Some companies are feeling like they've just been through a difficult divorce. That's because Big Four auditors have dropped them — in some cases after years of service.
In the first nine months of 2004, Big Four accounting firms resigned from 157 accounts. While some of those resignations followed unclean opinions, others reflect a move away from smaller clients that are perceived as riskier bets in today's regulatory climate. Not only are some small-caps struggling to implement appropriate internal controls, but they also generate less fee revenue. And with the Big Four stretched thin thanks to Sarbanes-Oxley internal-controls work, they appear to have decided it's better to trim their client lists.
Last July, Ernst & Young LLP ended its relationship with Redhook Ale Brewery, a $39 million Seattle-based company, after auditing the books for its 23-year history. Redhook CFO David Mickelson says the audit committee was anticipating a fee hike and had considered a change anyway. "It was kind of like when you're thinking about breaking up with your girlfriend and she does it first," he says. The timing could not have been worse, however. The company, in the final months of a distribution contract with Anheuser-Busch, had just received a going-concern opinion. Mickelson feared the resignation would make the situation look even worse. (The contract was subsequently renewed.) Together with the audit committee, he pushed to have Seattle-based Moss Adams LLP in place to handle the third-quarter filings.
Michael Perry, finance chief at Vitria, a $66 million software and services business, was less prepared when Ernst & Young resigned from its account in August. "I was stunned," says the CFO. "I thought I had an excellent relationship with the firm." Vitria quickly launched a search for a new auditor and signed with BDO Seidman LLP.
"It's very clear that there's a trend toward bigger firms resigning from small accounts," says Mark Cheffers, CEO of AuditAnalytics.com, which tracks auditor changes. Ernst & Young, however, denies that it is targeting small companies. "Along with other members of the accounting profession, we constantly reexamine our client relationships...we have resigned from a range of clients, both big and small," said the company in a statement.
Mickelson, for one, is happy with the attention of his new auditors: "Having firms competing for our business really made us feel better."