The value additions by internal audit
The success of organizations depend on how well it manages risks and implements internal controls. Successful implementation of internal controls depends on how robust the internal audit function is.
Irrespective of size and nature of business, internal audit is one of the core functions that helps in improving governance and ensure achievement of objectives.
It is imperative that the best approach, towards deciding whether to outsource vs inhouse internal audit, is adopted at the early stages of your organization’s growth. As the organization expands, internal audit supports the key building blocks by developing resilient systems and processes.
Factors affecting your decision
The objective of internal audit function is to provide assurance to the management on whether the internal controls are effective. Therefore, each factor that ensure achievement of the above objective needs to be considered in the decision making towards Outsource Vs Inhouse Internal Audit.
Most common factors considered for the decision making are:
- Independence of the auditors
- Domain expertise of the auditors (experience with similar organizations)
- Geographic spread of the organization
- Budget for internal audit function
- Specific skill sets in line with the organization’s industry
- Nature of business of the organization
- Is remote working possible in the organization
- Technology implemented in the organization
The arguments on outsource vs inhouse internal audit can go both ways. There are advantages and disadvantages on both the sides. So to be decisive, management needs to focus on their priorities in terms of the factors mentioned above.
For example, if the independence of the auditor is of utmost importance, then outsourcing is the best option to chose. The ability of an outsourced internal audit function to independently report on issues is unchallenged. The other factors favoring outsourcing of internal audit are domain expertise, remote working possibilities, geographic spread and level of technology implementation.
While factors such as budget, specific skill sets, and nature of business favor having an inhouse team to conduct internal audits. The budget factor can be overcome in case the internal audits are outsourced to internal audit or management consultants in India, where the skill levels are equal to the western nations while the costs are much lesser.
The third approach
The co-sourcing approach bring in new lines of thought to the argument of outsource vs inhouse internal audit. However, there are two different ways in which internal audit co-sourcing model works.
In the first model, the planning and reporting function of internal audit are centralized and inhouse while the execution is outsourced. Under this model, the expertise, skill and cost effectiveness of external team is the primary rationale.
In the second model, routine control evaluations and execution of other work is done by the inhouse team, while the outsourced auditors are responsible for establishing the systems and processes towards auditing, supervision of the inhouse team and also take care of the reporting to the management. Under this model the independence of the auditor is not affected while keeping a balance in terms of budget and expertise.
As going with only outsource or inhouse internal audit may lead to gaps in the factors considered above, a co-sourcing model is the best option to optimize the output from the internal audit function. It adheres to the budget while ensuring enhanced skills and expertise and a fair level of independence. It also widens the horizon of the inhouse team through new thought processes from the outsourced team.
Although, co-sourcing has it fair set of challenges such as overlapping responsibilities, inappropriate reporting structure and lack of coordination, a well designed co-sourcing model can overcome these challenges.
At the end, whatever may be the decision, the effectiveness of the Internal Audit function must be judged based on the mitigation of risks and achievement of the objectives by the management and other stakeholders.
Build the best Internal Audit team
Irrespective of the decision of whether to outsource, co-source or have inhouse team, to get the best out of your Internal Audits, have clearly defined objectives and a charter for the Internal Audit function, adequate systems and processes, and a clear line of reporting.
(The author is a subject matter expert on internal audit with more than 16 years of experience. She is leading a Chartered Accountant firm and has served various large, medium and small sized companies.)