Unexplained auditor changes a failure to communicate

By Dominic Jones

INVESTOR relations communications professionals need to be on the look out for unanswered questions in their companies’ disclosures. The fewer questions you leave unanswered the less you leave to investors’ imaginations.

Take announcements about changes to companies’ auditors. AP business columnist Rachel Beck recently reported that about three-quarters of the auditor change announcements at U.S. public companies last year gave no reasons for the switch, according to a study of 1,322 auditor changes by proxy advisory and consulting firm Glass Lewis & Co.

Does that mean that there’s something dodgy about three quarters of auditor changes and that companies don’t want to talk about it? Probably not because companies are compelled to disclose when they change auditors due to reportable reasons, such as a disagreement with the auditors.

Compliance is not enough

In almost all cases, auditor changes are done for perfectly straightforward reasons. There’s nothing shady about them. They could even be a sign of strong governance — such as mandatory rotation to increase auditor impartiality. Problem is, companies aren’t explaining their actions, so no one knows what is going on.

From my perspective, this is all just a failure to communicate. Companies are failing to ask the right questions before making their disclosures. They’re not putting themselves in investors’ shoes.

Instead, companies and their audit committees are asking lawyers what the rules are and they’re blindly following them, never stopping to wonder about the communication consequences.

Push on for new SEC rule

There’s now a push on to get the SEC to introduce a new rule to force companies to disclose any and all reasons for changing their auditing firms. Auditing firm Grant Thornton LLP is one that is pressing regulators to act. The AP’s Beck seems to concur. “Transparency needs to be stepped up,” she writes.

Now remember, this is all happening despite the fact that no one has presented any evidence that something untoward is involved in these unexplained auditor changes. Ostensibly, the driving force for this is simply because investors don’t feel they’re getting the information they need.

And you know whose job it is to keep investors in the loop, don’t you? IR communications professionals have to be more attuned to the questions that investors are likely to have, and they need to address them pro-actively.

Of course, boards of directors and executives need to consult their IR and communications staffs on the likely consequences of their actions.

From experience and from the very public messes boards have been getting themselves into recently — HP, Home Depot, etc. — too few directors have a grip on the importance of good communication.

And that’s one reason why we will continue to see the SEC passing new rules to make companies disclose information that otherwise is just common sense.

Related posts:

1. No changes please, we’re PR Newswire’s Disclosure Advisory Board
2. SEC unveils IDEA — and that’s all it is for now
3. Cox to announce IDEA will replace EDGAR
4. Huge social network for US shareholders planned
5. Why full-text press releases are now your enemy

Please Support Our Work
Email your friends about us. Subscribe to our paid publication Online IR Trends Quarterly. Get us to recommend improvements to your IR website (we're really good at it).