Industry insight into the auditor change process.

CASE STUDY

What drives the auditor change process from an industry perspective? Robert H. Brewer, director of audits for Praxair Inc., an industrial gas company in Danbury, Connecticut, producing gases such as oxygen, nitrogen and helium, said his company made a change when it spun off from Union Carbide in 1992. Brewer, who is chair of the American Institute of CPAs members in industry executive committee, said "we were not dissatisfied with our previous auditor, we were just a new company evaluating all of our outside suppliers to make sure they were the ones we wanted to deal with in the long run."

According to Brewer, Praxair went through a two-phase selection process. In the first, the company evaluated the candidates' qualifications on a global basis--Praxair does business in 44 countries. "We asked for statements of qualifications from around the world, starting at the top with the proposed engagement partner and the team that would work with us at the corporate level." The company looked at the match of firm offices around the world with Praxair offices. Contacts in Brazil had a big influence because it represented a significant portion of Praxair's income and sales at the time.

Brewer said there was no discussion of fees at this point. "Our drive wasn't necessarily to get the lowest fee--although we wanted a competitive rate--but to get the best fit with Praxair and our culture." Praxair evaluated and ranked the candidates in the original group and narrowed it down to a final two.

In the second phase, Praxair asked the remaining candidates to dig deeper into the company's operations and provide a price quote on what the audit would cost on a global basis. The candidates made a formal presentation to senior management on their services and synergies. They did presentations in Brazil and at corporate headquarters and were ranked on seven criteria, including creative approaches and ideas in conducting the audit, value-added services and transition approaches.

Brewer said Praxair ended up with a substantial savings over what it had paid before but added the actual fee ultimately did not have an impact on the selection. "I found out as we went through the process that firms do have different philosophies and ways of getting to the same result. All of the candidates were qualified to do our audit--the ultimate question Was the best fit and who could provide the services we were looking for globally."

As Praxair made the transition to a new auditor, Brewer said the predecessor auditor was very helpful about permitting access to records. "The new auditors went out of their way to make it a seamless transition for us," Brewer said. "We did not come out of the process feeling that changing auditors disrupts your business. At some point in the future, we'll step back again and see if we are still with the right people."

A strategic change in relationship

Bonnie L. Erickson is assistant controller of The Kendall Company in Mansfield, Massachusetts, and a member of the AICPA industry professional issues subcommittee. Kendall, which manufactures and markets disposable medical products and industrial tapes, is a division of Tyco International LTD, which decided to change auditors about two years ago.

According to Erickson, the primary factor driving Tyco to consider a change was that while the company had a good relationship with its long-standing auditor, it learned the lead engagement partner was moving up in the firm and would no longer be available to service the account. The partner's critical importance in determining the nature of the relationship between the two parties and the perceived quality of service, along with cost dynamics in the market, convinced management it might be a good time to look at what other CPA firms had to offer.

In the selection process, it became clear that fees were not going to be an issue. "All of the firms being considered would meet any fee offered by another firm," Erickson said. The capabilities of the lead partner and the chemistry between him or her and Tyco management in Exeter, New Hampshire, and the resources of the CPA firm's Boston office, which would be running the audit relationship worldwide, were among the most important factors in making the decision.

Tyco viewed the audit itself as a commodity. Erickson said any of the five competing firms could have done a decent audit that would have fulfilled the requirements. Tyco was looking for value-added services, such as systems consulting, tax and Securities and Exchange Commission reporting advice, and fast answers to its questions. Tyco also was concerned about the chemistry between the personnel in other firm and company locations.

Erickson also offered her perspective as a former audit manager with a large accounting firm who came to Kendall as director of internal audit. "One of the things that would drive me to look for an another audit firm would be a sense that the current auditor wasn't adding value in terms of making recommendations to help me improve my company's internal controls." Erickson said that along with reasonable fees and consulting possibilities, an important consideration is whether the auditor can point out weaknesses in the system of controls and offer practical solutions. "The stronger those controls are throughout the organization," Erickson noted, "the more senior management and the outside auditors can rely on them to identify problems."