Litigation

More on the auditor change at Catapult

By Tracy Coenen

Last week I wrote about Catapult Communications (NASDAQ: CATT) switching from Deloitte & Touche to a much smaller local firm, in a post called Big Four = Big Fees. In that post I referenced the CFO.com article from which I got my information. The article focused on the difference in fees between the firms: $985,000 for Deloitte and $561,000 for the small firm. That big savings was portrayed as the reason Catapult switched.

And in rides Francine McKenna of re: The Auditors. She raises a good point. Why did Catapult go to great pains to detail the reason for the switch from Deloitte to a virtual no-name firm? Was Catapult trying to embarrass Deloitte?

Well I think Francine may have found the answer, one which she suggests CFO.com might have found if they hadn’t just accepted Catapult’s story at face value. You see, in the company’s annual report for the year ended September 30, 2007, it was noted that a material weakness from the prior year was remediated.

What was this weakness, you ask? Well, you can see what the weakness was if you read the fix that was noted in that annual report:

The Company?s Chief Financial Officer performs a detailed quarterly review to confirm that the Company?s accounting for its cash, cash equivalents and short-term investments is in accordance with the requirements of generally accepted accounting principles in the United States.

Uh…. if the “fix” is that the CFO now reviews cash and short-term investments to see if they’re reported in accordance with GAAP, then the weakness was that he wasn’t doing it before! And…. not doing it was deemed a material weakness by Deloitte.

That’s pretty bad. And who knows.. maybe Catapult is upset that Deloitte forced them to fix the problem and make the disclosure.

Francine also notes that Catapult switched auditors in January of 2006, too, dumping PriceWaterhouseCoopers and hiring Deloitte.

Francine and I agree on this: It is not uncommon for companies to go opinion shopping.

Could that be what we’re witnessing here?

UPDATE: More on Dennis Howlett’s take is found here.

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Full post as published by The FRAUDfiles Blog on January 14, 2008 (boomark / email).