More and more companies part ways with their auditors

There's no love lost between a growing number of companies and their auditors. More than 1,460 companies in USA either dropped or got dropped by their auditors last year. That's a five-year record excluding those forced to leave Arthur Andersen in 2002 after it closed, Auditor-Trak says.

To show how high the corporate divorce rate is: Nearly a third of Russell 3000 companies — which represent 98% of the market value of U.S. stocks — changed auditors last year, says research firm Glass Lewis.

The pace is expected to accelerate. Just last week, KPMG resigned from Coca-Cola supplier Lancer saying the company has committed “illegal acts” and has done nothing to stop them. Lancer denies any wrongdoing.

Such rampant splitsville in Corporate America is a warning sign that there's still questionable accounting going on years after the collapse of Enron.

In about 10% of last year's cases, auditors said they left because a company either had “internal control problems,” disagreed over accounting rules or couldn't be trusted, says Leah Townsend, analyst at Glass Lewis. But 70% of firms didn't give any reasons for the change, leaving investors to wonder whether the accountants found something but quit or were fired before they had a chance to speak up. “It's definitely buyer beware,” Townsend says.

Some of the disclosures from recent auditor departures show:

• Internal control problems. This means the companies don't have the proper safeguards to make sure the numbers are right, Townsend says.

Long-struggling retailer Kmart dismissed its auditor, PricewaterhouseCoopers, in October. Before that, Pricewaterhouse said Kmart's real estate accounting “should be enhanced.” Kmart, which didn't return calls, said in a filing that the problem has been corrected.

• Disagreements. Energy firm Calpine fired Deloitte & Touche in April after a dispute over how to interpret an accounting rule that resulted in a restatement of earnings. The company says the disagreement was resolved and wasn't the reason for the dismissal.

• No faith in management. Deloitte resigned from Shurgard Storage in November after saying it could no longer trust Shurgard's explanation of overpaying its CEO $1.4 million. A Shurgard spokesman says Deloitte overreacted.

• Auditor shopping. Some firms may boot their auditor to see if they can find one that will offer a more lenient interpretation of the rules, Townsend says. She points to Staar Surgical, which switched from BDO Seidman to McGladrey & Pullen and back again after a dispute with McGladrey. Staar says the issues were fully disclosed.

Investors should expect more companies and auditors to go their separate ways as they struggle with greater scrutiny. “I expect to see more companies … make definite moves,” says Jon McKenna of Auditor-Trak.

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