Outsourcing Internal Auditing: Why and How?

In today's dynamic business landscape, firms often find that certain activities are better handled by experts who can dedicate their full attention and specialized skills to a particular task. This is especially true for internal auditing. An internal auditor is a critical figure in ensuring the accuracy, compliance, and efficiency of company operations. However, maintaining an in-house audit department can be cumbersome and may not always align with the firm's core competencies. This article explores the reasons why outsourcing internal auditing can be a more effective and efficient solution.

Why Outsource for an Internal Auditor?

Outsourcing specialist activities that are unrelated to the core competencies of a business is a common practice in today's professional services. This approach ensures that the firm can access the specialized skills and expertise needed without the overhead of maintaining a dedicated in-house team. Consider a scenario where your company requires its grass cut around the corporate office 12 times a year, each time taking five hours. Would it be more efficient to hire a full-time gardener or outsource the task to a professional landscaping company? Outsourcing internal auditing follows a similar rationale. When a firm needs a specialized service infrequently, it is often more cost-effective and efficient to outsource it. Moreover, key benefits such as access to specialized skills, reduced overhead, and elimination of the risk of biases in internal audits make outsourcing a compelling choice.

Internal Audit and Its Significance

An internal audit is a process of evaluating the company’s books and records to ensure they are accurate, complete, and properly compliant with relevant regulations. Unlike external audits, internal audits are conducted by employees within the company. However, to maintain the integrity and reliability of the audit, internal auditors must be independent and objective. Independent external auditors, on the other hand, conduct audits with the presumed independence and objectivity required to ensure unbiased evaluations. An internal auditor is a trained professional tasked with providing independent and objective evaluations of company financial and operational activities. Their primary objective is to ensure that the company follows proper procedures and functions efficiently. Unlike internal auditors, external auditors are hired by the company to perform an independent audit, which is crucial for ensuring the transparency and accuracy of the company's financial statements.

The Challenges of Internal Auditing

One of the key challenges with internal auditing is the issue of independence. An internal audit department is supposed to be totally independent of management. However, in practice, this can be difficult to achieve. If the findings of an internal audit continuously highlight issues with management, there are several ways an internal audit operation can be terminated, all of which are perfectly legal. This puts a significant pressure on internal auditors to avoid conflict and maintain a professional relationship with management, which can compromise the audit's objectivity. External auditors do not share the same level of dependence on the good will of the auditee as internal auditors do. If an external auditor intersects with management too frequently, the company may choose to terminate the contract and seek another auditor. The ideal situation is that the auditor should not be financially dependent on its client, allowing for unbiased and thorough evaluations.

Conclusion

Outsourcing internal auditing can provide numerous benefits, including access to specialized skills, cost efficiency, and enhanced objectivity. The independence and objectivity of external auditors are crucial for ensuring the accuracy and reliability of the audit process. By understanding the benefits and challenges of both internal and external auditing, companies can make informed decisions about their audit processes and ultimately improve their operational efficiency and compliance.

Keywords: outsourcing internal auditor, independent external audit, internal audit independence.