Business Forum: Outsourcing internal audit could help local firms

THE Institute of Internal Auditors, a US-based international professional organisation, defines internal auditing as an independent objective, assurance and consulting activity designed to add value and improve an organisation’s operation.
Experts say it helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes.
The task of most internal auditors is to monitor, assess and analyse organisational risk and controls including reviewing and confirming information and compliance with policies, procedures and laws.
Often, there is a symbiotic relationship between management, internal auditors, the board and audit committees that usually gives an assurance that risks are mitigated and the organisation’s corporate governance is strong and effective. The invaluable input that internal auditors provide to an organisation cannot be overemphasised.
But in our current circumstances where most companies are facing financial challenges, some firms might not consider it prudent to outsource “internal auditors”, particularly in situations where they already have an internal auditing team.
There obviously has always been questions on whether there is sufficient cause to engage and outsource internal auditors when an internal employee audit team already exists.
While it might seem superfluous to outsource internal auditors, there has been a noticeable weakness in internal employee audit teams that would have developed relationships with other employees within the organisation.
Suffice to say, they face increased pressure to pander to the whims of the organisation. In addition, since their contracts are in the hands of management, they might feel intimidated to expose cases that expose senior executives’ bad practices. Such a situation is not ideal for the health of the organisation as it defeats the purpose of having an audit team in the first place. Under this scenario, engaging a third party to provide the audit function becomes a tempting option.
Research has shown that engaging an independent audit review allows for control of employment costs related to the audit function since most companies might not necessarily have the money to support a full-time audit staff. But perhaps one of the most important attributes of outsourced internal auditors is their industry-wide skills.
Such skills, experience and expertise is most likely to benefit organisations.
Independent consultants are often aware of issues in the industry that the individual organisation may not be privy to, therefore they are in a position to offer guidance in those areas to help alleviate the risks and possible negative impact on the organisation.
Keith Gray, writing for The Risk Management Blog, also notes than an independent internal review allows an unbiased assessment specific to the organisation’s industry of operation.
It also allows new ideas to be communicated to improve efficiency and effectiveness of operations, improve internal controls and reduce risk.
Bringing in independent auditors also has the added advantage of affording the company self introspection and fully establishing the financial health of the firm. Some experts believe that there might not be need to employ full-time internal auditors as managing risks associated with daily operations requires strong internal controls, the application of best practices and training.
Outsourced internal audit teams may conduct their assessments once every quarter, a development that might be worthwhile to companies.
But there are some who contend that employee internal audit teams might better understand the internal processes of an organisation.
However, the internal dynamics of companies might differ so there might also be need to evaluate the advantages and disadvantages of outsourcing auditors before a decision is made.
If a company employs two internal auditors who earn a combined salary of $3 000 per month, it effectively means that the total salary for the internal audit function is $36 000 per year.
This amount does not include other benefits that the company caters for.
If the same company is to outsource this service, it may only cost plus or minus $4 000 per quarter, which will amount to $16 000 per year, which saves more than $20 000. Outsourcing internal audits is surely cheaper and can prove to be effective. But, as has earlier been claimed, circumstances differ from organisation to organisation. There is, however, need to ensure that the company that provides external auditing is not the same company that provides internal audit services.
The decision to outsource or employ can also be based on the size of the organisation and volumes of transactions for the company.
Big companies that handle huge volumes of transactions per day might have a compelling need to have continuous internal reviews. And the world as a global village is ever changing. The dynamism of technology demands that the skills of internal auditors be broad.
Outsourced internal audit teams therefore may comprise specialised IT personal who may be well equipped to conduct IT audits. Companies need to assess what is best for business and the role of internal audits should be carefully scrutinised by the board of directors.
Taurai Changwa is an Articled Accountant and ACCA finalist. He is the managing director of SAFIC Consultancy. He writes in his personal capacity and can be contacted at [email protected] or visit our facebook page SAFIC Consultancy or whatsapp on 0772374784.