Auditor Continuance: An Annual Question, Not an Annual Change

The question of how long to continue with the same auditor is often sitting somewhere off the radar screen. This is both the problem and the answer. The process of asking and answering the auditor continuance question should be part of the audit committee’s standard operating procedures and a standard annual checklist item for the audit committee.

As we discussed in Q&A #18, there are two key considerations to balance. On the one hand, you do not want to change auditors too often, particularly not every year. On the other hand, you want to avoid using the same audit team forever. There is a big gray area between every year and forever.

The solution to this dilemma is to define criteria for auditor continuance that works for your organization, aligns with generally accepted best practices, and honors transparency. These criteria should be formalized in your audit committee’s standard operating procedures.

The following guidelines will satisfy most needs and issues related to addressing auditor continuance.

1.         Procedure the Question

Add addressing the auditor continuance question as a standard procedural step for the audit committee to fulfill each year. Make sure to include in the formal working rules and checklist of tasks for the audit committee to accomplish each year.

2.         Consider Length of Service

Your auditor’s length of service with the organization is one of the key considerations to address. Make sure to document how long your current auditor has been working with the organization. Also reference your organization’s past auditor rotation patterns, and check whether your organization has written guidelines setting a maximum length of service.

If your organization does not have written guidelines addressing auditor rotation and length of service, consider adding guidelines to your audit committee’s standard operating procedures.

For example, a common guideline is as follows: three years of service followed by eligibility to participate in an open RFP for audit services for a second three-year term of service, with a hard cap of seven years of consecutive service (at which point, the audit firm must be replaced).

3.         Evaluate Past Performance

At the conclusion of the current audit cycle, the audit committee should evaluate the current auditor’s performance. For larger organizations, the audit committee can periodically perform mid-year mini-performance evaluations. The performance evaluation should be conducted by the audit committee working together with the organization staff. The performance evaluation should include a brief description of the evaluation process and document findings such as responsiveness to questions, meeting deliverable dates, and the quality of reports provided.

4.         Consider Your Organization’s Evolving Needs

Even with no length of service issues or performance issues, an organization’s evolving needs could be an important factor for change. For example, it may be time to consider changing auditors if your organization relocated its headquarters office, was involved in a merger or major acquisition, experienced substantial growth in operations, launched new specialized programs or services, or received new sources of unusual restricted funding. Big changes like these might not line up with your current auditor’s expertise and capacity.

5.         Uses Proper Processes to Reach a Conclusion

Lastly, the auditor continuation question is brought to a conclusion. The audit committee should bring the question up for discussion and then take a final vote. The result of the vote with corresponding recommendations for action should be documented and then communicated to the Board of Directors for final approval and action.

Planning Tip – There are two options to consider with respect to the timing of the auditor continuance question. It could be addressed as either: (1) the last step in the process of the current audit committee cycle; or (2) the first step of the next year audit committee cycle. The first option has the advantage of freshness, as the audit committee will have just interacted with the auditors and will benefit from recently experiencing, observing, and evaluating auditor performance. The second option has the potential advantage of the new audit committee taking a more independent look at the question, since prior audit committee members may have cycled off and been replaced with new members. Both approaches work, but I tend to prefer the first option for most nonprofits.

Auditor continuance is an important question. Take steps to formalize the process so the question is addressed each year in a consistent manner that will help ensure the best results possible.