Last week I wrote about Catapult Communications (NASDAQ: CATT) switching from Deloitte & Touche to a much smaller local firm, in a post called Big Four = Big Fees. In that post I referenced the CFO.com article from which I got my information. The article focused on the difference in fees between the firms: $985,000 for Deloitte and $561,000 for the small firm. That big savings was portrayed as the reason Catapult switched.
And in rides Francine McKenna of re: The Auditors. She raises a good point. Why did Catapult go to great pains to detail the reason for the switch from Deloitte to a virtual no-name firm? Was Catapult trying to embarrass Deloitte?
Well I think Francine may have found the answer, one which she suggests CFO.com might have found if they hadn’t just accepted Catapult’s story at face value. You see, in the company’s annual report for the year ended September 30, 2007, it was noted that a material weakness from the prior year was remediated.
What was this weakness, you ask? Well, you can see what the weakness was if you read the fix that was noted in that annual report:
The Company’s Chief Financial Officer performs a detailed quarterly review to confirm that the Company’s accounting for its cash, cash equivalents and short-term investments is in accordance with the requirements of generally accepted accounting principles in the United States.
Uh…. if the “fix” is that the CFO now reviews cash and short-term investments to see if they’re reported in accordance with GAAP, then the weakness was that he wasn’t doing it before! And…. not doing it was deemed a material weakness by Deloitte.
That’s pretty bad. And who knows.. maybe Catapult is upset that Deloitte forced them to fix the problem and make the disclosure.
Francine also notes that Catapult switched auditors in January of 2006, too, dumping PriceWaterhouseCoopers and hiring Deloitte.
Francine and I agree on this: It is not uncommon for companies to go opinion shopping.
Could that be what we’re witnessing here?
UPDATE: More on Dennis Howlett’s take is found here.
I’m not convinced Francine has this one right. As at this time I’m awaiting her moderation system to do its stuff but in essence it was a misclassification, the restatement had no effect on the business and Deloitte did not refer to it in their audit opinion.
Making the connection to ‘shopping for opinion’ also seems edgy because if that is indeed common practice then surely that’s a matter for regulators as it requires an element of collusion.
[…] Tracy Coenen also picked up on Francine’s story and I left a similarly worded comment there. […]
A material weakness is still material and a weakness, even if it did not impact that current numbers. It was clearly something that still needed fixing, no?
And I’m a firm believer that audits aren’t worth much to begin with… merely a clean opinion that a company buys from a particular audit firm.
Thanks for stopping by!
That’s an interesting opinion re: audit. It raises important questions because as I said to CFO.com, if the public can’t trust the audit certification then we’re in a race to the bottom that could destroy public confidence. If you have a pension plan, as many do, that’s a pretty big deal.
I’d be interested in knowing if your view as a practitioner is one that’s broadly shared among your colleagues. If so then that’s a trend people like myself should be aware and take note.
One of the worst companies on the planet. They try to pull every trick in the book and they got caught !
They own me money and will not pay.