Outsourcing The Internal Auditing Function

Published by slang April 30th, 2006 in Financial Strategy, Outsourcing

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There are advantages and disadvantages of outsourcing your company’s internal audit function.
Also, do you know how to measure the performance of the outsourced provider?
I have tabulated below the advantages and disadvantages and some measurements to assess the performance of the outsourced provider.

ADVANTAGES:

1	Skills If the auditing firm that you outsourced to is a large one, the company can enjoy the expertise of the auditors who are most skilled in their areas of audits.
2	Staff Quality Especially true if the provider is from the Big Four where the quality of the auditing staff supplier should be unusually high. This allows the company to have confidence that the audits will be in-depth and thorough
3	Knowledge of Best Practices Compared to the in-housed auditors, the outsourced auditors might have more knowledge acquired when they review the functions of many companies hence building up a hugh knowledge base of how processes can be performed most efficiently and effectively.
4	Variable costs The company only pays for audits performed hence the auditing cost can be switched from being a fixed one for an in-house staff to a variable one for an outside staff.
5	Quick accessibility to audit services The company has the advantages of very quick accessibility to an experienced audit team if it acquires a new business in a foreign location that is inconvenient for its internal staff to reach
6	Reduced travel costs With a big auditing firm, it can avail itself with audit staff from all over the region hence saving the company hugh traveling costs if it will to send its own internal staff
7	No downtime The company is able to avoid nonproductive downtime that sometimes occurs with an in-house staff, such as the interval between the end of one audit and the beginning of the next
8	No hiring and training costs The company can avoid the substantial hiring and training costs needed to staff and retain high key powered audit team

DISADVANTAGES:

1	Higher Cost? This can be more expensive as the auditing firm will charge its client using hourly rate which includes the firm’s overheads and profit margin. Also, there is the additional concern that as the audit progress, the audit firm will increase its fees.
2	Experience & skillsets The perceived quality of the auditors provided by the audit firm may be lower than anticipated since most of them have a very high staff turnover and also recruiting staff with lower level of experience in order to give them experience.
3	Training Some companies used the internal audit function to train their managers so as to given them a sound knowledge of how the company functions. By outsourcing, the company loses its training ground for the future manager of the company.
4	Responsibility The management might have the wrong notion that the responsibility now is passed to the outsourced provider.
5	Independence Sometimes, the outsourced providers are the external auditors hence the dependence of the external auditor is at stake as its directly conflict with their role as the internal auditors.

MEASUREMENTS:

1	% of Audits Completed This can be measured by dividing the total number of completed number of audits signed off by all parties by the total number of audits listed in the annual audit plan. If there is a big variance, it might mean that the appointed outsourced audit firm might be inefficient which should be replaced with another one.
2	Cost per audit This can be quantified or measured by extracting directly from the bills/invoices of the audit firm.

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