IN today’s ever-changing global business scenario, where previously identified risks have increased multifold and new risks have emerged due to technological shifts. Besides, organisations are cash-strapped; new business opportunities are hard to identify or pursue; and laws are getting stringent.

Because of all these competing variables, outsourcing the internal audit department (IAD) has become a tricky decision for a company’s audit committee to take.

Like every complicated issue, there is no straightforward answer to this one either. There are pros and cons; upsides and downsides.

I have tried to question, assess and analyse a wide range of diverse views to come up with a conclusion, with reference to Pakistan.

Presented below are some of the pros and cons of outsourcing internal audit (IA); though the list is not exhaustive. But it is precise and at the same time, all inclusive.

The pros include issues as: greater objectivity and independence; easy access to best practices, knowledge, as well as IA specialists; cost efficiency, because of variable rates for services as opposed to fixed payments to in-house employees; and a varied set of skills and expertise.

Meanwhile, the cons include: dissemination of business secrets as well as unwanted information; diverse approach as to testing of controls, against digging deeper; tall talks by external service providers (ESPs) as to the quality of their work; and the absence of loyalty and affiliation of ESP staff with the company.

The con list also includes the fact that due to frequent movement, ESP support personnel can’t get conversant with a company’s policies and procedures. And lastly, the audit committee may feel a false sense of security after hiring an ESP.

From the above, it can be inferred that the provision of other/auxiliary services as well as specialised services by the ESP may add value to a company’s internal audit function, and in most cases, these are necessary.

Moreover, as the ESP is hired for doing just some specific jobs that require a shorter span of time, the cons described above mostly don’t apply to such types of scenarios.

While a company can run its internal audit department at a comparatively lesser cost, many cons listed above are present. However, some of these can be mitigated through proper and thorough supervision by the chief internal auditor (CIA) and the company’s own staff.

The techniques that a company may apply in such scenarios include training deputies to work according to IA perspective, and then retaining them for a considerable period of time (at least more than one year); proper review of work performed by the ESP staff; and insisting on deputation of quality/A-grade ESP staff, and sending back those that couldn’t meet the performance expectation of the IA.

But it is complete outsourcing that we are really concerned about, as it is either risky or not as beneficial for a company as it is portrayed, since most of the cons/risks discussed above belong to it.

However, some of these risks may be mitigated if the company that outsourced its IAD applies the following controls: assuring quality of work by service level agreements (though it would be a subjective matter); insisting that the ESP provides staff with relevant prior internal audit experience at companies of similar nature and size; and insisting that the ESP hire permanent staff, and rather than deputing trainees, it send permanent staff to IA outsourcing assignments.

Such permanent staff would remain throughout the tenure of the contract to the company. It could also provide some kinds of incentive to the deputed ESP staff, so that they may feel affiliated with the company.

It could appoint as the head of internal audit, a person with relevant, proper and thorough IA background, and get them involved in the planning, performance and review of work performed by the ESP, rather than just letting them act as a coordinator. (This article has been abridged and edited.)

The writer is honorary secretary of the Institute of Cost and Management Accountants of Pakistan