Internal audit: Understanding Co-sourcing and Outsourcing in a Business

Minakshi Bindhani

01 Apr, 2023

Internal audit is a vital function for any organization. It assures management and stakeholders that the organization’s operations comply with laws and regulations and that financial statements^[1] are accurate and reliable. However, many organizations need help finding a suitable internal audit model that meets their needs. Co-sourcing and outsourcing are popular models organizations can consider when strengthening their internal audit function. This blog will explore the disadvantages and advantages of co-sourcing and outsourcing and provide guidance on which model may be best for the organization.

What is Outsourcing?

Outsourcing is a model where an organization engages an external firm to perform all or a significant portion of its internal audit function. The external firm takes over the day-to-day activities of the internal audit function, and the in-house team is disbanded or significantly reduced.

Advantages of Outsourcing

• Cost Savings: Outsourcing is a cost-effective solution for organizations that need more money or resources to perform certain business functions in-house. The firms can leverage economies of scale, lower labour costs, and more efficient processes to deliver services at a lower cost.
• Access to Expertise: It provides access to specialized expertise that may not be available in-house. External firms have a broad range of experience working with different organizations and industries, which can be beneficial in identifying best practices and providing recommendations for improvement.
• Focus on Core Competencies: A non-core function allows organizations to focus on their core competencies and strategic goals. Organizations can devote more time and resources to the areas essential to their business success by delegating certain functions to external firms.
• Increased Flexibility: It can provide organizations with increased flexibility to adjust to changing business needs. External firms can quickly adapt to changes in volume, technology, and regulatory requirements, allowing organizations to remain competitive and responsive to market demands.

Disadvantages of Outsourcing

• Loss of Control: It can create a loss of control over certain business functions. External firms may not be as invested in the organization’s success as internal employees, leading to a lack of control over the quality of work, timelines, and decision-making processes.
• Communication Challenges: It can create communication challenges between the organization and the external firm. Differences in language, culture, and time zones can create misunderstandings, delays, and miscommunication.
• Security Risks: It can create security risks, particularly in data management and IT. External firms may have different security measures and protocols than internal employees, leaving the organization vulnerable to data breaches and cyber-attacks.
• Impact on Internal Employees: It can have a negative impact on internal employees. It has specific functions that may lead to job losses, reduced morale, and a lack of institutional knowledge. It is essential to communicate the reasons for outsourcing and provide support and training to employees affected by the change.

What is Co-sourcing?

Co-sourcing is a model where an organization engages an external firm to work with its in-house internal audit team. The external firm provides specialized knowledge, skills, and expertise to supplement the organization’s internal audit function. The in-house team controls the internal audit function and manages the day-to-day activities, while the external firm provides support as needed.

Advantages of Co-sourcing

• Flexibility: Co-sourcing allows organizations to scale up or down their internal audit resources as needed. It benefits organizations that experience fluctuations in their internal audit workload or must tackle specific projects requiring specialized expertise.
• Access to Specialized Skills: External firms can provide specialized skills and expertise that may be available in various ways. This can be especially valuable in IT, cybersecurity, and data analytics, where internal auditors may need more technical skills and knowledge.
• Cost-Effective: Co-sourcing can be a cost-effective solution for organizations that need to supplement their internal audit function but may need more money or resources to hire additional full-time employees. Organizations can save money by engaging external firms for specific projects or periods rather than hiring full-time staff.
• Quality Assurance: Co-sourcing can also provide quality assurance and peer review for the organization’s internal audit function. External firms can help ensure that internal audit practices are aligned with industry best practices and regulatory requirements and can provide recommendations for improvement.

Disadvantages of Co-sourcing

• Integration Challenges: Co-sourcing can create integration challenges between the in-house team and the external firm. The external firm may have different methodologies, tools, and reporting requirements than the in-house team, which can create communication and coordination issues.
• Lack of Control: While the in-house team maintains control over the internal audit function, they may need to gain more control by engaging an external firm. It can create uncertainty and mistrust between the two teams.
• Limited Knowledge Transfer: Co-sourcing may provide a different level of knowledge transfer than other models, such as insourcing or co-sourcing. The external firm may focus on completing the audit project rather than transferring knowledge and skills to the in-house team.

Conclusion

In conclusion, choosing between co-sourcing and outsourcing for your internal audit function depends on several factors, including your organization’s size, complexity, and internal audit needs. Co-sourcing provides flexibility, access to specialized skills, and cost-effectiveness but may create integration challenges and limited knowledge transfer. Outsourcing can provide cost savings, access to expertise, and consistency but may lead to a lack of control and loss of institutional knowledge. It is essential to carefully evaluate the advantages and disadvantages of each model and select the one that best fits your organization’s unique needs. A practical internal audit function is critical for ensuring that your organization complies with laws and regulations and that financial statements are accurate and reliable.

Also Read:
Ten Steps to Effective Co-Sourcing of Internal Audit
Important Checklist for Internal Audit of Private Limited
Effective Steps of Performing an Internal Audit Successfully