Is Papa John's Auditor Shopping?

The pizza chain just dumped KPMG and hired EY.

Motley Fool Staff
Motley Fool Staff
Jun 20, 2019 at 11:08AM
Consumer Goods

In the world of business, one of the values an outside auditor brings to the table is the ability to independently assess how a company is doing. It's not always so easy to see our own mistakes, after all. So when KPMG told Papa John's (NASDAQ:PZZA) that the pizza slinger hadn't been maintaining effective control of its financial reporting, that was simply something the company needed to hear. Now, maybe it's a coincidence, and maybe not, but the restaurant chain has fired KPMG as its auditor, replacing it with the equally high-quality EY -- which you may know better by its old name, Ernst & Young.

In this segment from MarketFoolery, host Chris Hill and senior analyst Ron Gross consider how Papa John's will address the issues that KPMG pointed out, and weigh the possible reasons behind this move.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.

This video was recorded on June 17, 2019.

Chris Hill: Papa John's is in the news today because the pizza chain dismissed KPMG as its auditor and hired Ernst & Young. Earlier this year, KPMG said that Papa John's did not maintain effective control over its financial reporting. Just at first blush, this doesn't appear to reflect well on Papa John's. Does it?

Ron Gross: No. But I can imagine -- well, I shouldn't say I can imagine. They're probably not auditor shopping. That's what this looks like. You're not going to give me a favorable opinion, I'm going to go elsewhere. It looks, on the face of it, sleazy. If it's true, it actually is sleazy. That's why I can't believe it actually is the case.

It'll be great to see what the auditor opinion looks like next time it comes around to see if that material weakness is mentioned. But if it's not, it could be just that Papa John's has not gotten their act together, because you would expect them to correct the problems that their previous auditor identified. Either way, I think we'll probably not see that called out again in the next audit report. It looks a little weird, especially with all that Papa John's has been through over the last year with all the controversy. They don't need any more controversy. Just make pizza.

Hill: See, another example of you being more charitable than me. I'm not going to accuse Papa John's management of anything nefarious here. I will simply point out, however, that the last couple of years, this is the gang that couldn't shoot straight. Similar to Target -- and I hope and expect we will get more information about what happened with Target -- I expect we're going to get a little bit more color on what happened here. I hope it's nothing nefarious, but it wouldn't surprise me if there was something that hinted at, "No, we're doing a little bit of shopping. We want someone who's going to give us the benefit of the doubt," even though just from a stock standpoint, from a running-the-business-well standpoint, they haven't really earned the benefit of the doubt lately.

Gross: No. One other thing, though, that does give me a little bit of comfort is the big investment and the involvement by Starboard Value, which I used to know very well back in my hedge fund days. Quality folks. Not going to do anything nefarious. Not going to do anything to hurt their investment or hurt their investors. I think this is probably OK.

Hill: Get Shaquille O'Neal out front and center. Back in March, for those who missed it, Shaquille O'Neal joined the board of directors, took ownership of a bunch of franchises. That's such a great rebranding opportunity. Come on, make that happen!