How to Ax Your Auditor

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."

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