3a 10 Managing Outsourced Audit Activities


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How do you manage the outsourced internal audit activity ? A number of factors need to be considered ...

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3a 10 Managing Outsourced Audit Activities

  1. 1. “ Managing Outsourced Internal Audits”
  2. 2. - Sourcing decision- Internal Audit & other Corporate Services <ul><li>Is there a difference between “Outsourcing” the </li></ul><ul><li>other Corporate functions & Internal Audit? </li></ul><ul><li>ie. Outsourcing, </li></ul><ul><ul><li>Accounting activity (Say Payroll, Bills processing etc.) (or) </li></ul></ul><ul><ul><li>Fixed Deposit System (or) </li></ul></ul><ul><ul><li>Share registry work etc. </li></ul></ul><ul><ul><li>& </li></ul></ul><ul><ul><li>Outsourcing the “Internal Audit” work? </li></ul></ul>
  3. 3. IIA’s Perspective <ul><li>What is so unique about IA that it should be exempt from the outsourcing decision? </li></ul><ul><li>“ Internal Auditing is an unique effort that is aligned with the Management of the organisation and overall Corporate Governance” </li></ul><ul><li>“ Internal Auditors who are engaged full-time in an enterprise can assimilate the organisational culture and use this cultural awareness to understand risks and potential strategic outcomes. By being continually involved in business processes, they understand the inter-relationships that can impact the control environment”. </li></ul>
  4. 4. <ul><li>“ They (IA) have a vested interest in the long run success of the business. Internally housed IA functions can draw staff expertise from the many facets of the Business to provide independent reviews of operations.” </li></ul><ul><li>“ IA is best performed by an independent entity that is an integral part of the organisation which functions under the policies established by senior management & the Board of directors” , fully resourced & Professionally competent. </li></ul>IIA’s Perspective...
  5. 5. <ul><li>At the Same time, </li></ul><ul><li>“ Recent studies and new developments in services provided by external entities challenge management, audit committees and existing Internal Audit departments to carefully examine alternatives to the ‘traditional internal auditing’ function. </li></ul>IIA’s Perspective...
  6. 6. <ul><li>Fundamental Position </li></ul><ul><li>… .. that internal auditing is designed to serve the organisation. Therefore it is the responsibility of Management and the audit committee to provide effective oversight and management of the function - whether it is housed internally or provided by an outside service provider. </li></ul>IIA’s Perspective...
  7. 7. IIA’s Principal Interest “ Promote IA activities that provide maximum overall effectiveness in achieving the organisation’s strategic objectives”.
  8. 8. Situation Specific <ul><li>Some basic Questions </li></ul><ul><li>“ Audit Management” outsourcing or “Audit Assignment” </li></ul><ul><li>outsourcing? </li></ul><ul><li>“ Audit Skills” outsourcing or “Audit Manpower” outsourcing? </li></ul><ul><li>Outsourcing or Co-sourcing? </li></ul><ul><li>Objective “Cost Effectiveness” or “Quality Improvement”? </li></ul>
  9. 9. <ul><li>Some more basic Questions... </li></ul><ul><li>Is there a full time internal Executive - Auditor in place or audits </li></ul><ul><li>co-ordinated by a part time Executive? </li></ul><ul><li>Is the entire work outsourced (or) part of it also done by internal </li></ul><ul><li>team? </li></ul><ul><li>What is the level of the Head of Audit / Audit Co-ordinator ? </li></ul><ul><li>Is the audit responsibility lies with the Finance Head / Company </li></ul><ul><li>Secretary etc ., who have other primary responsibilities? </li></ul>Situation Specific...
  10. 10. Size of the organisation [Large Corporates] <ul><li>Can afford full time internal team </li></ul><ul><li>Function would have been there for longer years </li></ul><ul><li>Need for strengthening the internal function to serve the </li></ul><ul><li>growing organisation better. (Internal Consultant role) </li></ul><ul><li>Staff- Competent / trained </li></ul><ul><li>Will posses experience / insight needed to deliver high </li></ul><ul><li>quality service </li></ul><ul><li>Best Practices for specific industries </li></ul>
  11. 11. [Medium / Small size Companies] <ul><li>Company cannot afford Senior level Audit professional - </li></ul><ul><li>full time </li></ul><ul><li>Required skills may not be available internally </li></ul><ul><li>Would be cost effective if outsourced </li></ul><ul><li>Flexibility </li></ul><ul><li>Easier to tailor audit services to meet clients needs </li></ul><ul><li>Offer best potential for a long term relationship </li></ul><ul><li>(Comparatively less expensive) </li></ul>Size of the organisation...
