The shadow of outsourcing looms over the Internal Audit profession and poses a threat to our very existence. This is a relatively new phenomenon for Internal Auditors. There have always been times when Internal Audit departments faced slow or no growth. There were also times when, due to adverse economic conditions, layoffs occurred. For the most part, Internal Auditors weathered these situations with varying degrees of anxiety.
Outsourcing, however, is a greater cause for concern. Entire Internal Audit Departments can be swallowed up by the dreaded "external audit monster". These external audit firms have had their traditional bread and butter audit service fees continually squeezed. Indeed, some firms use the traditional year end audit service as a loss leader, hoping to recover fees based on add on consulting services. These firms view outsourcing as a tremendous opportunity to create a new revenue stream. These ambitions are not only confined to the "Big Six" firms. I personally received calls from Grant Thornton and BDO Seidman inquiring as to the possibility of augmenting my scarce resources with their own staff, "Co-Sourcing" is what they called it.
The Internal Audit climate is ripe for such exploitation. Internal Audit Departments are caught in the same state of flux as society in general. An ever changing, increasingly technological business landscape has created tremendous pressure to empower employees, push decision making closer to the customer. Segregation of duties, the classic internal control objective, becomes extremely difficult to maintain as increased technological capability, combined with ease of use and lower price to force companies to eliminate redundant positions and combine functions. Downsizing, re-engineering and right sizing have become euphemisms for laying off tons of workers, usually eliminating entire levels of middle management, who would usually exert oversight of processing and supervisory review activities. Even authorization may be difficult to maintain due to electronic sign off: For all these reasons, Internal Audit Departments face unprecedented threats and challenges.
The argument against outsourcing is strong. Conflict of interest concerns, economies of scale, in-depth knowledge of company operations, and above all, cost, are issues that can be developed to provide a competent Internal Audit Department with a significant advantage.
In my opinion, the bottom line is; if your CFO or CEO is even considering outsourcing the Internal Audit Department, your function is not adding value to the organization. How can you tell if your department is a candidate for outsourcing consideration? Let's take the outsourcing self-test.
1. How much does your department cost?
The answer to this question goes way beyond budget figures. This is your opportunity to slash overhead. Yesterday's empire builders have become today's excess baggage. Look at your support staff. How many secretaries, administrative assistants, professional practices, LAN administrators, etc., do you have? The less, the better.
2. What is your Audit Cycle time?
How long does it take to do an audit, on average?
This is a self-test, be brutally realistic. Benchmark the time it takes from when the audit is announced until the final report is issued. Include workpaper prep and review in this calculation.
3. Have you satisfied your customers?
This is the key question! In order to answer this, you first must define your customers and identify their needs. Examine the corporate landscape. Line management, the audit committee, senior management, peers, external auditors and even your organization's customers could all be considered the customers of the Internal Audit Department. Each has different needs. Evaluate the effectiveness of your department in satisfying these needs. Talk, survey, poll, and notice how often management requests the services of the Internal Audit Department. If the organization has many consultants, especially if they are external accounting firms, you may need to alter the way in which you do business.
4. If the Internal Audit Department were your own private business, would you be happy with it?
This is a summation of your self-test. Carefully and honestly review the results of the self-test. Gauge the effectiveness of the department's activities. Ask yourself question 4. If your answer if YES, go immediately to question 5. If your answer is NO, then develop a corrective action plan with tasks, deliverables, timetables and accountabilities.
5. How can you make it better?
Even in the best of functions, areas of improvement can be targeted. Everything's OK? Maybe. However, here is your opportunity to create an even more exceptional group, one that will add value and be seen by senior management as integral to the success of the organization.
Outsourcing is a valid business strategy. If services are not being provided in a timely, efficient manner, if customer dissatisfaction is high, if costs are high, if continuous improvement is not a department goal, then this business function should be outsourced.
Don't let it happen to you.