Companies must disclose if they dismiss their independent auditor, if the auditor resigns or declines to stand for re-appointment, and if the company hires a new auditor. A change of auditors is sometimes, but not always, a cause for concern. It depends on the reasons for the change. The following circumstances are widely seen as red flags, and companies must disclose them if they occurred over the previous two fiscal years. First, companies must disclose whether the departing auditor gave an adverse or qualified opinion on the company’s financial statements. These indicate that the financial statements are not prepared in conformity with generally accepted accounting principles. Second, the company must report certain disagreements it had with its departing auditor over accounting principles or practices, financial statements, or the scope or procedure of the audit. Third, whether or not it led to a disagreement between the company and its auditor, companies must disclose whether its former auditor advised it that:
- the necessary internal controls to prepare reliable financial statements do not exist,
- the auditor can no longer rely on management’s representations or is unwilling to be associated with the financial statements prepared by management,
- the auditor believed it should further investigate a matter or significantly expand the scope of its audit, and the auditor did not do so, or
- the auditor has found new information that materially impacts the fairness or reliability of current or prior financial statements, and the issue has not been resolved to the auditor’s satisfaction