Is it time to revise 8-K rules on auditor changes? Announcing an auditor change can raise red flags, even though such concerns may be unwarranted. In this era of increasing transparency, 8-Ks that also include the reasons for change can allay negative assumptions.

• Author: Fusco, Cono
• Position: 8-K filings

For nearly three decades, negative perceptions have been associated with the act of a public company changing its auditor. The general assumption was that organizations make such a move in order to gain a more favorable opinion or escape a problem. What began in the 1970s--with a system for reporting auditor changes through 8-K filings--still persists today, distorting the opinions of analysts, ratings agencies, investors and others involved in the capital markets.

While required 8-K disclosures have evolved over time to provide expanded information about auditor changes, the persistence of negative perceptions raises several questions:

1. What predisposes capital markets influencers to resist auditor change?

2. How did misperceptions develop?

3. What needs to be done to allow companies to change auditors more freely--whether changing from one Big Four to another, from a Big Four to a mid-tier firm or from one mid-tier firm to another?

4. What needs to be done to provide investors and analysts with more complete information and transparency in assessing a change in auditors?

With these concerns in mind, it may be time to seriously reconsider the disclosure process.

Shaping Perceptions of Auditor Change

It is not difficult to understand how concerns about auditor changes developed. When first addressed by the Securities and Exchange Commission (SEC) as a means to curtail opinion shopping, Form 8-K filings were required only when there was a disagreement between a company and its auditors. As a result, changes were continually associated with problems in a company's financial statements, whether these problems were real or just perceived.

In 1988, the SEC updated these rules, requiring all companies to report auditor changes, as well as if there had been a disagreement between a company and an audit firm or if one of four "reportable events" had occurred. The change expanded the auditor change disclosure requirements. But the only required disclosures were negative, despite the fact that some positive reasons for an auditor change did and do exist--such as changing to work with a firm that specializes in your industry or market segment, getting better service from your firm or getting a better value for fees.

Thus, over time, an auditor change has become a "red flag" that problems may exist with a company's financial statements, making many companies reluctant to change firms--even if they would be changing for the right reasons.

"There is a lot that is good about current 8-K filing requirements, but I do believe it would be helpful if reasons for an auditor change were provided in all circumstances," says Greg Jonas, managing director of Moody's Investors Service. "Whenever companies change auditors, questions are raised as to why; some reasons people are relaxed about, while other reasons are...