The Auditor and The Company Stock

            The auditing profession provides a valuable service to all stakeholders by ultimately instilling confidence in financial reports and management integrity.  The value of the auditor is extremely apparent when the auditor resigns.  The resignation of auditors can immediately devalue a company.

            When auditors resign, especially respected auditors such as PwC, Ernst & Young, Deloitte Touche Tohmatsu or KPMG, many investors head for the exits. The resignation of auditors often results in major stock dips.  For example, shares of Singapore-listed Sky China Petroleum Services Ltd, tumbled as much as 32 percent to an all-time low after it said its auditors, Ernst Young LLP had resigned.   China Media Express Holdings, Inc.,  had their shares fall 4.3% when they announced the resignation of independent auditor, Deloitte Touche Tohmatsu.   A couple years ago American Apparel Inc. had their shares fall by 25% in New York trading after saying Deloitte & Touche resigned as its accountants.  This past summer Nasdaq-listed SinoTech Energy Ltd. had their auditors   Ernst & Young's China resign as the company's auditor ultimately resulting in the company's stock suspended from trading. The impact the auditor has on the value of a company's stock is affected by his opinion on the financial statements, his inability to give an opinion and his resignation from an engagement.

            When an auditor resigns he will state his reasons for his resignation, however until the public becomes aware of the reasons, their first reaction is to sell.  Auditors can resign for many reasons such as an issue of independence, lack of profitability to their firm, or dissatisfaction with how their personnel are treated.  However, when auditors state they are no longer able to rely on the representations of management or that certain issues need to be looked at by an independent investigation, the integrity of the company is affected.  Moody's who puts out ratings on a company stock is obligated to understand the reason for an auditor's resignation because in many cases it  can wind up affecting a company's credit profile, which will affect stock value.

            According to a survey by the Chartered Certified Public Accountants, questioning the value of an auditor, 90% of respondents felt that the external audit brings value to them, 80% felt that audited financial statements were important to them in making investment decisions, 75% agreed that the scope of the audit should be extended to enhance the value of audit and 85% of respondents felt that the provision of non-financial information would serve their investment decision making purposes.  Based on the results of the survey and more importantly the impact on the stock of a company upon the resignation of the auditor, it is obvious the value the auditor provides to all its stakeholders.  The auditor has a huge responsibility and needs to constantly exhibit integrity, professionalism and competence.   The company that they are working for may be paying them but the confidence they instill in the public will ensure the value of their service.