Reference no: EM131605817

Late in 2007, Catapult Communications (CATT – NASDAQ) made the financial press because it dumped its Big Four auditor in favor of a smaller firm, on grounds of cost. The 8-K report describing the action is available at CATT 8K Change of Auditor. I’ve known ick Karp, CATT’s then-CEO, since the late 1970s. So, when I saw the CATT story, I asked if he was willing to write a few paragraphs for this course about the decision to abandon the Big Four. Here’s his e-mail note to me: Subject: Re: A Favor (for my classes) Date: Friday, March 21, 2008 4:12 PM Hi Ron, Sorry for the delay in responding but it enables me to reply with a bit of additional experience using our new audit firm. So far, and I am confident our CFO would say the same thing, the changeover has been entirely positive. The Big Four, at least the two of them I have experience with, know only one way to audit: they dig into detail by sending in vast phalanxes of junior associates, most of them people you see only a few times at most, who sit off in rooms conferencing with each other or working with laptops doing things that we, the client, never understood. Then the results of that work are passed on to the next highest tier for approval and comment, and so on, eventually reaching the partner on the account. This may be the most cost-effective way to handle a Fortune 500 company but it is overwhelming in both time and money for a micro-cap. Our new auditor told us that their approach would be different: their average blended billing rate per hour would actually be higher than the Big 4's, but we would only see more senior people and the savings would come from the dramatic reductions in staff hours required as a result. We've only gone one quarter so far, and no 10k yet (that's the real test, when the firm finally has to put their name on the dotted line), but so far they are completely sticking to that approach and we see no evidence that their work is any less thorough. As a result, the demands on our internal staff have been considerably reduced as well as there are vastly fewer people to ask for the same data to be presented to them in different ways. So to sum it up, I am very pleased with the change thus far. ick Let me pose two questions to discuss (feel free to add more items): What’s the down side – if any – to abandoning the Big Four? Will the Big Four be able to stem the flow of defections? According to CFO.com, they claim to be doing so. See Big 4 Stems Exodus of Clients to Smaller Firms. There's a sequel. The company was acquired by a southern California technology firm, Ixia. I rather suspect that ick and other major insider shareholders are happy to be able to have sold out and have access to their funds (sales by insiders are restricted). In any event, ick is now a former CEO.