Big 5 Sporting Goods Does the Big Four Shuffle

Small Cap Watch List member Big 5 Sporting Goods (BGFV) tried to slip some important shareholder news (a change in auditors) in an 8K filed late Friday afternoon:

During the two fiscal years ended December 31, 2006, and the subsequent interim period through May 25, 2007, there were no: (1) disagreements with KPMG LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to the subject matter of the disagreement, or (2) reportable events, except that KPMG LLP advised the Company of the following material weaknesses as existing as of January 1, 2006:

1. The Company lacked the necessary depth of personnel with adequate technical accounting expertise to ensure the preparation of interim and annual financial statements in accordance with GAAP.

Just a minor disagreement. As I noted recently, 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.

Well, perhaps they didn’t disagree on the fact that the company couldn’t adequately prepare financial statements, but that doesn’t make me feel any better about it.