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Companies Gain the Upper Hand in Their Auditing Relationships

A report says that companies are now firing their auditors more frequently, demanding more services and managing their relationships -- and fees -- more than in the past, when auditors seemed to always have the upper hand.

Lately there's been a renewed focus on auditors and their responsibility in the economic meltdown. Back in 2002, the collapse of Enron led to fingers pointed, fines levied and lawsuits filed, and the ultimate disappearance of auditor Arthur Andersen. And last month, the report on Lehman Brothers' bankruptcy called out auditors Ernst & Young for approving dodgy accounting by Lehman.

In light of that, I thought it was worth pointing out this report by CFO magazine that says that in most sectors, companies increasingly have the upper hand when it comes to negotiating with their auditors.

Welcome to the new auditor-client relationship. In the wake of the Sarbanes-Oxley Act of 2002, audit fees soared, auditors dumped risky clients by the hundreds, and "value-added" services all but vanished under the weight of new independence rules. Today, the reverse is true. Audit fees have been dropping across the board since 2007. In 2004, more than a third of auditor changes were the result of audit firms walking away from clients. Last year, 82% of auditor changes were because companies fired their auditors (among the Big Four, the number was 90%). And companies aren't just negotiating lower fees; they are also demanding more value — read "services" — covering everything from corporate-board education to competitive intelligence.

The "big four" in auditing are Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. In a note helpful to investors, regulators and journalists alike, the piece warns that very low fees and relatively high fees should both be red flags. The former, it says, may be an indicator of corner-cutting and generally shoddy audits. The latter may suggest a company is paying for greater "flexibility" in its accounting.

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