The CAQ’s continuing dialogue with individual investors indicates that many in the marketplace do not fully understand the scope of the audit process and the responsibilities placed on public company auditors. The In-Depth Guide to Public Company Auditing will help to bridge that information gap. The new Guide describes how a public company audit firm decides to accept a new audit engagement, how it assesses the risk that the financial statements contain material misstatements as part of determining the audit’s scope, and then how the auditors perform and report their findings – all in plain English. [Cindy Fornelli/CAQ, Guide]
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PwC Had Enough with Old Republic’s Sketchy Accounting
- Caleb Newquist
- March 29, 2010
Accounting firms take a lot of grief for bending over backwards for their clients. They’re in the client service business after all and keeping them as happy as possible is priority numero uno (despite what you might hear). Considering this factoid, when an accounting firm decides to cut a client loose for a “disagreement” over an accounting practice, we feel that’s a pretty good reason for any future accounting firm to think long and hard before taking on said client (case in point: KPMG taking the Overstock.com audit).
PricewaterhouseCoopers notified Old Republic International Corp. on March 19th that they would be “declining to stand for re-election as Old Republic’s independent registered public accounting firm for 2010.” That’s nice SEC filing language for “We’re so grossed out by you that we refuse to audit you any more.”
The two firms disagreed about the accounting treatment of “certain mortgage guaranty reinsurance commutation transactions with captive reinsurers owned by lending institutions.” That description alone makes us nauseous. The gist from Old Republic’s 8-K filing:
Old Republic had concluded that, in accordance with traditional reinsurance accounting practices, funds received ($82.5 million) in excess of amounts owed to it by the captive reinsurers should be deferred and recognized in the income statements of the future periods during which the related claim costs were expected to occur. PwC believed that generally accepted accounting principles (“GAAP”) required that the $82.5 million be recognized immediately as income from a contract termination.
So you have “traditional accounting practices” versus almighty GAAP. The tradish accounting wasn’t good enough for PwC, so they brought the probelme to the attention of the audit committee. The AC ultimately decided…wait…that management was correct. Shocked? Us too. The disagreement was brought to light back in November and in a press release when the company said that the transactions in question “which resulted in little consequential effect on the pretax loss.”
Apparently PwC wouldn’t let it go and the Company called in the SEC to get their $0.02 on the matter. Lo and behold, the Commission sided with PwC. After a lot profanity-laced belly aching (that’s what we imagine, anyway) and sleepless nights for both OR’s accounting department and the PwC audit team (that’s not debatable), Old Republic filed the delayed 10-Q last month with restated financial statements.
After what was surely 5 or so months of pure hell, PwC figured that this was an awkward enough situation that a break up was warranted. This was probably the perfect opportunity for PwC to get out of this engagement. They figured Old Republic wasn’t going to change their less-than GAAP-y ways, the audit committee is obviously no help, and God knows you don’t want to get the SEC involved every single time there’s a disagreement. If you were to ask us, its seems like a pretty logical reaction.
Now the only question is, which audit firm picks up Old Republic? PwC will certainly have some interesting things to share with the firm that decides they’re up for this particular headache.
PricewaterhouseCoopers drops Old Republic [Chicago Breaking News/CT]
8-K [SEC.gov]
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Auditor Swap: It’s Curtains For KPMG as AMC Theatres’ Outside Audit Firm
- Jason Bramwell
- November 25, 2019
AMC Entertainment Holdings put out a casting call for a new external auditor, and EY […]
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Some Companies Willing to Drop a Big 4 Auditor Like a Bad Habit…For Another Big 4 Auditor
- Caleb Newquist
- February 17, 2011
Auditor musical chairs isn’t something that happens too often but Reuters reports that more and more U.S. companies are looking to save a little extra scratch on their audit fees:
Bucking a long-standing preference by most companies to stick with the same auditor for years, some companies are putting their audit work out for competitive bids to win better deals on fees, or to get fresh teams looking at their books. “It’s a change in the competitive landscape among the audit firms where they have the ability and desire to take on more clients,” said Mark Grothe, an analyst at consulting firm Glass Lewis. Public companies also seem to be more willing to switch auditors, as long as one of the “Big Four” firms will be doing the work, he said.
The article cites Apple (dropped KPMG for E&Y) and Tysons (kicked E&Y to the curb in favor of PwC) as two prominent examples. We’re also aware that Credit Suisse is slowly transitioning a good portion of the audits performed by KPMG to PwC, according to sources familiar with the situation. Companies of this size willing to change their auditors demonstrates that some companies aren’t too concerned with the learning curve that may face their new auditors. In fact, some CFOs are more than okay with it, including Linster Fox of Shuffle Master who claims, “There’s no degradation in service — the service is actually higher.”
PwC’s Tim Ryan, however, doesn’t buy the idea that fees are the driving force behind the auditor switcheroo, “When a company does go through a change, it is almost always driven by something other than fees,” he told Reuters. Instead, a change is more likely to happen when, for example, a major fraud gets missed or there’s a difference of opinion on a crucial issue OR the CEO is a finicky character OR some other mysterious reason unbeknownst to all of us.
Regardless, the real concern is that all this auditor swapping puts a lot of pressure on fees:
Fee pressure has been intense worldwide, but especially in the United States, according to the International Accounting Bulletin, which tracks global audit fees. “The U.S. is a very competitive market, easily the largest audit market in the world, and the Big Four have competition from a much larger pool of firms,” said IAB editor Arvind Hickman. “Last year we received reports of fees being cut between 5 and 15 percent on average on audit work, and there were extreme cases where fees were being cut up to 40 percent,” he said. Fee pressure appears to be easing somewhat, “but there will still be fee pressure this year and we don’t predict it will go away any time soon,” he said.
This has Big 4 firms undercutting regional competitors and is no doubt, partly responsible for the parking lot at the Senior Manager level in some markets. With this level of competition and, as a result, a slowly decreasing portion of the Big 4 revenue stream, it doesn’t necessarily mean a career as an auditor is a dead end but it sure doesn’t help.
Auditor shopping helps U.S. companies cut fees [Reuters]