later, Study Finds

August 1, 2017

Companies thinking about changing their auditors should do so before the end of their second fiscal quarter, according to a recent study by researchers at the University of Notre Dame and Ohio University. Although there are legitimate reasons to change auditors having nothing to do with company malfeasance or auditor malpractice, turnover is rare so it can raise questions. In an interview with CFO Magazine, the study’s lead author says that a company announcing the dismissal of its auditor after the second fiscal quarter risks being “lumped in with the bad apples” that want to end the auditor’s engagement to cover up “nefarious” doings.

While Item 304 of Regulation S-K requires certain specified disclosures on Form 8-K in connection with auditor dismissals and resignations, the disclosures are typically opaque. The key takeaway from the study is that investors should pay more attention to timing than to words. The substance of a company’s disclosure has little predictive power, but “firms that dismiss auditors after the second fiscal quarter have markedly higher rates of future restatements, material weaknesses and delistings compared with firms that dismiss auditors shortly after filing the prior year’s 10-K,” according to the study.

Now that most companies have completed their second fiscal quarter, if you are considering changing your auditor for a legitimate reason, we encourage you to contact a member of Fredrikson & Byron’s Securities Group before taking any action that may lump your company in with the bad apples in investors’ eyes.

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