Outsourcing Internal Audit Isn't Only the Big Firms' Game

By Petravick, Simon | The CPA Journal, May 1997 | Go to article overview

Outsourcing Internal Audit Isn't Only the Big Firms' Game


Petravick, Simon, The CPA Journal


Outsourcing of internal audit services has often been discussed in the context of activities of the Big Six and the large organizations they typically serve. In fact, public accounting films of all sizes conduct outsourcing. Further, nonpublic accounting firms that specialize in providing internal auditing services (outsourcing firms) hold many outsourcing engagements. Finally, the findings show that many small institutions use outsourcing. To further understand the outsourcing activities of public accountants and outsourcing firms, this article examines the numbers and sizes of their clients and the length of time they have offered outsourcing. A recent survey provides insights into who the players are and who are their clients.

Senior executives at 232 financial institutions responded to this survey. Financial institutions (banks, thrifts, and credit unions) were selected for this study because outsourcing the internal audit function is active in their industry.

Outsourcing of Internal Audit Is Frequently Used

Table 1 describes the organization of the respondents' internal audit functions and shows the widespread use of outsourcing. Approximately 34% (79 of 232) have outsourced while 35% (81 of 232) use in-house internal auditors. The remaining institutions have their internal auditing provided by an affiliate (such as a parent company) or do not use an internal auditor at this time.

While the number of in-sourcers and outsourcers are approximately equal, they are considerably different in size. Table I shows that the median size of institutions that use an in-house internal audit function is nearly four times larger than those that use outsourcing. Regardless of size, managers of outsourcing institutions indicated that the primary reasons for outsourcing were having access to auditors with specialized expertise and improving management of internal audit costs.

The median sizes shown in Table 1 may seem relatively small compared to the largest institutions found in each range. This is due to the fact that approximately 71% of financial institutions have less than $100 million in assets. Therefore, the results are skewed toward smaller sizes since the sizes of all financial institutions are skewed that way.

Many Firms Provide Outsourcing

Table 2 shows that a wide variety of firms provide outsourcing. Local public accounting firms are the largest providers of outsourcing, holding 39.3% of the outsourcing engagements. Outsourcing firms are second largest, retaining 21.5% of the engagements. National public accounting firms hold 17.7% and the Big Six hold 10.1%. "Other" consists of institutions that outsourced to an entity not listed above or did not indicate who their outsourcing provider was.

Even though local and outsourcing firms are the two largest providers of outsourcing, their actions have not been dis cussed in the literature. This may be due to the fact these firms generally deal with smaller and privately held clients, where activity occurs outside the public's eyes.

Table 2 also describes the sizes of the firms' clients. The median sizes of the Big Six's, national firms' and local firms' clients were $105, $85, and $25 million, respectively. It should be expected that the smaller organizations might favor the local firms, since the pricing structure of Big Six and national firms would not be attractive to institutions of that size.

The median size of outsourcing fms' clients was $55 million. They hold a significant number of outsourcing clients and have obtained clients of several different sizes. To further understand the popularity of these firms, I interviewed the president of an outsourcing firm. He offered three reasons for their success.

First, many clients wish to have their internal audit work done by someone other than their independent auditor. When sensitive information such as irregularities or fraud must be investigated, users of outsourcing firms feel this arrangement gives them more control over the flow of information to their independent auditor. …

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