The New Dynamics of Auditor Selection

Much has changed between public companies and their external auditors in the past four years -- including the frequency with which the two groups part company. Since 2004, roughly one-third of all U.S. publicly listed companies switched public accounting firms, according to research by San Francisco-based proxy advisory firm Glass Lewis & Co.

While the Sarbanes-Oxley Act made the audit committee officially responsible for hiring and firing external auditors, most CFOs continue to play a pivotal role in assisting their audit committee with the selection and evaluation of auditors. The degree of their involvement in those decisions varies considerably: Some audit committees request significant help; others prefer to minimize management's involvement.

The criteria that inform auditor selection and retention decisions have also changed. For example, in most cases the relative importance of auditing fees as a selection factor has decreased compared with the importance of industry expertise and service quality. That said, rising audit fees have forced many small and midsize companies to seek proposals from new auditing firms.

CFOs who keep abreast of these and other shifts are better positioned to provide valuable support to the audit committee and ensure healthy relationships among management, external auditors and board members, notes Mark Heimbouch, executive vice president, CFO and treasurer of Jackson Hewitt Tax Services Inc. in Parsippany, N.J., a firm that prepares tax returns for individual consumers. "Sarbanes has certainly emphasized the importance of the relationship between the audit committee and the auditor -- some might argue at the cost of the relation-ship between the external auditor and management. I don't see it that way. The CFO now has to manage both sides of the relationship."