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When companies change auditors, something usually happened

Item 9 of the 10-K is a short section that many investors skip entirely. It discloses whether the company changed auditors during the period and whether there were any disagreements with the prior auditor. The brevity of Item 9 belies its importance: a change in auditors is often a signal that something went wrong. The company might have wanted a more accommodating auditor. The prior auditor might have objected to an aggressive accounting treatment. Or the prior auditor might have discovered something that prompted resignation. Investors who read Item 9 carefully often catch warning signals years before a broader market reckoning.

Quick definition​

Item 9: Changes in and Disagreements with Accountants is the section of the 10-K where the company must disclose whether it changed its principal auditor during the period and whether there were any disagreements with the prior auditor over accounting issues, auditor independence, or other matters. The disclosure is required under SEC Regulation S-K Item 304 and is supplemented by Form 8-K disclosures (within four business days of the auditor change). Item 9 is highly regulated; companies cannot omit or downplay a material disagreement.

Key takeaways​

  • Item 9 discloses auditor changes and disagreements with prior auditors.
  • An auditor change is not inherently problematic, but it always signals something.
  • Disagreements with the prior auditor are red flags; they often reflect disputes over accounting judgements.
  • The "disagreement" threshold is low; it includes any matter the prior auditor raised, even if the current auditor agrees with the company.
  • Companies must disclose auditor changes within four business days via Form 8-K; Item 9 provides summary disclosure.
  • If a company changes auditors mid-year, the prior auditor's reasons are disclosed in Form 8-K; investors should review these.
  • A pattern of frequent auditor changes is a significant red flag suggesting the company seeks auditors willing to accept aggressive accounting.
  • The SEC enforces Item 9 disclosures rigorously; companies that omit or downplay material disagreements face enforcement action.

What Item 9 must disclose​

According to SEC Regulation S-K Item 304, the company must disclose:

  1. The name of the prior auditor and the date of the change.

  2. Whether the change was initiated by the company or the auditor resigned/was dismissed.

  3. Any disagreements with the prior auditor. The SEC defines "disagreements" broadly to include not just disputes but any matter the prior auditor raised, even if ultimately resolved.

  4. The principal focus of the disagreement — whether it was an accounting principle, audit scope, auditor independence, or other matter.

  5. Whether the company consulted with the new auditor about the disagreement and what the new auditor's views were.

  6. Whether the prior auditor's audit report contained a qualification, adverse opinion, or disclaimer. (If so, this must be disclosed.)

  7. The involvement of the audit committee — whether the audit committee was aware of and approved the change.

Understanding auditor changes: the categories​

Auditor retirement or dissolution.

Sometimes an auditor simply retires from practice or closes its practice. A company is forced to find a new auditor. This is rarely a red flag. When the Big Four firm's local office closes or a partner retires, the company typically switches to another Big Four firm or a reputable mid-size firm. This is business as usual.

Auditor fees and audit committee direction.

An auditor's fees sometimes become an issue. If fees escalate materially and the audit committee decides to seek a lower-cost auditor, the company changes auditors. This can be a red flag (is the company cutting corners on audit quality?) or benign (the prior auditor was inefficient). Investors should assess the replacement auditor's quality. A shift from Big Four to a low-quality firm is a warning.

Disagreement over accounting treatment.

This is the serious category. The prior auditor objected to an accounting treatment (revenue recognition policy, fair value estimate for goodwill, capitalization of costs, etc.). The company either changed its accounting (the auditor is satisfied and no change is needed) or changed auditors (seeking an auditor willing to accept the treatment). This is a major red flag.

Auditor independence issues.

Occasionally, an auditor's independence is questioned. Perhaps the auditor provides too many consulting services, or there is a family relationship between the auditor and a company executive. In rare cases, the audit committee forces an auditor change to preserve independence. This is usually disclosed transparently.

Going concern or other audit findings.

If the prior auditor raised concerns about going concern (ability to continue as a going concern), the company might change auditors. A going concern opinion is a serious matter, and auditor change in response to this signals deterioration in the company's financial condition.

How to read Item 9​

Step 1: Determine if there was an auditor change.

The item opens with this sentence: "[Company] changed auditors on [date]" or "[Company] did not change auditors during the fiscal year ended [date]." If no change, Item 9 is very brief. If there was a change, read on.

Step 2: Identify the reason for the change.

Was the change initiated by the company or the auditor? If the auditor resigned, why? Common reasons:

  • Auditor retired or firm closed.
  • Company sought a lower-cost auditor.
  • Company and auditor disagreed on accounting treatment.
  • Auditor had independence concerns.

Step 3: Determine if there were disagreements.

The item will state: "There were no disagreements with [prior auditor]" or "There were disagreements with [prior auditor] regarding the following matters..."

If there were disagreements, read them carefully. What was the dispute about? Did the prior auditor object to an aggressive accounting treatment?

Step 4: Check if the new auditor's views were solicited.

If there was a disagreement, did the company consult with the new auditor about it? If the new auditor's view is disclosed and it agrees with the company (disagreeing with the prior auditor), this is a red flag. It suggests the company shopped for an auditor.

Step 5: Look for audit report qualifications.

If the prior auditor issued a qualified, adverse, or disclaimed opinion, this must be disclosed. A qualified opinion is a serious warning.

Step 6: Check SEC filings for the Form 8-K.

Item 9 is a summary. The detail is in Form 8-K (filed within four business days of the auditor change). Pull the Form 8-K to see the full disclosure of the disagreement.

Real-world red flag: The auditor shopping pattern​

A company hires Auditor A and builds a relationship over five years. In Year 6, the company's business is under pressure. Management wants to manage earnings more aggressively to meet guidance. Auditor A objects to the treatment. The company tells Auditor A it will seek a new auditor.

