When Companies Fire Their Auditors, Timing Is Clue to Future Trouble
Study shows that when auditors are fired late in the year, accounting problems are more likely
When a company and its auditor split up, it can be a sign of trouble in the books. But the two sides typically don’t give a reason for the breakup.
Two accounting professors instead looked at the timing of the split. They found that the later in the year it occurs, the more worried investors should be.
Most auditor changes happen early in the financial year, generally in the 30 days after the filing of the annual report. That is when companies typically choose their auditor for the new financial year. After that 30-day window, however, the chances of future accounting problems start to increase, according to the research.
When one of the biggest owners of radio stations in the U.S. fired its auditor in June 2019, it said there had been no disagreements over accounting issues.
A year later, Townsquare Media Inc. disclosed accounting errors dating back to 2017 and restated its financial statements. The company’s 2018 net loss tripled to $97 million. Its stock fell 16% that day.
The errors occurred while the Purchase, N.Y.-based company was being audited by midsize accounting firm RSM US LLP. The problems occurred in areas including the impairment of broadcasting licenses and the treatment of deferred tax losses where judgment by managers and auditors often comes into play.
A spokeswoman for Townsquare said the restatements were limited to noncash intangible assets and didn’t affect previously reported revenue or earnings before interest, taxes, depreciation and amortization. A spokeswoman for RSM US declined to comment.
