How to Change Your Auditor as a Public Company: Step-by-Step (Form 8-K Item 4.01)

Step 1: Confirm who has authority to make the change

Section 10A(m)(2) of the Securities Exchange Act of 1934 makes the audit committee of each issuer "directly responsible for the appointment, compensation, and oversight" of the work of its registered public accounting firm, including resolving disagreements between management and the auditor. Exchange Act Rule 10A-3 implements this through national securities exchange listing standards, so it binds companies listed on Nasdaq or NYSE American directly.

Many OTC companies do not have a separate audit committee. Item 304(a)(1)(iii) of Regulation S-K anticipates this: the disclosure must state whether the decision was recommended or approved by the audit or similar committee, or by the board of directors if there is no such committee. Either way, document the decision in minutes or a written consent. Management should not dismiss or engage an auditor on its own.

Step 2: Select and clear the successor auditor before you dismiss

The safest sequence is to have the new firm ready to accept before the current firm is dismissed. That avoids a gap in which you have no auditor for an upcoming quarterly review.

• Verify registration and history. Confirm the firm is registered with the PCAOB, read its public inspection reports and check its issuer audits on AuditorSearch. Our guide on how to find and verify a PCAOB-registered auditor explains how.
• Independence clearance. The successor must confirm it is independent under SEC Rule 2-01 of Regulation S-X and PCAOB rules before accepting. Prior consulting, bookkeeping or financial relationships with the company or its officers can disqualify a firm.
• Predecessor communications under AS 2610. Before accepting the engagement, the successor must make inquiries of the predecessor auditor. You will be asked to authorize the predecessor to respond fully. The inquiries cover matters such as management integrity, disagreements with management over accounting or auditing matters, communications about fraud or illegal acts and internal control matters, and the predecessor's understanding of the reasons for the change. If you limit the predecessor's response, the successor must consider that before accepting.
• Access to working papers. After acceptance, AS 2610 contemplates that the successor will ask you to authorize the predecessor to allow a review of its working papers. The predecessor may ask for a consent and acknowledgment letter first.
• Engagement letter and scope. Agree the scope, fee, timetable and treatment of prior periods in writing. See how we handle this on our auditor change service.

Step 3: Dismiss the current auditor (or receive its resignation)

Notify the current firm in writing once the committee or board has approved the change. If the auditor resigns or says it will not stand for re-appointment after the current audit, the disclosure obligation is the same. Record the exact date, because it starts the filing clock.

Step 4: File Form 8-K Item 4.01 within four business days

Under General Instruction B.1 of Form 8-K, a report is due within four business days after the event, and if the event occurs on a weekend or SEC holiday the period starts on the next business day.

Item 4.01 has two triggers:

• Item 4.01(a): the principal accountant (or an accountant on whom it relied for a significant subsidiary) resigns, declines to stand for re-appointment, or is dismissed. The company must provide the Item 304(a)(1) disclosures and comply with Item 304(a)(3).
• Item 4.01(b): a new principal accountant is engaged. The company must provide the Item 304(a)(2) disclosures.

The instruction to Item 4.01 states that the departure and the new engagement are separate reportable events. If you dismiss the old firm and engage the new one on the same day, one 8-K can cover both. If not, expect two filings; the second need not repeat what was already reported. See also our glossary entry on Item 4.01.

What Item 304 of Regulation S-K requires you to disclose

Item 304(a)(1) requires the company to:

1. State whether the former accountant resigned, declined to stand for re-election or was dismissed, and the date.
2. State whether its report on the financial statements for either of the past two years contained an adverse opinion or disclaimer, or was qualified or modified as to uncertainty, audit scope or accounting principles, and describe each.
3. State whether the change was recommended or approved by the audit or similar committee, or by the board if there is no such committee.
4. State whether, during the two most recent fiscal years and any subsequent interim period, there were any disagreements on accounting principles or practices, financial statement disclosure, or auditing scope or procedure that, if not resolved to the former accountant's satisfaction, would have caused it to refer to the matter in its report. For each, describe it, state whether the committee or board discussed it with the accountant, and state whether the successor may inquire about it without limitation.
5. Disclose any reportable events in the same period, even without a difference of opinion.

The reportable events in Item 304(a)(1)(v) are, in summary: (A) the accountant advised that the internal controls necessary to develop reliable financial statements do not exist; (B) the accountant advised that it can no longer rely on management's representations or is unwilling to be associated with the financial statements; (C) the accountant advised that the audit scope needed to be expanded significantly, or that information could materially affect the reliability of reports or financial statements, and the work was not done because of the change; and (D) the accountant concluded that information materially affects that reliability and the issue was not resolved before the change. In practice, a previously reported material weakness is a common reason to evaluate item (A) carefully with counsel.

The instructions to Item 304 define disagreements broadly: a difference of opinion is enough, even without an argument.

