6.6 Changes in Auditors

When planning for an IPO, an entity often considers whether its independent auditors have the requisite qualifications and experience to assist the entity with the IPO process. In addition to seeking an independent registered public accounting firm that has extensive experience with IPOs and public companies, an entity that has (or is interested in developing) international operations often wishes to engage an independent registered public accounting firm with a network of affiliated international firms around the globe.

In certain cases, the entity may be required to change its independent auditor to move forward with its IPO process because the prior auditor may be unable to be associated with the IPO. This could be the case because, for example, the audit firm is not registered with the PCAOB or is not in compliance with the SEC’s independence rules for its audits of the years for which financial statements will be included in the registration statement. A successor auditor will need to gain an understanding of the business, perform audits of one or more years, and coordinate with the predecessor auditor.

Connecting the Dots

If an entity changes to a new audit firm shortly before it commences an IPO process, the previous audit firm would be required to issue, for inclusion in the SEC filing, an auditor’s report on prior-year financial statements that refers to PCAOB standards. To comply with PCAOB standards, the previous audit firm may also need to perform additional audit procedures. If the prior auditor is not able to or willing to issue an auditor’s report that refers to PCAOB standards, the new auditor may need to reaudit previously issued financial statements.

An entity that changes auditors during the two most recent fiscal years or any subsequent interim period must provide certain disclosures under Regulation S-K, Item 304. For an existing public company, these disclosures are typically provided on a Form 8-K; however, the required disclosures for an IPO must be provided in the IPO registration statement.

6.6.1 Considerations Related to Dividing Responsibility for an Audit

Both AICPA and PCAOB standards allow an audit firm to divide responsibility for an audit with one or more referred-to auditors, although it is not common for audit firms to do so. Under SEC rules, if an independent public accounting firm divides responsibility with a referred-to auditor, the referred-to auditor’s report must be filed with the SEC and this report must refer to PCAOB standards. The referred-to auditor would also need to consent to the use of its auditor’s report in the registration statement. (See Section 6.8 for more information about consents.)

Even if an auditor previously divided responsibility with a referred-to auditor in its AICPA auditor’s report, it may not be appropriate to divide responsibility in the PCAOB auditor’s report if the referred-to auditor is not in a position to reissue its auditor’s report and refer to PCAOB standards. In addition, PCAOB AS 2101.06A states that “the participation of the engagement partner’s firm ordinarily is not sufficient for it to serve as lead auditor if the referred-to auditors, in aggregate, audit more than 50 percent of the company’s assets or revenues.” As a result, if an auditor previously divided responsibility with a referred-to auditor in a prior AICPA audit, the auditor would be required to reevaluate the appropriateness of that conclusion given the SEC’s position on this matter.