Outsourcing the internal audit function with special reference to the UK public and private sectors
Although not a new phenomenon on the business scene. outsourcing nowadays is occurring on a much broader scale and usually encompasses a wide variety of traditionally in-house activities. There is no doubt that in many cases outsourcing has created new ways and opportunities for growth. It has given organisations the chance to secure high quality services at a lower cost and it has even enabled them to concentrate on their core activities instead of devoting their, at times, scarce resources on peripheral ones. Having to compete in an increasingly global market amid growing antagonism, has forced organisations to harness the benefits of outsourcing while at the same time mitigate many of its potentially damaging effects (e. g. low employee moral, loss of control over the outsourced activity, etc). Evidence suggest that outsourcing has been extensively used in a plethora of activities which are often closely allied with or supporting the organisation's core business. One of the activities that has recently become a target for outsourcing is the internal audit function. This thesis incorporates a comprehensive literature review on the subject of outsourcing in general and that of internal audit in particular. It also includes a detailed analysis of data from a survey that was carried-out in the UK between May and July 1999. In this survey, a number of Finance and/(>r Audit Directors from both the public and private sectors took part. From the survey results it is clearly evident that the outsourcing phenomenon is not only limited to the private sector alone. In fact, the public sector has not been left untouched by the outsourcing frenzy either. Apart from looking at the factors acting as the main driving force behind the decision to outsource the internal audit function, the thesis also examines how internal audit is perceived and the likely impact an outsourcing decision may have on auditors' independence and the quality of internal audit service. Results indicate that the respondents consider internal audit to be both a `core' and an `essential' activity. What is also apparent from the results is the perceived value of internal audit, with the clear majority of organisations either having an internal audit function in-house or receiving the service from an outside provider. The main motivating factor behind the decision to outsource the internal audit function has been identified to be the `access to internal auditors with specialised skills. While an auditor with specialist skills may be needed in many cases, adding such a person to the permanent staff is often quite expensive, particularly if his/her skills are required for only a short period of time every year. The research also shows that organisations are, in general, satisfied with the quality of the provided service. One third of the organisations with an in-house internal audit function. stated that in the future at least some, if not all, of their internal audit function could be provided by an outside service provider. Despite showing their preference towards the services of the 'big five' public accounting firms, a significant number of organisations may still consider the use of a specialised internal audit provider'. The use of the same provider for both the internal and external audit services inevitably raises questions regarding the issue of independence and although the majority of organisations outsourcing the internal audit function use two separate providers, not all of them believe that independence is compromised when using one provider.
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