For the successor, Item 304(a)(2) requires naming the new accountant and the engagement date, and disclosing certain consultations with that firm during the prior two fiscal years and interim period, such as advice on the accounting for a specific transaction or the type of opinion that might be issued, or on any matter that was a disagreement or reportable event.

Step 5: Obtain the former auditor's letter (Exhibit 16)

Item 304(a)(3) sets out the mechanics precisely:

• Give the former accountant a copy of your Item 304(a) disclosures so that it receives them no later than the day you file.
• Ask it to furnish a letter addressed to the SEC stating whether it agrees with your statements and, if not, where it disagrees.
• File the letter as an exhibit to the report. Item 601(b)(16) of Regulation S-K describes this exhibit, which is why it is commonly numbered Exhibit 16.1.
• If the letter is not available when you file, ask for it as promptly as possible so it can be filed within ten business days after the 8-K.
• Regardless of that ten-day period, file the letter by amendment (Form 8-K/A) within two business days of receipt. Receipt on a weekend or SEC holiday starts the count on the next business day.
• If the former accountant sends an interim letter highlighting concerns, it must also be filed by amendment within two business days of receipt if it was not included in the original report.

Step 6: Plan around your 10-K and 10-Q deadlines

Under the Form 10-K general instructions, the annual report is due 90 days after fiscal year-end for non-accelerated filers (75 days for accelerated filers). Form 10-Q is due 45 days after quarter-end for non-accelerated filers (40 days for accelerated and large accelerated filers). Rule 10-01(d) of Regulation S-X requires the interim financial statements to be reviewed by an independent accountant before filing, so the new firm must be engaged in time to perform that review.

A change made shortly after a 10-K is filed gives the successor the longest runway. A change made in the fourth quarter compresses acceptance, predecessor communications and planning into the busiest part of the year. If a deadline is at risk, discuss a Form NT 10-K with counsel early rather than on the due date.

Step 7: Resolve prior-period reports, reaudits and consents

Your next Form 10-K presents two years of audited financial statements. The prior year was audited by the predecessor, so decide early how it will be covered:

• Predecessor reissues its report. The predecessor must agree to reissue its report, which requires additional procedures on its part before it can do so, and it will typically charge for that work.
• Successor reaudits the prior year. This is needed if the predecessor will not or cannot reissue (for example, if it has deregistered or ceased practice) or if its work cannot be relied on. AS 2610 addresses reaudits and makes the successor responsible for the reaudit work it performs; it cannot rely solely on the predecessor's work to support its opinion.
• Registration statements. Every auditor whose report appears in a Form S-1 or S-8 must provide a written consent, filed as an exhibit under Item 601(b)(23) of Regulation S-K. If you have an active shelf or an S-8, confirm the predecessor will continue to provide consents.

Budget and timing for these items should be in the engagement letter. Companies planning an uplisting or an S-1 offering should settle this before the change.

Step 8: After the first audit, check Form AP

For each issuer audit report, the PCAOB-registered firm files Form AP, disclosing the engagement partner and other accounting firms that participated. Under PCAOB staff guidance, it is due by the 35th day after the audit report is first included in an SEC filing, or by the 10th day if that document is a Securities Act registration statement. Once filed, it appears on AuditorSearch; confirm the information matches your filing.

Practical checklist and illustrative timeline

The timeline below is illustrative; actual timing depends on your filing calendar and is confirmed in the successor's written proposal.

• Board or committee minutes approving the dismissal and engagement
• Written dismissal notice and successor engagement letter with scope, fee and timetable
• Written authorization for predecessor to respond and to provide working paper access
• Draft 8-K shared with both firms and securities counsel
• Calendar entries for the four-business-day and two-business-day deadlines
• Plan for prior-year report reissuance or reaudit, and for registration statement consents

If you are considering a change, our auditor change team can explain the process for your filing calendar. OTC issuers can also review our OTC company audit and small-cap audit pages, and our article on what drives PCAOB audit cost.

Sources

1. Form 8-K, General Instructions and Item 4.01 — U.S. Securities and Exchange Commission
2. 17 CFR 229.304, Item 304 of Regulation S-K — Legal Information Institute
3. 17 CFR 229.601, Item 601 of Regulation S-K (Exhibits) — Legal Information Institute
4. 15 U.S.C. 78j-1, Exchange Act Section 10A — Legal Information Institute
5. 17 CFR 240.10A-3, Listing standards relating to audit committees — Legal Information Institute
6. AS 2610, Initial Audits — Communications Between Predecessor and Successor Auditors — PCAOB
7. Form 10-K, General Instructions — U.S. Securities and Exchange Commission
8. Form 10-Q, General Instructions — U.S. Securities and Exchange Commission
9. 17 CFR 210.10-01, Regulation S-X Rule 10-01(d) — Legal Information Institute
10. Form AP, Auditor Reporting of Certain Audit Participants — PCAOB
11. Staff Guidance: Form AP, Auditor Reporting of Certain Audit Participants (updated November 21, 2023) — PCAOB
12. AuditorSearch — PCAOB