Outsourcing of internal audit function is not a good idea for a

company. Discuss.
The development of outsourcing has made a great impact on the business
arena and millions have been spent and budgeted on the outsourced services. It
involves the use or employment of independent parties to perform a function
within an organization. Outsourcing of internal audit functions is a process
whereby management purchases the service of auditing from outside. Some
companies find it necessary to outsource some or all of their internal audit
function as it offers advantages to both the auditing firm and the company. While
the merits or benefits of outsourcing are apparent, there are a number of
constraints or limitations that reduce its effectiveness to the organization and
cause the downfall of many large corporations, such as the famous Enron and
WorldCom.
An uncontrollable resort of outsourcing would most likely cause a company
to face a problem in terms of confidentiality. The third party would easily be able
to get their hands on companys confidential data including the knowledge of
company systems. Although the external auditors have signed a service
agreement with the company where they agreed to provide confidentiality
clauses, this may not stop them from any conflict of interest or self-review threat.
For example, auditors may sell the firms data fraudulently for their own good.
Therefore, there should be a regular review by independent partner to ensure
independence of auditors.
Besides, Section 290.151 of MIAs By-Laws (On Professional Ethics,
Conduct and Practice) states that in respect of an audit of a public interest entity,
an individual shall not be a key audit partner for more than five years. Therefore,
it is mandatory for a company to have a rotation of audit engagement or staff
turnover in a specific period of time. Since the internal audit staff allocated to
one company may change frequently and some of the auditors which are
recruited have low level of experience, the systems of the company would not
always be fully understood. This may lead to a problem where the quality of the
service provided would decrease.
Outsourcing of internal audit function also has a bad effect to the company
of outsourcing. Contracting outside services involve a change to corporate
culture. For example, some companies used internal audit function to train their
managers where they are given a sound knowledge of how the company
functions. By outsourcing, the company would lose its training ground for the
future manager of the company. Therefore, the change needs sensitive
management to avoid a loss of morale or from other departments and areas,
which may fear for their job or resent an outsider questioning them.
Some would also argue that the cost of an outsourced service may be
more expensive than providing an in-house service. This is because the auditing
company will charge its client by hourly rate which includes the companys
overheads and profit margin. Eventually, these costs will become a fixed cost to
the organization in the long run. There is also an additional concern that as the

audit progress, the auditing company will charge the company a higher amount
of fees. When the cost is too high for the company to bear, this shows that an
internal audit department is not established at all.

The outsourcing of the internal audit function does not transfer the
responsibility for maintaining the adequate internal controls. It will just affect the
accountability of the management and internal control. Since the internal audit
function itself will promote and maintain independence in the management
design and structure, it is not necessary for the company to outsource their
internal audit function.
There also the possible loss of independence. This can be illustrated by
the quote taken by Cashell (1996) from William Bishop III, the President of
Institute of Internal Auditors(IIA) which states that the total outsourcing of
internal audit services to external auditors serves as a threat to the objectivity
and independence of the auditor in auditing processes. The independence of
external audit will be impaired if auditors perform internal audit activities that
involved management functions or by becoming part of the internal controls,
especially when auditors are responsible for the overall audit plan including the
scope, priority and audit procedures, having custody of assets, preparing the
documents for transactions, exercise roles on behalf of the clients and being
involve in monitoring the ongoing and control activities. In short, this will become
a threat of independece when external auditor act as an employee in the client
company.
The goals between the auditor and management might differ. They may
have contradic opinion and suggestion in handling their auditing procedures
unless there is a clear communication between them. This is where the
management need to consider the advice from the auditor concerning the audit
scope, company risk and ensure that the final scope of audit remains aligned
with the goals of receiving an objective assessment (Cynthia L. Course, 2014).
Moreover, this might lower the quality of services provided bt the external
auditor. Therefore, management may have to resort to a performance contract
with the outsider to ensure the quality of the services provided (Woodward,
2006).
Allegiance off in-house staff versus external service provider, where the
elements of motivation and loyalty are questionable. When there a staff is
alligiance off with the external provider, the services that external provider
provide to the company is not independent because there will be a influence or
interference to allow them to render impartial or unbiased opinions in the course
of their engagement.
Lack of auditor focus also one of factor contribute to the disadvantages of
outsourcing the internal audit. External providers will have more client that they
need to focus where more than one company that will request for their services.
Therefore, they cannot focused to their task and when they did not focused, this
will lead to poor services. They did not understand well the organization
regulation and quality control.

Reference
Cashell, G. R. (1996). Internal Audit Outsourcing. Benefits and problems
associated with the independent auditors taking on the role of internal
auditor.
Cynthia L. Course, C. F. (2014). Community Banking Connections. Consideration
when outsourcing Internal Audit at Community Banks.
Meyer, L. H. (November 2000). Testimony Of Federal Reserve Officials. Federal
Reserve Bulletin, 735-737.
Pn Sri Datin Dr Mary Lee, D. H. (2009). Principles and Contemporary Issues in
Internal Auditing. Malaysia: McGraw-Hill(Malaysia) Sdn Bhd.
Pop Atanasiu, B.-A. C. (accessed 25 March 2015). The outsourcing of internal
audit. It is a solution in increasing the quality of internal audit?, 13981400.
Woodward, A. G. (2006). A Greek Perspective on the Decision to Outsource or
Retain the Internal Audit Function. Journal of Applied Accounting Research,
1-10.
Aldhizer, G.R., & Cashell, J.D (10/01/1996). The CPA Journal (1975): Internal Audit
Outsourcing New York State Society of Certified Public Accountants.
Martin, C.L., & Lavine, M.K. (02/01/2000). The CPA Journal (1975) Outsourcing
The Internal Audit Function New York State Society of Certified Public
Accountants
Lowe, D.J., Geiger, M.A., & Pany.K (1999). Auditing: The Effects of Internal Audit
Outsourcing on Perceived External Auditor Independence Auditing Section of the
American Accounting Association