Knowledge and Insights

Internal Audit: When Outsourcing Should Be Considered

Expansion and growth present both excitement and challenges for a company. During such periods, new systems are introduced, processes are redesigned and refined, and employees are trained in the changes. Management may find that what worked before may not be effective or efficient anymore. These changes lead to an increased demand on the company’s internal audit (IA) function.

With an increase in complexity from expanding operations, as well as from an ever-changing regulatory landscape, a company’s internal audit function faces a greater set of challenges in adding value across different aspects of the business. New expectations and responsibilities of an in-house internal audit team most likely will require expertise across a wide range of specialized skills. These would include, but not be limited to, IT audit or comprehensive knowledge of particular regulations. It may not be possible from a time or cost perspective, to scale up and/or train an in-house internal audit team to meet these increasing demands. To address this, a company should consider outsourcing the internal audit function.

There are four basic arrangements through which a CPA or professional services firm can perform the outsourced internal audit function:

  • Full outsourcing is the most extensive service offering. A fully outsourced internal audit team would carry out all aspects of the company’s internal audit function. This arrangement may be permanent for companies that cannot afford a full-time dedicated IA team or the outsourcing may be temporary as a bridge while the company builds its own IA team.
    • The third-party provider may provide assistance in vetting, hiring and training the company’s candidates.
  • Partial outsourcing would involve the company outsourcing only a portion of the internal audit function to an external provider. The internal audit function around a specific reporting area, such as payroll, could be partially outsourced.
  • Co-sourcing has the in-house team working side-by-side with the external provider. This type of need may arise from situations such as a shortage of in-house internal audit staff, a special project with a tight deadline, or to augment the in-house team’s knowledge base on highly specialized regulations.
  • Subcontracting involves contracting with an external provider to complete a specific engagement or to complete a smaller part of a larger engagement. This is more limited in nature than the other three arrangements.

Each of these arrangements present a similar set of advantages and drawbacks compared to a traditional in-house internal audit function. The greatest benefits from an outsourced internal audit function are the ability to scale the internal audit team up or down quickly depending on the need, and the ability to potentially refine a deep-rooted internal audit function. Companies often stick with what works, even when the context of the work changes. By outsourcing the internal audit function, an external provider can bring in processes and ideas that may help the in-house team gain efficiencies, reduce cost, and add value.

A challenge for outsourcing may be an initial lack of internal knowledge about the company and its culture. In contrast, in-house internal audit teams are well-ingrained in the infrastructure and in a more natural position to understand and improve upon the company’s processes.  However, as external providers learn about the company’s business and culture, they often find issues and offer insights only possible through a fresh set of eyes.

Depending on the type, structure, and size of the organization, and the business environment, each company has a unique internal audit situation and should consider how they would answer the following question: How is our internal audit function adding value to the company?

If the question is difficult to answer, consider the areas where changes to the business landscape could disrupt the internal audit function the most. These are likely areas where the company could stand to benefit from some form of outsourced internal audit arrangement. If you would like to discuss your internal audit and compliance functions and Mercadien’s outsourcing solutions, contact us at spatel@mercadien.com or 609-689-9700.