Auditor Waves Goodbye to Crystallex

It’s never a good thing when an international auditing firm quits a high profile client. But it happens. Friday Crystallex (KRY) was looking for a new auditor.

The CPA Journal states that rules by the Securities and Exchange Commission may help to make the meaning of 'disagreements' more clear, and therefore, increase the reporting of auditor-client conflicts:

When switching auditors, clients will now be required to provide a description of:

• Disagreements or reportable events where the former auditor advised the company and questioned the accuracy or reliability of the company's financial statements, internal controls, management's representation, or prior audits.

• Whether the audit committee discussed each of the disagreements or reportable events with the former auditors.

• Issues discussed with the new auditor during the company's two most recent fiscal years and any subsequent interim period before the new auditor's appointment and the new auditor's and former auditor's views regarding the issues.

• Whether the former auditor's report for either of the past two years contained an adverse opinion, a disclaimer, or was qualified or modified with a discussion of the nature of the opinion.

• Whether the former auditor resigned, declined to stand for reelection, or was dismissed.

• Whether the decision to change auditors was acted on by the audit committee or board of directors.

• Any management-imposed limits on the former auditor to respond to the inquiries of the new auditor regarding each disagreement and reportable event.

I don’t think the Deloittes-Crystallex matter is serious or else the audit firm would disclose their reasons for quitting the engagement. But, clearly it doesn’t look good for the Company.

Having spent five years as an auditor with forerunner firms to KPMG and PricewaterhouseCoopers in Toronto, I have some experience to back up a possible explanation, but unless you were part of the decision-making or the negotiation, no one really knows the specific reason. There are too many gray areas to make a reasonable guess.

Sometimes these things happen when a Board changes control and wants a change for personal reasons. In this case, it appears from the news release that the auditor made the decision, so let’s look there for a possible reason.

Auditors don’t arbitrarily dismiss profitable engagements, so the factor(s) involved could be one or a combination of many possibles:

1. confidence in management, which sometimes occurs when a new CEO takes over, such as for example a personal issue that came up on the audit of a different company altogether, but about which the auditors simply refuse to deal with the new CEO

2. confidence in the consultants used to determine, as an example, new reserves

3. disagreement over scope of engagement that the auditors might believe is necessary to possibly get into restatement issues or some other matter that is concerning the auditor

4. difficulty in getting paid

5. difficulty in getting access to certain records that the auditors expect to be completely transparent

6. inability to get insurance coverage that would cover the perceived risk of the engagement

7. inability to audit all parts of the company such as, in this case, subsidiaries in Venezuela or offshore accounts

8. personal conflicts with a chief financial officer

At the end of the day, it could be the aggregation of several minor issues that somehow led to the final decision. To guess is to speculate.

Still, these things don’t look good.