Outsourcing Internal Auditing

Categories: Outsourcing

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Outsourcing internal auditing has become a strategic imperative in the business sector since the nineteenth century. Internal auditing is an objective, consulting and independent venture that plays a big role in improving operations in organizations. It involves disciplined and systematic approach that enhances effectiveness in control, governance procedures and also risk management. It is a dynamic venture that adds value in many organizations. Many businesses carry out outsourcing of internal auditing either partially or on full basis.

Organizations have to consider various alternatives before deciding on what level of outsourcing of internal auditing has to be incorporated.

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This includes evaluating the size of the organization and the resources available. Outsourcing internal auditing has various advantages to an organization. This includes minimizing corruption therein. It plays a big role in increasing effectiveness within the organization. Research shows that outsourcing internal auditing enhances accountability within organizations. It is time saving and quite cost effective when well managed.

This venture also has its disadvantages to organizations.

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Outsourcing involves external experts which creates an avenue for them to access confidential information within Companies. This increases insecurity therein. Research shows that this venture is quite challenging especially in the area of incorporating decentralized budgets. In most cases it plays a role in demoralizing employees especially when they are highly qualified and competent to carry out internal auditing within the organization. Surveys carried out in U. S shows that outsourcing has increased by twenty percent since the onset of the twentieth century

Introduction Today’s business environment is very volatile in nature.

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This has made many businesses to encounter many business risks that are quite complex in nature. The business risks come in many ways. They include business ethics, investor demands, corporate governance, competitive market pressures, regulatory compliance, changing technology and accountability. With time, outsourcing internal auditing has actually become strategic imperative in the business sector. Outsourcing internal auditing can be partially done or it can be full outsourcing. Partial outsourcing

This is whereby organizations source internal audit services from external sources less than hundred percent. Most organizations source fifty percent of these services from external auditors. Many organizations incorporate partial outsourcing of internal auditing. This is also known in other terms as co-sourcing. This actually means having to balance between full outsourcing and retaining an in house team. This is whereby in most cases the in house team has good control of internal audits. The management decides to make good use of external advisors such that the internal auditors get additional support.

This is especially when specialist skills are required. In this venture there is integration of a partnership that is formal between the external auditors and the internal audit team. In this case each party actually contributes experiences, skills and complementary knowledge. This is normally done in many organizations as a means of cost cutting. It also helps many organizations to upgrade their capabilities within the organization. It also plays a big role in increasing responsiveness and efficiency within the organization.

This helps many organizations to create operational effectiveness and efficiency especially in the areas that the firm is exposed to great risks. This is also beneficial to organizations as they are helped to comply with approved policies, industry best practices, procedures and regulatory requirements. This is whereby the methodology incorporated focuses on elimination of risks. This involves the use of risk assessment process that is fundamental in internal auditing. This allows organizations to carry out self assessments. There is normally little consensus on the issues of partial outsourcing.

This is in relation to the amount of partial resources that need to be outsourced. To measure actually needs one to understand the complexity, nature and the size of the organization. This can be done on ongoing basis or even for specific terms. Some organizations normally carry out subcontracting and in this case the internal auditing is only carried out for a limited period of time. Full outsourcing This is where a hundred percent of internal auditing is sourced from external experts. There are organizations that full outsourcing of internal auditing.

This helps the firms to focus on strategies to improve their competitive advantage. In many cases organizations normally retain a resource in house. This can be the chief internal auditor. He is normally responsible for assessment of the organizational and internal process needs. Such a person is responsible for communicating with management and the audit committee. He is also liable for allocating the internal audit resources in the department. When there is total outsourcing of internal auditing, it actually generates more questions on how to manage it within an organization.

When full outsourcing is carried out in an organization, it is important that the oversight responsibility should not be given to an external expert. It is always safe for this responsibility to be given to a senior management level employee in the organization. Management team in an organization has to evaluate and determine the source of internal audit resources and the structures available. Decisions made concerning outsourcing of internal auditing are normally varied from organization to organization. These decisions are normally subject to change.

Regardless of who carries out internal auditing in an organization, it has to be done in accord with standards in the business field. This noble task needs professionally competent staff to accomplish it. According to research, partnering with outside providers is actually an effective venture that helps organizations to get internal auditing services. This normally contributes to management of an organization’s strategic objectives. Considerations for evaluating outsourcing alternatives Organization size Outsourcing is not just for large organizations only but even the small ones too.

Many small organizations never have the ability to hire full time internal audit staff or even hire them on permanent basis. They therefore need to explore outsourcing. Reasons why many organizations evaluate outsourcing include specialty skills and temporary staff shortages. Resources This is one of the considerations that need to be analyzed before outsourcing is carried out. There are instances when internal audit resources are unavailable or even scarce due to various factors. Outsourcing internal auditors can be carried out on a permanent or on a temporary basis depending on resources available.

Outsourcing is actually necessary where organizations can be in a position to get competent internal audit staff and professional internal audit services in good time. Advantages of outsourcing internal auditing Saves costs Outsourcing of internal auditing became very popular in many organizations. This is because it offered significant advantages to accounting firms and corporations. Many organizations have really benefited from the outsourcing strategies in line with internal auditing. One of the benefits is that these strategies save money.

