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  • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 INTERNATIONAL JOURNAL OF ADVANCED RESEARCH (Print), ISSN 0976 – 6332 (Online), Volume 5, Issue 1, January- February (2014) © IAEME IN MANAGEMENT (IJARM) ISSN 0976 - 6324 (Print) ISSN 0976 - 6332 (Online) Volume 5, Issue 1, January- February (2014), pp. 53-58 © IAEME: www.iaeme.com/ijarm.asp Journal Impact Factor (2013): 4.7271 (Calculated by GISI) www.jifactor.com IJARM ©IAEME EFFECTIVENESS OF OUTSOURCING OF INTERNAL AUDIT AND FINANCIAL REPORTING BY THE CORPORATE Dr. B .Chandra Mohan Patnaik1, Dr. Ipseeta Satpathy, D.Litt2, Mr. Chandrabhanu Das3 1 Associate Professor, SoM, KIIT University, Bhubaneswar, Odisha 2 Professor, SoM, KIIT University, Bhubaneswar, Odisha 3 Research Scholar, KIIT University, Bhubaneswar, Odisha ABSTRACT A practice used by different companies to reduce costs by transferring portions of work to outside suppliers rather than completing it internally. Outsourcing is an effective cost-saving strategy when used properly. An Instance is businesses may decide to outsource book-keeping duties to independent accounting firms, as it may be cheaper than retaining an in-house accountant. In the present paper it is an attempt to understand the effectiveness of outsourcing of the Internal Audit and Financial Reporting (IA & FR) by the corporate. In this direction private organized sectors were selected for the survey. The accounts executives of 23 private sectors were approached and 216 questionnaires were distributed however only 84 responses were received. This includes junior level executives, middle level executives and senior level executives working in accounts departments of various organizations. The response rate was only 38.88%. For the sake of confidentiality we are not mentioning the names of the corporate. Key words: Internal Audit & Financial Reporting (IA & FR), Corporate, Employee. I. AN OVERVIEW The roots of Outsourcing can be traced back to 18th and 19th century industrial revolution but it was recognized as a business in the late eighties. In the 1990s Cost Management became a core issue for companies to run hence a lot of services perceived by the top executives as less critical were outsourced to many service companies and consulting 53
  • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 5, Issue 1, January- February (2014) © IAEME firms. (The Outsourcing Guide. Com) Previous Business Models of Self sufficient and fully Integrated Organizations have been challenged by rapid growth in technology and competition. Added to that scarcity of expertise and specialization required for various transactional and strategic activities of the Organizations and to maintain a optimum cost saving strategy has been a challenge for most companies to sustain in this competitive and dynamic Business Environment. Companies have to build better relationships with stakeholders and need to have better solutions for the constraints that act as barriers in their Journey of Excellence and Strategic Value. This has made Companies to outsource those activities which previously was thought to be managed in-house and pooling of resources and manpower within the Organization. Hence areas such as R&D, Product Development, Process Improvement, Brand Promotion and Risk Management are being outsourced. This Segment is growing and has evolved as of significant importance in the Global Corporate Scenario. II. OUTSOURCING IN FINANCIAL REPORTING AND INTERNAL AUDIT FUNCTIONS The CFOs/Chief Controller of Finances are faced with a lot of challenges in the recent dynamic business environment. Some of the main thrust areas are listed below: Proper Vigilance and Control over Financial Reporting and Compliances. Ensure better Internal Control Systems and automation so as to implement the best practices and solutions. Focus on improvement in Working Capital and Fund Management. Increase in Profitability and Brand Value. Reduction in Administrative Costs and better Cost Management Tactics The recent increase in frauds and window dressing of Financial Reports in famous companies like Satyam and bankruptcy of multinational giants like Enron and Lehmann Brothers which resulted in Global Meltdown in 2008 has led to stringent regulatory norms from Statutory bodies Like Ministry of Corporate Affairs and SEBI. This has compelled companies to go for more transparency and disclosures in their dealings with Investors as well as greater compliance in financial reporting and auditing. Hence points 1 and 2 have gained increased Prominence and Importance in the context of present Legal Framework and Regulatory Norms. To achieve these CFOs need to have a dedicated and specialized team of experts who can assist the CFO in meeting these deliverables. Considering the present economic scenario where Job hopping and career switching is a common phenomenon with lack of availability of niche talent in the market may prove to be a costly and cumbersome affair for these activities. Sometimes to keep the team dedicated one has to pay a huge price to these specialists creating a rift between the specialized team and the operational team as the specialized team has been formed by pooling of manpower and resources within the Organization. This rift causes barriers in communication and conflicts arise which hampers the Organizational Culture and increases the attrition rate. This in turn may affect even the operational activities of the Organization. Considering all these aspects Outsourcing seems to be a better alternative. It may also prove to be Cost Effective and reduce excessive dependence on Manpower. There is optimum allocation of resources and division of labor promoting Job 54
  • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 5, Issue 1, January- February (2014) © IAEME Satisfaction as sometimes the Specialist had to do these activities in addition to the Routine Jobs in absence of Outsourcing. This problem can be eliminated to a great extent. This growing demand for Outsourcing in the Finance and Accounting Sector has given growth to many noted and small consulting firms performing multifarious activities. Consulting Firms Like Pwc, Deloitte, PK Chopra and Co. engage in Regulatory Compliance, Financial Reporting and also advise the Firms to achieve better Internal Controls, perform Risk Management and also provide Fraud Investigations and Dispute Services. Information Systems and Security Audit are also being done by these firms to provide cost effective and scalable solutions. All these activities being outsourced will lessen the burden on CFOs pertaining to Legal hassles, disputes resulting due to poor compliance in Financial Reporting and Auditing. Hence the CFOs can concentrate on strategic activities that result in implementation of innovative methods and best practices within the Organization. Therefore the Internal Audit & Financial Reporting (IA & FR) industry segment is growing due to the demand from CFOs and Directors of Organizations. III. OBJECTIVE OF THE STUDY To understand the various issues related to outsourcing the Internal Audit & Financial Reporting (IA & FR) To suggest the check list before going for outsourcing the Internal Audit & Financial Reporting (IA & FR) IV. LIMITATIONS OF THE STUDY The study is restricted to selected organized private sector corporate units in Eastern part of India. The period of study is limited to 4 months i.e from September 2013 to December 2013. The views of the respondents may not represent the universal accepted one. V. METHODOLOGY OF THE STUDY For the collection of data primary stratified random sampling method used. For the collection of data 12 questions were identified after making the pilot study and taking the expert opinion of practiced chartered accountants, cost accountants and company secretaries. In overall 216 questionnaires were distributed in the accounts department of 23 private corporate units and finally 84 responses were received. The data was analyzed under three different levels. This includes junior level executives, middle level executives and senior level executives. In this direction 34 responses were received from junior level, 29 responses were received from middle level executives and rest were senior level executives. For analyzing the collected data percentage method used with close end options. VI. FINDING OF THE STUDY AND DISCUSSION OF RESULTS Answering to the question, whether outsourcing of IA&FR will streamline effectiveness of system and process majority of the respondents completely agreed. In 55
  • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 5, Issue 1, January- February (2014) © IAEME case of junior level accounts executives 70.6% completely agree, in case of middle level accounts executive 72.4% completely agree and for senior level 85.7% completely agree. Nobody from senior level disagrees or completely disagrees. However, in case of junior level executives 5.9% disagree and 8.8% completely disagree. In case of middle level only 3.4% disagree. Responding to the question, whether outsourcing of IA&FR will help to detection of fraud; 80.9% of respondents of senior level completely agree, 72.4% of middle level completely agree and 64.7% of junior level executives completely agree. Only 8.8% of junior levels completely disagree. Joining to the question related to whether interference of corporate will be minimized to a great extent with the help of outsourcing the IA & FR, 61.8% completely disagree from the junior level and the perception for the same in case of middle level and senior level were 34.5% and 9.5% respectively. 76.1% of senior level executives disagree, 34.5% of middle level were also disagree. In case of junior level executives 17.6% were completely agree and 20.7% of middle level were also complete agree. This shows that majority feel that the when outsourcing firm will provide their service for their service charges there is every chance of interference from the business houses. Somehow the service providing firm will have their own interest for their service charges this will give a scope for interference by the corporate. Answering to the question related to timely filing of compliance and reporting will be possible with the help of outsourcing IA & FR, 90.5% of senior level executives completely agree and the same for the middle level and junior level executives were 76% and 53% respectively. This shows that majority support the question. Responding to the question about the outsourcing of IA & FR will help in fixing the accountability of the staff, most of the respondents completely agree. In case of junior level executives 73.5% completely agree, in case of middle level executives 89.8% completely agree and for the senior level executives the same were 85.6%. Joining to the question related to moral check can be implemented with the help of outsourcing of IA & FR, majority completely agree. In this direction the perception of middle level executives were 83%, in case of junior level it were 83.3% and perception of senior level executives were 90.4%. Responding to the question related to outsourcing of IA & FR will help to adopt more transparent compliance system, majority completely disagree. In earlier question no.3 it is clear that when interference by the corporate over the audit firms will be there cannot be transparency expected. Accordingly in case of junior level executives 53% were completely disagree and 29.4% disagree, for the middle level executives, 34.5% were disagreeing and 58.7% completely disagree. In case of senior level executives 85.7% were completely disagreeing. Answering to the query related to whether outsourcing of IA & FR will allow the CFO to give emphasis on other important issues rather than monitoring employees, reporting and compliance related work; majority of respondents irrespective of executive levels, completely agree. The same for the junior level, middle level and senior level were 73.5%, 76% and 90.5% respectively. Responding to the question related to outsourcing of IA & FR will reduce the administrative and compliance cost, most of the respondents completely agree. In case of middle level executives the percentages for the same were 83%, and for the junior 56
  • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 5, Issue 1, January- February (2014) © IAEME level the same were 67.6%. However, for the senior level executives, 85.7% completely agree. Responding to this question that outsourcing of IA & FR may increase the chances of losing of job of employees, 85.7% of senior level executives completely disagree, 76% of middle level executives were completely agree and 52.9% of junior level executives completely agree and 29.4% were only agree. This shows the perception towards this question of senior level executives were quite opposite to junior level and middle level executives. This may be due to the fact that senior level executives having faith on them where junior level and middle level do not have confidence on them. Responding to this question, that outsourcing of IA & FR may increase the risk of losing vital information to competitors, majority of the participant completely agree. In this direction 90.4% of senior level executives completely agree, 89.8% of middle level executives completely agree and 79.4% of junior level executives were completely agreed. Answering the question, that outsourcing of IA & FR will help in identifying performing and non-performing staff in the organization, majority completely agree. This will be in the interest of the organization as a whole. It compel the underperforming/ non performing staff to perform otherwise they will lose their job. VII. CHECK LIST BEFORE GOING FOR OUTSOURCING INTERNAL AUDIT & FINANCIAL REPORTING (IA & FR) Strategic Information Sharing-Any high level decision affecting the financial reporting of the company and other schedules prepared during the statutory audit with any adjustments thereof has to be shared with the firm. Companies must see how much they can compromise to share this vital information. Vendor Lock in -Some Organizations have a tendency to depend on a particular firm for their Internal Audit & Financial Reporting (IA & FR) activities. These Firms may alter the processes and information systems to suit their firms only. Hence a Vendor Lock in situation creates a monopoly in the market where these firms can alter the terms and conditions of the contract. Collaborative Approach-Doing Auditing for the Organization means the Outsourcing firm has to understand every process and constraints thereof. Hence the Organization must create a collaborative atmosphere for the employees so that the firm with the help of employees can carry on smoothly the auditing and reporting activities. Cost Benefit Analysis-Although it is said that Outsourcing reduces Costs a thorough Cost - Benefit analysis has to be done which must include all hidden and implicit costs which may be imposed by the firm on the organization. The Long term benefits should include not only employee cost saving and risk mitigation measures but also whether it reduces the Skilled Labor Turnover Rate/Attrition rate. Focus on Deliverables and Real Time Solutions- As is said “Too many Cooks spoil the Broth” likewise if many consultancies come to a Organization and still the problem cannot be solved or if solutions are not feasible than it is really necessary for the Company to Ponder upon what went wrong. Add to this the Company bears the costs of engaging many consultancies which may affect the Profitability of the 57
  • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 5, Issue 1, January- February (2014) © IAEME Company. Hence before engaging a Consultancy the organization must ensure that it focuses on deliverables instead of creating a impractical scenario and the solutions must be real time and feasible. Entry and Exit Criteria-One must not blindly trust the Consultancies or give them High Handedness in every decision making situations. Consultancies when learn some uniqueness of processes in an organization there is every chance that a competitor may grab the consultancies and absorb that uniqueness. Hence suitable Entry and Exit Barriers must be fixed in the terms and conditions of the Contract. VIII. CONCLUDING REMARKS At present most of the corporate strongly believe in outsourcing the internal audit and financial reporting. However, it depends upon the size of the organization, need and scope for outsourcing this accounting part. Before going for outsourcing the cost-benefit analysis should be made. In the above study it is found that there are number of benefits of outsourcing. However, at the same time it is found that when secrecy need to be maintained it may not be possible. Autonomous of audit firm also at stake as the audit firm will engage themselves for their audit fees only. This will give scope for the interference by the top management and ultimately it is difficult to maintain the transparency in the compliance system. Considering this it can be concluded that outsourcing should be made only to that extent which is possible and in the interest of the organization as a whole. REFERENCES 1. ICAI Study materials 2. B.N.Tandon- Auditing 3. Jagdish Prakash- Auditing 58