Internal audits are crucial for many organizations and often a mandatory procedure. These audits seek to review a company’s processes and controls. Similarly, it also looks at the company’s financial systems to ensure proper bookkeeping and reporting. Once it examines all the processes, internal audits seek to identify weaknesses and recommend fixes.
Internal audits are critical for many companies. Although some companies do not require to have an internal audit function, most others use it as an internal control procedure. These audits differ from external audits in many ways. For example, unlike external auditors, internal auditors are a company’s employees. In some cases, however, some companies may also look at internal audit outsourcing.
What is Internal Audit Outsourcing?
Outsourcing is a process that involves using external suppliers to conduct internal functions. With internal audit outsourcing, companies can use external services for their internal audit function. This process involves hiring auditors that do not act as the company’s employees. However, they can still work similarly to internal auditors.
For large companies, it is very common to have an internal audit function. Usually, this function performs complex procedures and handles all the related services. Internal auditors also need specialized skills to perform their tasks properly. Most internal auditors are professionals registered with a professional body. Hiring skilled and experienced internal auditors can be challenging and also expensive.
The internal audit function in a company carries out a vast number of responsibilities. The most critical of these is evaluating the risks in the company and the effectiveness of its internal controls. However, for all of these operations, internal auditors need to overlook the company’s operations continuously. Having an outsourced internal audit function may, therefore, be more challenging.
What are the Advantages of Internal Audit Outsourcing?
Internal audit outsourcing may pose many challenges to any company. However, various advantages may come with having an outsourced internal audit function. Some of the primary benefits that companies may get from doing so are as below.
Expertise
Hiring an outsourced internal audit function may bring expertise to many companies. As mentioned, most large companies have a dedicated internal audit function that is in-house. For smaller companies, however, the same may not be possible. Therefore, it can introduce the expertise they need to operate an effective and efficient internal audit function.
Time-saving
Companies operating internal audit functions have to go through various steps to establish it. It usually includes establishing the structure, hiring employees, determining the procedures, etc. All of these tasks require time to complete. By outsourcing the internal audit function, companies can save the time they would spend on the above. In addition, with outsourcing, companies can get an immediate audit department without going through a complicated process.
Cost-saving
As mentioned, it can bring more expertise while also saving time. Through this, it can also be more cost-efficient for companies. On top of that, internal audit outsourcing contracts are usually a fixed amount. Therefore, companies will also find it easier to budget using this amount. Otherwise, companies have to pay many employees, including bonuses. Therefore, it can not only make it more difficult to predict but also drive costs up.
Better independence
One of the most critical issues with an in-house internal audit function is independence. Internal auditors are a company’s employees. Therefore, the management may have undue influence over their work. With internal audit outsourcing, the same does not apply. Therefore, companies will find outsourcing better for the independence of their internal audit function.
What are the Disadvantages of Internal Audit Outsourcing?
Despite its many advantages, internal audit outsourcing may also carry some drawbacks. For companies, it is crucial to understand these and weigh them against the benefits. Some of the primary disadvantages of internal audit outsourcing are as below.
Loss of control
Taking the internal audit function out of the company may force loss of control. Companies that outsource this function cannot have a say on how the outsourced internal auditors work. It can further lead the company to change the processes or procedures they use internally. Overall, it can cause unwanted problems for the company.
Not suitable for small companies
Internal audit outsourcing can be beneficial to many companies. However, for small companies with a low number of transactions and controls, the same may not apply. Usually, these companies don’t need an internal audit function at all. However, even if they do use internal audits, outsourcing may not be ideal given the requirements.
Initial costs
Internal audit outsourcing may result in lower costs. However, it may also require companies to bear high expenses initially. Usually, companies need to dedicate resources to help audit firms to get used to their operations. Similarly, for companies that have an existing function, the cost of redundancies may be high. Companies may also need to invest in systems to keep the information confidential. These may all add to the initial costs.
Conclusion
Internal audit is a function within companies responsible for risk management and internal control examination. Internal audit outsourcing includes using external suppliers to conduct these tasks. There are various advantages and disadvantages of internal audit outsourcing, as mentioned above.
