Which of the following are problems when outsourcing the internal audit function?

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Benjamin White, CPA
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Management should consider the value, time, and costs of:
Why Audits Should Not Be Done Internally (Risks)
Advantages To Outsourcing Internal Audits (Opportunities)
Which of the following are advantages of outsourcing the internal audit function?
What are the challenges of internal audit?
HOW DOES IT outsourcing affect the internal audit function?
What is outsourcing the internal audit function?

Benjamin White, CPA

Board Member | Accounting & Auditing Executive | Risk & Control | International | Strategy

Published Jun 16, 2020

An internal audit function performed mostly in-house or outsourced to a big four or other firm – which is better? As Chief Audit Executive I have managed both types of internal audit functions in the US, Europe and India. Either model can succeed or fail, but one will offer significant advantages depending on your needs and how you structure the function.

Advantages of Outsourced Internal Audit Functions

Internal auditors don’t worry, because after this I will present an equally compelling case why internal audit should be performed by in-house teams. Reasons to wholly or mostly outsource an internal audit function to a big four or other firm include:

Critical Mass: The smaller an internal audit team, the more difficult it is to maintain a diversity of skill sets in house.
Efficiency: On a per hour basis, outsourced internal auditors are usually more efficient.

Advantages of In-House Internal Audit Functions

When an organization is of sufficient size, internal audit is typically an in-house function, with occasional project-based outsourcing to a big four or another firm. The advantages of an in-house audit team include:

Cost: Outsourced auditors are typically twice as expensive as in-house auditors on a per hour basis.
Audit Hours: Given the same budget, internal audit hours will be much higher for in house internal auditor functions (due to the per-hour cost advantage).
Institutional Knowledge: In house internal auditors are employees on site year-round.

What Drives an Outsourcing Decision

With cost/hours and knowledge advantages, an in-house internal audit team should clearly be the right choice. However, there are several reasons why senior management may choose the outsourced approach:

Value: Some internal audit teams consistently fail to execute and/or deliver value. Audits may focus on the same old risks and miss new or emerging risks.
Trust: Internal Audit has lost the trust of management, leading to lack of cooperation and reducing the effectiveness of internal audit.
Cost: Outsourcing may be agreed at a lower total cost (but higher per hour cost) than the previous internal audit budget. This will doubtless result in fewer internal audits, which may not be a concern if the previous audits were low value.

What Drives an In-sourcing Decision

An outsourced internal audit function may be brought in house for one or more of the following reasons:

Growth: Companies that started with outsourced internal audit teams may grow to the point where supporting an in-house team becomes viable.
Fees: While the year one cost of outsourcing an in-house internal audit function may be attractive, several years of total fees and/or rate per hour increases may make outsourcing less attractive.

The Bottom Line

An in-house or outsourced internal audit function – which is the best option for your organization? Absent any regulatory concerns, organization size is probably the biggest driver in the decision, as outsourcing is more likely for smaller organizations. All of the above considerations are relevant for CFOs and audit committees overseeing the internal function. Internal auditors should take heed as well – if the value portion of the equation slips significantly, an internal audit function may find itself on the brink of being outsourced.

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If your organization is certified to ISO 9001 or a standard that is aligned with it, like AS9100 or IATF 16949®, and you perform internal quality audits, then you should know this:

For ISO 9001:2015 and AS9100:2016, one of the top 10 clausesfor registrar findings in 2019 was 9.2 Internal Audit.
The IATF® standard takes it a step further with the focus on Internal Auditor Competency – Clause 7.2.3, and even Second-party Auditor Competency – Clause 7.2.4.
You do have the option to use a qualified outside company to perform your internal audits!

Certification Bodies are scrutinizing internal auditors and their competency. That’s why many companies are choosing to outsource their internal audits to a 2nd party like simpleQuE whose auditors are qualified, certified, competent, and are experts on the standards, industry, and customer-specific requirements. In addition, many are current or former 3rd party auditors who bring valuable insight because of the knowledge gained from extensive auditing for certification bodies, and from seeing many companies and various ways these companies meet the requirements.

While management may be concerned with the cost of hiring a professional auditor to complete their internal audits, if they really consider all of the costs to the company and the value of having someone who audits all the time, and who has the benefit of seeing how other companies have improved their processes, they may want to reconsider.