  12. 12. Takes many forms <ul><li>Purchase of specialised audit services </li></ul><ul><li>Purchase of services in a specific geographic location </li></ul><ul><li>Full outsourcing of IA department </li></ul><ul><li>Outside providers entering into partnering agreements </li></ul><ul><li>with internal auditing department in performing audit </li></ul><ul><li>services. </li></ul>
  13. 13. “ Cost” perspective of Internal Audit <ul><li>Trend…….. </li></ul><ul><li>Business Divisions / Profit centres looking at audit </li></ul><ul><li>service Cost as an allocated overhead and from the </li></ul><ul><li>perspective of whether the “traffic can bear” - Not a </li></ul><ul><li>healthy sign </li></ul><ul><li>Need for defining ‘negotiables’ and non-negotiables </li></ul><ul><li>to audit customers </li></ul>
  14. 14. Arguments in favour of outsourcing <ul><li>Allows management to focus on core competencies </li></ul><ul><li>Economies of scale should result in cost savings for the </li></ul><ul><li>same services, or improved services for the same costs. </li></ul><ul><li>Flexibility in staffing leads to better resource allocation. </li></ul><ul><li>Access to leading best practices / Outsiders can add fresh </li></ul><ul><li>perspective </li></ul><ul><li>A clear customer focus </li></ul><ul><li>Better international and cultural coverage </li></ul>
  15. 15. Arguments in favour of outsourcing… <ul><li>Better access to and use of specialised skills (Availability </li></ul><ul><li>of varied Audit Skills - readily) </li></ul><ul><li>Eg., Information systems audit skills </li></ul><ul><li>Pairing in house auditors with service partners can broaden </li></ul><ul><li>the auditors’ knowledge & skills </li></ul><ul><li>Easier to remove an outsourced auditor than employees </li></ul><ul><li>Will enable meet customer’s urgent & unexpected </li></ul><ul><li>requirement </li></ul>
  16. 16. <ul><li>Overtime, outsourcing providers may command an ever- </li></ul><ul><li>greater premium for their services </li></ul><ul><li>An external provider won’t know the business as well as </li></ul><ul><li>an Internal Auditing Department </li></ul><ul><li>A valuable management Training ground is lost. </li></ul><ul><li>The outsourcing employee’s allegiance is to the </li></ul><ul><li>outsourcing provider, not the client </li></ul>Arguments in favour of in house - sourcing
  17. 17. <ul><li>‘ Corporate Governance’ is a Management Function that </li></ul><ul><li>cannot be outsourced </li></ul><ul><li>- Corporate Governance </li></ul><ul><li>- Internal Controls </li></ul><ul><li>- Internal Audit </li></ul><ul><li>Independence of the External Auditor may be impaired </li></ul><ul><li>when the outsourcing provider is also the External </li></ul><ul><li>Auditor (The SARBANES - OXLEY ACT of 2002) </li></ul>Arguments in favour of in house - sourcing...
  18. 18. <ul><li>Management and the Audit Committee lose an objective </li></ul><ul><li>source of information (ie. IA) </li></ul><ul><li>Institutional knowledge may be lost </li></ul><ul><li>Structure may replace internal knowledge (eg: risk </li></ul><ul><li>analysis approach - may not fit a particular </li></ul><ul><li>organisational climate) </li></ul><ul><li>New / first time service providers may not deliver what we want </li></ul><ul><li>In house staff may resent the assignment of a service partner to a </li></ul><ul><li>project that they believe they can perform.[ high profile project] </li></ul>Arguments in favour of in house - sourcing...
  19. 19. Successful Outsourcing <ul><li>PLANNING, MANAGEMENT , EXECUTION </li></ul><ul><li>Criteria based selection of Service Providers </li></ul><ul><li>Evaluation of Audit Team effectiveness / audit outcomes </li></ul><ul><li>Feed back from Auditees / changes in IA system </li></ul><ul><li>Audit learnings / Knowledge management effectiveness </li></ul><ul><li>Confidentiality agreement </li></ul><ul><li>Proper Vendor Selection & Evaluation System </li></ul><ul><li>Have a Strategic Alliance ! </li></ul>
  20. 20. Successful Outsourcing <ul><li>Clarity in defining the Scope of audit </li></ul><ul><li>Adequate pre-audit briefing. </li></ul><ul><li>Usage of Tools </li></ul><ul><li>Close monitoring of audit execution at the site </li></ul><ul><li>Internal Audit Co-ordinators & their effective role </li></ul><ul><li>Effective participation by the Audit Project Owner (IA Team) in closing meetings </li></ul>
  21. 21. Source Identification - A Practical Approach <ul><li>INTERNAL </li></ul><ul><li>Guest Auditors Pool </li></ul><ul><li>Specialised skills within the organisation pooled together </li></ul><ul><li>Executives drawn from different disciplines of the </li></ul><ul><li>organisation </li></ul><ul><li>Proactive Executives keen to learn & develop themselves </li></ul><ul><li>join the Internal Audit Team for a shorter duration as </li></ul><ul><li>Guest Auditors </li></ul>
