But local government observers have expressed reservations privately about the appointment and his choice of consultants to carry out the work.
Mr Butler is currently chairman of Eurotunnel train operators European Passenger Services, a director of national lottery organisers Camelot and a member of the Cadbury Committee.
The commission said he was 'well placed to carry out a rigorous review and to recommend ways the commission could increase its impact'.
Bain & Company was chosen partly because it has no connection with the commission.
Mr Butler will also consult representatives from the three main associations, including one councillor, one serving local authority officer and an officer from the association secretariat.
The announcement comes just one week after public accounts committee chairman Robert Sheldon asked the National Audit Office to explain the huge rise in Audit Commission staffing levels (LGC, 10 February).
The move reflects a growing concern among councils and politicians over who should audit the auditors. The decision to establish external scrutiny was made by the commission last year.
Local government observers questioned the appointment of Mr Butler.
'It is very bizarre that we have got an accountant looking into the service when we have reservations about the commission being too accountancy driven,' said one source.
Councils want the review to look at whether the commission examines quality of services to the public.
Some observers feel a figure with public service experience such as a senior academic or former permanent secretary would have been preferable.
Concern was also expressed that Bain & Company was mainly a corporate consultant with little experience of public service.