Magazine article The CPA Journal

Outsourcing the Internal Audit Function

Magazine article The CPA Journal

Outsourcing the Internal Audit Function

Article excerpt

Organizations are regularly outsourcing their internal audit function to large CPA firms, as well as to niche firms that specialize in the service. A survey of more than 1,300 internal audit directors representing different industries throughout North America revealed that more than 25% of U.S. and 31.5% of Canadian respondents' organizations' internal audit work is outsourced. Of those that do not currently outsource their internal audit activities, about onethird stated that they plan to do so in the future. Regardless of the firm being downsized, reengineered, or rightsized, the most common reason cited for outsourcing a portion of the internal audit function was financial savings: 601% of U.S. and 52% of Canadian respondents cited this as their reason.

Robert Barr and Stanley Chang in a 1993 article identified three forms of internal audit outsourcing. The simplest form of external assistance is supplementation. Through supplementation, outside contractors work with an internal audit department to help complete jobs that require a significant amount of time during short periods. Another form of internal audit outsourcing, audit management consultation, is usually an extension of a currently existing consulting or audit engagement by a public accounting firm and may develop with or without an internal audit department. Finally,, total outsourcing of the internal audit function is popular among small or mid-size companies without internal audit departments.

A fourth form of outsourcing, not identified by Barr and Chang but gaining in popularity, involves replacing an existing internal staff with an external organization. The external organization is usually a public accounting firm that is performing the company's internal audit function. Controversy often surrounds an appoint ment of this nature, because independence becomes an issue.

One Side of the Fence

Economic pressures on corporate America have forced many companies to consider the costs and benefits of having some support functions provided bi, outside vendors. By outsourcing these functions, firms are able to adjust the level or intensity of services while still devoting attention and resources to the primary aspects of their businesses.

Internal auditing is being reengineered because of a number of important changes in the general business environment. First, executive management and boards of directors are changing their attitudes toward the compulsory internal audit function. As many businesses look to reduce operating costs by removing their non-value-added services, internal audit departments that do not add shareholder value are being eliminated. Second, outsourcing as a means of achieving corporate objectives is presently in vogue. Businesses are selecting an increasing number of external service providers in lieu of hiring, training, and maintaining internal staff The external provider often employs large numbers of part-time person-nel, resulting in direct cost savings. Third. senior management has become more reliant on business advisors that are technologically competent and deliver cost-effective services on a global basis.

Organizations should consider whether it is more cost-beneficial to develop internal audit skills or simply purchase them from a competent service provider. The numerous potential gains from outsourcing include decreased costs due to reduced pension obligations and in-house training, the ability to engage outsiders on a just-in-time basis, and the ability to replace a fixed workforce with a virtual workforce possessing a wider range of skills and competencies.

Outsourcing the internal audit function can also lead to cost-effectiveness, cost conversion, personnel flexibility, and quality assurance. When contracted internal auditors are truly independent, they may feel freer to comment upon observed weaknesses. External auditors may have a larger and more diverse set of specialists to help management solve operating prob lems. …

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