  22. 22. Working arrangement - Corporate Service Teams <ul><li>Internal Technology Cells </li></ul><ul><li>Process Safety Cells </li></ul><ul><li>Energy Conservation Teams </li></ul><ul><li>TQM Centres </li></ul><ul><li>Safety Management Cells </li></ul><ul><li>BPR teams etc., </li></ul>
  23. 23. <ul><li>Big Fours ( Force ? ) </li></ul><ul><li>Medium Sized Audit firms ? </li></ul><ul><li>Young skilled Professionals ( owning growing </li></ul><ul><li>Internal Audit Firms ) who could directly involve </li></ul><ul><li>in field work ? </li></ul>EXTERNAL
  24. 24. Achieve effective co sourcing <ul><li>Combine expertise of a service partner with the cultural perspective of internal auditing </li></ul><ul><li>Enhance value by expanding scope of audit coverage </li></ul><ul><li>Gain access to specialized skills that internal auditing could not justify developing and maintainng in house </li></ul>
  25. 25. Subject matter experts required in many cases <ul><li>Insurance specialists for an Insurance Management Audit </li></ul><ul><li>A fraud investigator / forensic expert for alleged fraud situation </li></ul><ul><li>Civil Engineers while doing Building Contract Audits </li></ul><ul><li>Security Experts when doing Data Centre Security Audit </li></ul><ul><li>A Marketing Expert for conducting Marketing Department Audits etc., </li></ul>
  26. 26. Criteria for selection <ul><li>Projects & Skill set of service provider match </li></ul><ul><li>Fitting into the organisation’s culture </li></ul><ul><li>Single service provider may not have all the skills </li></ul><ul><li>required to meet the diverse needs of Internal Audit. </li></ul>
  27. 27. Partnership with Audit Customers <ul><li>Involving audit customers in the selection process </li></ul><ul><li>Understanding & communicating the deliverables </li></ul><ul><li>expected </li></ul>
  28. 28. Effective Contracts <ul><li>Clearly communicating the Projects Scope, key </li></ul><ul><li>deliverables & expected standards & performance. </li></ul><ul><li>Reporting requirement (Report reinforces the </li></ul><ul><li>outcomes of audit) </li></ul><ul><li>Format and delivery date </li></ul><ul><li>Billing format & frequency </li></ul><ul><li>(Arrangement should be combination of price, deliverability, reliability & dependability) </li></ul>
  29. 29. Managing the Engagement (Some practical tips) <ul><li>Effective Project Management skills required for keeping </li></ul><ul><li>the project on track. </li></ul><ul><li>Responsibility & Accountability for Project Management </li></ul><ul><li>should be clear (Audit Project Owner drives) </li></ul><ul><li>Manage the first day of the project effectively (It can </li></ul><ul><li>make or break it!) </li></ul>
  30. 30. Managing the Engagement (Some practical tips) <ul><li>Discuss Corporate Vision, Mission, Values & Principles </li></ul><ul><li>Audit Philosophy / Policies / Procedures / Methodology & </li></ul><ul><li>Performance Standards </li></ul><ul><li>Reiterate scope of audit </li></ul><ul><li>Review performance standards / project deliverables </li></ul><ul><li>Introduce the service partner to the rest of the Audit Team </li></ul>
  31. 31. Managing the Engagement (Some practical tips) <ul><li>Familiarise them with Internal communication system / </li></ul><ul><li>Business Applications, Audit Tools used & Audit work </li></ul><ul><li>paper system in vogue etc. </li></ul><ul><li>Above all, keep giving early ‘feedback’ regarding the </li></ul><ul><li>service partner’s performance (Deal with issues </li></ul><ul><li>effectively) </li></ul><ul><li>Terms of outsourcing should be clear to all </li></ul>
  32. 32. Managing the Engagement (Some practical tips) <ul><li>Scope should be clearly understood and rules for </li></ul><ul><li>changing them should be spelt out. </li></ul><ul><li>Weekly progress reports should include key performance </li></ul><ul><li>indicators </li></ul><ul><li>(Eg: Lumpsum contract – No cutting into the scope! </li></ul><ul><li>Manday rates – monitoring the time spent!) </li></ul>
  33. 33. Address all risks <ul><li>Poor planning / Bad contract / ineffective management! </li></ul><ul><li>Interview the Audit Team to gain an understanding of the </li></ul><ul><li>Qualifications / role each will play </li></ul><ul><li>Get the Resumes & experience of Team Members </li></ul><ul><li>Do reference check in case of first time engagements </li></ul>
  34. 34. Address all risks <ul><li>Substituting a lesser qualified staff in the place of a </li></ul><ul><li>high flier (who might have left for greener postures!) </li></ul><ul><li>Should not ‘sell’ other products during the </li></ul><ul><li>performance of a project </li></ul>
  35. 35. To conclude…. <ul><li>“ A properly sized IA function with the ability to employ </li></ul><ul><li>outside service providers, as needed, may be more economical, efficient, effective and responsive to organisation needs” </li></ul><ul><li>“ When Internal Auditors collaborate with experts outside the audit department , it can be a winning proposition for all involved” </li></ul><ul><li>THEN, THIS WILL BECOME A WIN WIN CO SOURCING! </li></ul>
  36. 36. THANK YOU