Management should consider the value, time, and costs of:

the initial training for their internal auditors,
retraining new internal auditors every year when turnover occurs,
the cost of retraining whenever the standard requirements change,
the time it takes for their people to plan for and complete the audits, especially when a competent outside expert can be more effective and efficient (less audit time, fast report turnaround time, better audits with more value-add findings and opportunities for improvement),
their return on this investment to perform internal audits with internal resources versus subcontracted auditing and industry experts.
Whether audits helped the company improve the effectiveness of its Quality Management System (QMS) processes, or was a lot of time and effort spent with internal resources just getting by with no improvement?
Keep in mind that our AS, IATF and ISO auditors can consult and coach while performing internal audits.

Once all of the costs have been considered and a look is given to how the current audits have led to process improvements, management will find the true value and price of a professional auditor will be comparable, or even less, to the cost they are now paying and will be much more valued-added than what they are currently getting. Isn’t it worth trying to see the difference of an outsourced audit versus what you’ve done in the past, especially if you’ve fallen behind and aren’t getting audits completed?

Here are more reasons to outsource internal audits from our very own team of auditors (who have seen it all):

Why Audits Should Not Be Done Internally (Risks)

Without proper training and experience, internal auditors don’t fulfill the competency requirements
Lack of time to perform the audits and write reports
Reports with limited or no findings. Internal auditors are afraid or hesitant to document any findings.
Not finding issues internally during audits, but outside auditors are finding many issues, and management knows there are systemic problems not being identified or fixed.
Internal auditors are hesitant to raise issues and findings.
Findings are nit-picky and don’t create any value for the company.
Audit reports don’t contain enough objective evidence to demonstrate a thorough audit was conducted. Often times there’s a checklist and the only objective evidence is “yes” written in to show compliance. There is no demonstration of the process approach or risk-based thinking. Audit methodology and reports are still checklist based on individual clauses of the standard, and not following best practices for auditing linkages and interactions between processes.
Timeliness of management in responding to findings/report
Internal turnover resulting in too much variation in reporting/focus and overall quality of audits

Advantages To Outsourcing Internal Audits (Opportunities)

A fresh set of eyes from outside the organization that are objective and unbiased
Reduces company’s investment in continual training on changing requirements or frequent turnover of auditors
Professional and timely reports
More content, findings, comments, opportunities for improvement, and observations for added value in the audit reports
More cost and time effective, freeing up internal resources. Outsourced internal audits often take much less time to perform with greater effectiveness and efficiency.
Management gives greater attention to an outside expert, especially when there are sensitive issues that an inside auditor may be hesitant to address
Better internal response and acceptance of findings and opportunities for improvement
Our auditors have:
- In-depth knowledge of the standard’s requirements,
- Experience in the field and can share best practices,
- An understanding and use of the process audit approach and risk-based auditing
- The ability to provide consulting while auditing
- Compliance to ISO 19011 on auditing management systems

All solid reasons for turning your audits over to the experts. After all, the true intent of being certified is to help improve the company, which will eventually have a positive impact on the bottom line. See a risk and opportunity analysis in this Risk Register example, which your company might use to justify outsourcing your internal audits. It’s also a way to demonstrate a documented example of risk-based thinking with a formal analysis. Contact us at 740-305-0868 or for more information about internal quality auditing and remote auditing (to comply with COVID-19 policies).

SimpleQuE is not associated with the IATF®, IAOB, ANAB®, IAQG®, and is not a certification body. SimpleQuE is an independent consulting, training, and second-party auditing service provider that assists a company on a path for the company to obtain and maintain certification through accredited certification bodies

Which of the following are advantages of outsourcing the internal audit function?

Advantages To Outsourcing Internal Audits (Opportunities) In-depth knowledge of the standard's requirements, Experience in the field and can share best practices, An understanding and use of the process audit approach and risk-based auditing. The ability to provide consulting while auditing.

What are the challenges of internal audit?

5 top challenges for internal auditors.

Talent shortage. Attracting and retaining internal audit staff has become a hardship in many sectors. ... .

Rise of remote work. The pandemic caused most organizations to pivot quickly to remote operations. ... .

Relationship-building barriers. ... .

Evolving audit skill needs. ... .

Tech tool reassessment..

HOW DOES IT outsourcing affect the internal audit function?

How does IT outsourcing affect the internal audit function? IT outsourcing brings with it risks that an organization's board and management must understand and manage. The internal audit function can provide assurance and advise the board and management about the risk and control implications of outsourcing IT.

What is outsourcing the internal audit function?

Internal Audit Outsourcing allows your organization to employ a temporary staff of audit experts to perform objective analysis and tests, and issue reports. Internal Audit Co-sourcing allows your organization to leverage I.S. Partners, LLC's knowledgeable staff with your existing in-house audit employees. I.S.