Auditor Predecessor Successor

Question: What is the purpose of predecessor-successor auditor communications? Which party, the predecessor or successor auditor, has the responsibility for initiating these communications? Briefly summarize the information that a successor auditor should obtain from the predecessor auditor.

The purpose of the predecessor-successor auditor communications is to help an auditor determine if a firm should engage with a new client. This communication will inform the auditor about the history of the client with the previous auditor and possibly expose some information that would suggest that accepting this client is not in the best interest of the firm. In recent times it has become important to carefully choose with whom a firm engages in an agreement with for representing them as their auditor. Not only is the firm's reputation at stake but they can be held liable for their client's fraudulent activities.

The Auditing Standards Board has issued a Statement on Auditing Standards Number 84 in October of 1997. SAS No. 84 replaced the SAS No. 7 which has the same title and was written to update the statement to the present environment. SAS No. 84 defines the required communications between the predecessor and successor auditor before accepting an engagement; what to do when the predecessor limits the responses to the successor; contains sample client consent and an acknowledgement letter and a successor auditor acknowledgement letter. Many of the CPA firms use caution when accepting new clients and go through a detailed procedure before accepting a new client. This is necessary to protect the firm from potential future liabilities based on their client's activities.

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SAS No. 84 made several modifications or improvements to SAS No. 7 which include communications prior to engaging with the client, discusses the usage and types of working papers, discusses the use of different types of correspondence letters for the predecessor-successor with examples, and outlines actions that the successor should follow if the financial statements are found to be misstated.

This Statement was then amended by no. 93 because the statement didn't address the case where an auditor started an audit but didn't complete it. SAS No. 93 clarifies the definition of the predecessor auditor to include this situation. The definition was refined to include any auditor who is engaged to perform an audit but does not complete it.

In the ZZZZ Best case study, Greenspan was an independent auditor that completed an audit of the ZZZZ Best Company in 1986. He used analytical techniques to look at the financial data and he confirmed the existence of their jobs by reviewing their documents. After completion of the audit, Minkow that owned the ZZZZ Best Company dismissed Greenspan and retained Ernst & Whinney as the company's auditor. A congressional subcommittee was probing into the predecessor-successor communications that occurred when this transition occurred. When the congressional subcommittee asked what information he provided to the successor auditor, Greenspan was said “Nothing. I did - there was nothing because they never got in tough with me. It's protocol for the new accountant to get in touch with the old accountant. They never got in touch with me, and it's still a mystery to me.”

According to SAS no. 84, the successor cannot accept the new client until they have communicated with the predecessor and have reviewed their responses. Even though the successor is required to initiate the communication, the predecessor is required to respond. The predecessor is required to get permission from the client before providing any information about the client. This means that there is a possibility that the predecessor will state that they will not be providing any information but they must respond stating this. If the predecessor doesn't provide any information, this most likely means that the client doesn't want them to disclose some potentially harmful information about the client and raises some concerns about accepting the new client.

In the ZZZZ Best Company case, Ernst & Whinney said that they communicated with Greenspan prior to accepting ZZZZ Best as an audit client. They didn't state any details related to the communication and Greenspan did not confirm this communication. Even if Ernst & Whinney did initiate communication with Greenspan, given that neither one confirmed the details of what was communicated means that Ernst & Whinney didn't follow requirement of reviewing the predecessor responses before accepting the client.

The successor auditor should obtain information that will help decide whether to accept the client as their auditor. The type of information that the successor auditor should be inquiring about is related to the integrity of the management and any disagreements that the predecessor had with the management over accounting or auditing procedures. If there's has been issues with management integrity or concerns about their integrity from the predecessor auditor, it most likely will be an ongoing concern which may cause problems in the future. Also, if the predecessor auditor had disagreements with the client about accounting or auditing procedures then it would best to discuss these procedures with the client before starting the engagement with the client.

Another item that the successor auditor should request is access to the predecessor's working papers. “SAS no. 84 includes a list of the working papers ordinarily made available to the successor, including documentation of planning, internal control, audit results and other matters of continuing accounting and auditing significance”.¹ The predecessor may limit the access to this working papers for reasons such as confidentiality agreements or litigations. These working papers provide the good insight into the client and give exposure to the predecessor and client's working arrangements. They will be the fastest and most detailed information for evaluating the client.

When responding to the successor after the initial communication, the predecessor may request a written agreement disclosing the terms of what they disclose. They may request that the successor keep the information confidential and agree not to engage in litigations against the predecessor related to the material disclosed.

Another item they should discuss is the reasons for the change in auditors. This information could show some insight into any management integrity issues if the predecessor auditor withdrew as the auditor.

The successor will need to document the communications with the predecessor. They should document when the communications occurred, the results of the communications, and details of what material was disclosed. Even though the communications may be oral instead of written, it is good practice to document the details of what communications were made and the nature of the communications. SAS No. 84 doesn't require the documentation of this communications but the successor auditors' working papers should show the details of communications that occurred.

The predecessor-successor auditor communications is the key to determining if the firm should accept the new client. This communication will allow significant information to be gathered in determining whether to proceed into an agreement or not. The success auditor must initiate the communication with the predecessor. The completion of this exchange of information is vital to protect the firm from potential future liabilities based on their client's activities.