Seven varied corporate governance organizations have teamed up to provide guidance to audit committees on how they should evaluate their external auditor and recommend retention or replacement to the board of directors.

The groups published a paper titled “Audit Committee Annual Evaluation of the External Auditor” providing  questions an audit committee should ask through its evaluation of the audit team, lead partner, and engagement quality reviewer, along with a sample rating system audit committees might consider using. The 10-page paper says audit committees should perform such a review annually to inform their decision on whether to recommend that the company should rehire the auditor or hire a new one.

The new guidance adds to a growing call on audit committees to up their game in managing the external auditor as regulators consider whether to impose mandatory rotation on auditors to address concerns about audit quality. “Public focus on how audit committees discharge their responsibilities, including their oversight of the external auditor, has increased significantly,” the paper notes in its introduction. Indeed, the Public Company Accounting Oversight Board is taking a hard look, along with regulators in Europe, at whether to impose term limits on auditors as a way to get more skeptical, independent, objective audits. The PCAOB is hosting another roundtable session on the topic this week in Houston. Through its study of mandatory rotation, the PCAOB heard concerns about audit committees' understanding of audit inspection findings, so it recently issued guidance for audit committees as well.

The paper is published by the Association of Audit Committee Members, Center for Audit Quality, Corporate Board Member, Independent Directors Council, Mutual Fund Directors Forum, National Association of Corporate Directors, and Tapestry Networks. They say the evaluation tool is meant to provide a brief, scalable approach using formal and informal processes to objectively evaluate the auditor's performance. Suggested questions for audit committees to ask focus on the quality of services and adequacy of resources provided by the auditor, communication and interaction with the auditor, and the auditor's independence, objectivity, and professional skepticism.

Audit committees are generally regulated by the Securities and Exchange Commission and the various stock exchanges where a given company might be listed. Only the New York Stock Exchange has an implied requirement for audit committees to annually assess their auditors, says CAQ Executive Director Cindy Fornelli. “There are thousands of audit committees out there and they're all over the board with respect to how they perform their duties and responsibilities,” she says. “Providing guidance from what the best audit committees do to all audit committees is helpful.”

Fornelli says the groups are working on another tool to help audit committees better disclose to shareholders how they evaluate the audit firm. “Audit committees could probably do a better job of communicating to shareholders how they are going about assessing the auditor,” she says. “That's the next phase of the collaborative group -- specifically talking about what those kinds of disclosures might look like.”

The groups came together to produce the evaluation tool as an extension of an earlier project among a few of the groups to develop anti-fraud guidance, says Fornelli. “Collaborating makes all of our efforts stronger,” she says. “We've found it to be a very effective way to work together.”

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