Under Item 304 of Regulation S-K and Item 4.01 of Form 8-K, companies must provide required disclosure when there is a change to their principal auditor. Here are 15 items to consider:
1. File the 8-K within four business days
Disclose any auditor change (resignation, dismissal or refusal to stand for reelection) on Form 8-K under Item 4.01 within four business days – no exceptions, even if the change occurs right before your 10-K filing.
2. No hiding by using the 10-K for the disclosure
You can’t satisfy Item 4.01 reporting obligations with a Form 10-K. A standalone Form 8-K is required, even if the change occurs within days of filing the 10-K.
3. Option to use the same filing if a new auditor is hired when one leaves: Separate events, separate items
Auditor departure (Item 4.01(a)) and new engagement (Item 4.01(b)) are separate reportable events. If they occur close together, you can report both in a single Form 8-K – but you don’t have to.
4. Auditor departs before their audit is wrapped: Form 8-K/A may be needed
If the auditor is dismissed before completing the audit, you may need to amend the 8-K once the audit wraps. Mention in your initial 8-K that an amendment will follow.
5. Get an exit letter from the departing auditor
Send the disclosures to the outgoing auditor – and request a letter stating agreement or disagreement. File it as an exhibit to your Form 8-K.
6. Say what you mean: Use Item 304 lingo
Stick to “resigned,” “dismissed” or “declined to stand for reelection.” Avoid vague terms like “terminated the relationship” or “parted ways.”
7. Repeat the 8-K language in the next proxy (and the proxy after that)
Even if you’ve filed a Form 8-K, you must repeat the disclosure in the proxy statement under Item 9(d) of Schedule 14A – at least for two years.
8. Yes, you can recycle the same disclosure for your next two proxies
It’s common to reuse last year’s auditor change disclosure for the second year’s proxy if nothing has changed.
9. Disagreements? Say so – even if there aren’t any
Item 304 requires affirmative disclosure of whether any disagreements occurred. If there were none, say so plainly.
10. No need to mention a peaceful transition
If there were no “reportable events,” you don’t have to say that. But if there were, they need full disclosure.
11. Going concern? Must disclose
If your auditor’s report includes a “going concern” paragraph, disclose that in your Item 304(a)(1)(ii) response.
12. New auditor might look like the old one (but is still new)
Even if the new auditor is affiliated with the old one (like a different country office), if it’s a different legal entity, it’s a reportable change.
13. Not all internal control issues are created equal
A “material weakness” is a reportable event. A “significant deficiency?” Maybe not – but tread carefully.
14. The broad brush of ‘disagreements’
“Disagreement” is defined broadly – it includes any unresolved difference in accounting principles, disclosures or audit scope that might have affected the report.
15. Silent treatment for the exit letter? Disclosure that lack of cooperation
If the former auditor won’t provide the required letter, disclose that fact in your Form 8-K or amendment.
Authored by
Broc Romanek