In the Classroom: “If previous auditors resigned, investigate why and understand the issues before accepting the engagement.”

You’re an auditor and you just landed a brand new client. The ink on the engagement letter hasn’t dried yet, and you start thinking about the date of your first audit.

But here’s the catch:

There was an auditor before you – one who decided to leave, or worse, got pushed out. Did you stop to ask why? Did you dig into the history of that relationship? Or did you smile, nod, and pocket the fee? ( you get marks in the exams if you discuss these concerns in your answer)

That’s where the O in TRIMROT follows: outgoing auditors.

This serves as a reminder to auditors. You need to know why your predecessor left. Very importantly, find out whether that departure was a hint of deeper problems brewing. Time and again, we see an incoming auditor missing that vital step with disastrous consequences. 

1. Communication with Outgoing Auditors:

First things first: the IESBA Code of Ethics requires communication with outgoing auditors, provided the client allows this to happen. But if a client refuses permission? That’s your first red flag! Why block transparency unless there’s something to hide? And yet, permission granted, too many firms fail to ask the tough questions. 

Case Study: Autonomy Corporation and Deloitte

In 2009, Deloitte took over from Ernst & Young as auditor of Autonomy. It appears Deloitte did not ask too many questions about why EY was resigning. A couple of phone calls might have revealed evidence of Autonomy’s aggressive bookkeeping. Some professional curiosity could have eventually forced Hewlett-Packard to take an $8.8 billion charge after buying the company. 

Instead, Deloitte got left in the dust. The rest is now a case study in how not to do it. 

2. Know Why the Change Happened 

Incoming auditors are supposed to find out why their predecessors walked away or were booted out. Was it over disagreements about accounting treatments? Limitations in scope?Management disagreements? These are not just polite questions but are actually fundamental risk indicators. 

Case Study: Quindell PLC and KPMG:

Did they ask why RSM Tenon left? If they did, certainly they didn’t act on the answers!

Aggressive revenue recognition practices at Quindell eventually led to massive restatements and regulatory scrutiny. The incoming auditors weren’t blindsided by chance – they walked in without looking. 

3. Transparency and Professional Courtesy 

Outgoing auditors aren’t off the hook here, either. The IESBA Code of Ethics obligates them to respond honestly and professionally to inquiries from incoming auditors. This is required provided the client consents. But here’s the thing—if the outgoing auditors stay silent, or worse, stonewall, you’ve got a problem on your hands. 

Case Study: Sports Direct International and Grant Thornton Source: BBC News: Sports Direct Audit Failures.

The most patent case of lack of meaningful communication was when Grant Thornton took over from Deloitte as Sports Direct’s auditor. Major related-party transactions that should have pointed some red flags around were not observed. Proper handover discussions could have highlighted the risks; lacking transparency, however, Grant Thornton was left in the dark. 

4. Documentation: Don’t Just Ask, Write it Down: 

Documentation counts. Although ISA 230: Audit Documentation does not address the outgoing auditor explicitly, it stresses that significant matters in the client acceptance procedure are documented. Why? For when something goes wrong-and it often does-that documentation may well be the only thing that saves your firm’s reputation. 

Case Study: Conviviality PLC and KPMG Source:

The Guardian: Conviviality’s Collapse When KPMG took over from PwC as auditor for Conviviality, their lack of proper documentation with regards to inquiries on why PwC left them was conspicuous. Their financial irregularities remained unchecked until the eventual collapse of Conviviality in 2018. It was not only the company that fell but also the credibility of the auditors. 

Why Do Auditors Ignore These Steps?

The requirements are clear; the exposures are glaring. Why does this auditor keep missing the steps? Let us now do some dissection: 

Fee Dependence: Big clients mean big revenues. Nobody wants to antagonise the engagement with pesky questions, even if those questions would save the firm in the long run. 

Pressures for Time: “We will take a look at that later.” Only, they never do. 

Complacency: “If the last guy didn’t notice anything, why should we?”

That’s how scandals happen, is why. 

The Final Lesson: Ask the Right Questions

Each of these cases-from Autonomy to Conviviality-comes down to one simple truth: if you don’t ask the right questions, then you’re taking a gamble with your firm’s good name. And speaking with outgoing auditors isn’t a matter of courtesy; it’s a professional duty. This will be what differentiates a good audit and a time bomb. With every new client’s assignment, remember in your head: “Why am I here? This isn’t some sort of abstract, rhetorical, or philosophical question-if you don’t know why the last auditor left, you are setting yourself up to be the next horror story.