The company interviews Auditor B (a smaller, hungrier firm). Management describes the accounting question to Auditor B. Auditor B, eager for the engagement, agrees the treatment is acceptable.

The company changes auditors and discloses in Item 9: "We had a disagreement with Auditor A regarding revenue recognition policy. We consulted with Auditor B, who determined the treatment is acceptable under GAAP."

This is textbook auditor shopping. The company changed auditors because the first one had integrity and the second was willing to bend. Investors who read Item 9 carefully spot this pattern.

The SEC has enforcement power over auditor shopping. If the SEC suspects the company changed auditors to avoid scrutiny of aggressive accounting, it can investigate. But the pattern is usually obvious in Item 9 and Form 8-K.

Common Item 9 red flags​

  1. Frequent auditor changes. If a company has changed auditors three times in the past five years, it is suspicious. Auditor changes should be rare (every 15–20 years, ideally). Frequent changes signal either incompetence in selecting auditors or a pattern of seeking compliant auditors.

  2. Change from Big Four to non-Big Four firm. A shift from Deloitte to a regional or local firm is a yellow flag. The company might have downsized audit costs, but it might also have reduced audit rigor. Investors should assess the replacement firm's quality.

  3. Disagreement over revenue recognition. Revenue is the top line. If the prior auditor objected to the company's revenue recognition policy and the company changed auditors, ask why. Is the company front-loading revenue? Is it recognising revenue on goods that can be returned?

  4. Disagreement over asset valuation (goodwill, intangibles). If the prior auditor wanted to impair goodwill and the company disagreed, and the company then changed auditors, this is a major red flag. Goodwill impairment is often deferred through auditor shopping.

  5. New auditor's views disclosed and they favour the company. If Item 9 discloses that the new auditor was consulted and agreed with the company (disagreeing with the prior auditor), this is a red flag. It suggests the company found a pliable auditor.

  6. Prior auditor's report contained a qualification. If the auditor issued a qualified opinion and the company then changed auditors, this is a warning. What did the prior auditor have concerns about?

  7. Auditor change in advance of aggressive accounting policy change. If the company changes auditors in Year 1 and then, in Year 2, announces a major accounting policy change (e.g., capitalizing costs previously expensed), the timing is suspicious.

  8. Quiet disclosure of auditor change. If the company buries the auditor change in Item 9 without emphasis, but Form 8-K (filed earlier) revealed material disagreements, the company is downplaying the issue. Read both Item 9 and Form 8-K.

The relationship between Item 9, Form 8-K, and Form 10-K timing​

Here is the timeline:

  • Event occurs: Company decides to change auditors.
  • Day 1: Company files Form 8-K (Item 4.01 Change in Accounting) within four business days, disclosing the auditor change and any disagreements in detail.
  • Weeks later: Company files Form 10-K, which includes Item 9 summarizing the auditor change and referencing the earlier Form 8-K.

Investors should read both documents. Form 8-K is filed immediately and often provides more detail. Item 9 is a summary. If Item 9 and Form 8-K contradict, the Form 8-K is the contemporaneous disclosure and is more reliable.

FAQ​

If there is no auditor change, can I assume the company is fine?​

No. A company that keeps the same auditor has stability, but it does not guarantee the financial statements are accurate. A company can misstate figures while keeping the same auditor. Item 9 is one data point among many.

Is it common for companies to change auditors?​

Large public companies rarely change auditors (every 15–20+ years on average). Smaller or younger companies change more frequently. A change every 3–5 years is unusual and warrants investigation.

What if the company says the auditor change was driven by cost reduction?​

Cost reduction is a common reason for auditor changes, especially when the prior auditor's fees escalate. Assess the replacement auditor's quality. If the company moved from Big Four to another Big Four firm, this is usually fine. If it moved to a much smaller firm, assess that firm's capabilities and quality.

If Item 9 says there were no disagreements, can I trust this?​

Mostly, yes. The SEC enforces Item 9 disclosures rigorously. Companies that omit or downplay disagreements face enforcement. However, "no disagreements" can be misleading if the company and auditor had informal discussions that did not escalate to formal disagreement. Read Form 8-K for more detail.

What should I do if I spot a serious red flag in Item 9?​

Consider the flag in context with other information. A single red flag does not mean the company is fraudulent, but it raises questions. If Item 9 reveals a pattern of auditor shopping or a disagreement over revenue recognition, investigate further. Read MD&A and the financial statements closely. Consider whether to own the stock or whether the risk/reward is unfavourable.

  • Form 8-K Item 4.01: Change in accountants — the contemporaneous disclosure of auditor changes filed within four business days.
  • The Big Four auditors: Deloitte, EY, KPMG, and PwC — the largest accounting firms.
  • Auditor independence rules: SEC and PCAOB rules governing auditor relationships and potential conflicts of interest.
  • Audit qualifications and going concern: Audit opinion types that signal serious concerns about the company's financial condition.
  • Material weaknesses in internal control: Auditor findings disclosed in the ICFR opinion that affect confidence in the financial statements.

Summary​

Item 9 discloses auditor changes and disagreements with prior auditors. While many auditor changes are routine (retirement, cost reduction), some signal underlying accounting disputes. When the prior auditor objected to an aggressive accounting treatment and the company changed auditors, or when the company changes auditors frequently, it is a red flag. Investors should read Item 9 carefully and cross-reference the contemporaneous Form 8-K disclosure for detail. Auditor changes that appear innocuous in isolation sometimes reveal a pattern of auditor shopping when analysed across multiple years.

Next​

Item 9A: Controls and procedures