Research shows that it is far much cheaper for this organization to carry out outsourcing than if it were to do train experts to carry out outsourcing. This is because the operational costs are highly minimized in this case especially when the staffs in an organization are not highly qualified in this field. Many Companies have benefited in reducing internal audit costs. This is by firms obtaining access to broad expertise that it would be expensive to maintain within the organization. Costs are reduced by overlapping audit effort and positions within the organization.

This is implemented by replacing fixed cost with employees that are variable cost effective. This also gives firms the ability to balance workloads. Saves time The other importance outsourcing is that it really saves the organization a lot of time. For instance, if the human resource management was to carry out personnel training so that they can carry out internal auditing it would take quite a long period of time. When outsourcing is carried out in an organization it helps in saving time and therefore other departments in the organization are given enough attention.

Staff is reduced Outsourcing really helps in the reduction of staff in many organizations. Research shows that if such organizations would manage an internal professional staff to handle internal auditing then it could be very expensive. Many organizations through outsourcing have managed to reduce the professional staff by half. This means that less money is used in the payment of staffs. This is very relevant for small organizations that cannot afford to pay professionals on a permanent basis and therefore carry out partial outsourcing. Increase in business effectiveness

Outsourcing has got very big impacts to the entire business. There is increased effectiveness in even the delivery of the services. This is because external experts have adequate experience to analyze the business operations. They also give invaluable advice to management in organizations on how to run the business. This actually leads to effectiveness in the business operations. As internal staffs in organizations interact with external professional they gain skills which in turn lead to increased business effectiveness. Resource relocation

The other importance of outsourcing internal auditing is that it allows the relocation of resources in the organization. Time as a resource is relocated to other important sectors in the organization by the managers. For instance the managers in many organizations able to use time saved in outsourcing to carry out strategic planning in the organization. This time is used to critically analyze the operations in the organization. Minimizes corruption Outsourcing internal auditing has got very many advantages to organizations. This is because it helps to minimize corruption within the organization.

In most of the organizations where outsourcing is not carried out, corruption is normally very rampant. This is because employees within the organization can actually lias to carry out inappropriate auditing of the books of accounting. This actually creates avenues for corruption practices to thrive within the organization. External experts that are normally used in carrying out internal auditing mostly do not have direct relations to employees within the organization. They play a big role in unearthing corrupt practices like money laundering since they have no fear of facing repercussions like being sacked.

In the long run corruption is highly minimized in the organization. Disadvantages of outsourcing internal auditing Insecurity A critical evaluation on outsourcing carried out in the most organizations raises some security issues. Every organization has got private and confidential information. Outsourcing in this case gives outsiders access to information that is very sensitive. Sensitive information in the organizations includes the employees’ terms of employment. This includes how much the employees are paid in each in relation to their qualifications.

This also includes the financial status of the organizations. In some cases, external experts link up with thugs and steal resources in the organization. That is why it is important that the overall venture of internal auditing be carried out by a senior employee within the organization. It is also important to have limits on the extent that external professionals can have knowledge on the ongoing within the organization. Demoralization of employees One thing that outsourcing does is that in one way or the other it demoralizes the employees.

Sources on interviews carried out in the many organizations show that the outsourcing of internal auditing done does not make good use of the employees’ insight and unique talents. This makes the employees feel quite incompetent when working in the organization. This is especially where full outsourcing of experts is carried out. This happens when employees in an organization are highly qualified to carry out the organization’s internal auditing. There is also the standpoint of labor that occurs in the outsourcing organizations.

To be realistic, outsourcing is a threat to the employees in the many organizations that carry out outsourcing of internal auditors. This normally gives rise to worker insecurity in the organization. The employees assume that the outsourced experts have come to replace them and simply refuse to cooperate. There is the probability of retaining or discharging of the workforce by the service providers Challenging A critical review on the outsourcing internal auditing strategies that are used in many organizations shows that the task is very challenging.

This is especially in the area of full outsourcing within the organization. It is very difficult to carry out budgeting in this case. It is also not very easy for parties involved in the organization to agree in making decisions that are related to outsourcing of internal auditing. Outsourcing that is normally carried out in many organizations is a test to the control in the organization. Working with decentralized budgets is a hard task for the financial managers in organizations that carry out outsourcing. The last decade saw accounting firm’s assurance and consulting firms grow by twenty percent in year.

Internal audit outsourcing has been one of fastest growing assurance services for accounting firms. In the year 1994, the Institute of Internal Auditors (IIA) carried out research and estimated the revenue emanating from internal audit services to be ten times that of the annual financial audits. In this case external audit and internal audit services are provided by the same firm. Conclusion Outsourcing of internal auditing is normally carried out in many organizations. Outsourcing can be carried out on partial of full basis. Partial basis is normally incorporated if the organization if employees are qualified.

Full outsourcing helps the firms to focus on strategies to improve their competitive advantage. The size of an organization and its resources play a big role in determining which type of outsourcing should be incorporated in an organization and to what extent. Outsourcing internal auditing has various advantages like minimizing corruption, saving costs and time. Disadvantages to outsourcing are that it creates avenues for insecurity and plays a role in demoralizing employees. All in all the benefits of carrying out outsourcing of internal auditing surpass the limitations.