Not Worried About Itron’s Auditor Change

Itron to Change Independent Registered Public Accounting Firm:

As a result of Itron’s (ITRI) acquisition of Actaris Metering Systems (Actaris) on April 18, 2007, the Audit/Finance Committee undertook a review of both Deloitte and E&Y as Itron’s independent accountants. E&Y served as Actaris’ independent accountant since Actaris’ formation in 2001.The Audit/Finance Committee conducted a comprehensive review and evaluation of both firms. Following the review, the decision was made to select E&Y.

According to Financial Shenanigans: How to Detect Accounting Gimmicks & Fraud in Financial Reports, Second Edition, investors should be wary of firms that change auditors:

Changes could offer clues to financial shenanigans, especially in those cases in which the auditors may have been fired because they found some problem that they were willing to supress.

A company that fires its auditor because of a disagreement over financial principles and then shops around for a new auditor that is more agreeable to its interpretation of GAAP has engaged in what is known as “opinion shopping.” To prevent this practice, the SEC requires a company that changes auditors to file a Form 8-K, notifying the commission of the termination and giving the details of any accounting disagreements. Unfortunately, few disagreements are ever actually disclosed in these filings.

That “unfortunate” lack of real disclosure is why investors generally should be wary of auditor changes even when no disagreements are noted. However, the acquisition of Actaris meant that one of the two auditors would be let go, and while it is a bit of a surprise that the parent company’s auditor lost out, I don’t consider it particularly alarming. Instead, it will be more important to monitor the future filings for any changes to accounting methods or assumptions that may be made. Those can then be evaluated on a case by case basis.

Disclosure: author owns call options on Itron.