FYI To All:
I thought this may be of passing interest. From today's Wall Street Journal.
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April 25, 1997
More Accounting Firms
Are Dumping Risky Clients
By ELIZABETH MACDONALD
Staff Reporter of THE WALL STREET JOURNAL
Growing numbers of high-level executives are suffering
from rejection -- by their accountants.
Hoping to protect themselves, the country's most prestigious
accounting firms are turning more aggressive in dumping
audit clients that they deem to be high-risk. "More than ever,
accounting firms don't want to expose themselves to clients
who will harm their reputations or generate costly
litigation," says Dan Guy, vice president of professional
standards and services at the American Institute of Certified
Public Accountants, New York.
So far this year, the Big Six accounting firms have dropped 30
publicly traded companies as audit clients, a review of
Securities and Exchange Commission filings by industry
analyst Brian McGreevy shows. In all of last year, the Big Six
dumped 92 such clients, up from 85 in 1994, he says. "Going
forward, the Big Six probably will reject more publicly traded
companies because of the threat of liability," he adds.
Mostly Small Companies
Most of those being rejected are small, lesser-known
companies that are seeking the Big Six's seal of approval. Mr.
McGreevy says the Big Six auditors now "want to deal with
bigger, more established companies than the smaller outfits,
the ones with their financial house more in order." As a
result, these smaller firms end up hiring lesser-known
accounting firms to audit their statements.
Industry officials say the crackdown on potential problem
clients is only beginning. "All the Big Six firms have taken
dramatic, aggressive steps to mitigate risk in their client
base," says Pat McDonnell, vice chairman of Coopers &
Lybrand's business assurance practice in Chicago. "A sterling
reputation matters more to us now ... so we no longer have
certain clients, and I'm proud of it."
Unitech Industries, a Scottsdale, Ariz., maker of cellular
phone accessories, knows all about the trend. The company
said in an SEC filing that Coopers resigned its audit account
last year because of "insufficient internal controls" at
Unitech. The filing says that Coopers was concerned about
Unitech's high turnover of financial and accounting
personnel. Unitech officials told the SEC that the turnover
may have left management without enough personal
knowledge and access to documents to make reliable
statements about company finances. Coopers declined to
comment.
Last year, Coopers dropped 28 public company clients, up
from 15 a year earlier. Arthur Andersen & Co. has booted 47
public companies since the beginning of 1994; Price
Waterhouse has ditched 46 since then. "When we looked
back at the suits we've had, we realized that a large number
could have been avoided if we were more careful about the
clients we selected," says Peter Frank, a vice chairman in
charge of risk management at Price Waterhouse.
Firms are sacrificing cold cash to make their policies stick.
Coopers says the tougher screening practices it initiated last
year cost it at least $22 million in 1996 revenue. (Its
world-wide revenue for the year was $6.8 billion.)
Chairman Is Puzzled
Sometimes, auditors drop companies abruptly. Late last year,
just one month after ConSyGen Inc. engaged Arthur
Andersen as its auditor, the Big Six firm dropped the
account. The reason, company officials say, is that Andersen
was uncomfortable with "management's business
philosophy." Robert L. Stewart, chairman of the small
Phoenix software developer, says, "I have no idea what that
means." Andersen declined to comment.
The firms say they have to boot clients because shareholders
and creditors of troubled companies have sued them so often
in recent years over allegedly faulty audits. According to
Accounting Today, an industry newsletter, the Big Six are
now spending more than 15% of their audit and accounting
revenue on professional-liability coverage. Despite federal
legislation in 1995 that restricted frivolous suits against
accounting firms and others, the number of shareholder
suits naming accountants as defendants hasn't declined,
according to National Economic Research Associates Inc., a
New York economic consulting concern.
To ferret out potential lemons, firms have increased their
scrutiny of information that prospective clients submit about
everything from finances to management changes.
Accountants are increasingly grilling companies' former
auditors about management integrity and trying to obtain
their audit work papers.
Intense Screening
"We have much less tolerance of risk and adverse client
economics," says Mr. McDonnell of Coopers. "Our screening
of audit clients has clearly become much more intense and
stringent as compared to three years ago."
Coopers is particularly leery of start-up companies, given
their higher risk of failure and investor lawsuits. "You're
going to get sued when people go broke," says the firm's Mr.
McDonnell. "It's those smaller companies where you'll also
find more volatility and aggressive positions on earnings,"
adds a Coopers spokesman. "That's where we've been
backing off and saying, 'no way.' "
Big Six firms are also taking a tougher look at companies'
internal controls, which are sometimes weak. In a recent
Louis Harris survey that Coopers & Lybrand commissioned,
four out of 10 middle managers surveyed admitted that
people in their companies try to work around internal
controls when they are thought to be "in the way."
On top of their other problems, companies that have trouble
with auditors may have a tough time getting new
bean-counters. "Now, we won't take on a client that has fired
its previous accounting firm over an accounting dispute
because it indicates a greater risk," says Mr. McDonnell of
Coopers.
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