Checklist: How to transition to a new external auditor

How to set up the external auditor transition for success

Even before the new external auditor begins working, company leaders can take initial actions to jump-start the transition:

1. Determine transition timing. All companies, especially public companies, must consider when during their fiscal or calendar year is the least impactful time to transition.

• For public companies subject to internal control attestations, the external auditor needs as much of the audit cycle as possible to complete the work.
• For private companies, a private equity acquisition can sometimes trigger an auditor transition. Stakeholders should consider the optimal transition timing in this scenario, since an acquisition can add many new tasks for company management to coordinate. This timing can be especially critical if a company has material inventory that needs to be observed at the acquisition date. For example, if the external auditor is hired late and has to have the client roll back the inventory to the acquisition date and test the intervening period activity, this can lead to a lot more work for both the auditor and the company.

1. Schedule an orientation with key stakeholders. To set expectations and introduce the new external auditor, public and private companies should schedule a meeting with company stakeholders early in the transition.

• These stakeholders might include C-suite executives, audit committee members, PEG senior managers, IT executives, and other parties needed for the audit.
• Bringing any new leadership, such as a new CFO that joins after a private equity acquisition, up to speed is particularly helpful.

1. Establish a communication strategy. Auditors and company management should determine the optimal cadence and channels of communication with each other and designate key contacts for various oversight responsibilities.

• Effective communication is especially important for public companies and audit committees with competing priorities and limited meeting time availability.
• Later in the transition, auditors and company management might want to regroup on their communication strategy and make changes as needed.

1. Align on reporting timelines. Company leaders and auditors should define the audit schedule, so everyone shares the same expectations.

• External auditors and management can determine internal deadlines for deliverables.
• In private equity acquisitions, the reporting timeline might require adjustments based on the acquisition date, debt agreement, and time period covered in the financial statements. If the reporting entity requires predecessor/successor financial statements, the new external auditor will need to coordinate with the prior auditor to review prior year audit work papers and audit the pre-acquisition period in the current year, whereas these steps are not required if the audit period commences with the acquisition date.

What to expect of the new external auditor

Once the transition begins, company leaders and managers can expect the external auditor to take the following proactive steps:

1. Examine previous auditor’s documentation. If the new external auditor promptly reviews the previous auditor’s notes and documentation, the external audit team can gain an understanding of business operations.

• The incoming auditor can build familiarity with past methodology and documentation, saving time for management.
• Rather than leaving concerns unaddressed, the external auditor can clarify any questions about previous work early.

1. Review financials and test internal controls early. An external auditor can review previous financial statement disclosures and test internal controls early to detect errors or potential risks in time for management to address them.

• Providing feedback late might lead to rushed fixes and missed regulatory filing deadlines.
• For control reliance, the external auditor can discuss sampling and scoping methodology with the internal auditor or a third-party provider.

1. Coordinate with valuation and tax processes. To avoid miscommunication and setbacks, the audit team can coordinate workflows with tax and valuation specialists.

• For private equity acquisitions that require valuation, early communication between audit and valuation firms can prevent delays in the audit process.
• If a company is also transitioning to a new tax firm, miscommunication between tax and audit teams can slow down both processes.