Pros and Cons of Outsourcing Internal Auditing

Internal Auditing Function Outsourcing:

The work of internal audit is usually undertaken by a specialized team in a business organization. But with changing times the business entities are now outsourcing there Internal Auditing functions as well either fully or partially. Since there are major challenges of Internal Auditing in future, to be up to date the organizations are totally taking up such outsourcing services.

There are four types of arrangements that a business organization can choose from while outsourcing the Internal Auditing Function. These arrangements are-

  • Partial Outsourcing: It is a type of arrangement where the organization purchases less than 100% of the services from the external Internal Auditing provider or outsourcer. In such an arrangement the external service provider and the core team in the internal audit section of the firm shares the working plan of the internal auditing function.
  • Full Outsourcing: In this the entire function of internal audit is carried and conducted by the outsourcer that is actually an accounting firm different from the external auditor of the business entity.
  • Co-sourcing: When an organization is facing a temporary shortage of staff in the Internal Auditing section, it requires this type of outsourcing service to complete a special project assignment, meet the tight deadlines of the work, cover the remote sites of the business, or when the organization is facing difficulty in recruiting suitable, skillful and qualified auditors for conducting internal audit.
  • Subcontracting: In this, usually, a third party undertakes a part of an engagement or specific engagement for a limited period of time.

Pros of Outsourcing Internal Auditing Function:

Outsourcing the function of Internal Auditing has its own share of advantages and benefits. These pros are-

  • It provides a flexibility in staffing the resources.
  • The Internal Auditing Outsourcing can also help in revitalizing a very long and old established auditing function up to some degree or extent.
  • It can also provide greater value for money depending upon the situation or circumstances in the business organization.
  • Since the internal auditor is from an external source, their independency from the management is strengthened.
  • In organizations where the internal audit section is small, some outsourcing of Internal Auditing is required so that the management, board of directors and the audit board committee can be provided with an assurance over the key risk areas of the entity.
  • A proper and advanced technology will be used by the Internal Auditing outsourcer that the internal audit section of the business firm may lack. They are provided with all the latest innovations in the techniques of auditing and also given the opportunity of bench-marking by the outsourcer.
  • The organization is benefited from the access to experts and specialists that can also help in providing a key insight for achieving the goals of the business.

Cons of Outsourcing Internal Auditing Function:

The drawbacks of outsourcing the Internal Auditing Function includes the following-

  • Managing the service level agreements and the contracts effectively with an external service provider can be very challenging.
  • The people of the business organization can be a bit non-cooperative and non-receptive to some external outsourcer or internal Auditing Service provider.
  • The outsourcer will be on a disadvantage of lack of internal knowledge about the organizations culture and working environment. It will take some time to get used to the whole processes and the system of the entity.
  • The Outsourcing of Internal Auditing Function can be time constraining and expensive sometimes depending upon the service areas one wants to have from the outsourcer.
  • If Internal Auditing is outsourced then there is a chance that the opportunities for internal promotions may be reduced or disappear significantly with time as Internal Audit is used as a ground for training often.
  • A risk of confusion will always prevail over accountability and responsibility.

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    Author: Anil Agrawal
    EZYBIZ India Consulting LLP, New Delhi. The firm is business and tax consultancy firm providing consultancy in Taxation, Regulatory, Transfer pricing, Valuation, Corporate funding and Business set up matters. He may be reached at 9899217778 or anil@ezybizindia.in.
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